Selling a Medical or Chemical Manufacturing Company

What a buyer is looking at

Start with what the company makes and who needs it. A contract manufacturer of components for medical device companies has a different profile from a company that owns a branded product. A specialty chemical blender that sells to industrial users differs from one that supplies laboratories or hospitals. Buyers want revenue by product, by customer and by industry served, plus the margin on each one.

They will ask how the customers found the company and how long they have stayed. In this trade a customer often spends months or years qualifying a supplier, running samples, auditing the plant and writing the supplier into their own documents. Once that is done, switching costs are high and the relationship tends to last. Buyers pay more for a company with customers who qualified it years ago and still order every month. They pay less when most of the revenue comes from a handful of customers whose purchasing might change when their own product changes. Our post on customer concentration explains how buyers weigh this.

Product life cycle comes up as well. A component that goes into a device in the middle of its market life is a better bet than one for a device that is being phased out. A chemical used in a process that is moving to a different method has a limited future. Buyers read your customer forecasts, if you have them, and ask what you hear from purchasing departments.

The quality system is part of the asset

For medical manufacturers, the quality system is a file cabinet of procedures, training records, batch records, supplier audits, complaint handling, corrective action reports and internal audits. Buyers want to know whether the company is registered with the federal regulator, which products are covered, which quality certifications it holds, when the last inspection took place and what the findings were. Any observation or warning from an inspector is something to bring up first, together with the response and the evidence that it was fixed.

Chemical manufacturers have a related set of records. Safety data sheets, labeling, batch and lot tracking, certificates of analysis, retained samples and supplier qualification files all come up. Customers who audit the plant leave reports behind, and buyers will ask to see them. If the company holds a quality management certification, buyers check its scope and the date of the last surveillance audit.

The reason for this attention is that the buyer inherits any gap. A recall, a customer complaint trend or an unresolved audit finding becomes the new owner's problem the day after closing. Buyers or their lenders often hire a specialist to review the quality system. A company that has done its own review first has time to fix what turns up, which a seller does not have when the buyer's specialist finds it during diligence. Our post on due diligence describes what the process looks like.

Approvals, permits and what moves with the company

Some products need approvals before they can be sold, and those approvals sit with a named company. A buyer needs to know which approvals exist, whose name they are in, whether they move in a sale of assets or a sale of the company, and whether the regulator has to be told. That question can change the way the deal is built, and it is one reason buyers and sellers talk early about the structure. Our post on asset sales and stock sales covers the choice.

The plant has its own permits. Air, wastewater, hazardous waste, storage of flammable or toxic materials, fire code compliance and local operating permits are common for chemical makers, and medical manufacturers have some of the same. Some permits are tied to the facility and move with it, some belong to the operator and need to be reissued. Rules vary by state and your attorney confirms what applies. Buyers also ask about environmental history. If chemicals were handled at the site for many years, a buyer or their lender will probably order an environmental review of the property, and the results can change the deal.

Controlled substances, export controls and shipping rules for hazardous materials add further layers for some products. Whatever applies to you, make a list of every license, registration, permit and approval, who holds it, when it expires and what it takes to transfer.

Raw materials, suppliers and equipment

A manufacturer is only as steady as its supply. Buyers ask where the key raw materials come from, how many sources exist, whether the supplier is qualified in your customers' documents and how long it would take to change. If a customer's approval names a specific supplier, switching is slow. Price swings in raw materials also matter, and buyers look at whether you can pass cost increases through to customers and how fast.

Equipment is typically a large share of what is being bought. Reactors, mixers, tanks, filling lines, clean rooms, molding or machining equipment, test instruments and packaging machines should be listed with age, condition, maintenance records and calibration records. Calibration history matters because a measurement that cannot be traced to a standard can invalidate a batch. Equipment that is specialized, well kept and validated is worth more than equipment that merely runs. Validation records, which show that a process produces the same result each time, are something buyers want in the file.

The building matters just as much. Clean rooms, ventilation, floor drains, containment and storage areas are expensive to duplicate, and a buyer will look hard at whether the lease allows the current use and whether the owner of the property will assign it. See the lease is part of the deal. If you own the building, the business and the property usually need to be handled together, and our post on selling a business with real estate attached explains the options.

What tends to sink a sale

The deals that fail tend to fail for reasons found in the first month. The quality system has gaps that the buyer's reviewer finds quickly. A major customer holds the right to approve a change of ownership and does not respond. A supplier is a single source with no backup. The environmental review turns up contamination. A key approval is held by a person who is leaving. The founder is also the technical expert, and nobody else can explain how a process works.

Confidentiality needs particular care, since customers who audit your plant might hear about a sale from your employees. We market a business without naming it, and buyers sign a nondisclosure agreement before they see anything that identifies it. Our post on how we market a business confidentially explains the steps.

Preparing the company

Begin with a review of the quality system by someone who has not worked in it, and fix what they find. Build a single register of approvals, permits and certifications with owners and expiry dates. Document the processes that live in the founder's head, and train a second person on each critical one. Sort revenue by customer and product, and ask the largest customers what they plan to buy over the next two years. Check the environmental history of the site and talk with your attorney about what a buyer will find.

Business Advisors of America builds a valuation from your records, assembles the materials a buyer and lender will ask for and screens buyers for experience in regulated manufacturing. The page on selling a medical or chemical manufacturing company shows how we approach it, and a short call with us is a sensible next step.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.