Before deciding to start Nuha, I seriously looked into the manufacturing space. I still think there's a large amount of opportunity there, and if you have nothing but time and patience, you should consider the following.
Some things I believe are true:
- Global supply chains peaked in 2019, perhaps even a few years earlier, and covid was the wakeup call that the world needed to realize that a tightly connected grid built on just-in-time principles meant that a tiny shock in one corner had massive ripple effects to the other side of the world.
- I believe that reshoring will only continue to increase, for two primary reasons, one of them being the point above.
- I don't believe in nearshoring as much as others do, especially to places like Mexico, primarily because I believe others discount the effect/presence that the narcos have in Mexico, and could have on factories. The last thing companies want to happen is to put huge efforts setting up nearshoring infrastructure in Mexico and then have it held hostage by gangs.
- With the exception of oil and gas, many business owners in industrials end up having kids that opt into going into professional services (finance, law, medicine, software, etc) than choose to work in the family business, and this is especially true for small- and medium-sized factories in the US. The owners of these business are old and on the verge of retiring -- they need someone to pass their business onto and/or sell it.
- The tax code will probably change, if it hasn't already, to tax this upcoming class of small business sales. The owners will probably be in much more of a hurry to sell their businesses if this is announced.
- Entrepreneurship through acquisition is a small, but slowly growing concept. (If you don't know what this means, I suggest you read this book). The primary competition is in this space is on the services end, where every MBA grad and PE firm is fighting to roll up pool cleaning businesses and car washes. There is no point in wasting your time here, because you're fighting with everyone up and down the sales price scale to acquire a business. Plus, MBA grads and PE firms can only roll up so many local businesses and raise prices before the customers get mad at the price pressure and extreme drop in quality and decide to give their money to the local handyman instead.
- Now, the MBA types and the PE firms will never touch the small manufacturing businesses, primarily because they are spreadsheet guys and have never worked with their hands in their life. The PE firms will buy manufacturing businesses, but almost never below a sales price of $20-30m.
- Given reasonable effort and a "roll up your sleeves and work hard" attitude, you can probably start acquiring your first small manufacturer at a $1-5m sales price. I wouldn't go anywhere below $1m, because that implies that the business is entirely reliant on the skills of the owner, which you likely won't be able to grasp quickly, and so the entire acquisition would become moot.
Now, you might be wondering, "well, this all sounds pretty straight-forward and reasonable, so why didn't you pursue it?"
To answer your reasonable question: I got to a point where I was talking to banks about acquisition terms, and I frankly couldn't stomach personally guaranteeing millions of dollars in loans. That's the primary reason, and I'm glad that I did it that way, because I ended up starting a company that is the perfect founder-product-market fit for me.
THERE IS A WAY THAT YOU CAN PURSUE THIS ENTIRE STRATEGY WITHOUT TAKING OUT MILLIONS OF DOLLARS IN LOANS.
It would just require a lot of patience and time, both of which I decided not to use. You can build relationships with the owner of a small factory over the course of a year or so, sort of like an apprenticeship, and then bring up the topic of owner financing. You can probably talk an owner into doing 100% owner financing, and then slowly buy them out of the business over time. This has happened, and it is possible, but again, requires effort, patience, and time into building relationships with someone.
If we assume that you acquire your first factory (regardless of financing method) and improve operations and the balance sheet while maintaining quality, the next step would be to do the same thing 5-6 more times and roll them up. You can sell them to a PE firm for $20m+, but if you've gotten to that point already, you might as well continue what you're doing and just build a large manufacturing business/holding company worth even more. Investors come knocking on your door when you least need them :)