For the last 4 years now, manufacturing businesses have been hot buys, especially in the $1 Million to $5 Million range.  That trend continued once again in the latest Market Pulse Report by the Pepperdine Private Capital Market project.

Craig Everett, PhD, director of the Pepperdine Private Capital Markets Project, said the following about this data:  “For years, people have talked about manufacturing being dead and jobs going overseas, but there is a resurgence in the U.S.  In the lower middle market, manufacturing is very much a sought-after industry, as it’s been the number one or two market leader for the last several years. We see it every day: manufacturing businesses are busy, profitable, and in-demand.”

Here’s a snapshot of the data:

Sale Price #1 Industry #2 Industry #3 Industry
< $500k Personal Services Restaurants (tie) Business Services & Consumer Goods/Retail
$500k – $1MM Business Services Personal Services Restaurants
$1MM – $2MM Manufacturing (tie) Business Services & Consumer Goods/Retail
$2MM – $5MM Manufacturing Construction/Engineering Healthcare & Biotech
$5MM – $50MM Information Tech Manufacturing Healthcare & Biotech

You would think that based on simple supply and demand that this is good news for sellers of Manufacturing Businesses, and bad news for buyers, but not necessarily.  A factor at play here is the fact that there are simply a lot of manufacturing businesses out there with owners who are nearing retirement.  This directly coincides with the #1 reason given for selling across all 5 price ranges….”retirement”.

Note:  See our article on the top reasons that good businesses come up for sale.

The combination of a resurgence of manufacturing in the United States, and an influx of manufacturing business owners approaching retirement is a potential win-win for buyers and sellers.  The founder of the Institute for Business Acquisitions, Tom Ellis, has always been a big fan of manufacturing businesses, and have been a significant portion of his portfolio throughout his career.  I asked Tom what originally drew him to that sector and he said “at the time, in the mid 70s, they were the easiest type companies to get acquisition bank financing“.  To a large degree, that is still the case today.

From the data, you will see that manufacturing is less popular with smaller value purchases, but that is presumably do to a simple issue of supply…meaning that there aren’t many manufacturing businesses available for less than $1MM.  This makes sense, because manufacturing is often heavy in assets, such as equipment and real estate, driving the value up.

This is also a positive for the buyer, because, as Tom Ellis mentioned above, it lends itself to easier financing.  Banks often like asset based lending simply due to the quality of the collateral…..meaning their money is at much less risk.  You can typically get an asset based loan in the range of 70% – 90% of the asset value…which is great as a buyer, especially if you can negotiate seller financing to cover all or most of the remaining amount.

Note:  Check out our 8-Step Guidebook to learn more about negotiating seller financing.

In summary, if you are new to buying a business, don’t forget to keep your eyes open to manufacturing businesses, that you may have previously considered old or antiquated.  They might seem “boring”, but they are hot buys for a reason….because there are a lot of very solid, stable, and profitable manufacturing business out there for sale, and we believe there are many many more on the horizon as the baby-boomer generation continues to retire and approach retirement.

If you would like additional tips and advice on buying a manufacturing company or any other type of company, please join our free Business Buying Support Forum here.

Looking forward to talking with you there.

Aaron Knight
Managing Director
Institute for Business Acquisitions

OUR SIMPLE 8-STEP PROCESS FOR PROFITABLE BUSINESS ACQUISITIONS

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