Has the time come to sell your engineering business? Are you ready to retire or would you like to step back from day-to-day operations? Either way, you’re likely to face some unique, sector-specific challenges. For example, in some instances, only licensed professional engineers can buy engineering companies. This makes your target market much smaller than it would be for a typical business sale.
So, when it comes to selling your company, it’s critical to do some diligent preparation and secure a fair business valuation. That way, you’ll make your company as attractive as possible to potential buyers.
This may seem like a daunting task – but don’t worry if you’re unsure where to begin. This article explains some of the factors you should consider. They will help increase the value of your business and deliver a timely sale at the top market price:
1. Make a list of business assets
Buyers will want to understand the basic function of your business. They’ll need to know what products it makes and have a full insight into the production process. This information is driven by the plant that your business owns.
Begin by creating an asset list that’s categorised by the type of work and output. It’s a simple but effective way to explain the focus of your business. Some company owners include the business asset list in a wider summary or report. There are no hard and fast rules on this, but the more operational information you can provide the better. Remember to keep contents factual and easy to digest.
2. Get an up-to-date plant valuation
Once you have a document that sets out assets and associated business operations, it’s time to take the next step and get an up-to-date plant valuation. This is important – as engineering companies have more capital tied up in plant and other physical assets than companies in other sectors. Often, engineering plants have a greater second-hand value than shown in accounts. That’s because depreciation – as it’s shown in your profit and loss statement – is often greater than the real devaluation of the assets.
Getting a current second-hand plant value will underpin the sale of your business. It will also play a key role in delivering the price you want. In one example, we provided a business evaluation for Gear Service Stockport Ltd, a precision and general engineering workshop. It uncovered hidden physical assets that equated to 33% of the value of the business. This made the company more attractive to prospects and helped seal the deal.
Knowing an engineering company’s asset value reduces risk for buyers. They may want to use the assets to secure the capital they need to buy your business or to fund future expansion plans.
3. Prove profitability and return on investment
Besides asset ownership, buyers are seeking ongoing return on investment. The work we did with Charles Leek & Sons underscores this.
When we started working with them, this gear manufacturer, based in the heart of England, had been listed for sale for two years despite a workshop full of valuable plant assets. It soon became clear that the plant was not delivering a good return on investment. So, we worked with the business owners over six months to improve revenues. Charles Leek & Sons was sold six months later, after demonstrating sustained higher profitability.
Understanding the break-even point was a key issue in this case. And it’s important across the entire engineering sector. It identifies the number of units you need to sell to cover fixed costs and to generate a profit. Armed with this insight, owners can review and reset sales targets. They can also put in place appropriate marketing initiatives and promotions.
If the business has a full order book, but low profitability, then the information can be a catalyst to carry out a fixed and variable cost review. This process should make it easier to turn a profit and make your business more attractive to buyers.
4. Reduce the working capital to sell your engineering business
Most engineering businesses have big balance sheets. This is due to high fixed asset costs and large working capital requirements. However, owning a company with a high working capital may not be attractive to buyers. It may suggest problems in funding future growth or an inability to pay creditors. In extreme cases it could be an early warning of bankruptcy. For this reason, it’s sensible for business owners to try and reduce working capital ahead of the sale.
But it’s not just good practice from a buyer’s perspective. If you can reduce the working capital in your business, you could make some extra cash for yourself before the sale even happens. To sell your engineering business, allow yourself 12 months to put a plan in place that reduces outstanding debtors and increases credit on your books. If you can sustain this over several months then you can draw the cash out of the business at or before the sale. Lower working capital also demonstrates efficiency and that growth can be self funding.
5. Provide a clear view of intellectual property
Let’s turn to intangible things like intellectual property. Many engineering companies have developed unique systems and processes as well as products. Wherever possible these could – and should – be protected by patent or copyright. New owners will want to know that competitors can’t copy what you’re doing and flood the market with similar goods.
Buyers wouldn’t want to work in a crowded market with little differentiation. Being able to show watertight legal documents will give new owners security in their investment.
6. Offer proof of predictable, post-sale revenue
Mechandling, one of our clients based in Cheshire, built bespoke material-handling equipment. Each job was designed from ground up, which made it complex and in need of significant input from the owners at each stage.
We recommended that Mechandling developed a modular product development process that could be easily replicated. At sale, we could show potential buyers that 70% of sales were fulfilled from this modular approach. This demonstrated Mechandling could deliver a regular long-term and predictable income stream, even when the current owners were no longer involved.
Long-term growth prospects are particularly important when wanting to sell your engineering business. The high volume of physical assets and fixed costs makes it much harder to respond to market changes. This means changes need to be anticipated further in advance than in other sectors. Modular working is one way to improve agility and adapt where necessary.
Top tips to sell your engineering business
Before you sell your engineering business, consider writing or commissioning a SWOT analysis. It will enable you to address potential market challenges that may impact profits ahead of sale. Even if you don’t implement the findings, you can demonstrate potential solutions. That way, new owners can adopt them once you’ve sold up.
Check your current contacts too. Do they include ownership transfer clauses? With such clauses, your customers may not be legally obliged to remain on board with the new owners. This is something that would cause concern for any buyer.
As you can see, there’s far more to selling an engineering business than advertising it on the open market. Although it may appear complex, you will achieve a higher value if you prepare as far in advance as viable within your own personal circumstances. As a next step, consider talking to a business broker and get your business valued (three out of four businesses are eligible for a free valuation).