Business Valuation Blog | Understanding Buying / Selling a Company

During a divorce, the divorcing couple must split personal and professional assets. When one partner in the marriage owns a manufacturing company, the company's worth must be split during the divorce proceedings. Valuing a manufacturing company can determine the worth of the business, which helps negotiations proceed. Here's what you need to know about business valuation for divorce purposes when it comes to manufacturing facilities. 

Splitting Up Marital Assets in a Divorce

Divorce laws vary by state. Generally, divorce lawyers classify assets as belonging to one party or both parties.

If an asset was acquired before the marriage (as when someone owns the manufacturing plant before the marriage), then it's classified as separate. The caveat here is business improvements that were made using joint funds, for instance new equipment financed by a joint back account. Even with a manufacturing business that predates the marriage, the spouse may be entitled to a portion of the company's value. 

If a manufacturing company is acquired during the marriage, then it counts as shared property and must be split in the divorce agreement. In many states, property should be split 50/50 between the spouses. 

Many divorcing couples do not want to co-manage a business together. The easiest solution to this dilemma is often the least desirable one: Sell the business and split the profits from the sale of the manufacturing company among both parties.

Another common option is for one party to buy out the other party of their interest in the business, then run the manufacturing company. When the business owner wants to retain their business and buy out the spouse, they must first take a valuation of the manufacturing company to determine worth, then pay out the rightful share as part of the divorce proceedings.

Business valuation experts can value the manufacturing company to determine its worth. It's better to have an independent valuation of the manufacturing company than rely on the business owner, who is not neutral, to estimate the value. Relying on the owner to gauge the manufacturing company's worth is not recommended, as it's in the owner's best interest to undervalue the company, while it's in the spouse's best interest to overvalue the manufacturing plant. 

Valuing a Manufacturing Company for Divorce

Manufacturing companies can be valued using an asset, income, or market-based approach. An asset-based valuation calculates the worth of equipment and personnel, an income-based approach assesses present value as compared with future earnings, and a marked-based approach looks at the worth of similar manufacturing facilities recently sold. 

Asset-based valuations are common with manufacturing facilities, since these companies tend to own a lot of expensive and unique equipment; however, sometimes it's best to combine appraisal methods. An appraiser will identify the best method to use based on the company and circumstances, explain the selected method of valuing a manufacturing company, and provide documentation to support their valuation. 

Some couples choose to hire a single appraiser who can determine the business's value. Other couples opt to hire two appraisers, so each spouse can work with an appraiser of their choice. If two appraisals are conducted, the valuations can be compared by the attorneys during the divorce negotiations. 

Determining what, if any, part of a business a spouse is entitled to is a process best left to divorce lawyers. Once you determine that a business counts as shared property and must be split, identify a qualified appraiser who can value the business for divorce purposes. 

A company appraisal is a company appraisal, right? Wrong. Different industries often value different aspects of a business based on what's important in that sector. Oil and gas depends on market prices. Construction depends on demand. Repair services are often driven on reputation and goodwill of the community. So what's different when you're valuing a manufacturing company? We thought you'd never ask.

What's different when valuing a manufacturing company

• Current market conditions. If you're manufacturing oil rigs and oil is selling for $50 per barrel, you're not going to sell a lot of rigs. This can impact the value of your manufacturing company, unless you have options to diversify into other markets. A good business appraiser takes note of market conditions and may be able to offer suggestions to improve your standing in a weak market.
• Reputation for innovation within the company. Is your company a leader in fresh new features or adding new interfaces that hadn't been considered before? This kind of reputation can improve your company's overall value. Is this innovation supported by just a few individuals in your company? A business valuation specialist can tell you where your business' strengths and weaknesses are, allowing you to secure areas needing improvement and grow areas that are already strong.
• Uniqueness of products manufactured. Are you the only manufacturer of your products, such as a range of after-market off-road truck equipment? Or are you one of a few dozen manufacturers producing plastic clothes hangers? Having a unique product can increase the value of your business, while manufacturing a commonly produced product can lower your overall value.
• Brand value. Is your company known as a leader in your industry? If you're well known, your brand will go a long way towards creating interest in new products. If you have a reputation for excellence, that creates a certain level of expectation that your products are worth an additional amount, driving your company's value up.
• Specialization. If your industry requires a certain level of precision in manufacturing and you have the equipment and expertise to manufacture products to that level of precision, you can often charge a premium for your products. That premium is reflected in your company's overall appraisal value.
• Level of market saturation. How much room for growth is there in your market? Are there alternative markets that haven't been leveraged yet? If your market is already completely saturated with little prospect for growth, you may see a negative impact on your business' value. If you can diversify to create new features or options to expand the market again or make it feasible for segments of that market that have been previously unexplored to buy in, your business value can increase.

