Production vs. Value: Does it matter? by Ed Davis, CPA, CVA
I’m Sorry, Tell Me Again When You Want That Delivered??
“If there is any one secret of success, it lies in the ability to get the other person’s point of view and see things from that person’s angle as well as from your own”
… Henry Ford
Production … every business has it, every owner worries about it. If you’re a manufacturer, distributor, contractor or even a service company, your livelihood and success depends on your production capabilities. And, if you’re thinking about selling your business, prospective buyers will be very interested in your “productivity.” It’s a key “metric”.
The point is, this is where the sales and acquisitions of manufacturing and contracting companies differ from sales and acquisitions of companies in other industries. Smart buyers (the ones you want to work with) will “dive deep” into your “productivity” during their due diligence. There are times during the “deal” process when it helps if you, the seller, think like your buyer and this is one of those times. Buyers of manufacturing and construction companies are very focused on:
- the operational and production aspects of your business
- the “output” or “throughput” with an emphasis on both actual and maximum capabilities
- the forward looking capabilities (note: less time analyzing historic numbers),
- the production process, i.e. “what, how, when, why and results”
- the deal price – what buyers see or think becomes a significant part of the deal price whereby pricing discounts and/or premiums are based on old, outdated, maxed-out production capabilities vs. new, efficient, growth potential…your business is priced accordingly
In particular, buyers will spend time analyzing and reviewing:
- Capacity capabilities – are you maxed out or is there room for growth? Be careful when discussing real output and potential output. There is a theoretical number and a number that’s reality, so be clear about what is being represented.
- Material and warehouse “work flow” – is the manufacturing area, assembly line, warehouse area operating efficiently or are there weaknesses causing unpredictable work completion, missed delivery and lost sales?
- Parts and components design – what are the weaknesses and strengths of your design work and through-put? What impact is that having on finishing the order and generating the bill?
- Continuous improvement – is there an active, ongoing plan involving improvements/solutions to the process, production, delivery and sale? How long have these processes been in place and what are the results?
- Key suppliers – is the relationship strong or weak? Is the supplier a dependable, reliable source? Is there potential disruption in their delivery? Look at the auto industry…no demand, no production, no parts, suppliers folded.
- Industry status – turmoil or stability? Contractors and banks are fighting to recover and health care is in a perpetual state of change. Running a business today is more dynamic than ever; change isn’t an option. It’s inevitable. Buyers want to know what your plans include.
- Forward looking – historical data is interesting but for manufacturers and production businesses, it’s all about the forward-looking numbers. Buyers don’t expect sellers to make the future happen, but buyers do want to “know what they don’t know”. Sellers need to show them the way and not make the future a mystery that the buyer has to solve.
- Reality check – what are the real issues and challenges? Is equipment replaced regularly and recently? How much capital needs to be invested in the ‘hard assets”? Is working capital sufficient for ongoing and growth needs? What’s going on with the customer base and how stable is key management?
- Technical aspects – the buyer might not understand or appreciate the technical aspects of your operation. Put on your “sales hat” and explain it to them in non-technical terms including how your operations compare with the industry and your competitors.
In preparing and then presenting your production capabilities for ownership transitions, keep it simple, keep it relevant. If not, you might lose the right buyer who “opts out” early in the process. Hateful, but it happens.
If you’re like most business owners we work with, you’re probably curious about how your company would be “ranked” by prospective buyers. Email Greg or Ed or call us to find out about our “Value Builder Assessment”. This Assessment provides an estimate of your business value AND shows you where you should invest your time and resources to enhance the value of your business.