When Is The Right Time To Sell A Manufacturing Business In Canada?
The right time to sell a business - manufacturing or otherwise is a bit subjective. There are typically three reasons business owners want to sell:
- The business isn’t making money, and they want to cut their losses
- They want to retire or move on to a different opportunity
- They think they can sell it for more money now than they could later
We’re going to skip the first point because, I’ll be honest, if you’re losing money hand over fist and you want to sell, I’ll probably point you to one of our competitors for assistance; we’re in the business of making successful businesses even more attractive to buyers before they sell. So, let’s assume things are going great for you, and you either want to move on or you think your business is near its maximum valuation.
Great news! You can talk to my team and me, and we can set your business up to be more attractive to investors. I recommend giving us about two years of advanced notice; it takes time to get a business ready to sell, but that preparation can:
- Help negotiations and the sales process go smoothly and efficiently
- Get you more money for your business
Those are two things that any business owner wants. But let’s assume you have all the time in the world, and you can wait for the right economy to sell your manufacturing business in. You should look for:
- Periods of economic growth: Manufacturing businesses tend to sell for less during a recession
- Periods where your government is incentivizing domestic manufacturing
- Periods where foreign governments are incentivizing imports (new free trade agreements are a great example)
- Periods where what you’re manufacturing becomes more strategically important (to governments or other companies)
- When industry multipliers are strong
Your own finances matter a lot, too. You should ideally look to sell when your business is growing - and ideally, when it’s been growing consistently for 3+ years. When you’re seeing great growth and stability, you can get buyers interested fast - as long as you’re prepared.
How To Prepare Your Manufacturing Business For Sale
I mentioned that we recommend at least two years of prep work before putting your manufacturing business on the market. Here’s what those two years of preparation can get us:
- A more diversified supply chain
- A more diversified customer base
- Redundancy in key employee knowledge to reduce reliance on individual employees
- Modernized equipment
- Clean, properly documented financials and records
- Well-documented SOPs
- Automated or streamlined inventory management
- Up-to-date equipment maintenance and logs
- Reduced legal liability
Companies looking to purchase manufacturing are especially concerned about supply chain resilience and potential downstream legal liability; that goes double if they’re aiming for vertical integration of what you manufacture into their existing products. Taking the time to document your processes and make a more resilient supply chain is essential!
How Manufacturing Businesses Are Valued In Canada
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is the most commonly used form of valuation for manufacturing businesses, though very distressed businesses may just sell their assets (not the kind of sales we usually deal with here at Catchfire). Occasionally, a smaller manufacturing business may use Sellers' Discretionary Earnings (SDE).
Your equipment, the contracts you have in place, your production capacity, your inventory, your location, your employees, and several other factors will also influence the value of your company to a prospective buyer.
Who Can Buy A Manufacturing Company And How To Reach The Right Buyers
Manufacturing companies can be purchased by any number of different investors. Sometimes, one of your customers might want to purchase your company to vertically integrate their supply chain. Financial investors might be interested in adding your company to their portfolio, and members of your own team might be interested in purchasing your company if you plan to retire.
Rarely, companies dealing in aerospace and defence manufacturing may find their ability to sell to owners in foreign countries, especially countries Canada sees as rivals, to be limited. This won’t stop you from selling your company, but it may limit your buyer pool.
How The Sale Process Works From Marketing To Letter Of Intent
I give this tip to everyone I work with: The number one most important thing to keep in mind when you’re selling your business is to keep it quiet. Everything you communicate must be on a need-to-know basis, and NDAs should be used as frequently as needed to stop news of the sale from getting out.
Suppliers can get antsy. Customers can get antsy. Employees can get antsy. Key stakeholders getting worried about a sale can hurt any business, but it’s especially impactful for manufacturers, which tend to be more reliant than other businesses on a select few role players.
Once you’ve found a potential buyer, you’ll want them to sign a letter of intent - I’m skipping a few steps, but I don’t want to bog you down in the details. This letter will include conditions of anonymity; that condition will have to be maintained throughout the due diligence process, which can be a bit of a delicate balancing act.
