Selling a manufacturing business

Buyers and lenders want to know two separate things about your equipment: whether it still performs the job it was bought to do, and what an independent appraiser says it is worth. Those two answers are not the same. A twenty-year-old CNC machine that is maintained, calibrated and producing to spec can be worth more in appraised value than its book value suggests, and that appraised figure often becomes part of the collateral base an SBA lender relies on to fund the deal.

Keep maintenance logs. A machine list with purchase dates, service history and any recent rebuilds gives an appraiser something to work from and shortens the diligence period considerably. We cover how a lender views these figures in how buyers finance the purchase.

If you own your plant, the real estate is usually sold or leased separately from the operating business, which lets a buyer finance the company without also financing the building, and lets you decide whether to keep the real estate as an income property after you exit. If you lease, a lender will want to see enough term remaining on the lease, with renewal options, to make the financing period comfortable, and the landlord will need to consent to the assignment.

Manufacturing inventory is rarely a single number. Raw material, work in process at various stages of completion, and finished goods each get valued differently, and a buyer will want a physical count near closing rather than relying on your accounting system's running total. Work in process in particular needs a clear method for assigning value to partially completed units, because overstating it inflates the purchase price in a way that does not survive diligence.

Many manufacturers grew up serving a small number of original equipment manufacturers, and that concentration is normal in the industry even when it makes a generalist buyer nervous. What matters to a knowledgeable buyer is tenure, whether you are a sole source or one of several qualified vendors, and whether the relationship runs through purchase orders and supply agreements or through a personal relationship you built over years.

Purchase orders and a documented backlog are the strongest evidence you can offer that revenue continues after you leave. A stack of open orders extending six to twelve months out does more to support a price than almost anything else in the file.

If your plant holds ISO certification or a customer-mandated quality system, keep the audit history organized and current, because a lapse discovered during diligence raises questions about whether the certification will survive a change of ownership. Environmental review is also standard for manufacturing real estate, particularly where solvents, coatings, plating or fuel storage are involved. A Phase I environmental assessment is common practice on owned industrial real estate and buyers will expect one.

In manufacturing, the plant tour tells a buyer more in twenty minutes than the financial statements tell them in a week. Both need to hold up.

Machinists, welders, programmers and floor supervisors with years of tenure are frequently the reason a plant produces at the quality it does, and a buyer will ask, directly, what happens to that team after closing. Documenting who does what, cross-training where you can, and being candid about any retention risk is part of preparing the file. We go through the broader version of this work in preparing your business for sale and in what makes a business worth more.

If you are weighing timing against retirement plans, that decision interacts with all of the above — equipment cycles, contract renewals, key employee tenure — and is worth thinking through on its own. See selling a business before retirement.