Buying a manufacturing business: what to check in the numbers
Short answer
When buying a small manufacturer, check customer concentration first (many depend on a few OEM or distributor accounts), then gross margin by product or job, because overhead allocation can hide losers. Physically inspect equipment and get a realistic capex plan, count and value inventory (raw materials, work in process, finished goods, obsolete stock), and confirm that the machinists, programmers and the person who quotes jobs will stay. Review quality certifications, environmental permits and any customer supply agreements.
Small manufacturers are often the classic "boring business": steady customers, real assets, and owners near retirement. The risks are where the customers, the machines and the know-how sit.
Customers and margins
| Item | Source | Why |
|---|---|---|
| Revenue by customer, 3 years | Sales ledger, invoices | Concentration and trend |
| Supply agreements, POs, pricing terms | Contracts | Durability, price resets |
| Gross margin by product or job | Job costing, quotes vs actuals | Which work actually pays |
| Material cost pass-through | Contracts, invoices | Exposure to input prices |
| Backlog and open orders | ERP or order book | Near-term revenue |
Worked example: margin by customer, not by company
Small manufacturers often price jobs from experience and allocate overhead roughly, so the company-wide margin can hide a big customer who barely pays for the machine time it uses. Ask for job costing or quote-versus-actual data for the main part families and customers. If none exists, build a rough version with the person who schedules the shop.
Illustrative example, not a real business
A machine shop has $3.0 million of revenue. Customer A is $1.2 million (40%), customers B through F are $1.8 million together. Materials and direct labor for A's parts run $840,000, leaving $360,000 (30%). For B through F, they run $1,080,000, leaving $720,000 (40%). A also uses the shop's two five-axis machines about 60% of the time. So the largest customer brings 40% of revenue, a third of the gross profit ($360,000 ÷ $1,080,000), and most of the capacity on the most expensive equipment. If A asks for a price cut after the sale, which large customers often do when an owner changes, the hit lands on the work that already earns least.
Equipment, inventory and people
- Equipment list with age, hours, maintenance, liens; inspection of critical machines.
- Capex history vs depreciation; deferred items. See deferred maintenance.
- Inventory count by category; obsolete stock. See inventory.
- Who quotes, programs, schedules and handles the main customers.
- Quality system and certifications; customer supplier approvals.
- Environmental permits, waste handling, safety record.
- Lease or real estate, power and utility costs.
Concentration is usually the deciding issue; see customer concentration.
Environmental and safety: the real-estate-sized risks
Manufacturing sites use oils, solvents, coolants and sometimes plating or painting chemicals. Contamination can attach to the property and, depending on the deal structure, to the business. If you're buying or leasing the building, a Phase I environmental site assessment under ASTM E1527-21 is the standard first step, and it's how a buyer of property establishes "all appropriate inquiries" under EPA rules. Ask how hazardous waste is classified and shipped under RCRA, whether the site has any air or water permits, and for OSHA logs and inspection history under the general industry standards (29 CFR 1910). Lenders often require environmental review on manufacturing deals, so expect it either way.
What an SBA lender will check
Lenders will verify tax returns against IRS transcripts, look closely at customer concentration and whether major customers have supply agreements, and value the equipment as collateral (often with an appraisal). Inventory will be counted and tested for obsolescence, and the lender's valuation will consider whether the business can run without the seller, who in many small shops is the one quoting jobs and holding the big customer relationships. Under SBA change-of-ownership rules the seller can consult for a limited period after closing but can't stay as an employee, so plan the knowledge transfer before you close.
Red flags specific to small manufacturers
- Quotes that live in the owner's head. If nobody else can price a job, ask to watch the owner quote three and write the method down before closing.
- Machines kept running by one maintenance person. Ask who fixes the critical equipment and how long repairs take when they're out.
- Inventory valued at standard cost that hasn't been updated for years. Recount and revalue a sample.
- Customers paying old prices while material costs rose. Margin will look worse once you check job by job.
- A single customer's annual blanket order treated as a contract. Read it; many can be cancelled.
