[EP 266] State of the Market Series: Manufacturing Industry Deep Dive – What’s Selling, What’s not – and Why..

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Joanna:  

Hi, it’s Joanna Oakey here and welcome back to The Deal Room Podcast, a podcast proudly brought to you by our commercial legal practice Aspect Legal. Now today we are talking to David Ferraz from Argus Business Brokers all about the state of the market in the industrial print, and wholesale sectors. David is the managing director of Argus business brokers and specializes in selling and valuing businesses with a really strong focus on manufacturing wholesale and distribution businesses. David has a particularly high level of experience in selling and valuing print related businesses. And he’s also a registered business valuer by the Australian Institute of business. In this episode today, we are talking about the state of the market in the industrial print and wholesale sectors. We’re talking about the trends, who the buyers are that are around at the moment and how they characterized which businesses in this industry are most saleable, and how sellers can position themselves best in this market. So without further ado, here we go with our discussion with David. 

Joanna:  

David, welcome on to The Deal Room Podcast.

David:  

Thank you, Joanna. Thanks for having me in the show.

Joanna:  

My absolute pleasure as always, David. All right. So why don’t we kick this off? How about we start off by you giving just a little bit of a background about the sorts of businesses you deal with how long you’ve been in the market? Just a bit of a background of you?

David:  

Yeah, absolutely. So I actually come from a bit of a manufacturing type background, but mostly on the print side before getting into broking. I’ve been selling and valuing businesses for about 17 years now. And that’s mostly been a focus on manufacturing, wholesale, distribution, printing trades type businesses. So most of what I sell, doesn’t operate from the shop, it operates from the factory. Yeah, that’s pretty much the high level overview of Argus business brackets in me love it. Okay,

Joanna:  

wonderful. Well, look, let’s kick it off with just talking about the trends in the market. So what are the trends that you’re seeing at the moment in this market?

David:  

So actually, the trends are quite varied. And it depends on which segment of the market you’re getting into. So I’ll talk a little bit about each of those industry sectors we discussed. So manufacturing, wholesale trades, and then printing. If you’re looking at printing business, and it’s very manufacturing businesses, they’ve always had quite good demand. So there’s been a pretty strong amount of inquiries that have come through for those kinds of businesses. The only ones that I’d say a bit difficult to sell, and not in that much demand are those that are very technical, so and very reliant on a very skillful owner. So, for example, I once had a display manufacturing business, that guy was extremely talented of making these magnificent displays to go into like Harvey Norman, etc. where you’d get the latest mobile phone, and it’s on the stand. And it looks like it’s made out of metal with rivets, but it’s actually made out of particleboard, you know, underneath, and we get buyers walking in, they just look at in awe at what this guy’s done, but they just had no confidence that they could do it themselves. 

David:  

So that was actually very difficult to sell. You did get itself but that was a hard one. That’s manufacturing. If you move into wholesale, also, there’s massive demand for wholesale type businesses. But if you go and look online, try and find them. They’re actually not that many available. I don’t know if that’s because people are just holding on to them or what that is, but yeah, the the only exception to that is you get some businesses where people start to try and sell things and They will sell the good stuff and keep all the bad stuff. So after, you know, a decade or so they’ve just got a warehouse of stuff that nobody can sell. And it’s all outdated and covered in dust. Those ones that they actually usually not making a profit by the time they get to that stage and they can be able to sell, but any well managed wholesale business very, very saleable. 

Joanna:  

Love it. Okay, and what are our, you know, what, what are the, we’ll get to print in a moment, but the men on the manufacturing the wholesale side, what are you seeing as the size of businesses that have the most demand? It’s interesting.

David:  

You think sort of with businesses, because there’s always a pyramid, there’s, there’s a hell of a lot of small businesses and then at the PQ, there’s not that many of them. But for some reason or other, they seem to be a pyramid of buyers as well, you know, that matches that, then I see pretty much demand across the scale. So you were just recently involved in that one that we solved with just circa one mill type profit. And that one, we had great demand for that. And, yeah, just earlier, I think you were also involved in that little chemical distribution, one that was like tiny, and that one also had good demand. 

