Valuation Multiples for a Machine Shop
A machine shop engages in machining metal parts on a per-job or order basis. Most often, a machine shop company completes jobs on a low volume basis. The main activities within the machine shop include drilling and boring, grinding services, fastening services using automatic screw machines, and manual and computer numerical control (CNC) millings services. The machine shop services industry generates about $32.0 billion in revenue. This industry is expected to grow for the next five years at a 3.9% growth rate. As you can see, this industry has great potential. Are you interested in joining this growing industry? If so, it is important to understand the value of a machine shop. Get started by scheduling your free consultation call today!
Valuing a Machine Shop
The first step to purchasing or selling a machine shop company is to understand its value. It is highly recommended to obtain a business valuation from a professional business appraiser, such as Peak Business Valuation. There are several factors that go into valuing a machine shop and it can be complex. A business valuation can help in a number of ways.
If you are looking to sell a machine shop company, a business valuation can help you get the most for your machine shop services company! A business valuation can also help the seller when negotiating with potential buyers. If you are buying a machine shop, a business valuation can help you determine a fair purchase price for the business. Whether you are looking to buy or sell a machine shop company, a business valuation will help you feel confident. If you have any questions, Peak Business Valuation is happy to help!
Valuation Multiples for a Machine Shop
Peak frequently works with companies in the machine shop services industry. We would love to help you. Schedule a free consultation with Peak Business Valuation, business appraiser California! We receive many questions about valuing a machine shop. One of the most common questions is, “How does a valuation expert determine the fair market value of a company?” One of the ways is through using valuation multiples. Below we discuss what average multiples for a machine shop company look like. As well as, when and how valuation multiples are applicable.
Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. These multiples do not represent the valuation opinion of Peak Business Valuation or its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional about any matter in this article.
What is a Valuation Multiple?
There are various ways to value a machine shop service company. A valuation expert, such as Peak Business Valuation, most often values a company by using valuation multiples. A valuation multiple is similar to a ratio, which compares two factors to each other. One of the common ratios in valuation is an SDE multiple. The SDE multiple compares the seller’s discretionary earnings of the business, with the implied value of the company. (SDE stands for seller’s discretionary earnings.)
A valuation expert, such as Peak Business Valuation uses the multiples of other similar machine shop services companies that have recently sold on the open market. They then apply the multiple to your machine shop services company to get a range of value.
Example of a Valuation Multiple for a Machine Shop
For example, a machine shop services company has $150,000 in SDE. It receives a 3.14x SDE multiple. This means the business would have an implied value of $471,000. ($150,000 times 3.14) On the contrary, a 3.47x multiple would imply the value of the company would be $520,500. ($150,000 times 3.47)
As a professional business appraiser, Peak Business Valuation works with several individuals who were buying or selling a machine shop services business. Every machine shop service company is unique. As such, the range of value can be significant. Here is a range of valuation multiples that a machine shop company transacts at and is valued at. Below we discuss SDE, EBITDA, and REV multiples for a machine shop services company.
Average SDE Multiple range: 2.34x – 3.49x
According to our data, a machine shop business transact between a 2.34x – 3.49x average SDE multiple. To derive an implied value of a machine shop service company, apply the multiple by the most recent 12-month period of revenue. The calculation is as follows:
SDE X Multiple = Value of the Business
For example, a machine shop service business generates $250,000 in sellers’ discretionary earnings. It transacts at a 2.81x multiple. In this case, the business value is worth approximately $702,500.
$250,000 X 2.81x = $702,500
Seller’s discretionary earnings is a common cash flow multiple experts use to value small businesses. It starts by calculating the company’s operating profit and adding back potential expenses that a new owner may not incur. These expenses may include the owner’s compensation and personal expenses. As well as other expenses such as non-recurring or non-related business items.
Average EBITDA Multiple range: 3.04x – 4.23x
The average EBITDA multiples for a machine shop services business range between 3.04x – 4.23x. Apply this multiple to EBITDA to derive an implied value of the business. The calculation is as follows:
EBITDA X Multiple = Value of the Business
For instance, a machine shop business has an EBITDA of $170,000. It transacts at an EBITDA multiple of 4.03x. Using the above metrics, the machine shop business is worth approximately $685,100.
$170,000 X 4.03x = $685,100
An EBITDA multiple measures a company’s return on investment (ROI). This multiple is preferred as it is normalized for differences in capital structure, taxation, and fixed assets. Normalized ratios allow for comparisons to similar businesses. Normalized ratios also more accurately represent the future earnings a buyer can expect from the business.
Average REV Multiple range: 0.61x – 1.22x
According to our data, a machine shop business sells for an average of 0.61x – 1.22x revenue multiple. A valuation expert calculates the value of the business by multiplying the amount of revenue or sales a machine shop company makes by the valuation multiple.
Revenue X Multiple = Value of the Business
For instance, a machine shop company makes $950,000 in revenue. The valuation expert applies a 0.73x multiple. This calculator means the business is worth approximately $693,500.
$950,000 X 0.73x = $693,500
Depending on the machine shop company, a valuation expert may not rely on a revenue multiple. Typically, the most reliable multiples are SDE and EBITDA, because they are cash flow multiples. The cash flow multiples consider how expenses impact a business. For example, COGS, salaries, rent, and other expenses. A revenue multiple does not consider the operations of the business. Therefore, a valuation expert may rely on the SDE and EBITDA multiples instead of a revenue multiple when determining the fair market value of a machine shop services company.
When it comes to valuation multiples, remember there are many factors that may impact the business valuation. It is recommended to seek advice from a professional business appraiser. Peak Business Valuation, business appraiser California, would love to talk with you more about the factors that may impact the value of a machine shop services company.
One of the main goals of Peak Business Valuation, business appraiser California, is to help small businesses thrive! We seek to do that by helping business owners maximize the value of a machine shop company. We focus on providing valuable information to help you grow, sell, or buy a machine shop. Get started today by scheduling your free consultation below!
For more information on machine shops, see “Value Drivers for a Machine Shop.”
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