5 Factors That Influence Your Manufacturing Business Valuation

A business valuation is both a personal and professional challenge, but manufacturing industry trends are favorable. The North American manufacturing industry is on the rise, impacting the American economy positively year after year.

With nearly half of all U.S. employees in the United States being employed by small businesses, mergers and acquisitions are becoming a solid way to build brand value, scale, and give yourself a competitive edge.

Historical Performance

Although past performance does not always predict future performance, selling your current business means you must make an attractive proposal to the buyer. Your financial records need to be kept current so that past performance can be audited and future performance can be anticipated.

From your financial records, the buyer can determine healthy cash flow, current assets, and any owed payments or liabilities.

Your profit margins will be a tell-tale sign of whether the buyer has wiggle room to make the changes necessary to increase profitability while looking for opportunities to improve the business.

Position in the Market

Beyond the numbers, your valuation is also linked to your brand and competitors. Depending on your position within the market, this can increase or decrease your valuation. You will likely have a more favorable valuation prospect if you are an industry leader in your industry or a niche space.

Brand recognition, a well-established customer base that lacks concentration, great reviews, and potential customers knocking on your door to give you business can increase your company's valuation. The buyer will conduct an assessment to consider your market share and risk so that they can see your overall internal and perceived reputation.

A popular way to value a business is by a multiple of your earnings. The buyer can select whichever multiple they like, but the most common is a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Calculating Your Company’s Value With EBITDA Multiples

The Corporate Finance Institute provides the following EBITDA multiple formula:

EBITDA Multiple = Enterprise Value / EBITDA

In other words, in order to find your EBITDA multiple, you must first determine your business’ Enterprise Value and EBITDA:

• Enterprise Value = (market capitalization + value of debt + minority interest + preferred shares) – (cash and cash equivalents)

• EBITDA = Net Earnings + Interest + Tax + Depreciation + Amortization

Once those two figures are calculated, you’ll take the Enterprise Value figure for a given year and divide the EV by your EBITDA for the same year. The result is your EBITDA multiple.

As an example, let’s look at a theoretical company calculating EV, then EBITDA, then the EBITDA multiple for 2023. The figures below are relatively round for simplicity:

Enterprise Value

• Market Cap: $69M (how much you’re worth)
• (+) Debt: $1.3M
• (-) Cash: $0.3M
• (=) Enterprise Value: $70M

EBITDA

• Net Earnings: $3,000,000
• (+) Interest: $450,000
• (+) Tax: $900,000
• (+) Depreciation & Amortization: $650,000 
• (=) EBITDA: $5M

With EV and EBITDA calculated, we can now take the $70M EV and divide it by the $5M EBITDA, which would result in an EBITDA Multiple of 14x for 2024:

EBITDA Multiple

$70M EV / $5M EBITDA = 14.0x EBITDA Multiplier

A median expected valuation is a 13.8x, but that can fluctuate depending on the manufacturing industry and how technical and or precise the specific industry is.

Future, Potential Growth

Once the financial records and overall business have been reviewed, the buyer will start to plan whether they can make improvements and what potential the business may have. Selling a business isn't just about acquiring their current cash flow and assets, but also the company's potential for growth.

If you are a niche player in your industry, the buyer may want to assess whether different revenue verticals can be explored with the current staff and equipment available. If your manufacturing company is more generalized, they may look to specialize in a few areas to gain a larger share of the key clients and partners.

To increase your business valuation, it's important to underscore what you do best and consult the buyer on your vision for your company in the future.

Industry Trends

The manufacturing industry and landscape continue to shape and evolve. Trends are forming around many different factors, including talent attraction and retention, implementing green/sustainable solutions, safety, and the expanded use of CAD and CNC machining.

Buyers will look to see how well you have adapted to current conditions to see how resilient you may be in the future. For example, suppose you have enhanced your company to stay up-to-date with regulatory requirements and have made significant investments in upskilling training and equipment. This shows the desire to future-proof your business and a general sentiment among your staff to follow suit.

Risk Considerations

Business owners know that running a successful business comes with the risk involved, but a company valuation will be affected by the amount of risk a buyer has to take. Mitigating risk puts an onus on both parties, but actively ensuring you do your part to derisk the acquisition or merger as much as possible will make for a more attractive deal.

The buyer will evaluate financial, operational, and market risks for a realistic valuation. Being transparent from the beginning about issues, problems, or challenges you face will be a benefit as it shows a genuine desire to disclose everything and put it on the negotiating table.

ReNEW Manufacturing Solutions: Partners Who Care

At ReNEW, we know that not everything is just in the numbers. We want to hear about your market position, the skills of your staff, and everything that goes into shaping your story and reality. We take a different approach by overcoming challenges and seizing opportunities. Detailed plans are made to ensure that we retain your brand, image, and staff - while consulting with you every step of the way.

Connect with us today to learn more about how we can find a new home for your business.