Exiting your Manufacturing Business Successfully

Most small to middle-sized businesses face significant challenges.  Manufacturers are no exception.  Common concerns include (but are not limited to):

• Labor shortages – Baby boomers retiring from key positions, ghosting employees, and increasing skill gaps.
• Supply chain issues – Re-shoring or near-shoring, acquiring inventory (just-in-case versus just-in-time), and increased transportation costs.
• Speed of change – Industry 4.0, Internet of Things (IoT), and cybersecurity.

These challenges have taken the “fun” out of running a business for owners.  Often owners stress that they are looking for guidance on an exit plan.  Even if you are not yet looking for such advice, we recommend being proactive and beginning to develop your exit strategy.  This is important as many manufacturing business owners have a significant percentage of their personal net worth locked up in their business.  With the stakes this high, developing an exit strategy is important.  To maximize your value, you must follow a process and set up a system to recognize the value of your business. 

No matter the size of your business, you need to consider an exit strategy.  It is typically recommended that three to five years before selling, one should start to develop the process and strategy.  There are several steps in this process.  The following stages are discussed below.

Discover Phase

1. Value the business to know what it is currently worth.  This can be a formal business valuation or a Merger and Acquisition (M&A) assessment. 
   
2. Assess your Personal Plan.  What will you do after you sell the business?  What does the next chapter in your life look like?  Without a personal plan, many business owners feel a lack of purpose in their lives.  According to the Exit Planning Institute, 76 percent of business owners who sold their businesses profoundly regretted selling within a year.  This Seller’s remorse is the regret that a business owner may feel after exiting the business. There are many reasons for this feeling.  Understanding your purpose helps ensure that you have a fulfilling life after you exit.
   
3. Personal Financial Plan.  The business owner should have a personal financial plan prepared.  This involves developing goals for the next chapter of their life.  The goal is to see the amount of money needed to meet these goals. The process for exiting is driven by a wealth goal. If the current personal net equity is not significant enough to meet the wealth goal, there is a “Wealth Gap”.   If there is a wealth gap, the business value will need to be increased until such time it has closed the wealth gap.
   
4. Business Financial Plan.  If there is a wealth gap, how much does the business value need to grow?  How is this business growth completed?  Now is the time to work on your business versus in your business.  Factors that drive business growth and related value include:
   • Market Attractiveness – How attractive is your business to others? 
   • Business Readiness – How ready is your business for sale?Business Risk – How can you reduce the risk in your business?Value Gap and Value Growth – How do you increase your EBITDA and what drives growth for your business?  How healthy is your business?
   • Exit Options – Do you sell to a competitor, management, private equity, or ESOP?  Do you sell assets or stock?

Preparation Phase

1. Create an Action Plan. 
   • Protect your business’s value by reducing risk.  For instance, a business owner may develop contingency plans or review insurance coverages.
   • Know what needs to be done and execute those items.Stay committed to the plan.  Change is difficult.
   • Besides protecting value, the owner will need to focus the organization on building value.  This may include working to improve efficiency or grow revenue, profit margins, or both. 
     
2. Revisit your Plan at least quarterly.
   • Review your growth strategy.
   • Continue to improve sustainable profitability.
   • Reduce debt.
   • Improve cash flow.
   • Continue to work on building a strong management team. 
   • Keep an eye on market and industry trends.  Adjust your plan, if needed. 
   • Compare actual results to planned results.

Decide Phase

1. Sell or grow the business.
   • If growth is needed due to the wealth gap, repeat the planning process quarterly.
   • If it is decided to sell the business:
     • Assemble an advisory team.  Selling a business is complex.  You will need to surround yourself with trusted advisors, which may include CPAs, wealth advisors, attorneys, and business brokers, among others.
     • Develop a comprehensive exit strategy.  This will outline a timeline and steps needed to sell the business.

HBK has experience in formulating, designing, and implementing the above strategies.  If you are interested in learning more about the exit process, please contact a member of the HBK Manufacturing Solutions team at 330-758-8613 or manufacturing@hbkcpa.com.