Manufacturing Business Valuation Multiples – EBITDA-Based Valuation

FAQ

How long does it take to sell a manufacturing business?

Here is what the process of selling a manufacturing business looks like when you work with a capable, manufacturing-focused advisor:

  1. Hire a business broker or M&A advisor
  2. Prepare a CIM
  3. Market the Business to a Targeted Buyer List
  4. Solicit Indications of Interest (IOIs)
  5. Hold Management Meetings
  6. Gather Letters of Intent (LOIs)
  7. Conduct Due Diligence

On average, It takes 8-9 months to sell a strong manufacturing business.

Valuation ranges widely for manufacturing companies and depends greatly on their size, recurring nature of their clientele, how highly engineered the products are that they manufacture and other factors.

On average, the manufacturing companies we work with in the lower middle market will sell for 5 – 8 X adjusted EBITDA.

Manufacturing business valuation multiples play a crucial role in determining the worth of a company in the manufacturing sector. As investors, buyers, and sellers seek to assess the value of a manufacturing business, valuation multiples provide valuable insights into its financial health, growth prospects, and market position. 

In this article, we delve into the world of manufacturing business valuation multiples, exploring their definitions, types, and the typical process of valuing a manufacturing business. We will examine the factors that influence these multiples, analyze real-world case studies, and discuss sector-specific variations. 

We will also explore the impact of the current, interest-raising environment on manufacturing valuation multiples, offering insights and guidance for investors and manufacturing business owners in navigating this evolving landscape.

How Valuation Multiples Work for Manufacturing Companies

A valuation multiple is a way to come up with an appropriate valuation for a company. This is true of manufacturing companies, in the lower middle market and virtually every other industry, although there are some other valuation approaches for high-growth businesses and publicly traded companies.

For Manufacturing companies, the valuation multiple is determined by how desirable the business is and applied to a trailing twelve-month (TTM) adjusted EBITDA figure to get the final valuation of the business. EBITDA is a metric that measures a company’s ability to generate cash before it services its debt or pays taxes. The acronym stands for earnings / net income before interest taxes depreciation and amortization.

What is Adjusted EBITDA and How Does it Affect Business Valuation?

to calculate adjusted EBITDA an M&A advisor or investment banker will take the company’s non-recurring expenses (one-time legal expenses, buying out an old business partner, etc.) and add them back into the EBITDA figure. Additionally, if the business owner is serving as CEO of the company and is taking more compensation than the future owner will need to pay their CEO, that is added back into the bottom line as well to show the true earnings that are available to the business owner.

Note that the term “Seller’s discretionary earnings” is often used as a synonym for Adjusted EBITDA.

Finding the Appropriate Multiple for a Manufacturing Company

As mentioned, the multiple is applied to TTM Adj. EBITDA to arrive at the business value and likely purchase price. However, finding TTM EBITDA is a fairly straightforward equation. After performing due diligence, business buyers and sellers can typically reach an agreement on what that number is. Finding a valuation multiple, however, is more art than science.

The More Desirable Your Business is to an Investor, the Higher Multiple They Will Pay

At a high level, it really is that simple. However, different buyers will find different industries and business traits appealing. Some will like a niche industry with as few competitors in it as possible. Others will favor a manufacturing company in a larger industry where there may be more of a growth opportunity, even if it means they will have to invest more in technology to stay ahead of their many competitors. However, there are some other factors here that are seen as highly desirable across the board. We’ll go into further detail on these below.

Related Content

We put together another article on the process of selling a manufacturing company that we think you may like.

The Factors That Make a Manufacturing Company More/Less Valuable:

  1. Highly engineered product(s)
  2. Critical product(s) (think medical devices or A&D products)
  3. High-growth (this could be a proven sales team or differentiated technology)
  4. Scale, potentially $10m EBITDA plus (the larger the business, the higher multiple)
  5. A large total addressable market or the ability to expand into adjacent ones
  6. High margin (indicative of a high level of automation (lights off facility) and differentiation from competitors
  7. Recurring customer base without customer concentration. (Having too much of your revenue coming from a few customers can drastically decrease your multiple)
  8. Strong leadership team
  9. Clean, well organized financials. (most manufacturing companies use outsourced CFOs or have an internal CFO).
  10. Long term contracts.
  11. Well represented by a professional M&A firm such as Raincatcher

We Have Had Success Representing Manufacturing Business Owners Like You

Valuation Multiples in Different Manufacturing Industry Sub-sectors

Valuation multiples can vary significantly across different, manufacturing industry sectors due to variations in industry dynamics high customer concentration, growth prospects, and market conditions. Understanding these sector-specific differences is crucial when assessing the value of manufacturing businesses. Let’s explore some key sectors and the factors that contribute to their valuation multiples.

  1. Automotive Manufacturing:

    The automotive manufacturing sector is highly capital-intensive and cyclical, characterized by significant competition and technological advancements. Valuation multiples in this sector often depend on factors such as market share, product portfolio, technological innovation, and brand strength. Companies with strong positions in electric vehicles (EVs) or autonomous driving technologies may command higher multiples due to their potential for future growth.

