How to Value a Manufacturing Business
Manufacturing businesses create products from raw materials. This can include mechanical, physical, and/or chemical processes. According to IBIS World, the manufacturing industry generates about $1.4 trillion each year. In the coming years, this industry can expect healthy revenue growth. As such, buying, growing, or selling a manufacturing business can be very lucrative. However, the manufacturing industry is very competitive. To succeed, it is beneficial to learn how to value a manufacturing business.
The best way to learn how to value a manufacturing business is to obtain a business valuation. During a business valuation, a valuation expert calculates the fair market value of your manufacturing business. Additionally, business appraisers can discuss the strengths and weaknesses of a manufacturing business. With this information, you can begin to increase the value of a manufacturing business you are looking to buy or sell.
Peak Business Valuation is a professional business appraiser. At Peak, we work with manufacturing businesses across the nation. We are happy to provide you with a business valuation for a manufacturing business. Peak can also discuss any questions you may have on how to value a manufacturing business. Schedule your free consultation below to get started!
How to Value a Manufacturing Business
Business appraisers consider various valuation approaches when deciding how to value a manufacturing business. Often, Peak Business Valuation relies on the market approach and/or the income approach. Both of these approaches are effective, however, each uses a different basis of valuation. A valuation analyst will determine which method is best as part of a business valuation. This often involves using a combination of business valuation methods to value a manufacturing business.
Valuing a Manufacturing Business Using the Market Approach
The market approach is one of the most common business valuation approaches. This method is similar to the real estate appraisal process. When valuing a home, real estate appraisers assess similar properties that recently sold in the area. This provides them with useful information to determine the fair market value of the home. When valuing a manufacturing business with the marketing approach, a business appraiser looks at similar companies that recently sold. If the business is private, they will refer to private transaction databases to gather information.
Multiples for a Manufacturing Business
When working with the market approach, business appraisers use valuation multiples. Valuation multiples are ratios that compare the value of a business to financial metrics such as cash flow, sales, or earnings. To find the appropriate valuation multiples for a manufacturing business, valuation experts apply the proper NAICS or SIC code. Below, we highlight SDE, EBITDA, and REV multiples for a manufacturing business.
SDE (Seller’s Discretionary Earnings) Multiples for a Manufacturing Business
- The SDE multiple measures the value of a business in relation to its seller’s discretionary earnings. This multiple is common when valuing manufacturing businesses.
EBITDA Multiples for a Manufacturing Business
- EBITDA multiples measure a manufacturing business’s earnings before interest, taxes, depreciation, and amortization. This helps business appraisers understand the return on investment (ROI) a manufacturing business can generate.
REVENUE or SALES Multiples for a Manufacturing Business
- REVENUE or SALES multiples represent the total amount of revenue or sales a manufacturing business generates.
To learn more on how to value a manufacturing business using the market approach, see Valuation Multiples for a Manufacturing Business.
Valuing a Manufacturing Business Using the Income Approach
The income approach is another common business valuation approach. This valuation method measures the value of a manufacturing business by assessing its earning potential. In addition, the income approach assesses the risks associated with buying or selling a manufacturing business. We highlight a few common risks below.
-
- Competition: The manufacturing industry is fragmented and competitive. To succeed, manufacturing businesses need to differentiate from competitors.
- Machinery: Manufacturing businesses require a variety of machinery and equipment to manufacture products. As such, it is important to acquire high-quality machinery and equipment. See also Manufacturing Equipment Appraisal.
- Financial Performance: Operating a manufacturing business can come with high overhead expenses. It is crucial for these businesses to have strong financial planning and budgeting skills.
- Skilled Staff: It is vital for manufacturing businesses to hire a skilled management team. This increases efficiency and reduces risks in a manufacturing business.
Methods to Value a Manufacturing Business Using the Income Approach
There are several variations of the income approach. The most common methods are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value a manufacturing business 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 is best if your manufacturing business has a long and stable history. When using this income approach, business appraisers determine a reasonable amount of earnings for one period. Then, the earnings are divided by a capitalization rate which indicates the rate of return investors can expect. The capitalization of cash flow method also assesses the risks of a manufacturing business. We discuss some common risks for manufacturing businesses above.
Discounted Cash Flow Method
The discounted cash flow method is ideal for manufacturing businesses with strong financial histories and/or reliable forecasts. This method involves projecting future earnings over a 3-5-year period. The earnings are then divided by a discount rate rather than a capitalization rate. The discounted cash flow method measures the value of a manufacturing business by taking the time value of money into consideration. Please note, that this method is less common since it is limited to future cash flow estimates which can be arbitrary.
Summary
Whether you are looking to buy, grow, or sell a manufacturing business, it is helpful to understand how to value a manufacturing business. There are several common methods for valuing a manufacturing business. To learn which approach is best for your manufacturing company, obtain a business valuation. During a business valuation, you will learn the fair market value of a manufacturing business as well as the associated risks and opportunities. This information is important if you want to maximize the value of a manufacturing business.
Peak Business Valuation, business appraiser, is happy to help! We value manufacturing businesses on a regular basis. As such, we are happy to provide you with a business valuation for a manufacturing business. Additionally, Peak can answer any questions you may have on valuing a manufacturing business. Schedule a free consultation with Peak today by clicking the link below!
For more information see Valuing a Manufacturing Company, Value Drivers for a Manufacturing Business, and Valuation Multiples for a Manufacturing Business.
