Are you considering buying or selling a manufacturing business, or are you just wondering what a manufacturing business is really worth? In this article, we’ll discuss how to value a manufacturing business.
Manufacturing is a broad category of many business types covering myriad finished products. This mix produces difficulty in determining how to value a specific manufacturing business.
The valuation of privately held, small to medium size businesses is not an exact science. But fortunately, resources are available to valuations specialists to help reach a conclusion of market value for manufacturing businesses.
All of the manufacturing business valuation formulas we’ll quote here are based on the opinions of industry experts and averages derived from completed sales of manufacturing businesses reported to national databases.
One respected authority reports that manufacturing businesses – in general – will appraise on average between 3 to 4 times Seller’s Discretionary Earnings (SDE), or 3 to 5 times Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). But again, these are only broad averages among many different manufacturing categories.
For a definition of Seller’s Discretionary Earnings (SDE) and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), please see this article.
Now for some valuation multiples from respected authorities on specific manufacturing categories:
- Aluminum Extruded Products – 6 times Seller’s Discretionary Earnings (SDE).
- Blinds & Window Shade Products – 3 times SDE, 5 times EBITDA.
- Chemical Products – 4 to 9 times EBITDA
- Cosmetic & Beauty Products – Under $1 million in annual revenue = 3 times SDE, over $1 million in revenue = 5 times EBITDA.
- Concrete Pipe & Block Products – 6 times EBITDA.
- Food Products – 4 to 7 times EBITDA.
- Furniture for Households and Institutions – 4 to 7 times EBITDA.
- Glass Products – 2 to 3.5 SDE.
- Metal Fabrication – 3 to 5 times SDE, 4 to 6 times EBITDA.
- Paint Products – 3 to 5 times SDE.
- Plastic Bottles – 3 times SDE.
- Pre Fabricated Wood Buildings – 3 to 4 times SDE.
- Screws, Nuts & Bolts – 8 to 11 times SDE.
- Signs – 3 to 5 times SDE.
- Women’s Apparel – 3 to 11 times EBITDA depending on size.
- Wood Kitchen Cabinets – 2 to 3 times SDE.
If the type of manufacturing business you’re interested in is not listed above, contact me. I’ll most likely be able to find it in our resources.
If real estate is being sold with the business, its value should be added to the results obtained from the above formulas.
And at the risk of being repetitive, the above-quoted earnings multiples are averages within each manufacturing business type. Many factors impact the valuation of a particular company, including:
- The revenue and earnings trend of the business.
- The company’s dependence on the owner and his/her willingness to assist in the transition.
- Customer concentration. Do one or a few customers account for an unusually high percentage of the company’s revenue?
- The upcoming need for any capital expenditures.
- Are trained employees likely to stay with a new owner?
- Any patents or unique technologies owned by the company.
- And perhaps most important is the “reality check.” This check makes sure the business is producing enough cash flow yearly to (1) cover the debt service on the loan that the buyer will use to buy the business, (2) pay the owner a living wage, and (3) produce a decent rate of return on the new owner’s investment.
The above issues will determine where within the quoted valuation ranges a specific manufacturing business will fall.
Our firm has been offering business valuation and ownership transfer services since 1986. If we can assist you with these issues, please don’t hesitate to contact us.
For further reading, here are additional related articles:
- The 3 Most Critical Issues in Buying or Selling a Business
- Seven Negotiating Rules When Buying or Selling a Business
- How to Conduct Due Diligence When Buying or Selling a Business
- Selling a Business? Ask These 5 Questions to Separate Serious Buyers From Tire Kickers
- What Is a Business Broker? What Do Business Brokers Do?
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