David:  

So I think that just that sector as a whole for that, with manufacturing, I think if they’re a little bit bigger, that they’re better, because there’s, there’s the opportunity for someone who’s not that skilled, to, to walk in and the staff that can sort of keep the machine going, so to speak, you know, whereas if it’s as if it’s a smaller one than that the owner, they don’t have the skills and the product a little bit more technical, they’d struggle. So yeah, I think in terms of size, it’s across the board.

Joanna:  

Great. Okay. All right. And then finally, print, let’s talk about print. What what are you seeing in the market in terms of trends in the print market?

David:  

I think it’s quite interesting. If you look at people as a whole, they will think that the print industry is dead industry, a dinosaur that’s going backwards, you know, that the way of the video store, and, to a certain extent, in certain sectors, that’s true, like you look at the phones, people used to print 1000s Millions of forms for people to fill in and invoice books and, and they’d go into the newsagent, and browse and collect a few magazines and go home with those in the newspapers, etc. All of those have sort of drifted into digital. But underlying that you’ve got the packaging sector. So we’ve just using more and more packaging, sending more and more things, by mail, everywhere, you know, lots of small little businesses with their products. And so, and along with the packaging goes the labels, so labels and packaging are going gangbusters. They really strong sectors, and those kind of businesses are in pretty good demand actually.

Joanna:  

Yeah, that that’s that’s really interesting, isn’t it? You know, sort of that that split in in the industry? Okay, great. All right. Wonderful. So let’s talk about the buyers. So what what characterizes the kind of buyers that are around?

David:  

 Okay, there’s, there’s a whole cluster of different types. For, for the small businesses, mainly, you get the owner operators, those are the guys who are sitting in their corporate jobs or whatever, and getting sick and tired of working for someone else, and somebody telling them what to do. And especially people with a very solidly independent mindset, they want to go out and do their own thing. So for the most part, those are smaller budget buyers, but there are those out there that have got bigger budgets, we’ve saved people from massive corporate positions. We’ve been on huge salaries, and they’ve accumulated quite a bit of wealth. 

David:  

And they are looking for bigger ones too. So you get those guys. There’s also acquisition biases, huge amounts of those where they might want to grow by bolting on competitive businesses onto theirs in the print industry, and I think different sectors are more used to it. The print industry is very, they used to doing acquisitions, so even small businesses will get bought bought by other businesses. And I’ve had some buyers who’ve bought 5678 businesses from me. They just me every year or so do another acquisition rather than hiring a salesperson who then owns the the sales base, they’ll buy a business and then, you know, the sales might drift off if it’s a declining market, but they will top it up to their next acquisition. And so they go and do well like that

Joanna:  

The handy buyers to have in your rolodex there, David, I like it.

David:  

There’s one that  comes and there’s another one gone.

Joanna:  

Good. I love it. I love it. So in the last two to five years, would you say there has been any sort of change in the predominance of each of the particular type of buyers, whether it’s this sort of owner owner operators that are coming out of corporate or whether these, you know, professional buyers looking for acquisition and growth? Has there been any sort of change in either of those? 

David:  

I think maybe COVID and all the government incentives have had an impact on that, because, you know, people were kept in work. So they’re all the shopkeeper jobs savers going in there. And so the government’s managed to keep I don’t know if the government has kept it or, but it’s kept employment extremely high and unemployment extremely low. Which means, yeah, there’s less and less of the unemployed people were looking for those buyer job type businesses. So that sort of dropped the demand for those those smaller buyer job businesses. So that kind of buyers is less at the moment. And the acquisition type buyers are a bit more prevalent. It’s interesting that yeah, so good economic times with with high employment, or bad times for selling small businesses and vice versa.

