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How to Value a Machine Shop

How to Value a Machine Shop

Machine shops use a variety of equipment and machinery to cut and shape raw materials like metal and plastic. An industry report on IBIS World notes that there are over 17,000 machine shops throughout the country. Together, these businesses generate around $9 billion in revenue annually. Moving forward, we can expect the industry to benefit from a diverse customer base. This is ideal if you are looking to buy, grow, or sell a machine shop. However, it is important to note that the machine shop industry is very fragmented and competitive. To combat this, it is beneficial to learn how to value a machine shop. 

The best way to learn how to value a machine shop is to receive a business valuation. During a business valuation, business appraisers will determine the fair market value of a machine shop. In addition, a valuation expert may highlight the risks and opportunities of a machine shop during the valuation process. With this information, you can take the next steps in maximizing the value of a machine shop you are buying or selling

As a business appraiser, Peak Business Valuation values machine shops throughout the United States. As such, we are happy to provide you with a business valuation for a machine shop! Peak can also answer any questions you may have on how to value a machine shop. Start now by scheduling your free consultation with Peak Business Valuation below! 

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How to Value a Machine Shop

When deciding how to value a machine shop, business appraisers consider a variety of business valuation approaches. Business appraisers at Peak often utilize the market approach and/or the income approach. Each approach relies on a different basis of valuation. As such, business appraisers will determine which method is most appropriate as part of a business valuation. This often involves using a combination of business valuation approaches to value a machine shop. 

Valuing a Machine Shop Using the Market Approach

The market approach is common when valuing a machine shop. This approach is similar to how a real estate appraiser values a property. Real estate appraisers assess similar homes that recently sold in the area as part of the real estate appraisal process. This helps them determine a fair value for the property. When valuing a machine shop with the market approach, business appraisers look at similar businesses that sold on the market. If the machine shop is private, valuation analysts refer to private transaction databases to gather pertinent information. 

Multiples for a Machine Shop

Valuation multiples are a defining characteristic of the market approach. Multiples are financial ratios that compare the value of a machine shop to metrics such as sales, earnings, and cash flow. To find the valuation multiples for a machine shop, business appraisers apply the proper NAICS or SIC code. Below, we discuss SDE, EBITDA, and REV multiples for a machine shop. 

SDE (Seller’s Discretionary Earnings) Multiples for a Machine Shop
EBITDA Multiples for a Machine Shop
  • EBITDA multiples represent a machine shop’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment (ROI) an investor can expect from a machine shop. 
REVENUE or SALES Multiples for a Machine Shop
  • REVENUE or SALES multiples measure the value of a machine shop to the total amount of revenue or sales it generates. 

To learn more on how to value a machine shop using the market approach, see Valuation Multiples for a Machine Shop.

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Valuing a Machine Shop Using the Income Approach

The income approach is another common business valuation approach. When using the income approach, valuation analysts assess the earning potential of a machine shop. In addition, the income approach considers the risks associated with buying, growing, or selling a machine shop. Below, we discuss a few common business valuation approaches. 

    • Competition: The machine shop industry is very competitive. As such, machine shop operators must differentiate from competitors. 
    • Machinery and Equipment: Machine shops use a variety of machinery and equipment to process materials. It is important to secure high-quality equipment to succeed. In addition, you may consider receiving a machinery and equipment appraisal. 
    • Financial Performance: The machine shop industry has seen adverse financial conditions in recent years. Moving forward, it is vital to have strong financial planning skills. 
    • Location: The location of a machine shop plays an important role in its success. Operators should identify key markets and locate near them to increase demand and reduce costs. 

Methods to Value a Machine Shop Using the Income Approach

There are many ways to utilize the income approach to value a machine shop. The most common methods are the capitalization of cash flow method and the discounted cash flow method. In the following paragraphs, we discuss how to value a machine shop using the capitalization of cash flow method and/or the discounted cash flow method. 

Capitalization of Cash Flow Method

The capitalization of cash flow method involves determining a reasonable amount of earnings for one period. Then, the earnings are divided by a capitalization rate. Doing so calculates the rate of return an investor can expect. In addition, the capitalization of cash flow method assesses the risks associated with buying or selling a machine shop. This method is best for machine shops with long and stable histories. 

Discounted Cash Flow Method

The discounted cash flow method is ideal if your machine shop has a strong financial history or a reliable forecast. When using the discounted cash flow method, business appraisers project future earnings over a 3-5-year period. A business appraiser then applies a discount rate to the cash flow. This takes the time value of money into account. Keep in mind, the discounted cash flow method is less common since it is limited to future earning estimates which can be inaccurate. 

Summary

If you are looking to buy, grow, or sell a machine shop, it is helpful to understand how to value a machine shop. There are several common business valuation approaches for valuing a machine shop. To know which method is best for your business, receive a business valuation. During a business valuation, you will learn the fair market value of the machine shop as well as its strengths and weaknesses. This information can help you take the next steps in increasing the value of a machine shop

Peak Business Valuation is happy to help! At Peak, we work with machine shops on a regular basis. We can provide you with a business valuation for a machine shop. Additionally, we can discuss any questions you have on the value of a machine shop. Schedule your free consultation with Peak Business Valuation today! 

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