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Big Opportunities In Small Manufacturing Companies – With the Right Due Diligence, Now is the Time to Buy

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Author, Insider 94 staff

This is an excellent time for small American manufacturing companies. As more and more American companies are cutting ties with China based sourcing and manufacturing, the opportunities for small domestic manufacturers are increasing. This pivotal turning point makes now the right time to buy for those who wish to acquire a manufacturing company.

There is a perfect storm of reasons for uncertainties in China. The current political climate, increasing tariffs, intellectual property theft concerns, and pandemic fallout, including shrinking direct labor, are culminating to drive decisions to seek manufacturing and sourcing domestically.

Large companies in a wide range of industries have recently moved component and product sourcing to the US, creating opportunities for manufacturing companies that include CNC, heat treatment services, metal forming and plastic molders to become the suppliers. In fact, according to Dodge Data and Analytics, construction of new manufacturing facilities in the US jumped 116% for the 12 month period ending May 2022, pointing to an incredible shift.

Adding to the appeal for purchasing a small manufacturing company, they are often a preferred option by lenders.  The asset structure that serves as collateral and steadiness of working capital make manufacturing companies a favorable acquisition to lenders, frequently offering an SBA 7 (a) solution in these deals.

Additionally, industry expertise is not a necessity for purchasing. While relevant experience is always a plus, success in manufacturing ownership doesn’t rely upon it. Experience with managing a process-based business lends itself well to leadership/ownership in this arena. The trick truly is, finding the right fit.

With an increase in opportunities, comes an increase in probable issues. While pursuing a purchase, planning is vital to a successful deal. It is imperative to work with a Broker to help manage the process with you, analyzing the possible risks and potential rewards of the acquisition.

Be sure to consider the following with your Broker for any feasible purchase:

  • Determine Customer Concentration: Examine what customer contracts exist and if any account represents more than a 15% share of annual revenue, which could represent a higher risk for acquisition.
  • Assess Supplier Relations: Confirm major vendor and supplier relationships, gaining an understanding for their role in production, especially if one or more is seemingly irreplaceable (which increases risk).
  • Audit the Workforce: With the current nationwide labor shortage, you need to have an in-depth understanding of the positions, skill-sets, recruiting, and retention strategies of the company to establish the level of risk.
  • Gauge your Role: A crucial phase one assessment for any manufacturing acquisition is a thorough understanding of your role as an owner. You must determine if the scope of the role requires more than one person or if there are relationships with major customers that would be negatively impacted by new ownership (can a smooth transfer take place?). You need a comprehensive review to accurately assess any owner risk for the acquisition.
  • Safety Review: Analyze and ensure employee safety standards, training,and records are maintained in accordance with State regulations.
  • Verify Best Practices: Confirm documentation, preferably paired with a video for each one, of best practices for any processes that are vital to the business. Ensure there is a backup and that it is kept securely off site.
  • Benchmark the Metrics: Part of due diligence is assessing key metrics, if available. Ask to review revenue and margin per employee, inventory turnover, returned goods analysis, new products sales (as a percentage of total revenue), equipment productivity, and quote capture rates.
  • Develop a Strategy for Success: While purchasing a small manufacturing company might be part of an overall acquisition strategy for creating wealth, you must have a foundational strategy in mind for success. These investments are attractive for their positive long-term prospects, long product lives, and general financial stability. However, plans for innovating, parts replacement pricing, and remaining competitive must be part of an overall strategy for success.

The upside for American manufacturers is better than that of other industries for many reasons, making acquisitions an attractive investment right now. With careful strategy, the long-term value of buying a small manufacturing company comes with many benefits that ultimately can outweigh potential risks with the right due diligence.

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