Valuation Multiples for a Manufacturing Business
Manufacturing businesses include operators who use raw inputs to transform into new products using physical, mechanical, or chemical processes. Assembly of parts may also be included in this industry. Some of the major products and services in the manufacturing industry include the following:
- Food, beverage, and tobacco
- Petroleum, coal, chemicals, plastics, and rubber
- Transportation and machinery equipment
- Metals and mineral production
- Computer, electronic, and electric products
- Wood and paper products
- Textiles, apparel, and leather products
- Other products
The manufacturing industry generates over $6 trillion in revenue with nearly 636,000 manufacturing businesses. The manufacturing industry is highly fragmented with no business capturing more than 1.5% of the market. As such, in the United States, there are many transactions of manufacturing businesses. If you are buying a manufacturing business or selling a manufacturing business, understanding the value of a manufacturing business is key. A valuation expert will determine a fair market value for the manufacturing business. This is done through a variety of methods including the use of valuation multiples for a manufacturing business.
Valuing a Manufacturing Business
There are many factors impacting the value of a manufacturing business. This can include the world price of steel and crude oil, customer and supplier concentration, and operating efficiencies, among others. A business appraiser at Peak Business Valuation will analyze your manufacturing business and its financials. They will compare your manufacturing operations to that of similar manufacturing companies. Using various valuation approaches the business appraiser determines a fair market value of the manufacturing business.
Understanding the value of a manufacturing business is an important part of buying or selling a manufacturing business. A business valuation report shows the fair market value and will help you understand the strengths and weaknesses of the manufacturing business.
If you plan on buying a manufacturing business, a business appraisal will help determine a fair purchase price. A business appraisal is also a useful tool for negotiating the purchase price as you understand more in-depth the operations of the manufacturing business.
If you are selling a manufacturing business, a business valuation will help you decide on a fair listing price. As a business owner, you don’t want to leave money on the table, but you also don’t want to scare away potential buyers by listing too high. A business valuation will help you understand a range of values for what a willing buyer and willing seller are willing to transact at.
Valuation Multiples for a Manufacturing Business
Below is a brief overview of valuation multiples for a manufacturing business. This includes EBITDA, REV, as well as SDE multiples for a manufacturing business. The following numbers are only a guide. For specific information about your manufacturing business, schedule a free consultation with Peak Business Valuation, business appraiser.
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?
A business appraiser commonly uses valuation multiples for a manufacturing business when determining a fair value. A valuation multiple is a ratio. The multiple compares two factors to each other. One of the most common valuation multiples in business valuation is an SDE multiple. The SDE multiple for a manufacturing business compares the seller’s discretionary earnings with the implied value of the manufacturing business.
When using valuation multiples for a manufacturing business, the valuation expert will compare your business to similar manufacturing companies that recently sold. This comparison helps to determine an appropriate market multiple for your manufacturing business. This is just one method; the valuation expert may use several business valuation approaches to determine a range of value for the manufacturing company.
For example, the seller’s discretionary earnings of a manufacturing business are $733,000. Using a 3.09x SDE multiple implies the value of the manufacturing business is $2,264,970. ($733,000 times 3.09x) Whereas, if a 2.76x multiple is more appropriate, the manufacturing company is worth approximately $2,023,080. ($733,000 times 2.76x)
As a business appraiser, Peak Business Valuation provides business appraisals for manufacturing businesses across the United States. We love working with individuals who are buying or selling a manufacturing business. Knowing the value of a manufacturing business is done through a business valuation report. Get started with your business valuation by scheduling a free consultation.
SDE Multiples for a Manufacturing Business
Average SDE Multiple range: 2.68x – 3.54x
In Peak’s data, manufacturing businesses on average transact between a 2.68x – 3.54x SDE multiple. To determine the implied value of the manufacturing company, take the seller’s discretionary earnings and multiply them by the applicable SDE multiple. Below is the calculation.
SDE X Multiple = Value of the Business
For instance, a manufacturing business has $364,000 in seller’s discretionary earnings. The valuation expert determines a 3.42x SDE multiple is appropriate. Using the above calculation, the manufacturing business’s implied value is approximately $1,244,080.
$364,000 X 3.42x = $1,244,080
The seller’s discretionary earnings multiple is a common cash flow multiple that small businesses transact on. The seller’s discretionary earnings are calculated by taking the company’s operating profit and adding back potential expenses a new owner may not incur. Common add-backs in business valuation include a fair owner’s compensation, any personal expenses ran through the business, as well as other non-related or non-recurring business expenses.
EBITDA Multiples for a Manufacturing Business
Average EBITDA Multiple range: 3.54x – 4.19x
In our data, the average EBTIDA multiple for a manufacturing business is between 3.54x – 4.19x. To derive the implied value of the manufacturing company, take EBITDA and apply the multiple. The calculation is as follows.
EBITDA X Multiple = Value of the Business
For example, the EBITDA for a manufacturing company is $589,000. It transacts at a 3.86x EBITDA multiple. Using the above calculation, the manufacturing company is worth $2,273,540.
$589,000 X 3.86x = $2,273,540
The EBITDA multiple measures the return on investment or ROI an investor can expect from the business. A valuation expert may prefer using this multiple as it normalizes differences in capital structure, taxation, and fixed assets. Normalized ratios allow the valuation expert to compare similar manufacturing businesses. Using normalized ratios can more accurately reflect the future earnings a buyer can expect from the business.
REV Multiples for a Manufacturing Business
Average REV Multiple range: 0.54x – 0.79x
According to Peak Business Valuation’s data, manufacturing businesses sell for an average of 0.54x – 0.79x of revenue. A revenue multiple is less common to rely on, but the valuation expert will determine if it is applicable to your manufacturing business’ transaction. To calculate, use the most recent 12-month period of revenue prior to the valuation date and multiply it by the applicable REV multiple for the manufacturing business.
Revenue X Multiple = Value of the Business
For instance, a manufacturing business generates $3.2 million in revenue. Using a 0.67x REV multiple, the manufacturing business has an implied value of $2,144,000.
$3,200,000 X 0.67x = $2,144,000
When valuing a manufacturing business, the business appraiser at Peak Business Valuation will determine what multiples are applicable for your manufacturing business. Often small businesses transact on cash flow multiples – SDE and EBITDA multiples. This is because cash flow multiples consider expenses such as COGS, salaries, and rent, among other expenses.
When looking at valuation multiples for a manufacturing company, keep in mind that these numbers are only averages. There are many factors that impact the manufacturing business as well as the multiple that is most applicable. The business valuation expert will use their expertise to analyze the manufacturing business’s financials and key value drivers. They will compare your manufacturing business to similar manufacturing businesses in the country. Using several valuation methods, the business appraiser at Peak Business Valuation determines a fair market value.
Peak Business Valuation, business appraiser, values manufacturing businesses regularly. We would love to answer any questions you may have about valuing a manufacturing business. Whether you plan on buying a manufacturing business or selling one, a business appraisal is important. Start your business appraisal for a manufacturing business today by scheduling a free consultation below.
For specific types of manufacturing businesses, see the below links:
- Apparel Manufacturing
- Iron and Steel Manufacturing
- Metalworking Machinery Manufacturing
- Shoe and Footwear Manufacturing
- Sign Manufacturing
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