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How to Value an Apparel Manufacturing Business

How to Value an Apparel Manufacturing Business

Apparel manufacturing businesses create clothing and apparel for men, women, and children. There are approximately 293,000 apparel manufacturers across the United States. According to IBIS World, these facilities generate around $143 billion each year. As such, operating an apparel manufacturer can be lucrative. Therefore you may be looking to buy, grow, or sell an apparel manufacturing business. As such, it is helpful to understand how to value an apparel manufacturing business. 

The best way to learn how to value an apparel manufacturing business is to obtain a business valuation. During a valuation, a business appraiser will discuss the strengths and weaknesses of your apparel manufacturing business. In addition, you will learn the fair market value of an apparel manufacturing business you are buying or selling. With this information, you can begin to maximize the value of an apparel manufacturing business. 

As a business appraiser, Peak Business Valuation values apparel manufacturing businesses on a regular basis. We are happy to provide you with a business valuation for an apparel manufacturing business. In addition, Peak can answer any questions you may have on how to value an apparel manufacturing business. Start now by scheduling a free consultation with Peak Business Valuation below! 

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How to Value an Apparel Manufacturing Business

When deciding how to value an apparel manufacturing business, valuation experts consider a variety of common business valuation approaches. At Peak, our valuation experts often rely on the market approach and/or the income approach. Each valuation approach uses a different basis of valuation. As such, a business appraiser will determine the most applicable approach during a business valuation. This can include using a combination of business valuation approaches. 

Valuing an Apparel Manufacturing Business Using the Market Approach

The market approach is one of the most common business valuation approaches when valuing an apparel manufacturer. To understand the market approach, consider the real estate appraisal process. When valuing a home, a real estate appraiser looks at similar properties that recently sold in the area. This helps them accurately determine a fair value for the home. Similarly, the market approach requires business appraisers to assess similar recently sold businesses when valuing an apparel manufacturing business. If the apparel manufacturer is privately owned, valuation analysts will refer to private transaction databases to gather relevant information. 

Multiples for an Apparel Manufacturing Business

Valuation multiples are a defining characteristic of the market approach. These are financial ratios that measure a business’s value in relation to metrics such as cash flow, sales, and earnings. To determine the proper valuation multiples for an apparel manufacturing business, a valuation expert applies an NAICS or SIC code. The following section highlights SDE, EBITDA, and REV multiples for an apparel manufacturing business. 

SDE (Seller’s Discretionary Earnings) Multiples for an Apparel Manufacturing Business
  • The SDE multiple is common when valuing an apparel manufacturing business. This multiple measures the value of an apparel manufacturer in relation to its seller’s discretionary earnings
EBITDA Multiples for an Apparel Manufacturing Business
  • The EBITDA multiple measures an apparel manufacturing business’s earnings before interest, taxes, depreciation, and amortization. This helps business appraisers determine the return on investment (ROI) an apparel manufacturer can expect. 
REVENUE or SALES Multiples for an Apparel Manufacturing Business
  • REVENUE or SALES multiples reflect the total amount of sales an apparel manufacturing business generates. Apply the multiple to the business’s revenue to calculate the fair market value

To learn more about how to value an apparel manufacturing business using the market approach, see Valuation Multiples for Apparel Manufacturing.

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Valuing an Apparel Manufacturing Business Using the Income Approach

Another common valuation approach is the income approach. This valuation method measures an apparel manufacturing business’s cash flow potential. In addition, the income approach assesses the risks associated with buying, expanding, or selling an apparel manufacturing business. We highlight a few of these risks below. 

    • Competition: The apparel manufacturing industry is fragmented and competitive. To succeed, operators must find ways to differentiate their services. 
    • Financial Performance: Financial conditions in the apparel manufacturing industry have fluctuated in recent years. As such, apparel manufacturers need to have strong financial planning and budgeting skills. 
    • Location: The location of an apparel manufacturing business has a strong influence on its success. It is important for manufacturers to locate near key markets such as clothing and apparel retailers. 
    • Machinery and Equipment: Apparel manufacturing businesses use various types of machinery and equipment to manufacture clothing. As such, it is vital to secure functional and reliable machinery and equipment. When valuing an apparel manufacturing business, you may also need a manufacturing equipment appraisal.

Methods to Value an Apparel Manufacturing Business Using the Income Approach

There are many variations of the income approach. The most common methods are the capitalization of cash flow method and the discounted cash flow method. Both of these methods evaluate an apparel manufacturing business’s earning potential. Below, we discuss how to value an apparel manufacturing business 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 ideal if your apparel manufacturing business has a long and stable history. This method involves determining a reliable amount of cash flow for one 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 associated with buying, growing, or selling an apparel manufacturer. We discuss a few common risks above. 

Discounted Cash Flow Method

The discounted cash flow method is best for apparel manufacturing businesses with strong financial histories and/or predictable forecasts. When using this income approach, business appraisers project future cash flows over a 3-5-year period. Then, a valuation expert divides the earnings by a discount rate to take the time value of money into account. Please note that the discounted cash flow method is less common since it relies on future cash flow estimates which can fluctuate.

Summary

If you are looking to buy, grow, or sell an apparel manufacturing business, it is beneficial to learn how to value an apparel manufacturing business. The most common valuation methods for valuing an apparel manufacturer are the market approach and/or the income approach. To learn which method is best for your business, obtain a business valuation for an apparel manufacturing business. As part of a business valuation, you will learn the fair market value of an apparel manufacturing business as well as its associated strengths and weaknesses. 

Peak Business Valuation is happy to help! At Peak, we work with apparel manufacturing businesses across the country. We can provide you with a business valuation for an apparel manufacturing business and/or manufacturing equipment appraisal. In addition, we can discuss any questions you may have on valuing an apparel manufacturing business. Schedule your free consultation today by clicking the following link! 

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