Private equity investments in manufacturing have skyrocketed.
According to New York-based investment firm Jahani and Associates, private equity firms funneled roughly $262 billion into manufacturing companies between 2020 and 2024.
Interestingly, distributors are also seeing more private equity investments, as are some independent manufacturer’s representative groups.
What does PE mean for the future of manufacturing — and what should you know before jumping on board?
What Is Private Equity, and Why Is It So Popular?
PE firms generally strive to increase a company’s value through a mix of strategic oversight, management improvements, and financial restructuring. PE investments can take a variety of shapes, from a growth capital investment (where a PE firm provides capital to fund expansion, in exchange for a minority equity stake), all the way to a full buyout.
Although private equity isn’t new, it’s also not a coincidence that these investments have been growing at a fast clip over the past several years. Several timely factors are at play:
A stronger supply chain
COVID-19 completely disrupted manufacturing, and supply chain issues were widespread. For example, as consumers ate breakfast at home more often during the pandemic, cereal producer Kellogg Co. experienced a massive growth in demand for its products — but also found itself scrambling to source enough paperboard for its boxes.
To counter these challenges, many manufacturing companies diversified their supply chains, creating redundancies and backup plans in case of future disturbances. These stronger supply-side strategies have, in turn, made these manufacturers more attractive to PE firms.
Reshoring
The pandemic also put a spotlight on the risks of offshoring. Transportation delays, lack of centralized control, and even geopolitical instability wreaked havoc on the ability for some manufacturers to easily move their goods.
In response, many companies moved operations either onto or closer to U.S. soil. Ford Motor Co., for example, reshored its electric vehicle production to the United States with a substantial investment in its American factories. As manufacturers protect their ability to predictably supply their goods, PE firms become more interested.
Cashflow
Ultimately, the bottom line is the biggest driver for firms looking to invest in companies. And unlike some markets like technology, where new innovations can take years to yield a profit (if ever), manufacturing companies produce tangible, salable products that can generate revenue immediately.
What’s notable is that these trends don’t appear to be shifting anytime soon. So as more PE investors come looking for new manufacturing acquisitions, the million-dollar question is: Should you turn to private equity to fund your manufacturing company’s growth?
The Advantages of Private Equity in Manufacturing
There are many reasons you might be interested in working with a PE firm. Some include:
- Immediate cash: A PE investment provides significant upfront capital that can fund big purchases and major initiatives, such as developing new products, expanding into new markets, or adding new technologies.
- Experience and expertise: A PE firm that’s well-versed in your market can bring much-needed managerial and strategic knowledge that can help you more quickly optimize your operations and level up your leadership team.
- New connections: A PE firm enables you to tap into a larger network of suppliers, investors, or other business partnerships that can add tremendous value to your operations.
- Exit opportunities: For owners nearing retirement but struggling with developing a cohesive succession plan, a PE firm can solve this challenge and allow you to make a graceful (and lucrative) exit.
The Downsides of Private Equity in Manufacturing
Although private equity can bring substantial advantages for manufacturers, it’s not without risks as well. These include:
- Short-term focus: PE firms typically have a limited investment horizon (usually about 5-7 years). This means they might prioritize short-term gains over your company’s long-term health.
- Loss of control: Depending on the particulars of your contract, you’ll likely no longer be the sole decision maker on major issues — which could potentially send your business in a direction you don’t approve of. Toys“R”Us, for example, had to file for bankruptcy after a PE firm sold off its real estate and forced the already-struggling retailer to lease the buildings back.
- Cultural changes: Is the culture of your company important to you and your employees? A PE firm might change it. For example, if everyone loves your open-door policy and monthly potluck lunches, be aware that a PE firm could make sweeping changes that could dramatically change workplace culture and affect employee morale. Your customer and distributor relationships might also change with someone else at the helm.
Questions to Ask Before Selling Your Manufacturing Company to a PE Firm
If you’ve weighed the pros and cons and you’re still interested in selling all or part of your company to a PE firm, congratulations — and the following questions will help you evaluate whether a potential partner is a good match for your needs.
What is the investment horizon of the PE firm?
