Private Investment Criteria For Manufacturing Businesses

Most manufacturing businesses tend to operate with the aim to achieve one or more strategic objectives.  These are the targets that the business will set itself to achieve within a specified time.  For example to increase sales by 50% over the next 3 years.  Whilst many businesses will be looking to sustain or grow their business, other businesses will plan for an exit strategy to sell the business.

Business investors will start by looking at the financials of the business such as balance sheets and EBITDA (finance metric used to indicate profitability of a business).  Beyond this however, there are a range of investment criteria that a potential investor will want to understand in order to ascertain the current position of the business and future business potential.

Cash is the lifeblood of a business.  A lack of cash within a manufacturing business will cause severe operational problems for the business.  A company with a high stock value may experience a shortage of cash due to the time it takes to convert the stock back into cash.  A symptom lack of cash may mean that the business is not be able to pay its bills from suppliers, staff wages, VAT and so the list goes on.  The knock on effect of a lack of cash will start to impact the business through delays from suppliers, production delays and ultimately delays to customer delivery which in turn will have a negative effect on future sales due to unhappy customers.      

An investor will want to look at current sales performance of the business and compare this with previous years to see whether or not business turnover has grown, stayed the same or reduced.  More important than sales is the level of profit achieved on sales.  Profit can be compared with cash flow to indicate how well a business is turning its revenue into profit. For example a business may have good sales revenue figures but the time taken to convert this sales revenue into profit due to long delays to customers means a delay in cash coming back into the business.

Manufacturing businesses often tend to have large asset values due to the large capital value of property and equipment that the business uses to produce its goods.  Investors will be keen to learn what assets a business has, the condition and value of these assets and how the business uses these assets to meet its customers requirements.  For example a business may be struggling for cash yet have asset value tied up in machinery which is under used or not used at all which could be generating additional production income or simply be sold to provide a vital business cash injection.

Businesses and the market places that they operate in are continuously in  a state of flux due to a range of factors beyond their control such as direct competition, foreign exchange rates, new technology, global supply and demand, economic upturns and downturns, commodity prices to name just a few.  A business investor will want to understand current performance, previous performance and potential for future performance.  Manufacturing has been hit particularly hard since the global economic crash in 2008 with some businesses going out of business.  Those businesses which have survived have started to see an upturn as the economy improves.  More recently in 2015 the rapid decline of the oil price has meant huge layoffs and big economic woes for many businesses.  An investor will look at all these factors to understand their investment risk exposure.

Businesses work with many different people starting with the team of employees who keep the business moving.  They will also work with a portfolio of customers who order goods and services from the business.  Finally there will also be external suppliers and stakeholders to the business.   Ensuring the right team of people are involved, engaged and aligned with the business vision, mission and values is critical to the future success of the business.

Whilst there are many performance metrics and KPIs which are used for measuring individual areas of manufacturing performance, a potential business investor will be able to make an informed judgement call on a business and its corresponding valuation based on the above 5 performance factors.

An ideal business investment opportunity will be able to demonstrate a healthy cash flow and sustainable sales growth with a sufficient level of profit backed up by an experienced workforce who can drive the business forward.

A poor investment opportunity will likely have poor cash flow due to a combination of business debts and poor sales performance.  Other off putting factors may include a requirement for significant capital investment in infrastructure and new assets to support the business into the future.  Also the team may be unfit for purpose requiring a restructure, additional training and investment.

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