Business Valuation Blog | Understanding Buying / Selling a Company

Beyond the Obvious: How to Value a Manufacturing Business

Posted by Business Valuation Specialists LLC on Aug 14, 2015 7:30:00 AM


Business appraisals are common in companies of all sizes and across all industries. Although there are some universally accepted guidelines for business valuations, such as examining the balance sheet and income statement, there is also some degree of customization. Valuation methods are often industry-specific. To get the most accurate business valuation an accredited business appraiser will use a combination of general and industry-specific metrics to formulate a business appraisal.

How to value a retail business is different from how to value a service business. A boutique that sells the latest fashions is not the same as a company that gives guided tours of New York City. Manufacturing businesses depend heavily on machinery and equipment and you need to take a different approach to valuation.

How to value a manufacturing business requires an appraisal that examines the balance sheet, income statement, and key valuation ratios. It could also integrate an analysis of the company's machinery through an equipment appraisal. Last, but not least, how to value a manufacturing business means looking beyond the most obvious assets of the company. Following are some of the other variables that can add to the value of a manufacturing business.

Existing Contracts & Relationships

While there are some exceptions, small manufacturers normally do not sell the products they produce to the end-user. Instead, they develop relationships with retailers, wholesalers, and distributors. A handbag maker might have a contract with a large department store to provide 50 leather bags each month. An existing contract with Lowe's and Home Depot would add a great deal of value to a manufacturer of small specialty tools. Existing contracts guarantee future sales and lower customer acquisition costs. Connections matter in any business, including the manufacturing business. Being "in the loop" offers another channel for promoting the product or products a company manufactures. A company can build a strong reputation as a leader in its segment of the manufacturing industry by adding positive professional relationships. Professional relationships can lead to new sales, more profits, and a higher company valuation.

Proprietary Manufacturing Process

If your manufacturing company finds a way to produce the same product as your competitors produce, but at a cheaper per-unit price, you then have a competitive advantage over your competition. You may be able to price your product lower than your competition and gain market share, or, price it at the same level as your competition and enjoy a greater profit margin on your sales. A company is worth more when it does something better than its competitors.  

Generic vs. Specialized Product

When you are the only game in town because you are the only company that manufactures a specialized product that is in demand, you get to set your price. A number of companies can manufacture generic, plastic lawn chairs, but it takes skilled artisans and special equipment to create intricately-designed, custom stepping-stones. Pricing power increases the valuation of a company.

Utilization/Capacity of Equipment

When you value a manufacturing company you need to factor in the growth rate. If a company has a utilization rate of only 30 percent of the capacity of its equipment, it means that the equipment can be used as the company grows. Capital expenditures can be reduced/eliminated and that translates into bottom line profits.  

Location/Access to Transportation

A strategic location next to a network of highways, a railroad depot, or major airport, can lower shipping costs when finished goods need to be delivered. If your company has lower shipping costs than the companies you compete with, you have a competitive advantage. Competitive advantages increase business valuations. 

These are just some of the many variables that need to be considered when determining how to value a manufacturing business. A skilled business appraiser will be able to incorporate the most pertinent variables to establish an accurate value for your manufacturing company.

Topics: business valuations, how to value a manufacturing business