You’ve been slogging along for 40 years and the cement floor bites harder every day. You are wondering if it is time to sell the company, but you have no idea what it is worth or if anybody would want it.
I’ve been helping folks buy and sell machining businesses for quite a while. This blog is a primer on what to consider when selling and how to go about it.
- Why sell? Understand yourself and your situation. Are you being forced by illness, distraction, disinterest, or the allure of retirement?
- Is the business making money? This question is crucial, because if it’s not making money, the only options may be auction, liquidation, bankruptcy, or giving it away.
- What are the family considerations? Many machining companies are family businesses, which means that in case of death or disability, chaos may be the result. In such cases a sale may be the best option before a disastrous event occurs.
- If you have made the decision to sell, ask yourself how badly do you want to sell? Going concerns that are not making much money or are completely reliant on one person are usually very tough to sell, except by auction or liquidation. Auctioneers regard each chance as a money making opportunity, which is not a bad thing for the seller as long as they understand their position and vigilantly look out for their own interests. In many cases businesses are worth more dead than alive. The assets accumulated over many years are valuable to other people in the field. Appraisals will help you figure out value, but as someone who has done many of them over the years, I can tell you they are guesswork even when done by experienced people.
- If you think your business has more value as a going operation than as an auction of its equipment, and you believe your intellectual property is valuable and your customers are likely to stick with a new capable operator — and your financial statements look attractive, selling as a going business makes sense. But ask yourself — are you doing it because of ego or business judgement. As an egotist myself, I do not totally discount ego, but most buyers will not pay you for it.
- The “EBITDA” question. If you have taken the plunge to sell the business as a living entity, for most legitimate prospects the first question will be what is your EBITDA, which stands for “earnings before interest, taxes, depreciation and amortization.” A business may show a meager “net income” but be very profitable from an EBITDA standpoint. Perhaps you bought several 5-axis turn-mill machines in the last few years and your depreciation has depleted your net income. Your EBITDA may make your numbers attractive. For machining companies without a branded product sellers should expect to get 3 to 5 times EBITDA. Buyers usually discount the value of inventory and intellectual property unless the owner and key people will stay on to run the business for a few years or key employees will sign a contract to stay on. Buyers will also consider the owner’s salary if he or she is to be replaced and how much cash they have taken out each year. Financial statements often hide important bombshells which experienced buyers will look for. Being transparent is vital if you seriously want to sell.
- Should you hire a consultant to facilitate the deal? Of course you should, being one myself. Selling an ongoing business if it is under $10 million in sales is difficult at best. If EBITDA is paltry, it is a longshot but not impossible. Each case is different and financial numbers do not dictate every sale. A tenacious broker with knowledge of the market may well be the difference between making a sale or languishing for years as the shop floor feels harder and harder on your feet. Hiring a “business broker” who does not know a Bridgeport from a town in Connecticut is almost always a waste of money, though anybody can get lucky.
- How much is the fee? It will depend on many factors. For a smaller job shop, with under $1 million in EBITDA, it will be 5-10%. Over $1 million the percentage will go down.
- Last question in this blog. Should you sell to a “private equity company.” My answer is that they may pay the most because their goal is to pull companies together, look for tax benefits, and sell the business in five years. It works well for everybody — when it works, which is seldom from my view. But if you have no personal or sentimental stake in your enterprise, private equity may be a good option. But I must admit that I would not be a good broker for you.
Selling an ongoing small machining business as a going organization is difficult and often time consuming. Lookers usually aren’t buyers, but if you have a capable organization with people who are likely to stay on it can be worth the effort. Having a partner in the process can help a lot.
Question: What do you see happening to your business after you exit?
