Exit Strategies for Manufacturing and Distribution

The manufacturing and distribution industry is in the midst of a dramatic transition. Over the next 15 years, roughly 125,000 family-owned manufacturing businesses will change owners as the Boomer generation retires. This impending ownership transition is part of the largest generational wealth transfer in history, with an estimated total value of $6 trillion across all industries.

Small and midsize manufacturing companies make up a significant share of the projected transfer. Eighty-seven percent of manufacturers employ fewer than 50 workers. Most of these businesses are privately held, and many are family owned. For business owners, mapping out an exit plan at least five to 10 years in advance is critical for optimizing the desired outcome, whether it’s a generational transfer of ownership or a sale.

Documenting an exit plan doesn’t lock you into a single option. Instead, doing the groundwork in advance can help you explore transfer options and prepare for opportunities that may arise, such as selling. A documented plan also allows you to adapt to changing environments like sales growth or decline and if your goals change over time.

So, where do you start? There are three basic phases to exit planning: discovery, preparation and decision.

Discovery Phase: Know Your Numbers

Before you make any decisions about how you want to transition your stake in the company, you should work with a financial advisor to assess your finances and exit readiness from both operational and personal angles.

Business Valuation

Speak with your trusted accounting advisor who can help you structure your plan and find the needed experts during this phase, including business valuation experts. Valuation experts are a good first step in getting a reasonable idea of what you can expect to receive on a sale of your business. Determining the value of business involves distinct, industry-specific considerations, so you’ll want to choose valuation partners with a specialized focus on manufacturing and distribution. For example, an independent valuation expert will help you calculate asset value, including equipment, facilities, inventory and intellectual property. They can also determine the value of excess capacity represented by assets not in use or underutilized facilities.

In addition, due to changing market demands, rapidly evolving technology and a dynamic supply chain landscape, the value of manufacturing and distribution centers are often less consistent compared to other industries. As part of the valuation, it’s essential to also look at the current market value and comps for recent sales of similar businesses as a benchmark. Working with a manufacturing valuation expert will take these factors into account while also identifying opportunities to optimize your company’s value.

Personal Financial Planning

Creating a business exit strategy should be done in tandem with personal financial and estate planning that answers key questions, such as: Do you want to continue working for an extended period after a sale transactions or are you planning to retire as soon as possible? If you’re planning to leave the business to your children or other family members, what’s the appropriate timeline for the transition? How will you compensate other heirs who elect not to be part of the business? How much money will you need to live? What are the tax implications if you decide to sell?

Spend time thinking through your personal needs and goals. Discuss different scenarios with your financial advisor who can help you explore options, create financial projections and identify gaps. Connecting the dots between your business and personal financial goals is essential. The Exit Planning Institute estimates that up to 90% of business owners have their personal wealth tied up in the company.

Based on the discovery phase, you will pinpoint your goals for the company, identify preferred options for transitioning the business and determine what needs to be addressed before initiating your exit. Ideally, you’re planning well in advance, giving yourself time to implement strategies, develop successors and accelerate the company’s value.

Preparation Phase: Reduce Your Risk

Armed with the information gathered and goals determined during the discovery phase, it’s time to put a plan in place that prepares you and the company for the exit you envision. During the preparation phase, the focus is on working with your advisors and leadership team to “de-risk” your business and personal finances. By reducing risk, you increase the value of the business and the level of preparedness for exit. Even if you’re not planning to exit in the near term, having a plan and taking action to address gaps and risks in your strategy gives you more exit options and the flexibility to adapt as your situation changes.

Every exit strategy is unique. While there’s not a one-size-fits-all plan, your business and financial advisors can help you identify and mitigate risks, including:

• Reduce owner dependency. Relationships need to be transitioned, and if this does not happen in an orderly fashion — well before an exit, this will substantially impact the value. These relationships range from the brand vision and customer relationships to operational processes and intellectual capital.
• Document strategies and processes. If too much of a company’s strategy exists in an owner’s mind, the business is worth less to a potential buyer. A lack of documentation also makes it difficult for successors to take over and run the business successfully. During this phase, document strategies, processes, operating agreements, strategic alliances and customer relationships.
• Make business improvements. Every company has gaps that need to be addressed, whether in technology, operational processes or talent development. Considering the impact on the company’s valuation and the owner’s exit plan can shift how business improvements are prioritized.
• Prepare successors. If your goal is to transition the business to an existing leader or family members, the preparation stage is the time to map out and execute a plan to transfer knowledge, build skills and provide opportunities to gain diversified experience. A documented succession plan, backed by an action plan, increases the company’s value and helps ensure business continuity if something happens to accelerate your exit.

Decision Phase: Take Your Next Step

The work done in the discovery and preparation phases helps make the exit decision easier. With your valuation, readiness assessments, documentation and strategic plans at the ready, you gain the flexibility to accelerate your exit if an attractive buy-out opportunity arises. You’re also able to adapt the plan to allow an intergenerational transfer, a management buy-out or a sale to employees as your situation changes. Or you may decide you’re not ready to exit, and leverage the plans to drive continued growth and evolving exit strategies.

The manufacturing and distribution industry experts at CBIZ can guide you through the exit planning process, providing readiness assessment support, valuation services, financial planning, tax planning, succession planning and more. Connect with a member of our team and gain access to more resources here.

This article includes input from Scott Sutton, Managing Director of CBIZ Somerset. As a trusted industry advisor, Scott provides compliance and consulting services and guides owners through the most important decision of their professional lives: how to successfully exit their business.