  2. Chemicals and Materials:

    The chemicals and materials sector encompasses a wide range of industries, including specialty chemicals, polymers, and materials for construction and industrial applications. Valuation multiples in this sector are influenced by factors such as product differentiation, research and development capabilities, and exposure to end markets. Companies with a diverse product portfolio, strong intellectual property, and sustainable competitive advantages tend to have higher multiples.

  3. Electronics and Technology:

    The electronics and technology sector is characterized by rapid innovation, short product life cycles, and intense global competition. Valuation multiples in this sector are often driven by factors such as technological leadership, intellectual property, customer base, and growth potential. Companies operating in emerging technology areas, such as artificial intelligence, Internet of Things (IoT), or 5G, may command higher multiples due to their potential for disruptive growth.

  4. Food and Beverage Production:

    The food and beverage production sector is relatively stable and less cyclical compared to other manufacturing sectors. Valuation multiples in this sector are influenced by factors such as brand recognition, market share, product diversification, and distribution networks. Companies with strong brands, a loyal customer base, and a track record of consistent revenue and profit growth tend to have higher multiples.

It’s important to note that these are just a few examples, and valuation multiples can vary within each sector based on company-specific factors. Factors such as growth rates, market positioning, competitive dynamics, and regulatory environments also play a significant role in determining valuation multiples.

Moreover, macroeconomic conditions and industry trends can impact valuation multiples across all manufacturing sectors. Factors such as interest rates, inflation, government policies, and global trade dynamics can influence investor sentiment and market valuations.

When assessing valuation multiples in different other manufacturing businesses and sectors, it is crucial to consider a comprehensive set of factors that are specific to each sector and individual company. This includes analyzing financial performance, growth prospects, competitive advantages, industry trends, and broader economic conditions. By conducting a thorough analysis of many factors, investors and stakeholders can make informed decisions when valuing manufacturing businesses in various sectors and identify opportunities for potential investment or strategic transactions.

Thinking About Selling?

If you are entertaining selling your company, feel free to request a consultation with one of our manufacturing business brokers or M&A specialists to learn about our unique process and why we believe it is the best in the industry.

Who Buys Manufacturing Companies?

While potential buyers are trying to get your business for the lowest price they can, if your business is desirable enough to sell and you’re working with a quality business broker like Raincatcher, you’ll likely get multiple prospective buyers making offers for your business. This is important as it helps give us (and our clients) negotiating leverage with the buyer and helps get the highest value of your business.

Generally speaking, if your business is over $2m in profit, we’ll get 5+ offers for it from private equity groups and strategic buyers alike. A private equity group is a team of investment professionals who manage money for outside investors (typically this is high net-worth individuals or pension funds). They will look to buy all or a portion of the business on behalf of their investors.

Strategic buyers are companies who have a strategic affinity in buying your business. This means they could be a similar manufacturing company. Or, they may be a service business that sells to the same end market as your manufacturing business does. While they are few and further between, strategic buyers can typically pay a higher price for the business than a private equity buyer.

How To Increase the Valuation of Your Manufacturing Company

In addition to increasing the appeal of your business in the various areas mentioned above, most buyers would like you to stick around with the business for a reasonable transition period post-close. This will not only help them get comfortable with the operations of the company post-close, it helps assure that leaders in key departments will remain in place for the buyer.

Additionally, if you have a clear plan on how to help the buyer increase the company’s future earnings, the potential acquirers would be excited to see this and may be willing to pay a slightly better multiple.

Other Valuation Methodologies Occasionally Used When Selling a Manufacturing Business

While a manufacturing business’ valuation can be made as simple as taking earnings before interest taxes and multiplying it by the appropriate valuation, there are several other more academic approaches that are used by wall street to asses a manufacturing company worth.

Discounted Cash Flow Analysis Valuation

This is projecting the future earnings of a manufacturing business, applying a discount rate to them (for time and perceived risk) and trying to come up with a company value based on the present value of the future cash flow.

Multiple of Book value

Many manufacturing businesses are in cyclical industries which means that they may fall on hard times and have little or no earnings. If the business owners are in looking to sell while the manufacturing business is performing poorly, potential buyers may look to buy the business on a multiple of its book value. Even a discount to its current book value. This process is also known as asset based valuation.

When valuing manufacturing companies through this methodology, a business broker or business appraiser will look at the company assets (accounts receivable, equipment, other fixed assets) and subtracting any liabilities (payables, debt, etc.).

It is important to know that if you elect to sell your business to a new owner based on this approach, you are likely getting a much lower valuation for your business than if you were to build it back up and sell at a later date.

Request a Consultation

If you are looking to sell your manufacturing company we invite you to reach out to get introduced. We’d be happy to discuss our auction process and how we help manufacturing business owners and other lower middle market business owners achieve maximum value with our proprietary auction process.