- with readers working within the Insurance, Property and Law Firm industries
Whether you manufacture bespoke products, operate high-volume production lines, supply major retailers or produce specialist components for other manufacturers, when preparing a manufacturing business for sale, most owners focus on increasing profitability, improving production and growing revenue. However, legal due diligence can have just as much impact on value.
Buyers are looking for certainty, and legal risks often translate to lower offers, increased warranty obligations and/or lengthy negotiations. We have put together five legal issues we commonly see affect the value of manufacturing businesses.
1. Your key customer relationships aren’t documented
Strong customer relationships are valuable, but buyers will want confidence those relationships will continue after settlement.
If key customer arrangements are undocumented, can be terminated on short notice, or rely heavily on personal relationships, buyers may question the sustainability of future revenue.
Well-drafted customer agreements can provide certainty around pricing, supply obligations, term, renewal rights and termination provisions, helping to reduce transaction risk and improve buyer confidence.
2. Your supply chain is vulnerable
Recent years have highlighted how quickly supply chains can be disrupted – and the impact this can have on a business.
Buyers will closely examine whether a business is overly reliant on a single supplier, whether critical supply arrangements are documented, whether key inputs can be sourced elsewhere, and how exposed the business is to price volatility or overseas disruption.
A resilient and well-documented supply chain demonstrates that the business can continue operating even if market conditions change.
3. Your route to market isn’t secure
For many manufacturers, value lies not only in making a product but in getting it to market.
Distribution, agency and reseller arrangements are often fundamental to a business’s success, yet many are poorly documented or contain provisions that create uncertainty following a sale.
Buyers will want to understand whether distribution arrangements are exclusive, whether they can be terminated at short notice, whether they are transferable, and who ultimately controls the customer relationship. Weak distribution arrangements can undermine confidence in future earnings.
4. Your competitive advantage isn’t legally protected
Many manufacturing businesses derive their value from proprietary processes, designs, technical know-how and other intellectual property rather than physical assets alone.
Buyers will expect clear ownership of that intellectual property together with appropriate protections to prevent confidential information from leaving the business.
Intellectual property assignments, confidentiality obligations and appropriate legal protections can help ensure that the business’s competitive advantage transfers with the sale.
5. You don’t own or control the assets that drive the business
Manufacturing businesses often have complex ownership arrangements for critical assets.
Tooling may be owned by customers, equipment may be subject to finance arrangements, software licences may not be transferable, or intellectual property may never have been formally assigned to the business.
These issues are frequently identified during due diligence and can delay transactions, reduce value or require additional legal work to resolve before settlement.
Steps to take before you sell
Addressing these issues is considered ‘good housekeeping’ for a business regardless of whether you are looking to sell now or in the future. However, conducting a legal review in advance of a sale allows owners to strengthen their commercial position, reduce due diligence risk and present a business that gives buyers greater confidence in its long-term value.
If you are considering selling, open to selling in the future, or you just want to cross your t’s and dot your i’s – we can conduct a review of your business to ensure it is legally sound and attractive for acquisition.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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