Why Now Could Be the Perfect Time to Sell Your Manufacturing Business
July 1, 2024
After spending many years (if not decades) building up a successful manufacturing business, eventually you’ll begin to think about exiting the company. One of your first questions is likely to be, “Is now a good time to sell?”
If you only look at the news headlines, you might assume it’s a difficult time to sell a business and achieve a good outcome. After all, inflation has proven persistent, interest rates are still elevated, and the future of the economy appears uncertain. However, it actually could be the perfect time to sell your manufacturing business, based on several positive trends.
Buyers Are Active
While the deal volume is not nearly at the levels of 2021 and 2022, investors are actively buying businesses and completing deals at attractive multiples.
PwC is forecasting M&A deal volume in the industrial manufacturing sector to ramp up during the second half of 2024, particularly for small- and mid-sized companies with the potential to help buyers bolster their capabilities. Similarly, a KMPG survey of C-suite executives found 65% anticipate M&A activity growth this year, with industrial manufacturing one of the top three areas of focus.
Both private equity (PE) groups and strategic acquirers are currently in search of high-quality manufacturing companies.
- PE investment has been a mainstay of manufacturing, with PE groups pumping more than $1.4 trillion into over 11,000 manufacturers in the US over the last 10 years (per a report by Pitchbook and the American Investment Council). And these investors are still sitting on significant capital they must deploy—by some estimates, as much as $1 trillion in the US alone. Many PE groups are drawn to manufacturing because these businesses aren’t banking on a speculative concept to take off; they’re selling tangible products and typically generating steady cash flow.
- Many strategic acquirers have strong balance sheets that can support acquisitions, thanks to investment spurred by the Inflation Reduction Act and the Bipartisan Infrastructure Law; federal subsidies for electric vehicles, semiconductors, infrastructure, and clean energy; and millions of dollars in Paycheck Protection Program (PPP) loans. Many corporations view a manufacturing acquisition as an opportunity to diversify their product line or customer base, expand into a new market, or supplement their production capabilities.
Smart Technology Adoption Could Spur More Activity
The digital transformation of manufacturing has the potential to make many businesses more attractive to investors. As manufacturers leverage process automation technologies and generative AI to drive efficiency on a large scale or transform how work is done, they are building greater enterprise value and finding themselves on investors’ radars.
While reducing costly labor with automation is critical, investors are even more interested in businesses that use smart manufacturing technology to innovate. For example, using high-tech cameras and laser scanning to inspect parts against quality tolerances can yield massive quality improvements that make the company more competitive while increasing margins. One manufacturer implemented resource management software that drove significant efficiencies, which enabled them to grow at a healthy 30-40% per year and eventually attracted more buyers willing to pay more for the business. The application of AI in manufacturing is likely to prove a catalyst as well, with a State of Smart Manufacturing report noting that gen AI is expected to be one of the top ten areas of investment for manufacturers over the next 12 months.
Other Trends Make It Challenging
The manufacturing M&A picture isn’t all rosy though, as there are several hurdles that business owners should be aware of.
First, valuations are under pressure as manufacturers face the dual challenges of persistent inflation and relatively high interest rates, making it difficult for some to avoid losing business to lower-cost providers outside the US. For example, a CNC and machining company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) decreased by two-thirds after a major customer moved its business to a supplier in China. For auto manufacturers investing in electric vehicle (EV) production, the high cost of capital to finance the necessary retooling projects and potentially slow adoption can weigh on revenue and margins, reducing valuations.
Second, though there is great interest in reshoring manufacturing, challenges remain. The supply chain constraints spurred by the pandemic and exacerbated by geopolitical tensions underscored the downsides of offshoring manufacturing. Yet, inflationary pressures and elevated interest rates make it tough for manufacturers to invest in US-based production and still stay competitive, further weighing on valuations.
How Do You Decide If the Time Is Right?
While there is no way to predict what the future holds, the fact that interest rates seem to have hit their peak and inflation appears to be stabilizing are positive signs for manufacturing M&A. And with both PE and strategic buyers still active right now, demand is strong for quality manufacturing businesses. However, whether the time is right to sell your business depends on more than just macroeconomic conditions and buyer demand.
The manufacturing M&A experts at NuVescor can help you assess whether now is a good time to sell your manufacturing business, based on your unique goals and situation. We follow a proven process designed to help you make this complex decision and move forward with confidence.
- The NuVescor team determines an accurate valuation for your business, going beyond standard benchmarks and delving into the strategic reasons a buyer would purchase your company.
- We survey our wide network of buyers in a blind fashion to determine if there is interest in a business like yours and what these buyers perceive as a reasonable valuation, based on all the intangibles that create value.
- We assess your company’s financial health and whether you could take the calculated risk of waiting for a potentially better deal later.
- We talk with you about your personal goals, including whether you’re able and willing to ride out a volatile market or prefer to exit the business soon.
If we believe it’s a good time to sell your manufacturing business, we’ll prepare to take your company to market using a proven process that gets you in front of the right buyers, highlights your company’s unique value, and keeps the deal moving forward quickly (increasing the odds that the deal will close). We also negotiate competing offers and structure the deal in the most tax-efficient way, taking advantage of a favorable corporate tax environment.
On the other hand, if we believe it might be prudent to wait to sell your manufacturing business, the NuVescor team will recommend measures you can take to improve the company’s value and set the stage for a stronger deal when the time is right.
Now could very well be the perfect time to sell your manufacturing business. With NuVescor as your partner, you can make that decision with confidence.
Learn more about our services that help owners sell their manufacturing business and complete a successful transaction. Or book a call with one of our manufacturing M&A specialists.