How long does the PE firm plan to hold the investment? Their exit strategy impacts your business’s future direction and operations, so it’s important to understand their plans.
What level of operational control will you retain after the sale?
Will the existing management team be kept in place, and how much autonomy will they retain in decision-making? If you want to remain in your role but the PE firm wants to replace the entire management team, this is critical to know.
What are the PE firm’s plans for your manufacturing business?
Do they want to grow the business organically, or are they considering mergers and acquisitions? How will they handle existing operations, workforce, and company culture? Will they retain current employees, or will they replace your entire staff?
Is the PE firm informed about your supply chain, sales channel, and go-to market strategy?
This answer will indicate whether the firm has done its homework and is genuinely interested in the specifics of how your company operates, rather than just the financials. It also suggests that they can contribute strategic insights that can help you enhance operations, enter new markets, or optimize your supply chain.
Does the PE firm have experience in selling through distributors or direct to end user customers? Is this likely to change?
This will help you understand whether the firm is aligned with your sales model. If the PE firm plans to shift from a distributor model to a direct sales model, or vice versa, this could have significant implications for your business and your IMR relationships.
How does the PE firm plan to achieve returns?
Is the strategy based on cutting costs, leveraging the company with debt, expanding operations, or using other methods? It’s important to ensure your vision for the company matches theirs before completing the deal.
What is the PE firm’s track record with similar manufacturing companies?
Look at their other investments. How did they pan out? Pay particular attention to the details you’d like to see in your own deal. Was the management team kept on staff? Did product quality suffer? Their successes — and failures — with other companies will tell you a lot about what to expect.
How will the transaction be structured?
Will it be an outright purchase, a partial stake, or a complex financial structure that might affect future revenues or ownership? Know all the details up front.
What are the legal implications of the sale?
Obviously, it’s critical to have a lawyer look over any contracts involved in the sale. An experienced attorney will consider any warranties and indemnities being requested, along with any clauses that could affect you post-sale, such as non-compete clauses.
What happens to your manufacturing business if the PE firm’s strategy fails?
Don’t assume everything will go as planned. Insert contingencies into the contract to minimize negative impacts on you and your business.
And lastly, if you have specific desires about anything that might happen post-sale, negotiate it and get it in your contract before the sale.
Strategies to Become a More Attractive PE Investment Target
Clearly, there are many moving pieces to PE investments. It can be helpful to think about this process like a job search. In an ideal world, you’d like to have offers from multiple firms – which would enable to you be selective and only choose the partner truly best suited for you and your company.
Here are some things to keep in mind that will encourage PE firms to compete for your business.
- Focus on pristine financials. Inevitably, you’ll face questions about your financials. Make sure your financial documents are in order so you’re ready to field those questions.
- Tighten up your sales strategy. PE firms will be keenly interested in your revenue. Using an IMR to grow sales and reduce expenses can help you attract the best PE firm for your financial needs.
- Build a solid operating foundation. Having in place the right tools and processes – including a properly implemented ERP system and clearly documented SOPs – will show a PE firm you can deliver what they need: growth with minimal effort.
The Role of an Independent Manufacturer’s Representative
For owners of manufacturing companies that are looking to attract private equity, a good Independent Manufacturer’s Representative (IMR) can be your secret weapon.
With the right relationships and experience in your market, an IMR can help increase your sales without requiring you to hire more salespeople, which, in turn, improves your bottom line and your company’s overall financial outlook — an attractive combination for PE firms! Some IMRs even provide much-needed marketing support to help expand your sales funnel.
Conversely, a PE firm can also help an IMR sell more product. If they’re willing to work with your IMR, they may be able to provide insights about the desired audience or other networking opportunities.
But before you engage with a PE firm, you might want to loop in your IMR. They can play a role in helping the PE firm get excited about moving forward with your company, and they can also help put you in a better position to find a firm that you’re just as happy about.
Looking for an IMR to help attract a PE firm to your business? This checklist tells you what to look for.
Patrick McKeever is president of Durrie Sales, an industrial manufacturers’ representative agency specializing in cutting tools and industrial products.
