Buying a Manufacturing Business

Buying a manufacturing business is a little different than buying any other kind of business, because it has two major areas that are always problematic: (1) Inventory, and (2) Equipment. Here is what I mean:

Inventory

We have previously discussed the various ramifications of inventories when buying a business, but inventories are much more complicated when buying a manufacturing business. This is because a manufacturing business has at least three types of inventory:

Parts and raw materials
Finished goods
Work in Process

Some manufacturers have additional special classes of inventory, but for now we'll stick with these three basic types of inventory.

Parts and raw materials
This category is pretty self-explanatory…this is the category of inventory that contains the things the business buys to put into whatever product the business is making. Whatever these things are for the business you are looking to buy, they go directly into the inventory when they are received from the supplier.

Finished goods
These are also exactly what they say they are…the products manufactured by the business, but not yet sold or shipped. This is the most common type of inventory for most businesses, because it is simply the products on hand that are to be sold (or sold but not yet shipped).

Work in process
This is the most difficult category of all to get a handle on when buying a manufacturing business. This is the category of parts and material that is in the process of being converted into a finished product. This inventory is problematic because it has both material and labor involved in the product during manufacturing. Unless the business has a sophisticated method for tracking products through the manufacturing processes…determining the value of work in process can be a nightmare. You need to carefully analyze this part of the inventory value during your due diligence.

Many books have been written and classes given on how to value inventories, and even then many people do not agree on the best methods for certain businesses. It depends a great deal on whether taxes or profits are of primary concern. So, my advice is to hire a good accountant to help you with your inventory valuation during your due diligence, because you want to receive the proper value for what you will be paying for the business.

Equipment

Every manufacturing business has some form of equipment that produces a product, or products. Some businesses are more equipment intensive, and others more labor intensive, but sometime during your analysis of the value of the business you are trying to buy, you will need to come up with a representative value for the equipment.

Typically, the seller will want a high value (naturally), and an appraiser will normally set a value on the basis of what the equipment is worth set in place to a "going concern." That will almost always be higher than what you want to pay, so you will need to determine your price for the equipment based on the open market, and then add what it might cost to install and set it up in place. This should be your beginning valuation of equipment when buying a manufacturing business. If the equipment is custom made for this particular business, the problem becomes more complicated and you may have to go with an appraiser's valuation.

There you have some additional insight into the issues of inventory and equipment when buying a manufacturing business. The remainder of the buying process is the same as any other business, and you can learn more on this by reading the other reports in this module.

The next issue that every buyer thinks about at some point is how to finance the purchase of the business. There is a special report available titled Loans to Buy a Business.

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