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How to Value a Shoe and Footwear Manufacturing Business

How to Value a Shoe and Footwear Manufacturing Business

Businesses in the shoe and footwear manufacturing industry create various types of footwear for men, women, and children. An industry report on IBIS World notes that there are only about 860 shoe and footwear manufacturing businesses in the United States. These businesses generate over $440 million each year. We can expect slight revenue growth in the coming years as the number of businesses rises. As such, it may be a good time to buy, expand, or sell a shoe and footwear manufacturing business. Learning how to value a shoe and footwear manufacturing business is an important part of this process.

To learn how to value a shoe and footwear manufacturing business it is best to receive a business appraisal. During a business appraisal, you will learn the fair market value of a shoe and footwear manufacturing business. In addition, business appraisers will discuss the strengths and weaknesses of your shoe and footwear manufacturing business. This can help you take the next steps to increase the value of a shoe and footwear manufacturing business

Peak Business Valuation, business appraiser, is happy to help. At Peak, we work with shoe and footwear manufacturing businesses across the country. As such, we can provide you with a business appraisal for a shoe and footwear manufacturer. In addition, we can discuss any questions you may have on how to value a shoe and footwear manufacturing business. Schedule a free consultation with Peak Business Valuation today by clicking the following link! 

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How to Value a Shoe and Footwear Manufacturing Business

When deciding how to value a shoe and footwear manufacturing business, valuation experts consider a variety of common business valuation approaches. The most common approaches when valuing a shoe and footwear manufacturer are the market approach and/or the income approach. Both methods are effective, however, each provides a different perspective on the value of a business. As such, a business appraiser will discuss the most suitable method for your shoe and footwear manufacturing business. This may include a combination of valuation approaches

Valuing a Shoe and Footwear Manufacturing Business Using the Market Approach

The market approach is very common when valuing a shoe and footwear manufacturing business. This approach is similar to how a real estate appraiser values a property. Real estate appraisers look at similar homes that recently sold in the area to understand a fair value for the property. When valuing a shoe and footwear manufacturer with the market approach, business appraisers consider similar businesses that recently sold. If the business is private, business appraisers gather data from private transaction databases. 

Multiples for Shoe and Footwear Manufacturing Businesses

When utilizing the market approach, business appraisers work with valuation multiples. Multiples are financial ratios that compare the value of a business to metrics such as earnings, cash flow, and sales. To find the valuation multiples for a shoe and footwear manufacturing business, valuation analysts apply the proper NAICS or SIC code. Below, we discuss SDE, EBITDA, and REV multiples for a shoe and footwear manufacturing business. 

SDE (Seller’s Discretionary Earnings) Multiples for a Shoe and Footwear Manufacturing Business
  • SDE multiples are common in small business valuation. This multiple measures the value of a shoe and footwear manufacturer based on its seller’s discretionary earnings
EBITDA Multiples for Shoe and Footwear Manufacturing Businesses
  • EBITDA multiples reflect the earnings before interest, taxes, depreciation, and amortization of a shoe and footwear manufacturing business. This indicates the return on investment (ROI) a shoe and footwear manufacturer can generate. 
REVENUE or SALES Multiples for a Shoe and Footwear Manufacturing Business
  • REVENUE and SALES multiples measure the total amount of sales or revenue a shoe and footwear manufacturer generates. Apply the multiple to the business’s revenue to calculate the fair market value

To discover more on how to value a shoe and footwear manufacturing business using the market approach, see Valuation Multiples for Shoe and Footwear Manufacturing.

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Valuing a Shoe and Footwear Manufacturing Business Using the Income Approach

The income approach is another common valuation approach when valuing a shoe and footwear manufacturing business. This approach assesses the earning potential of a shoe and footwear manufacturer. In addition, the income approach considers the risks associated with buying or selling a shoe and footwear manufacturing business. We highlight a few common risks below. 

    • Competition: This industry is very competitive. To succeed, it is important for operators to create diverse revenue streams to differentiate from competitors. 
    • Machinery and Equipment: Shoe and footwear manufacturers utilize a variety of machinery and equipment. As such, it is vital to acquire high-quality and functional manufacturing equipment. As a business appraiser is valuing a shoe and footwear manufacturing business, a manufacturing equipment appraisal may also be necessary.
    • Financial Performance: Financial conditions can fluctuate frequently in the shoe and footwear manufacturing industry. To succeed, it is crucial to have strong financial budgeting and planning skills. 
    • Location: The location of a shoe and footwear manufacturer plays an important role in its success. The best locations are near key markets such as footwear retailers and wholesalers. 

Methods to Value Shoe and Footwear Manufacturing Businesses Using the Income Approach

There are several variations of income approaches. The most common income methods are the capitalization of cash flow method and the discounted cash flow method. The following paragraphs discuss how to value a shoe and footwear manufacturer with 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 for shoe and footwear manufacturing businesses with stable histories. This method involves determining a reasonable amount of earnings for one specific period. The earnings are then divided by a capitalization rate to calculate the rate of return investors can expect. The capitalization of cash flow method also assesses the risks of a shoe and footwear manufacturer. We highlight a few of these risks above. 

Discounted Cash Flow Method

The discounted cash flow method is ideal if your shoe and footwear manufacturing business has a strong financial history and/or a reliable forecast. When using the discounted cash flow method, business appraisers project future earnings over a 3-5-year period. The earnings are then divided by a discount rate rather than a cap rate. This measures the value of a shoe and footwear manufacturing business by taking the time value of money into consideration. Keep in mind, this method is less common since it relies on future earning estimates which can be subjective. 

Summary

Whether you are looking to buy, expand, or sell a shoe and footwear manufacturer, it is important to understand how to value a shoe and footwear manufacturing business. The most common methods are the market approach and the income approach. To know which method is most applicable to your shoe and footwear manufacturer, obtain a business appraisal. As part of a business appraisal, you learn the value of a shoe and footwear manufacturing business as well as the risks and opportunities associated with it. This information is vital if you want to maximize the value of a shoe and footwear manufacturing business

Peak Business Valuation is happy to help! As a professional business appraiser, we value shoe and footwear manufacturing businesses on a regular basis. We are happy to provide you with a business appraisal for your shoe and footwear manufacturing business. If you have any questions on valuing a shoe and footwear manufacturing business, schedule a free consultation with Peak Business Valuation below! 

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