Part 4 of the Offsite Innovators Business Transition Series
Owners generally have a pretty good idea of whether they believe their business is healthy. They know the sales numbers, they know what’s in the pipeline, and they certainly know whether they’re making money. After years of running the company, they develop an instinctive sense of how things are going.
A prospective buyer has a different problem. Instinct isn’t enough. A vital key is the presence of adequate management information systems (MIS). If an owner says the company has a strong backlog, good margins, loyal customers, and significant growth potential, an experienced buyer eventually has to ask a simple question: Can you prove it?
That’s where evaluating an offsite manufacturing business begins to get interesting. The numbers certainly matter, but so does understanding what’s behind them. Observable MIS is essential.
A BACKLOG ISN’T JUST A NUMBER
A substantial backlog sounds impressive, and it may be. But one of my first questions is how that backlog was determined. Are these firm orders? Have deposits been received, and can they be verified in the company’s financial records? Are the projects realistically scheduled, or are some of them still dependent on financing, approvals, or decisions outside the manufacturer’s control?
Then I want to understand whether the operation can actually deliver what has been promised. Conversations with procurement, sales, and production often tell you things a backlog report cannot. What are current purchasing lead times? Are material shortages affecting production? Is inventory available for the work being scheduled? What does the yard inventory look like?
None of this means the backlog is suspect. It simply means that a buyer needs to understand the quality of the backlog, not just its dollar value.
DO YOU REALLY KNOW YOUR COSTS?
Financial statements provide another part of the picture, but they can also raise questions. High labor costs, excessive overtime, aging payables, missed purchasing discounts, and irregular physical inventories can all be indicators that deserve a closer look.
Cost information is particularly important in manufacturing. Material and labor costs move, sometimes quickly, yet I’ve seen companies that don’t update their cost decks on any consistent schedule. When that happens, management may be quoting today’s projects using yesterday’s costs and not discover the problem until the financial results arrive months later.
A profitable company doesn’t have to be perfectly efficient. Very few are. But management should understand where the money is being made, where it’s being lost, and why.
SOMETIMES WHAT’S MISSING TELLS YOU THE MOST
Over the years, one of the more revealing answers I’ve received to a management question has been some variation of, “We don’t really have that information.” Almost as concerning is, “I can get it for you,” followed by information that is weeks or months out of date.
A healthy business should generate meaningful information that management actually uses. That doesn’t require elaborate software or reports stacked three inches thick. It does require current information that allows management to understand what’s happening in production, purchasing, sales, labor, inventory, and profitability while there is still time to do something about it.
Systems and procedures matter for the same reason. I don’t simply want to hear that a company has them. I want to see evidence that they’re being used in the normal course of running the business.
NOT ALL REVENUE IS CREATED EQUAL
A buyer also needs to understand where the company’s sales are coming from. A business with a broad distribution network and a healthy mix of builders and developers presents a different risk profile from one where a substantial percentage of annual sales depends on one or two customers.
That doesn’t automatically make customer concentration bad. A large, long-standing customer can be enormously valuable. But the buyer needs to understand the relationship, the volume discounts being provided, how secure that business really is, and what would happen if one major customer went elsewhere.
Again, the question isn’t simply how much the company sells. It’s the quality and sustainability of those sales.
THE NUMBERS TELL ONLY PART OF THE STORY
Ultimately, I’m trying to understand the actual health of the business, and that means looking at more than a snapshot of the current year. How does today’s operation compare with the past three years? Are margins improving? Is productivity improving? Is the customer base becoming stronger or more concentrated? Is the company becoming more disciplined as it grows, or simply becoming busier?
This is also where culture enters the picture. A management team aligned around maximizing the company’s people, equipment, materials, systems, and profitability will generally behave differently from one that spends most of its time reacting to the crisis of the day. Financial statements tell you what happened. The way the organization operates often helps explain why.
Growth potential deserves the same scrutiny. Nearly every business can tell an attractive growth story. The important question is whether that story is supported by available capacity, market demand, capable management, realistic capital requirements, and facts.
THE BOTTOM LINE
Owners considering a transition sometimes assume that a buyer will evaluate the company primarily through its financial statements, equipment, real estate, and perhaps a multiple of earnings. Those things are certainly important, but a serious evaluation goes much deeper.
A healthy business should be able to support the story its owner tells about it. Backlog should be verifiable. Costs should be understood. Management information should be current. Customer relationships should be identifiable and measurable. Growth expectations should be grounded in reality.
The real question isn’t whether you believe you have a healthy business.
It’s whether a prospective buyer can reach the same conclusion.
Thinking About the Future of Your Offsite Business?
Whether you’re planning an ownership transition in the near future or simply want to build a stronger, more valuable company, understanding the actual health of your business is an important place to start.
At Offsite Innovators, we help owners evaluate, prepare, and position their businesses for ownership transition. If you’d like a confidential conversation about where your business stands today and what a prospective buyer is likely to see, we’d welcome the opportunity to talk.
CLICK HERE for a FREE video Consultation.
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