I'm evaluating a turnaround business in the manufacturing space. Advice?
July 25, 2023
by a searcher from The University of North Carolina at Chapel Hill - Kenan-Flagler Business School in Raleigh, NC, USA
An acquisition opportunity was handed to me recently and I am a bit outside my experience. A fellow searchfunder suggested that I post something here and see what I could learn from the community.
I have not been in a turnaround before (company is currently losing money and needs to be turned around or liquidated) but I can acquire the company for almost nothing. The idea of an acquisition that requires very little capital investment (no personal guarantee, lenders, or investors) is very attractive, but I might be overly optimistic about the upside potential. It would be great to get some advice on:
1. how to evaluate a turnaround - most valuation methods assume positive EBITDA,
2. lessons learned that a first-time turnaround searcher should know, and/or
3. any other insights so I can go into this with eyes wide open to the real opportunity at hand.
I know typically we are all looking for the "good businesses" (profitable, high growth, etc.) but I've had a few opportunities for a "good businesses" fall apart because of difficulties securing the capital required to purchase. Trying to get past my blinders.
Thanks for any insight!
from Oklahoma State University in Wichita, KS, USA
1. Speaking from the manufacturing start-up experience. Does the company have product market fit today (paying customers that want to continue to pay if product was available). If a soft yes or no, then you would need to invest in R&D which takes resources (time, money, specialized talent). I would avoid the deal unless you have an unfair advantage in understanding the customer problem as well as have unique access to those customers once you have figured out how to create the product they have to have.
2. Sharing a learning from the turn-around I considered. Ultimately, it was a pass for me because the company had a specialized team close to retirement age with unique manufacturing knowledge that would be difficult to quickly replace. Moreover, with a failing balance sheet that could not support me long enough to reasonably figure out how to survive.
Ideas:
1. Is there real estate that could provide some untapped revenue (sub-lease) or becomes the primary focus with the business included. Downside, the business fails, and you have some valuable real estate.
2. What could you liquidate all of the assets for? I would not pay more than the liquidation value.
3. If the reason why the company is not profitable today can't be clearly identified, then it's tough to make the case the dynamics could quickly be changed even with very effective management.
4. If you want to do the deal, can you structure it so that you take very little to no personal risk. Possibly, paid a salary for x time and then the acquisition is 100% seller financed.
5. Take everything I said with a grain of salt. I have never done a turn-around.
Best of luck! Cheers to much future success on this deal or the next.
from The University of Michigan in Waukesha, WI, USA
- Although you may acquire the business with little cash you should be ready to spend/invest to turn the business around. My assumption is the previous owner did not invest in maintaining/replacing equipment and/or training employees. You may need a large check to effectively turn it around.
- It will take time. After investing in the business it may take months or years to become profitable. Additionally, it will most likely require long hours to get the business to turn the corner.
- Changing cultures is tough. Turning a mfg. business around may require employees to work long hours and/or work harder than they are used to. While you may be ready to work hard, the employee base may not be. Without them being onboard with the increased effort a turnaround will be difficult. In the same vein hiring new motivated employees may come at higher costs so be ready for a larger payroll if that's a strategy.
= Assuming sales growth is part of the strategy, you may need to accept lower margins to "win" business. If this is the case, it will take months to years (depending on industry) of price increases to get to hit target margins. Lower margins mean longer time to true turnaround profitability.
- My opinion is never do a turnaround alone. A great supporting partner or manager is essential. Someone may need to work "in the business" (i.e. fixing equipment, supervising production, putting out fires, scheduling, etc) and someone will need to work "on the business" (biz dev, strategic roadmap, etc). A turnaround will require a lot of firefighting which can suck up all your time/energy and never give you an opportunity to truly work on the business.
I hope this helps and feel free to reach out with any questions.