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How to Successfully Position Your Plastics Processing Business for a Buyout
Follow these steps to strengthen key business fundamentals and attract potential buyers.
Pierre Maillet
April 13, 2024
7 Min Read
Yoh4nn/iStock via Getty Images
At a Glance
- Start by working with experienced professionals to conduct a comprehensive business valuation.
- Ensure that your financial records are accurate, transparent, and well-documented.
- A loyal, diversified customer base is an asset when positioning your business for a buyout.
For plastics processing business owners and senior management, the prospect of a buyout can be both exciting and daunting. If you're considering selling your business soon, or simply want to ensure it's attractive to potential buyers down the road, or just creating a succession strategy, there are steps that you should be taking now. Let’s dive into some strategic ways for a plastics processor to increase business value and growth potential.
Conduct a business valuation.
Before initiating discussions with potential buyers, it's essential to clearly understand the value of your business. Work with experienced professionals to conduct a comprehensive business valuation that considers factors such as financial performance, market position, growth potential, strengths, risks, and industry comparables.
Understanding the qualifiable worth and potential of your business will enable you to negotiate from a position of strength and maximize the value of the buyout.
Ensure financial stability.
On the surface, the financial value of any business is its ability to have consistent growth with increasing cash-flow generation. But in the real world, any serious buyer will perform due diligence and look at many more aspects of a business before acquiring it — mainly to identify its strong points as well as risk factors that could diminish value or lead to failure.
Ensure that your financial records are accurate, transparent, and well-documented. Focus on improving key financial metrics such as revenue growth, profitability, and cash-flow generation. Minimize debt, reduce unnecessary expenses, and optimize working capital management to bolster financial stability and attractiveness to potential buyers.
Capture critical information.
Knowledge transfer and company depth are key assets that should not be overlooked. As a plastics processor, you understand the risks associated with employee turnover, especially when a few employees hold key intelligence. Critical information, know-how, and best practices should not be the sole domain of any one individual. This information should be documented to safeguard against it walking out the door with a retiring or disgruntled employee.
Any thorough due diligence will uncover gaps in this area. To help make your business attractive and ease transfer of ownership, make sure that new management is not handicapped by missing information.
The case of the secret recipes.
Archive Holdings Inc./The Image Bank via Getty Images.
This is a true story about the acquisition of a very profitable bakery known statewide for its amazing pies and crusty bread. Upon entering the business on Monday morning, the new owner found the shelves empty of any baked goods. It turned out that the previous owner was the only baker who knew the secret recipes.
It took some time for the new owner to educate himself in the art of baking — five long years before the business was successful again. In other words, the business buyer had to re-create the value himself. A more thorough due diligence should have been conducted prior to acquiring the business.
Based on the Rockefeller “scaling up approach,” internal systems and inadequate distribution of responsibilities are major factors in limiting business growth and the reason why so many fail to scale up.
Ask yourself the following questions:
Are your plastics manufacturing processes like costing, scheduling, quality, production, and purchasing, to name a few, automated with an integrated scalable system?
Are your business methods outdated? Does your business adopt more efficient ways to do the same tasks? What tasks are not done but should be done?
Are you relying on very few individuals with their own little system, like spreadsheets, to get key business operations done?
Who are the key management team members in your business? What are their skills? Are they nearing retirement with or without a backup?
Is your internal machinery outdated or updated constantly to keep up with new automation technologies in the world of plastics processing?
Do you have key external partners that help you add the depth you need? Are they reliable? Do they have competitors that can replace them or add capacity?
When you leave, will the team in place be able to replace you? It takes anywhere from five to 10 years to ensure proper business continuation. Unfortunately, business owners often realize this when they are too old to take on that process.
A competent and cohesive management team is essential before and after acquisition. Take the steps to develop leadership talent within your organization and ensure succession planning is in place for key roles. Demonstrating a capable management team with a clear vision for the future instills confidence in potential buyers and facilitates a smooth post-sale transition.
Stay focused.
As in the bakery example, ask yourself the following question: What is your secret recipe? In other words, what are your key competitive advantages and what differentiates you from other plastics processors? Answers to these questions should be listed and key elements protected.
As a part of this exercise, take time to consider how you can create even better value within your specialization. Ask your customers what would be valuable for them. Look beyond what you’re currently providing and consider value-added services. This might include adding assembly, printing, product decorating, or drop shipping services, for example. Providing customers with the needed extras not only strengthens the bottom line but builds long-term repeat business.
Being specialized today is a major advantage, as your brand will be stronger and easier to establish. Likewise, the opportunity to create a higher value for your customers will be much greater. Creating value for your customers creates better value for your company in terms of profitability. (A great book on that subject is The Inside Advantage by Robert H. Bloom.)
Determine sales vulnerabilities.
A loyal and diversified customer base is an asset when positioning your business for a buyout. Foster strong relationships with key customers by providing exceptional service, customized solutions, and reliable support.
Just as important, diversify your customer portfolio to mitigate risk and demonstrate market stability. A track record of satisfied customers and long-term contracts can significantly increase the attractiveness of your business to potential buyers.
When evaluating sales and related risks, consider the following:
Does any one customer represent more than 5% of your sales?
Are you selling locally? Statewide? Countrywide? Or internationally?
Do your products cover multiple industries or are you limited to one?
Could your products access new markets with new internal mechanized processes, like lot tracking certification at shipping?
Can your system handle public warehouses and countrywide transactions?
Can your system handle consignment sales?
Can your system handle multiple currencies?
It is possible to be specialized while having a strong diversification in terms of geography. The more, the better!
Review management practices.
Thomas Barwick/Stone via Getty Images.
Operational efficiency will be scrutinized by potential buyers when evaluating your business. Streamline your operations by implementing lean manufacturing principles, optimizing production processes, and investing in automation technologies where feasible. By maximizing operational efficiency, you not only increase profitability but also make your business more attractive to buyers seeking a well-run operation with minimal overhead. Scalable systems and processes can accommodate future growth without significant restructuring or investment. Leverage technology to streamline workflows, optimize supply chain management, and enhance scalability across all facets of your business operations.
It's one thing to have a great system in place but do you use what really matters in terms of managing its profitability? All successful plastics businesses have something in common: They track their production costs for each work order. They know what went well or did not, and they check their costs before confirming an order.
Some raw material prices may have increased, or previous production costs indicate that the production specs need to be revised. This is super important to protect the sustained profitability of any plastics processors. Systems now exist to mechanize that costing process, and they can even recalculate prices automatically when resin prices increase. With today’s inflation, it is critical to stay on top of that. Are you doing that?
Do you know how much cash your production floor made or lost today? Do you have an internal system that can provide that information in terms of reports and dashboards?
Again, setting targets for each shift, day, month, or quarter known by the production employees and supported by a small incentive plan deliver marvelous results in terms of motivation and teamwork. Human Resources is playing an increasing role in improving internal communications to build and keep an experienced workforce in place.
Focus on product quality and innovation.
Innovation and product quality are paramount in the plastics processing industry. Continuously invest in research and development to enhance product offerings, improve performance, and stay ahead of competitors. Highlight any proprietary technologies or intellectual property that sets your business apart.
Demonstrating a commitment to innovation and delivering high-quality products will enhance the perceived value of your business in the eyes of potential acquirers.
Act now.
Positioning your plastics processing business for a buyout requires careful planning, a thorough review, and a focus on maximizing value. Taking steps now to understand and strengthen key business fundamentals will attract potential buyers, command a premium valuation for your business, and achieve a favorable outcome for all stakeholders involved.
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