It is important to understand how to sell a foam manufacturing company the right way. Otherwise, you may sell for far less than you could otherwise receive or have your company sit on the market for years before the right buyer approaches you. Specifically, we recommend selling with the assistance of a full-service business broker. They can help you find the right buyer and avoid costly and time-consuming setbacks and canceled deals. This review from an experienced business broker discusses how to determine the value of your foam manufacturing company, along with presenting a four-step process for you to follow. We also provide additional industry details about the polystyrene foam manufacturing and urethane foam manufacturing industries.
About The Foam Manufacturing Industry
The foam manufacturing industry remains strong despite industry challenges from government crackdowns on the use of plastic materials for certain purposes and the threat of import competition. In fact, the industry has increased between 1.4% and 2.2% over the past five years, depending on the type of foam manufacturing. Specifically, we take a close look at the industry data for polystyrene and urethane foam manufacturing, which are the two most popular material types.
Polystyrene Foam Manufacturing Industry
The domestic polystyrene foam manufacturing industry has risen substantially in the past five years. However, recent state bans to polystyrene foam and vocal opposition to the production of the material are expected to have a sizable impact on the industry size and trend. With that said, the industry remains strong for now, presenting an opportune time for many owners to sell before government crackdowns begin to affect profits. Notably, the polystyrene foam manufacturing industry numbers and projections are as follows:
- There are approximately 474 polystyrene foam manufacturing companies in the U.S.
- There was a 2.2% annual growth for the polystyrene foam manufacturing industry from 2018 to 2023
- The polystyrene foam manufacturing industry generates $12.4 billion in annual revenue
- The annual profit for the polystyrene foam manufacturing industry is $594.3 billion
- Experts predict a slight decline in annual growth (-0.4%) from 2023 to 2028
Urethane Foam Manufacturing Industry
The urethane foam industry is relatively large and growing rapidly. The industry has been able to remain strong despite threats of manufactured urethane imports (Business Reference Guide). Urethane foams are used for insulation, shock reduction, packaging, seat cushioning, and fluid filtration systems primarily; there are many other less common uses as well. Here are the most recent industry numbers and projections:
- There are approximately 714 urethane foam manufacturing companies in the U.S.
- There was a 1.4% annual growth for the urethane foam manufacturing industry from 2018 to 2023
- The urethane foam manufacturing industry generates $13.3 billion in annual revenue
- The annual profit for the urethane foam manufacturing industry is $677.7 million
- Experts predict a slight increase in annual growth (0.9%) from 2023 to 2028
How to Value a Foam Manufacturing Company
You can determine the fair market value for your foam manufacturing company by using a market approach. This uses your seller’s discretionary earnings (SDE) and other financial metrics and applies them to rule-of-thumb data for the foam manufacturing industry, which is as follows below.
We also cannot stress enough the importance of non-financial considerations as well. Far too many business brokers rely solely on rule-of-thumb data, which leads to the full value of your company not being displayed to buyers. Instead, we recommend finding the value in your company by considering non-financial factors that drive worth as well, such as:
- Growth potential
- Geographic location
- Client concentration
- Workforce quality
- Unique industry advantage
- Reason for selling
Detailed record keeping can also help you build a justifiable valuation for your company that is above what the rule of thumb data alone may suggest. Every company is unique. We strongly suggest receiving a professional valuation from an experienced business broker you can trust, rather than trusting yourself to conduct your own valuation. Keep in mind, buyers are going to want to know how you arrived at your asking price. A professional, objective valuation from a broker is a great way to ensure you can justify your asking price and provide yourself with negotiating leverage.
Polystyrene Foam Manufacturing Rule of Thumb Data
Polystyrene foam manufacturing companies generally sell for around three times the owner’s discretionary earnings (SDE). Of course, the specific valuation depends on the details of your company. If you have an established workforce, a diverse list of clients, and are well-positioned for future growth in the market, then you may receive a much higher valuation. With that said, here are the industry numbers:
- Polystyrene foam manufacturing companies sold for approximately 2.95 times the Seller’s Discretionary Earnings (SDE)
- Polystyrene foam manufacturing companies sold for approximately 3.92 times the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
- Polystyrene foam manufacturing companies sold for approximately 0.69 times the annual net sales
Urethane Foam Manufacturing Rule of Thumb Data
Urethane foam manufacturing companies historically have not received as generous of valuations (relative to polystyrene manufacturing companies). However, this may change in the years to come as more states crackdown on polystyrene materials. As of May, 2023, the rule of thumb data for this industry is as follows below. Keep in mind, your valuation with a market approach may look different than the figure you arrive at when you apply rule-of-thumb data alone.