As you can see, when it comes to valuing a manufacturing company, many different aspects come into play that can directly impact your business' value in a very different way than companies in other industries may be impacted. For this reason, it's important to work with a certified business valuation specialist with experience in your industry to ensure you're getting the most accurate possible appraisal report.

How much is a manufacturing company worth? It's a tough question, one that has plagued the minds of business owners for centuries. So many factors work into the final calculations that it can be virtually impossible to determine the final valuation of a company. Issues such as the reason for the business appraisals, the amount of time available to sell the company, the company's reputation and goodwill in the community and many other aspects can cause a significant difference between business valuations. Here's a quick look at what's involved and how the final figure is calculated.

How do you determine how much is a manufacturing company worth?

• Why do you need the value determined? Business valuation specialists who have gone through the certification process know which methodologies to apply to your particular situation. If you're getting ready to sell, the appraiser will look at the market conditions and what similar businesses have sold for.
• How quickly do you need to turn over the business' value? If you need to quickly sell your business or raise funds to buy out a partner who is leaving or to settle an estate, you'll need to accept a lower price than you may be able to receive for the business if you had time to prepare it for sale to the perfect buyer at a much higher price.
• What is your business' position in the community? If you have a reputation for excellence, over-the-top customer service or for cutting-edge innovation, your business will have a higher value than one that doesn't meet those standards. It can include your position within your industry or specialty.
• What are the current market conditions in your business' industry? If your market is growing like crazy, there will be a lot more investors interested in purchasing your business, boosting its value significantly over what you might receive when it's in a regular cycle of operation or in a slump.
• Do you specialize in any particular areas that increases your products' perceived value? If you're the only manufacturer of a particular product or use specialized techniques, your products will often have a higher profitability or market share than they would if you're creating the same products as all your competitors.
• How strong is your brand? Brand recognition helps you demand a premium for your products. This is the most basic premise behind why generic sodas cost so much less than household names such as Coca-Cola or Pepsi. When you've worked hard to build up your brand, you can expect a higher return for your products.

When you need to know how much is a manufacturing company worth, having a grasp of how the process works can make a huge difference in understanding the final calculated value. Due to the complex factors involved in calculating the business' final value, it's often better to leave this process to a well-qualified, experienced business appraisal specialist.

When you run a manufacturing company, there are many areas where you can make improvements or tap into additional value. Some of these involve taking risks in entering new markets, doing extensive mapping of your strategy or planning your actions in the market when you're not sure what the future may hold. But one of the most under utilized tools used for finding hidden value in your business is the business appraisal. Business appraisals look at a wide range of factors to determine a business' true value. It also makes it easier to find where your business has potential for significant growth. Here's how having a business appraisal performed helps you find that hidden value.

How valuing a manufacturing company reveals hidden value

The first area you'll find value is where your business is not performing up to standards. How is that adding value? Because it helps you ensure your company is as strong as possible. This allows you to improve your business, building its value. Are your assets overvalued because they receive more wear and tear than your competitors? Is your overhead too high because you haven't replaced the old, power-hungry light fixtures in your plant? Is there disruption happening in your industry that may lead to a downturn for more traditionally-modeled businesses? By knowing where your business is weak, you know where to improve it to ensure it will do better in the future.

But how do you compare to your competition? Because business valuation specialists spend their days working with a number of businesses in your industry or related industries. This gives them the insight to what a healthy manufacturing business looks like. They can compare your business to others that are similar or to similar businesses in other industries that are going through the same type of conditions and issues your business is facing. Is it a good time to diversify your production line? Should you look at digitizing your operation to reduce overhead? Having a business appraisal means you can learn from other business' mistakes and successes.

When you're considering expanding your business by merging with another company, do you know the condition that company is already in compared to your own? A company valuation of that business provides the same level of insight. If that company is strong where yours is weak and vice versa, they may be able to compensate across the board and make the merger a success. If, on the other hand, you're looking at a business that has similar weak points, you could simply be taking on unnecessary risk that could cost you your existing manufacturing company. By having a business appraiser take a solid look at both companies, you know what you're getting into from the start or can avoid making a bad investment all together. 

As you can see, there are many areas where your manufacturing company has real value that may be hidden. By taking advantage of the information provided in business valuations, you can improve your business' position in the market and take smart opportunities. If you need help getting the valuation of a company, it's important that you work with a business appraiser who has the necessary training and experience to give you the information you need.