Private Market Insights
In the small business M&A space and in entrepreneurship through acquisition groups, buying a manufacturing business is often not the first topic people talk about. Some even advise against looking in that space due to the specialized nature of equipment, processes etc.
It’s time to bring in an expert to dispel some of the myths. As part of the Private Market Insights series. We have invited David Jones, from 4Ward Manufacturing Solutions, who’s been in the space for over 12 years. Together with Josh Levine, our host and CEO of Private Market Labs, they talk about the challenges and opportunities of acquiring, owning and operating a manufacturing company.
At 4Ward, they help companies increase the speed of implementing these programs while reducing associated costs and risks for all parties involved. Tune in and find out more from David by listening to this episode.
Deciding between an OEM and a Contract Manufacturer
David started the conversation by reminding us that every physical thing we use was manufactured somewhere and by someone through one of two ways:
- by the original equipment manufacturer (OEMs)
- by the contract manufacturer
An OEM focuses on the end product, the quality and the value it yields in the marketplace. The contract manufacturer focuses on the equipment that will be used to mass produce the OEM products. If you are looking at an OEM with contract manufacturers, it’s critical to see if the outsourcing partners are a good fit. The contract manufacturers need to have the right technical support, specialized equipment and brand recognition to produce OEM products. It’s important to take note of this during an OEM due diligence process. OEMs must ensure that they have a solid product, one which can yield results and the process of manufacturing is safe and accurate. Buying these can turn out to be slightly more complex than acquiring a contract manufacturer.
Acquiring a Contract Manufacturer
Nevertheless, buyers must spend time doing specialized due diligence on the physical asset. They need to look specifically at the viability of the equipment before investing or buying a contract manufacturer. As a buyer, you want to make sure you’re investing in a business that has up to date tools. You also should look at whether they have invested in maintaining their production facilities. You can reach out to experts who will run the evaluation of the equipment, the business and their stand in the marketplace and help make the right investment decisions.
Additionally, you need to be aware of the environmental risk associated with the property where the business is operating on. You could come across issues with gasses and toxins that were released in the environment and can accumulate and pollute the soil. If you detect contaminants later on, after the acquisition, you will likely have to pay to get it cleaned out. The simplest check you can run for contamination is to see if the business you are planning to buy is in a superfund site. It is, then it’s better to walk away. During negotiations, you can still compel the seller to ensure the environment is risk free.
Lastly, in this acquisition process, you need to be weary of sellers who think their business is worth more than it is. Most of these sellers have sentimental attachment to their business which dictates how they view and value it. You, as the business person, should do your evaluation and, if the numbers don’t make sense, walk away.
Life after acquiring a manufacturing business
After purchasing a manufacturing business, as with any business, you need to have a clear definition of what success will be for the organization. How do you want to scale the business? How would you build the customer base and brand? Defining your success will bring about clarity, make the business operate well and show you the gaps in the process that you will need to focus on to reach your goals.
Acquiring manufacturing businesses is a fast growing industry. You need to be aware that it comes with more complex risks, especially when looking at equipment and environmental issues.
Our goal is to ensure that entrepreneurs have access to the services and knowledge they need before investing in SMBs. Tune in to our next episode on our Twitter Spaces every month, ask questions and let us know what topic and/or guest you would like us to bring to the next conversations.