With recession sweeping the country, many companies in the small manufacturing business sector are facing tough times. They aren’t focusing on developing new products or launching marketing campaigns. They’re trying to figure out how to maintain market share and revenue streams, in other words, how to stay afloat. Owners are finding themselves in the position of choosing whether to stick it out or jump ship and obtain value from the company while they still can.
Jim Marler, manager of business performance and technology services at the Manufacturers Resource Center in Pennsylvania, explains the options for struggling companies.
“Many of these businesses are family owned, and they have never been through a recession before. Your average firm can’t afford to have a full-blown CFO or might not know how best to work with banks and lenders during times of crisis,” he says. “MRCPA helps businesses decide what their best future strategy is and then provides them with counseling along the way. Whether the decision is to navigate through the choppy waters or make an exit, we help owners preserve and maximize the value of their businesses.”
MRC is a nonprofit corporation that provides consulting to manufacturers to help them identify resource options and develop strategies to grow and develop their businesses.
The first step, Marler says, is to determine the financial health of the company, starting with the balance sheet. Many of the typical balance sheet ratios (current ratio, debt-to-equity ratio) are useful indicators, as are cash flow, historical revenue, revenue stability, current inventory and asset levels and what capital expenditures are needed to maintain the business course. It’s also important to be in a stable or growing market and to have a good core product line. All of these aspects together paint a picture of the financial viability of the firm.
If all the financial information checks out, the second step is for the owner to decide whether he or she is willing and able to stay engaged in the business. In tough economic times, long-term owners often get fatigued and lose their commitments.
“Many owners of these small firms have built up their business over decades. After all that time it can be tough to get out there and turn up the wick, stay engaged, and drive the business at the pace it needs to weather the recession storm. If they don’t, it’s just a matter of time before all the value they’ve built up starts to slip away,” Marler says. “It’s important that the owner have the same energy and inclination to continue as the entrepreneur that made the business successful.”
If the company is financially viable and the owner is willing, Marler starts looking at strategies to keep the company afloat. One of the most important things a business can do in a downturn economy is to maintain a good relationship with its lenders and shareholders. Banks need to know that their debtors are in good shape, and firms should market themselves accordingly. Occasionally in this climate a firm’s bank will become unstable, and though they may be reluctant to do so, firms should consider switching to a more stable bank. Manufacturers Resource Centers also recommend that businesses develop strategies to manage cash flow in an appropriate fashion during an economic crisis.
If it is determined that the company isn’t financially stable enough or the owner is ready to pass the business on, the next step is to decide whether to put the firm on the market or to pass the company on to a family member or key employee. “Most SMB owners have never faced these types of decisions before,” Marler said. In the case of a succession, or handing off of the business, a Manufacturers Resource Center can help the business identify a new owner by looking at the skills of potential candidates, putting together organizational development plans, and navigating the maze of tax and legal requirements. If the owner decides to sell, the Manufacturers Resource Center helps out by valuing the business, setting up a confidential summary for potential buyers, developing a marketing strategy, and coaching owners throughout the selling process to ensure that the owner gets the best value for all the hard work he or she has invested over the years.
As Marler says, many small manufacturing businesses are family-owned companies built from the ground up over a long period of time. The survival instinct is what has helped them survive through all the vicissitudes of the economy, and letting go of their livelihood is a tough pill to swallow. Unfortunately, the current economic landscape is harsh and unforgiving, and some firms might need to be acquired or find new leadership in order to survive. As difficult as it is to do, owners should acknowledge the fact that the best business decision might be to let go, and if not, they should adjust their business strategy accordingly.