- Urethane foam manufacturing companies sold for approximately 2.28 times the Seller’s Discretionary Earnings (SDE)
- Urethane foam manufacturing companies sold for approximately 3.68 times the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
- Urethane foam manufacturing companies sold for approximately 0.57 times the annual net sales
How to Sell a Foam Manufacturing Company
Your business broker should personalize your sales approach based on your goals, preferences, and timeline. Therefore, there is no single one size fits all approach to selling a foam manufacturing company. However, there are common steps you can expect and prepare for before you start. Below we discuss the general sales process that includes these steps:
- Plan and prepare
- Find potential buyers
- Negotiate a deal
- Due diligence
- Closing the sale
Plan and Prepare
There are a number of steps you must take before you start seeking a buyer. First, and as discussed, you must determine how much buyers are willing to pay for your company; this is known as your “fair market value.” From there, you will need to prepare your legal, financial, and operational documents for your foam manufacturing company. These documents may specifically include your:
- Federal tax returns (3+ years)
- Profit and loss (P&L) statements
- Cash flow statements
- Balance sheets
- Business license(s)
- Patents, trademarks, and copyrights
- List of inventory, machinery, etc.
- Real estate appraisal (and lease agreements)
- List of employees
- List of customers
- List of suppliers
This is not an all-inclusive list. Your business broker, attorney, and CPA professional can help you prepare a more extensive list of all that you will need. Lastly, you will need to establish your goals for the sale, such as your asking price, non-financial goals, and long-term vision for after the business sale is complete.
Find Potential Buyers
Now, you get to find a buyer for your business (exciting, right?). Your business broker should lead this effort on your behalf. Ideally, you should choose a business broker who has extensive resources available to them to find buyers. Notably, it is imperative they seek buyers in a confidential manner and utilize non-disclosure agreements (NDAs) as necessary. There are several channels business brokers often use to find buyers. This includes private databases, online websites (in a confidential manner), and connections with other brokers and investors that they have created over the years.
Negotiate a Deal
Your business broker should also help you negotiate a deal with potential buyers. Keep in mind, the buyer’s job is to secure the best possible deal for themselves. With this in mind, many (if not all) will likely offer below your asking price. It is important to work with a business broker who understands how to negotiate professionally and effectively to ensure you receive full value for your company. Negotiations end once you accept a qualified buyer’s offer and they sign a letter of intent (LOI).
Due Diligence
Due diligence allows the buyer the opportunity to learn more about your company. This serves several purposes. For one, it allows the buyer to confirm the details you provided them when they made the offer. This helps them feel more secure and confident with the purchase price. Secondly, due diligence helps the buyer plan the initial actions they will take once they take over as owner. Notably, due diligence usually involves the following:
- Provide the buyer with your legal, financial, and operational documents (see above)
- Allow the buyer to tour your foam manufacturing facilities and oversee business operations for a day
- Schedule weekly cadence calls with the buyer to help ensure a smooth and fast due diligence process
- Answer the buyer’s questions in regard to your company’s information and operations
Close The Sale
Ideally, the majority of work has been discussed and organized by the time you close the sale. For closing, you will need to review the purchase agreement along with your attorney before signing. The buyer will then send you the payment either directly or via an escrow agent; a representative from their loan institution may be present at signing as well.
After the sale, you will need to update all legal information to reflect the ownership change. You will also need to provide the new owner with access to all facilities, along with notifying all employees, suppliers, and long-term clients that the deal is finalized. Training the new owner may be involved as well, depending on what terms were negotiated early in the sales process.
Are You Interested in Selling Your Foam Manufacturing Company?
Sigma Mergers and Acquisitions understands how to properly value and sell a foam manufacturing company for fair market value. We take pride in the diligent work we provide for our clients, and we are focused on personalized approaches and delivering results. You can get started by contacting us. We offer free, no-obligation business valuations.
