Prepping to Sell a Modular Plant

A CPA with experience in modular mergers and acquisitions offers advice on how to set yourself up for success.

• To streamline the negotiation and sales process, you must understand what data buyers will want to evaluate and ensure you have the required documentation ready.
• Buyers will need audited financial statements, data on your employees, equipment and property, as well as detailed customer and market information.
• Non-financial factors will also signal the likely success or failure of the merger or acquisition, so don’t be surprised when the buyer scrutinizes your company culture to evaluate the fit.

Document the Finances

It’s imperative to prepare the previous three years of your profit and loss statements, balance sheets and asset lists, as well as your units sold lists. These financial statements need to have been audited by an independent CPA to ensure their accuracy.
You should also generate a three-to-five-year sales trend analysis that defines territories, sales strength, builder base and overall market performance and potential. You want to accurately present the sales trends and price fluctuations in the markets where you operate, as well as the internal and external forces likely to affect those trends.
It’s also important to define the value of, and costs associated with, all equipment. Modular manufacturers are laden with tools and equipment — saws, jigs, cranes, forklifts, trucks and transporters. Prior to the sale, Grisetti suggests reviewing all equipment repair and maintenance records and existing warranties. Those records need to be up to date.

Define Your Customers

Potential buyers will want to see data that presents your builder customer base and that highlights the largest sales producers. It’s also a good idea to document how many of your builders have model homes and sales centers. This information will show the buyer that there is an existing pipeline of established builders to whom future sales will be made.
Keep in mind that you should be ready to answer questions such as whether you offer your builder customers a model home program and, if so, whether you are carrying any loan interest on these models (which some manufacturers do to make it easier for builders to participate). Also, are you the only manufacturer with model homes on your builder customers’ lots, or do your competitors have homes there as well?
If a merger or acquisition does takes place, it’s important that all parties understand the relationships that you have with all builder customers. Grisetti advises offering to set up meetings between the buyer and your largest producing builders. This will help the buyer understand the actual value of the builder network.
These meetings will also allow the buyer to hear concerns from your builder customers. Concerns could include anything, ranging from a lack of two-story plans to delivery problems. Although the buyer can (and most likely will) contact your customers directly and get this information anyway, facilitating the process shows transparency and establishes trust by assuring the buyer that you’re not trying to hide any issues.
It’s also important to help a potential buyer understand all the markets in which you have a presence. Some manufacturers operate in different regions of the country with different housing preferences. For instance, homeowner tastes in the Midwest are different than those in the South.

Present Your Employees

In sporting terms, Grisetti says to think of employees who come with the company as “your bench.” In an acquisition, companies acquire the experience and skills of all employees — company leadership, as well as those in engineering, accounting, processing, sales and manufacturing.
It’s important to document years of experience as well as any special skills or certifications employees have. These could include staff engineers and architects (which are rare but not unheard of), as well as workers with Lean certification.
When Grisetti was asked to assess modular companies, he would also review employees’ compensation packages, bonuses and geographic wage requirements, and then compare them to the acquiring company’s standards. He would adjust wages if they were too low, but would never require pay cuts.

Calculate Floorplan Values

Grisetti says that he would always ask for a list of state-approved plans as well as a list of Third-Party Approved Plans. In his experience, the companies he investigated always undervalued their floor plan collections. That is, the plans were usually worth more than the company estimated.
Manufacturers generally don’t fully account for all the time, effort and expense that goes into the development of the stable of plans they own. It takes a considerable amount of engineering time to develop a plan from scratch. The company often has scores of CAD-engineered construction drawings that detail electrical, plumbing and framing, including every lumber member that exists in the floors, walls and roof systems. There are also marketing elevations and simplified floor plans for selling.
The value of all those plans should be a factor when negotiating a price for the company.

Assemble All Agreements

You also need to present the type and volume of materials being used in your products, the supply chains that are used, what the agreement terms are and whether items are purchased from distributors or direct from the manufacturer. Grisetti would always review the duration of supply agreements and whether they allowed for percentage increases or decreases in volume, so it will be helpful to have this information ready. It’s essential to determine whether these agreements are transferable to the new owner.
A modular manufacturer may also have an array of lease agreements that include equipment, real estate and other assets. These lease agreements should be available for review as part of the audit to confirm the terms are favorable and leases are transferable.
Although most residential modular manufacturers sell through builder networks, some also sell directly to end-users through a consumer division. The buyer will undertake due diligence of both.
As part of this due diligence, each manufacturer-owned model home or storefront sales center will be reviewed to make sure the operation is running efficiently, and that they are reporting accurate P&L numbers. In addition, their infrastructure, property (owned or leased) and personnel will be assessed. Providing the buyer with information upfront will expedite the process.

Understand Your Culture

While the financials are crucial, note that a smart buyer’s due diligence will go beyond financials to look at things like company culture.
Acquisitions generally go well, Grisetti says, when both companies share cultural business similarities. Do they align in terms of work ethics, adherence to protocols and standard operating procedures? Do they have a similar commitment to continuous improvement, dedication to always doing the right thing, to valuing employees, to being open to new ideas? If they don’t, then you do not have a match. If they do, then it could be a great merger.
Further, Grisetti asserts that when skill sets, knowledge and experience intermingle, growth is gained by each party. If there are gaps in the buyer’s company that could be filled or be complemented by the acquisition of talent and resources of the other, that’s a win for both.
If your company is preparing to acquire another company, make sure your key leaders are prepared for the additional work and responsibility needed to teach and train their newly acquired employees and colleagues. You want to make sure both companies can continue to grow and increase efficiencies.

Reed Dillon is a content brand specialist, marketing consultant and freelance writer who focuses on offsite and new construction. He is the owner of Creative Brand Content in Moneta, Virginia. Contact: [email protected].