Get your finances in order
Let’s start with an obvious one. Any potential buyer will be very keen to fully understand your business’s financials. So ensuring they’re kept up to date, well organised and easy to follow is absolutely paramount.
Apart from being an absolutely essential thing to do, ensuring your financials are in order also provides you with the perfect opportunity to remind yourself of your company’s performance history, as you’ll likely need to be able to explain the reasons for peaks and troughs in turnover and profits in the past.
Engineering businesses often deal with high turnovers and relatively low-profit margins compared with other sectors. Anyone looking to buy an engineering business will already know that, but they will also want to see that the business is trending in the right direction and that there is potential for growth.
And, while we’re on that point, you should also know what capacity your factory is running at. Is it running at full capacity? If not, this represents a clear means to expand. Sharing some suggestions and ideas regarding how to grow the company during any buyer meetings will help them visualise how they can take the company forward.
Get rid of the debt
Buyers are particularly interested in engineering businesses that own assets unencumbered by debt. Fixed assets are often used as security for financing the acquisition, so if you’re thinking of selling your business, it might be worth clearing any asset-related debts before taking your business to the market. This will open up the pool of prospective buyers interested in buying your business, and the valuation will not be discounted by the level of debt.
Take a step back
It’s important that you can demonstrate that your business can function just as successfully without you as it can with you.
Most owners of engineering businesses are engineers. They’re hands-on. The buck stops with them both technically and in the relationships with the company’s main clients. While there isn’t anything particularly wrong with that, if the business is over-reliant on its owner, potential buyers will question how the business will be run when they take over.
If you’re not sure how crucial you are to the success of your engineering business, then ask yourself some questions:
- How many hours per week do you work?
- Since you started the business, have you gradually hired people to take tasks off you?
- Who quotes for the work that comes in? Is it you?
If you find that you’re working 40 hours per week, taking charge of all important tasks, and preparing the quotes for all the work your company does, the likelihood is buyers will struggle to see how they can continue to run the business profitably once you’re gone.
Overall, you’ll need to consider how you can make yourself less important. And in our experience, the best way to do that is to start delegating your key tasks, such as estimating and quoting, to other people.
Know your customers
One question to ask yourself is: What percentage of your revenue does your top customer represent?
Anything higher than around 20-25% is going to be a red flag for any potential buyers because it shows the business is over-reliant on one customer - what would happen to your business if you lost that top customer?
In addition, we tend to find that businesses that have this issue usually see lower gross profit margins from those customers as they constantly bring costs down, in order to keep the key customer happy.
Creating a comprehensive marketing plan to get more customers will help you mitigate this problem (as will creating products - more on that later). If your business is in this situation, it’s best to resolve it before looking to sell.
Counting the costs
Buyers will be interested to know how much a business charges for work. So it’s important to show the margin on materials that you charge as well as the labour charge-out rate. These need to be within the market norms.
Equally, if your production staff wages have not kept up with the market rates over the years, buyers will be concerned that there will be requests for wages increases on the change of ownership.
Check the forecasts
We speak to a lot of engineering companies and a lot of potential buyers of engineering companies, and if there’s one thing we hear a lot, it’s that owners of engineering companies believe that they can’t forecast.
Well, actually, yes you can. Engineering companies tend to be fairly mature businesses - they have long-term customers and stable revenues. This actually makes them perfectly suited to forecasting, so make sure that you do it regularly.
And remember, any potential buyers will want to see them.
Think about creating products
This could probably be categorised as an “optional extra” but creating and selling products can be a great way to add value to your engineering business and generate interest from buyers.
Most engineering companies make their money by selling the cost of labour, but labour is a finite resource dependent on the number of employees you have and the capacity of your factory.
Products, however, are scalable and will generate much higher profit margins. It’s easier said than done, of course, but if there was a way to productise an element of the work you do, then you should seriously consider doing it.
Take emotion out of it
Your business is a major focus of your life. We understand that. You’ve nurtured it and turned it into a success through hard graft, sleepless nights and a boundless determination. And we can also understand why you would find it hard to take disagreements about the value of your business personally. But it’s our experience that this never helps proceedings.
Part of selling your engineering business (or any business, for that matter), is about negotiation and compromise and, while it might be difficult, you’ll need to see things from both yours and the potential buyer’s perspective. That way conversations are far more positive and agreements are reached far more quickly. Remember the best deals are when both sides win.
It may also be worth thinking about a figure you’d be happy to sell the business for. Business brokers will aim to get you the best price on the market. A good broker will also give you realistic advice on the valuation they expect to achieve. If this is not enough, it may be worth seeking the advice of a financial advisor to assess your personal finances and what will be required for your future plans.
Throw your questions at us
Lastly, and we genuinely don’t want to labour this point too much, but it’s always worth speaking to the experts if you have any questions or hesitations about the process of selling a business.
If you’re planning on doing it, then selling your engineering business is likely going to be one of the most important things you do in life, and it’s essential you get everything right to ensure you get the result you want.
Selling an engineering business is not a quick or straightforward process (and we’d be extremely wary of anyone telling you that it is), and a bit of help making sure you’ve got everything in order can go a long way - and that’s where we can add plenty of value.
Anyway, we hope you’ve found this article useful, and it has at least given you a solid foundation of knowledge to build on. But if you do have a question that we haven’t answered, please let us know so we can make this article as useful as possible for you and for future visitors.
We wish you the best of luck in selling your engineering business and, should you wish to ask us any questions, please call us on 020 8090 9380 or email us at ask@hornblower-businesses.co.uk. We’ll be happy to help.