Due Diligence, Deal Structure, And Closing Considerations
The due diligence process can be long, involved, and less-than-subtle; that’s one of the reasons we spend two years preparing before selling your business. When all of your financials, maintenance records, and other key documents are ready to go, it becomes a lot easier to provide everything a prospective buyer needs to see.
For the structuring of the deal, EBITDA is the most common for mid-sized manufacturing businesses. Selling shares comes with capital gains advantages - but I’m not a tax accountant, so I highly recommend talking to yours to understand how you should structure the deal to reduce your tax liability.
When it comes to closing, when you close, when you inform key stakeholders, and in what order you inform them are all key considerations. You may also be asked to stay on with the company for some time after the deal is closed to smooth the transition. The years we take to prep your business before the deal should reduce the company’s reliance on your knowledge and skills so that you can move to your next adventure more quickly.
Common Mistakes To Avoid When Selling A Manufacturing Business
There are so many mistakes you can make that it would take too much real estate to list them all here. A few of the common ones:
- Waiting too long to start planning your exit (you should start planning to sell as soon as you start planning to open a business)
- Not preparing (I really do recommend two years)
- Not getting your financials in order
- Waiting until big CapEx problems force you to sell
- Letting your equipment deteriorate
- Trying to sell when your suppliers or customers are too concentrated
FAQ About Selling A Manufacturing Business In Canada
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1. How long does it take to sell a manufacturing business in Canada?
The devil is always in the details, but manufacturing businesses tend to take about 12-18 months to sell in Canada, longer than many other industries. Manufacturing is complex, and buyers will have to look into your supply chains (and their redundancy), environmental regulations, equipment, inventory, and your customer base to make a decision.
Taking time in advance to prepare can help you reduce the time it takes to sell; by diversifying your suppliers and customer base, reducing owner or key employee dependency, and getting all of the paperwork for your machinery, equipment, and environmental impact in order, you can drastically reduce the time it takes to sell.
2. What documents do buyers usually ask for during a manufacturing business sale?
The due diligence process is extremely involved for manufacturing businesses. You’re going to have to prepare a lot of paperwork, including:
- Financial records, including
- Financial statements
- Tax returns
- Income statements
- Balance sheets
- Accounts receivable/accounts payable
- Bank statements
- Budgets
- Forecasts
- Records on margins, revenue by customer, and more
- Legal documents, including
- Employment contracts
- Leases
- Customer agreements and warranties
- Supplier agreements and warranties
- Corporate documents (certificates of incorporation, etc.)
- Environmental and safety compliance records
- Operational documents, including
- Equipment lists
- Inventory reports
- Quality control certifications (ISO, etc.)
3. How is EBITDA used when valuing a manufacturing company?
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is the most commonly used form of valuation for manufacturing companies in Canada. It is calculated with the following formula:
EBITDA = Net Income + Taxes + Interest Expense + Depreciation + Amortization
That formula can be simplified to:
EBITDA = Operating Income + Depreciation + Amortization
Once EBITDA is calculated, it is multiplied by a number. Here’s an example:
A manufacturing company has an EBITDA of $1 million. The multiple used in valuation is 4. According to this calculation, the business would be valued at $4 million.
4. Should I tell employees, customers, or suppliers before the deal is firm?
Absolutely not; anonymity is key. You might be tempted to tell key stakeholders about a pending deal because you don’t want to surprise them - the surprise will be on you if news leaks, people leave, and the deal falls through. Total anonymity is best.
5. Do I need a business broker or M&A advisor to sell my manufacturing business?
No! You also don’t need a parachute to jump out of an airplane.
You wouldn’t jump out of an airplane without a parachute, though - they make the whole skydiving process a lot smoother, a lot safer, and a much better idea all around.
M&A advisors do the same for business sales.
6. What taxes should I plan for when selling a manufacturing business in Canada?
That depends on how you structure the deal, but expect to pay capital gains tax on shares or assets.
Ready To Sell Your Manufacturing Business? Talk To Catchfire
I want to help you sell your business for more. My team wants to do the same. Ready to sell your business? Get in touch today.