Joanna:  

Okay. All right. And so then let’s talk about the saleability of businesses. Obviously, we talking about three, you know, different industries here, but you know, they have a bit of similarity between them. What what makes each of these businesses saleable versus not saleable, or really saleable? You know, when really in high demand versus not

David:  

bid, there quite a few things there that will impact the scalability of the business, I think one of the things is having good financial records. And I think having good financial records is also in part dependent on having a good quick accountant, somebody’s going to make sure that you’ve got the most recent financials, I often see businesses where, you know, like, now they still give them a 2020 financials as the most recent ones, that they’ve got their accountants that are way behind with getting their, their documentation in order. And, you know, that’s the business is just not ready, because the buyers accountants gonna say, where’s that stuff? I want to see 23 And I’m gonna see 22

Joanna:  

It’s annoying to a buyer, isn’t it? You know, and, you know, of course, sets off a whole heap of red flags that you don’t want set off at that point, you know? Absolutely. So financials. 100%. I agree with you get them ready. What else? Yeah, and

David:  

another thing linked to Financials is often, especially with businesses that are selling a product, a lot of the businesses, you’ll see the stock values got your 100,000, north, north north, nobody did a stocktake there, you know, and it’s just 100,000 at the end of every year or whatever. So when end up seeing that with a variety of sizes of businesses, were they just guessing the stock at the end of the year. And what does that mean? It means that your gross profit is an estimate, which means your your bottom line, profit is an estimate. 

David:  

And so if your opening and closing stock were quite different than your profit is actually a might be very far off what what you’ve reported. So that’s one thing that will make accountants concerned and it’ll make people less confident in the business and they’ll either not want to buy it or they’ll offer a lower price because our based based on our conservative approach to that. And another thing is that I found which impacts businesses is if people haven’t set the business structures up properly, so they’ve got two or three family businesses running through the same company, and they just reporting one set of financials for tax. 

David:  

So then they want to sell one and well, what is the financial position, you know, what finance what expenses belong to which business and you know, become very messy, and again, you lose buyer confidence. And it might not make it through due diligence. And it might just, if it gets old punish the price quite heavily. So there’s that.

Joanna:  

Well, that’s an I just want to add to that, because I completely agree with you on the structure side. Some of the other issues that I say from the structure side as well is when trusts have been used and then can be quite difficult to deal with. If we’re, if we’re particularly if we have partial sales, because there’ll be need for a restructure before a sale, we’re, you know, we’re working on one right at the moment where, where our sellers retaining 30%, and we need to do a restructure before the sale, because the only way to retain that 30% is to restructure the business and then have a share sale for a portion. And that can be a complete pain in the neck. And it can be a real trip hazard, with tax as well. And that classic that we see is just that failure to get tax advice leading into sale and going in with the wrong structure of the sale to meet the structure of the business. You know, and it’s only finding out at the last point. So anyway, I don’t want to record the conversation. I just want to you know, reiterate. David, I completely agree get your structure sorted out.

David:  

Yeah. Talk to your lawyer, talk to your account, make sure that that’s all? Absolutely. Well said,

Joanna:  

well, in advance Well, in advance. Yeah. And what else? What else have we got in our list?

David:  

Um, one, another thing that I see sometimes, is you’ve got a business where you’ve got three or four family members working in the business, and those family members all want to leave when the business is sold. So suddenly, you’ve got their roles are not clear, the hours that they work are not clear. So the buyer looks at this, you know, who am I going to replace? How does somebody walk into a business and have to replace three or four people at the same time? And, you know, can they do it are they going to be able to succeed, so that sort of structure can put buyers off. So if it’s okay, if those family members have proper paid employees doing a professional job, and most of them want to stay, so maybe just the owner wants to leave? That’s probably okay. 

