Manufacturing vs. service companies for ETA target

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November 23, 2020

by a searcher from Northwestern University - Kellogg School of Management in Atlanta, GA, USA

In much of the ETA literature, there seems to be a focus on service businesses vs. manufacturing. I'm curious to understand why that is. What are some of the key watch-outs for a manufacturer that sometimes aren't thought about until deep into due diligence?

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Reply by a searcher
from University of Notre Dame in Cambridge, MA, USA
Yeh from my understanding, the reason why manufacturing businesses usually do not fall in the ETA literature as attractive targets is because of the CapEx. However, I do think this is misguided because CapEx for small businesses low on the order of a few hundred thousand dollars, and if you buy the right business, the previous owner would have made those upgrades. This also provides hard assets to borrow against.. A manufacturing company can then use that capital to support 2-5X revenue growth.. At the same time, for a service business to grow, you have to train and hire new employees, and each employee may produce 2-3X revenue growth. I'm a little bias toward manufacturing businesses though I like them to have their own product lines. Managing people is hard; managing equipment much more straightforward. I am curious what other people have to say.
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Reply by a searcher
from Iowa State University of Science and Technology in Overland Park, KS, USA
I'll also chime in as a searcher specifically running towards manufacturing. In the US extensive consolidation and limited investment in start-up manufacturing outside of a few fields (focused on manufacturing that can't be exported to low-cost countries) have limited opportunities. A relatively narrow pipeline of manufacturing businesses have matured over the last 30 years or so to create viable targets. Its also far more attractive to invest in distribution of finished goods vs. manufacturing. Imagine the flexibility of warehouse space versus investing in a particular technology and the physical equipment associated with it.
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