- Environmental housekeeping problems visible on the walk: stained floors, unlabeled drums, floor drains.
What moves the value of a small manufacturer
We don't value deals or publish multiples we can't verify. Appraisers and lenders weigh these factors:
| Factor | Supports a higher value | Pulls it lower |
|---|---|---|
| Customers | Diversified, long relationships, agreements | One or two customers buy most output |
| Margins | Known by product, consistent | Unknown; big customer at thin margin |
| Equipment | Maintained, capacity to grow | Old, deferred, near the end of life |
| People | Quoting and scheduling done by staff | Owner holds the know-how |
| Quality | Certified system, low scrap and returns | No system; recurring quality claims |
| Site | Clean environmental history, long lease or owned | Contamination risk, short lease |
The first 90 days after you buy
Visit the top customers with the seller in the first weeks, before anyone hears rumors. Keep the shop's routines and people as they are, and spend time on the floor learning which jobs are hard and why. Get the quoting method, critical machine maintenance and supplier contacts written down while the seller is still available. The improvements most new owners eventually make (repricing thin-margin work, updating job costing, adding a second shift) work better after you understand where the margins really are.
Documents to request, in one list
- Three years of tax returns, financial statements and bank statements; monthly P&Ls for 24 months.
- Revenue and gross margin by customer and product line; open order book and backlog.
- Supply agreements, blanket orders, pricing terms and any change-of-control clauses.
- Job costing or quote-versus-actual reports for the main part families.
- Equipment list with age, hours, maintenance records, liens; any recent appraisal.
- Inventory by category with aging; the last physical count and its variance.
- Quality system documents, certifications, scrap and return rates, customer scorecards.
- Environmental permits, waste manifests, any assessments; OSHA logs and citations.
- Lease or deed, utilities history (power is a big cost for some shops), insurance and claims.
- Org chart with roles, tenure and pay; who quotes, programs, schedules and buys.
Questions to ask the seller
- What did your top five customers buy in each of the last three years, and do you have supply agreements with them?
- Who quotes jobs, and how often do actual costs come in over the quote?
- Which machines are critical, how old are they, and what would replacing them cost?
- How much inventory hasn't moved in a year?
- Do you hold quality certifications, and do customers require them?
- Have you ever had an environmental spill, citation or OSHA recordable injury?
Frequently asked questions
How do I check equipment?
Get a list with age, hours, maintenance records and liens, and have an equipment appraiser or experienced operator inspect the critical machines. Ask what's been deferred.
How is manufacturing inventory handled in a sale?
It's counted at closing and often split into raw materials, work in process and finished goods. Agree how obsolete or slow-moving stock is valued before you sign.
Do certifications transfer?
Quality certifications are usually tied to the site and system, and the certifying body may need to be notified of a change of ownership. Customers may also need to re-approve you as a supplier.
How do I verify a manufacturer's revenue independently?
Match invoices to customer purchase orders and payments in the bank, and compare raw material purchases with output: if revenue rose but steel or resin purchases didn't, ask why. For larger customers, a supplier scorecard or approved-vendor letter also confirms the relationship is real and in good standing.
What happens to customer approvals when a manufacturer is sold?
Some customers, especially in regulated or engineered supply chains, approve specific suppliers and sites and may need to re-qualify the business after a change of ownership. Read supply agreements for change-of-control clauses, ask the seller which customers require notice, and plan those conversations before closing.
How should inventory be handled when buying a manufacturer?
Count it at closing by category (raw materials, work in process, finished goods), value it at cost, and agree in the LOI how slow-moving and obsolete stock is treated, often excluded or written down. Work in process is the hardest to value; agree a method with the seller before the count.
Sources
- SBA SOP 50 10 8.1, Appendix 15 (QoE and valuation requirements)
- eCFR 29 CFR Part 1910 (OSHA general industry safety standards)
- OSHA: General industry standards (29 CFR 1910)
- EPA: Hazardous waste (RCRA)
- ASTM E1527-21 (Phase I environmental site assessment)
- EPA: All Appropriate Inquiries
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.