David:  

But, you know, it should be if they, I suppose, the lesson is that if they’re family members in there, they should be professionally and properly employed by the business and sort of as close to unsafe as you can get. And, you know, if they properly employees, they probably won’t buy the bolt out the door as soon as the owner sells. So I think that’s, that’s important. And, of course, one of the things is that, you know, some businesses, if you look at their customer structures, that just in terms of saleability, again, if they’ve got one customer that’s 50, 60 70% of sale, that’s obviously going to be a very much more difficult business to sell than one that’s got a good spread of customers. It’s harder to correct that then other things. But it’s something just to be mindful of and to adjust one’s expectations if one has got a high concentration into one customer. Yeah, because often, often, that customer may just dislike the biomes and say, Now I’m dealing with them so…

Joanna:  

Oh, and I guess it’s about looking at the business from a buyers eyes as well and you know, working out what it is that a buyer is going to see as risk and certainly that customer concentration may have worked for the business in the past but absolutely is viewed as a risk from a bite size, isn’t it?

David:  

I think also premises wise, you know, they do things in relation to premises, I suppose number one, you know, obviously first impressions last and one of the things are often see you walk into premises and they’ve got a you know, corner there that’s, you know, all the beds and furniture and stuff because their sons just gone overseas for six months and just digital their furniture and they’ve got a sport in the corner of the factory and they’ve got the kayak and motorbikes and you know, all sorts of things like that. So probably it should look like a business.

Joanna:  

But I love it. I’ve not even thought of that. Well that’s a really good one. That’s a that’s hilarious, how often does that happen? Quite often?

David:  

When people are in their factories that just. Yeah, it’s it becomes a second shed, you know, so they got to watch it.

Joanna:  

Yeah. Yeah, a bit of a spring clean of your house like that.

David:  

And then I mean, you can just walk into business and you’ll see they’ve got so stop old dusty boxes that that all frayed and lying in a corner doesn’t look good and it’s useless stuff. It’s not worth it. You think to anybody get rid of this stuff, you know, or some old broken machine that they cannibalizing for spares or something, just just make it look nice, you know, it’s just that people are thinking as where they are going to work, they tend to think of it. Often I think, where am I going to park my car? Where am I going to sit? I can see, visualize that. So if it’s, if it’s not very nice, and yeah, that’s going to impact the solubility. So I think that’s, that’s important. 

Joanna:  

Absoluttely and you said, there’s two things with prep?

David:  

Vendors who own the premises, you know, just make sure that, that they know, what the market rent for that place is if they’re going to rent it out. And, you know, think about what sort of lease structure they want, because I have seen also what dramatic changes in expectations in in the lead up to settlement that have stuck deals up. So, for example, one factory was in Brookvale. And this guy had quite a big factory that he was using for water, sort of not that larger business. And he’d been charging himself about 80,000 rent, and he was convinced that post word was when it came, the buyer was almost locked and loaded, then he got his market review, and it was about 220,000 market rent for the place. So suddenly, the viability of the business dropped dramatically, you know, and so I think that’s very important to to do that research.

Joanna:  

Amazing, isn’t it? Yeah, absolutely. And actually, that concept of, you know, the rent side, it is actually interesting how often that is left, you know, not as part of the prime negotiation, but right at the end, okay, we’ll do a market review, rent review, that then suddenly comes as a sticking point, right at the end, you know, so we’ve actually got a few where there’s, that’s happening at the moment. So I think it’s a really good point, get it get that understanding, right? In the beginning, it is all about that preparation side, isn’t it, but here’s the things to do to be really prepared.

And actually something for an owner to think about with that rent. And I often people will be very focused on the value of the business if they own the premises. But a premises might, for example, typically be valued at say, 12 times its annual rent, just that’s not an exact figure, but just ballpark, you know, and where’s the business might be three times its profit. So if you reduce the rent by say, 100 or 10,000, then you might gain 30,000 in value of the business. But if you increase the rent about 10,000, you increase the value by 120,000. So it’s better to almost sacrifice the business value a little bit just to get the right rent.

