At some point your shop is going to make a transition in leadership or ownership. You might pass the business to your children or sell to a motivated entrepreneur. Whatever the case might be, your expertise needs to find its way to the next generation, because right now you are the business. If you are even considering this transition in the next 5 years, you cannot start planning too early.
The goal of this series is to help job shop owners take a realistic approach to valuing their business. When thinking about succession, there should be no surprise in the size of offers or contingencies placed on them. This is also written to inform shop owners of levers they can pull to increase value and how the Paperless Parts Platform can help.
Part 1 – The True Value of Manufacturing Businesses
I spent the last three years of my life speaking and working with hundreds of job shop owners. One thing has become very clear – the perception of wealth in US manufacturing is overinflated. Many shop owners have a false sense of what their business is worth. This is deeply concerning because these business owners believe they have an asset that will carry them through retirement when in reality, they do not and will most likely end up working in the business much longer than anticipated. Let’s take a look at some numbers.
The average manufacturing operation generates roughly $5M in revenue. The U.S. census tells us there are approximately 20,000 of these businesses. If shop owners perceive the value of their operation to be at 1x revenue, which most do, then the perceived total value of manufacturing businesses is $100B (20,000 * $5M). However, the reality is these business are only worth about $2.1M each when valued at 3x EBITDA. This means a more realistic total market value is roughly $42B. This is a huge gap!
Single Point of Failure
The hard truth is that most owners won’t even hit 3x EBITDA when it comes time to sell. More often than not, the owner is a single point of failure in the shop.
A single point of failure (SPOF) is a part of a system that, if it fails, will stop the entire system from working. – Designing Large-scale LANs – Page 31, K. Dooley, O’Reilly, 2002
You know who you are – Do you do all of the quoting? Are you the only sales person who talks to customers? Is navigating your filing cabinet like cracking the enigma code? Are you the only one who remembers when you are about to quote a repeat job from 2 years ago?
You are a key piece of your shop’s value. When you leave for retirement, the business is likely inoperable by the average business buyer. This reduces the options you have for selling and means you are either going to have to stick around for a long time to train the new owner or the true value of the business becomes asset based. This includes capital equipment and real estate which are both reliant on the market and general economy. With this in mind, it is important to understand the value drivers in your shop outside of just assets.
In Part 2, we will focus on the the small steps owners can take to drive value upward and be proactive in securing their retirement by making sure they are not a single point of failure.
If you want to skip to the punch, come see how Paperless Parts will help you win – sign up for a demo today.
— Jason Ray
Jason Ray is the Co-Founder & Chief Executive Officer at Paperless Parts. Jason drives the company’s product vision, while building relationships with manufactures and partners. Before Paperless, he served as an officer in the US Navy and led the implementation of additive manufacturing technology. Jason holds a BA (Trinity) and MBA (Babson).