Demand for manufacturing businesses has always been very high for the following reasons:
- Easier Financing: since most manufacturing business have equipment with some resale value, it's is generally easier to finance the purchase of manufacturing companies. Banks can land for the purchase using the equipment as a collateral. Even government sponsored loans such as the small business loan only finance the purchase of equipment (for as high as 90% of the equipment value). Banks and most lenders are however very reluctant to finance goodwill, inventory and even accounts receivable.
- More Scalablity manufacturing businesses are generally more scalable than service or other types of businesses. Its is easier to buy equipment and apply the same processes to grow the business when demand increases for a manufacturing business than its is for a service business to hire knowledgeable employees and train them to deliver outstanding service to customers. Moreover, in general terms manufacturing employees need less supervision than service employees.
- Less Dependence on the Previous Owner: When clients are satisfied by the product manufactures by a company, their relationship with the company owners/ managers become less important. As long as the company under new ownership keeps the same product quality, previous customers will stay with the new owners. Service businesses however are build on customer relationships and trust. Making a judgment on The quality of service delivered is very subjective and cannot be distinguished from the quality of the human relationships between the provider and the customer. For that reason, a huge disruption can happen when the company is sold to another party. Relationships have to be built from scratch and trust have to be earned again. Therefore, the risk of loosing some customers is higher for the transfer of a service business vs. a manufacturing business.
- Processes and Intellectual Property are Easier to Patent It is generally easier for manufacturers to keep proprietary information and trade secrete confidential from competitors. These trade secrete and/or intellectual property can be registered and patented. This creates a competitive advantage that enhances the resale value of the business.
Unfortunately with these advantages come serious disadvantages:
- A large number of mass manufactured products are already or could be manufactured cheaper in China. As a result , some manufacturing companies can hardly compete and are driven out of business.
- Manufacturing companies are more expensive to buy. They sell for higher multiple of profits. You generally get a higher return when you buy a service company.
- Some manufacturing companies have powerful unions. This drives the labour costs higher and reduces the business flexibility to improve on its processes.
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