Joanna:  

That’s amazing. That’s really good point. David. Love it, putting that in my arsenal. Interesting. Okay, and what else did we cover everything else that you feel is relevant to saleability?

David:  

you know, how the buyers can position the business to get it, you know, ready for sale and maximize it? saleability? You know, I think some of that is just making sure, again, that they’ve got their financials all sorted, and the latest stock ready, so it’s going to be all their tax returns all their bears, ready to pull out a report on age data’s age creditors or, or Sales by Customer, you know, obviously, you’ll never provide customer names, but you got to be ready for that. And also, to at least appear to be, you know, very open, transparent and willing to help the buyer with their due diligence because then they’ll trust it. And the moment people clam up, people always wonder what has been hidden away. So

Joanna:  

exactly. I completely agree. And I think it’s about being open as well, because my experience has been when a buyer, if a buyer is left to find out something that’s negative about a business and knows that you have deliberately not told them. That right there can be a deal breaker. It’s about keeping that trust and being open, being prepared, having the information but also being open I think with it.

David:  

And actually I’ve heard it said that if you’re selling something and your message is entirely positive, then people don’t trust it as much as if you throw a little bit of a negative in there. Well, I don’t know.

Joanna:  

That’s a really good point, isn’t it? Yeah, that’s right.

David:  

Another thing with saleability that I think one can learn a lot from franchisors about it, they, they have gear their businesses up, so they can sell a business to anybody. So whatever industry sector it is, they’re not looking for or for most sectors, somebody with skill in that industry. In fact, they usually prefer someone who’s maybe got good sales or, or management experience. And you know, it’s about the customer relationships there. So, if one’s got the systems and procedures and the staff in there, you can do things so that you’ve set the business up so that the owner doesn’t need to be extremely industry experienced. So I think good systems and procedures can help a lot with that.

Joanna:  

Hundred percent. Absolutely, completely agree. Well, look, thank you so much, David, for your insight into these industries, really fascinating hearing about what’s happening in the market at the moment, some very, very practical tips here about how to get your business in the best position for sale. If we have any listeners who have businesses in the industrial print wholesale sectors, and they want to have a bit of a chat about what they should be doing to get sale ready. If they’re gearing up for sale. How do they contact you, David?

David:  

Oh, yes, absolutely. I can contact me on my mobile 04 25329 765. Or you can email me [email protected]. We’d love to hear from them.

Joanna:  

Love it. We’ll put all of that in our show notes. So if you are running along the beach right now or on your commute into work now which one I’d prefer to be doing, then that don’t worry, you’ve we’ve got the show notes just pop in, you’ll be able to click straight through to David. David, I just want to say a huge thank you for coming on to The Deal Room Podcast today. 

David:  

It’s been a pleasure. Thank you very much, Joanna.

Joanna:  

Well, that’s it for this episode of The Deal Room Podcast. We hope you’re now primed for your next deal with these pointers and have enjoyed these fascinating insights. Now if you’d like more information about this topic, then head over to our website at thedealroompodcast.com, where you’ll be able to download a transcript of this episode as well as access any contact details and any other additional information we referred to in today’s podcast. Now if you’d like to get in contact with our guest today and the services they offer, you can go ahead and check out our show notes for a link right through to them and their details. You can also book indirectly with our Legal Eagles at Aspect Legal. If you’d like to soundboard your next steps, discuss a legal question or find out more how we can assist whether that’s with buying or selling a business or perhaps somewhere in between. Now, don’t forget to subscribe to The Deal Room Podcast on your favorite podcast player to get notifications whenever a new episode is out. We’d also love to hear your feedback. So please leave us a review and rating. If you’re already one of our subscribers or even if you’re listening to this podcast for the very first time, every review helps our team produce valuable content for you. 

 

Joanna:  

Well, thanks again for listening in. You’ve been listening to Joanna Oakey and The Deal Room Podcast, a podcast proudly brought to you by our commercial legal practice Aspect Legal. See you next time.

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