Manufacturing Business Valuation: Preparing for Owner Liquidity Events

The economic downturn has been especially painful for Chicagoland's manufacturing business owners who had anticipated or planned liquidity events in the next 1-3 years. If that's you, what's to do? Well, after sorting through your emotions, it may be time to confront the brutal facts and get back in the rational game of manufacturing profits.

If you own a manufacturing business with revenues of between $5m and $100m, you may have last experienced EBITDA of $ 0.5m-$15m for the fiscal year that ended some time in 2007. It is likely both numbers were down for the fiscal year ending in 2008, and you may perceive the forseeable outlook to be bleak. So you've been talking to a few Investment Banks, some of whom courted you pretty hard, and maybe you came to trust two or three of them. You're seriously considering delaying your liquidity event 'until things pick up'. You could be waiting a while. At 56 or 61 or 67 years of age, what are your options, without resorting to seller financing?

Well, you could just accept the belief that significant value has been irreparably destroyed, and be prepared to trade it for immediacy. You lose money.

You could convince yourself that modern medical advances really will extend your lifespan, and hunker down for a little bit longer than you'd previously been prepared to. You convince yourself you won't lose time.

Or, (drumroll) you could work smarter on growing your manufacturing business, and its profits

What kind of smarter work do I mean? Well, the Investment Banks and potential investors/buyers are looking for a few things, and prominent among these is a strong and credible EBITDA trend. A positive EBITDA growth trend, and a credible management system (one that will withstand the scrutiny of due dilgence) for sustaining future growth are key to increasing the value-at-sale.

Let's make the assumption that Dr. W. Edwards Deming was right, and that it has always been your job to answer two questions for the firm:

• Where do we hope to be five years from now?
• By what method will we get there?

Dr Deming also famously observed that "94% of failures are due to the SYSTEM, and 6% are due to the worker”, and "The factory offers 3% of the opportunity for company improvement”.

I'm going to make an informed guess here, and say that virtually no small and medium-sized manufacturing businesses in Chicago currently use world-class systems for growth, although many have implemented world-class quality systems (ISO/TS/AS, etc). A large number have also undertaken continuous improvement initiatives (Lean, Six Sigma, Theory of Constraints, etc), with varying degrees of success. As an aside, those of you who are the exceptions, and are successfully using world-class systems for business growth, please email me and tell me about your growth systems - I'm eager to learn!

So, if I was a manufacturing business owner considering a liquidity event, I just might conclude that if I spent the next six months using one of the proven systems for business growth, and I focused outside the factory (new customers, new markets, new products, patents, and the like), I could likely get my liquidity event back on track to giving me the sales proceeds I'd been counting on for many years. Doesn't that very reasonable investment of time and effort seem like a better alternative to fear, paralysis and, utimately, disappointment?

Alistair Stewart

Manufacturing prophet with a passion for Manufacturing Profits