Transition planning for manufacturers: What does it look like?

Ask any manufacturer about their priorities and you will hear about efficiency, production schedules and client relationships. Rarely does transition planning make the list. Yet it may be the most important step in protecting a company’s future.

Studies show that many business owners underestimate the time and preparation required to pass on their companies. This is especially true in manufacturing, where the complexity of operations and the value tied to specialized equipment make transitions more challenging.

For manufacturers who have invested decades into building their businesses, transition planning is about more than simply selling. It is about preserving a legacy, protecting employees and securing financial stability for retirement or the next venture. Read on about what transition planning actually involves, the options available and how manufacturers can start preparing today.

Why transition planning matters for manufacturers

More than half of privately owned businesses in the United States are led by owners over the age of 55. Within manufacturing, many of these leaders are baby boomers who are now considering retirement. At the same time, a growing number of Gen X owners are beginning to think about what comes next. Yet research from the National Center for the Middle Market shows that fewer than half of middle market businesses have a documented succession plan.

This lack of preparation poses real risks. Without a transition strategy, manufacturers may face reduced company valuations, uncertainty for employees and leadership gaps that disrupt production. In many cases, business owners who wait until the last minute to sell or pass along their company discover that the price offered does not meet their retirement needs once taxes and transaction costs are factored in.

The COVID-19 pandemic accelerated this reality for many owners. Facing supply chain issues, regulatory changes and employee concerns, some decided they were ready to move on. Those without a plan often accepted offers that looked appealing on paper but lost significant value after due diligence reduced purchase prices.

The lesson is clear: Transition planning is not just about preparing to sell at some distant point. It’s about controlling outcomes now to ensure the business is positioned for strength, regardless of when a change takes place.

Manufacturers who plan ahead are better equipped to:

• Identify the right buyer or successor for their company,
• Strengthen financial records and operational systems before due diligence begins,
• Protect their employees and customer relationships, and
• Preserve the legacy of the company while also meeting personal retirement goals.

By beginning the planning process five or more years in advance, manufacturers can clean up financial reporting, address inventory valuation issues and diversify their customer and/or vendor base. These improvements enhance company value and provide more options when it is time to transition.

Third-party sales: Preparing for outside buyers

For many manufacturers, a third-party sale is the most common transition path. This approach involves selling to private equity firms, competitors or other external buyers. It can provide the highest financial return if managed properly, but it also requires extensive preparation.

The Moore on Manufacturing podcast emphasizes the importance of timing. Owners who allow three to five years before selling have the opportunity to strengthen financial systems, diversify customers and build a management team that can operate without the owner. This preparation reduces risk for buyers and helps secure a stronger purchase price.

One of the most common mistakes in third-party sales is assuming the initial offer will remain unchanged. Buyers conduct detailed due diligence, often reducing their price if they discover financial inconsistencies, outdated inventory valuations or heavy reliance on a single customer. A company that looks attractive at a $10 million offer may see that number reduced significantly after a review of its financials.

To position for success, manufacturers should do the following:

• Review and clean up financial reporting several years before selling.
• Address inventory issues, including obsolete items carried on the books.
• Strengthen customer diversification so no single client represents the majority of revenue.
• Develop a management team that can operate independently of the owner.

Private equity firms are particularly active in acquiring manufacturers. While this creates opportunity, it also means buyers will scrutinize cash flows, backlog, working capital and leadership. Competitor acquisitions are also possible, though valuations in those cases are often lower.

Owners considering this path should consult with advisors early. Proper planning ensures the sale proceeds align with personal retirement needs and company legacy goals.

Selling to management teams or key employees

Another option is to transition ownership to trusted managers or key employees. This strategy has the advantage of continuity. Employees already understand the company, know the customers and often have relationships that extend beyond the owner. For many manufacturers, this path feels less disruptive than selling to outsiders.

However, it’s not without challenges. The first question is whether those employees have the skills and leadership to operate the company independently. A simple test is whether the owner can take extended time away without the business requiring constant input. If the team can manage without interruption, they may be prepared for ownership.

The second challenge is financing. Employees rarely have the capital to purchase a company outright. Options often include SBA-backed loans, private financing or partial owner financing. Each option requires careful analysis to ensure the business can support debt payments while still providing the new owners with reasonable compensation.

Even when selling to employees, it’s important to prepare the business as though it will be sold to a third party. Strong financials, diversified customers and reliable systems protect both the seller and the buyers. Since many owners remain financially connected to the business through notes or installment payments, ensuring stability is in everyone’s interest.

Sellers must also account for the emotional aspect of the transition. Employees who have excelled in operational roles may struggle with the responsibilities of ownership. Coaching, mentoring and gradual exposure to financial decision-making can ease the transition. As the transcript highlighted, this is as much a mental shift as a financial one.

Owners exploring this option should review resources like the U.S. Small Business Administration for financing programs that can support employee purchases. They should also work with experienced advisors to structure agreements that protect both parties while allowing the company to thrive.

Passing the business to family members

For many manufacturers, the idea of keeping the business in the family is appealing. It can preserve the company’s history and provide opportunities for the next generation. However, family transitions are often the most complex of all ownership changes.

One challenge is fairness when multiple children are involved. Some may be active in the business while others are not. If all children inherit equal shares, conflicts may arise over compensation, control and dividends. In many cases, parents address this by providing other assets such as cash or life insurance benefits to nonparticipating children. This helps avoid disputes that could damage both the business and family relationships.

Another issue is readiness. Owners sometimes want to pass the company to a child who has not been involved in daily operations. Without preparation and training, this situation can place the company at risk. The best outcomes occur when children have worked in the business, developed leadership skills and shown genuine interest in carrying it forward.

Financial structuring also plays an important role. Some parents choose to sell the company at a discounted value, while others combine gifting with installment sales. Owner financing can provide steady retirement income while allowing the next generation to assume control gradually. Estate and gift tax considerations must also be addressed. Careful planning ensures parents can use lifetime exemptions and minimize tax burdens.

James Moore’s Estate Planning Services team works with families to evaluate these options. By balancing financial planning with family dynamics, manufacturers can ensure their business remains strong while also protecting personal and family relationships.

Employee stock ownership plans (ESOPs) and other alternatives

Employee stock ownership plans (ESOPs) offer another transition option for manufacturers. In this model, ownership transfers gradually to employees through a trust that holds company stock. ESOPs provide tax advantages for both sellers and employees while also encouraging long-term loyalty.

Although ESOPs are less common than traditional sales, they’re becoming more visible as business owners explore alternatives that protect legacy and employees. Companies with ESOPs often experience improved performance, lower turnover and higher employee engagement. For manufacturers, this can mean stronger productivity and continuity through leadership changes.

However, ESOPs are complex. They require independent valuations, trustee oversight and ongoing administrative compliance. They also may not provide the immediate liquidity that some owners seek, making them better suited for leaders who value gradual transition and employee involvement.

In addition to ESOPs, some manufacturers explore hybrid approaches. These include partial sales to employees combined with third-party investments or staged buyouts involving both family and management teams. Each approach has unique tax and financial implications that should be reviewed with advisors.

Transition planning is both financial and emotional

Transition planning prepares your business, your employees and yourself for the future. The most important lesson is to start early. Manufacturers who allow time to strengthen financial systems, prepare successors and explore multiple options have more control over outcomes. This preparation protects company value, provides security for employees and ensures personal retirement goals are met.

If you’re ready to explore your options and build a transition strategy, contact a James Moore professional. Our manufacturing team understands the unique challenges you face and will work with you to create a plan that supports your goals today and well into the future.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.