Manufacturing business valuation is an important process that defines the value of a given manufacturing company. Having an accurate idea of that value is essential for ownership, partners, and third parties to make appropriate decisions about financing, investing in, and buying or selling a manufacturing business.
A company without an accurate and reliable business valuation is at a disadvantage in a competitive industry.
Research from McKinsey predicts a significant rebound of the US manufacturing industry over the coming decade, driving investment and growth. Business owners who understand and can demonstrate their value are more likely to succeed in this climate.
Why Do Companies in Manufacturing Get a Business Valuation?
Here’s why a manufacturing business might seek out a business valuation: It could be time to buy or sell, they might need to know the value of their company to calculate discretionary earnings, or there could be all sorts of succession, tax, and ownership details to resolve.
Many of these reasons apply only to niche situations, but there are three core reasons that every business can benefit from. A business valuation is:
- either essential or highly beneficial when a business is seeking out financing,
- looking for investors, or
- preparing to sell.
Securing Financing for Your Business
Businesses of all sizes can rely on financing from investors to accelerate their growth. However, access to this financing is far from guaranteed. It’s the responsibility of the manufacturing business to demonstrate its solid financial outlook to the lending partner.
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There are many factors that go into demonstrating suitability for a business loan or equity sale. The valuation of a company is certainly one of those factors, and having professional valuation rather than back-of-the-envelope estimates is much more convincing to any prospective investor.
In addition to the overall valuation, you’ll be able to demonstrate assets and liabilities clearly to the lender. These details can help your business access credit that the bank might have otherwise not been willing to offer.
Attracting Investors to Your Company
Depending on the stage of growth of your business, you may be looking for investors to allow your company to accelerate and expand. Within the US, 98.6% of manufacturing companies are considered small businesses, so there is significant competition over investor interest.
Showing a solid valuation inspires confidence in investors. They are careful with their money and need to know that your business is solid. Having an accurate valuation can help demonstrate the unseen value of your company while also showing that you have your books in order.
Selling a Manufacturing Business
Many business owners find themselves asking about what to consider when selling a manufacturing business. Selling a business is always a high-stakes undertaking, so you want every advantage possible when soliciting offers from potential buyers.
Having an accurate valuation provides significant leverage during negotiations. Being able to back counter-offers with concrete numbers is a major advantage.
In general, you want to prepare for five years before you sell. The standards for how clean and organized your books need to be is higher, and you also want to present forward-looking information to really demonstrate the value of your business.
Determining the Valuation of a Manufacturing Company
When determining the value of a manufacturing company, there are several different valuation approaches that can be used.
There are many individual factors that impact which of these approaches is most accurate for any given business. In any case, determining the valuation of manufacturing companies is something that most businesses will require CFO services to accomplish.
- Asset-based valuation is one of the most common methods for manufacturing business valuation.
- This balance sheet-based approach adds together all of a company’s assets and subtracts liabilities to arrive at a final valuation. There is also a need to evaluate intangible assets. Given the relative size of manufacturing assets and liabilities compared to other businesses, this method can provide a favorable valuation for manufacturers.
- Another approach relies on applying simple industry rules of thumb to earnings. A valuation can be determined by taking EBITDA, or earnings before interest, taxes, depreciation, and amortization and applying an appropriate multiple for a manufacturing business.
- Multiples are values that the earnings are multiplied by to arrive at a valuation and can be adjusted based on a specific sector, size, and other factors.
- A business can also use the comparable transaction analysis valuation process to arrive at a valuation.
- In this case, the business appraiser compares the company to another company with a comparable industry, net income, and other factors that has recently undergone transactions that reveal its value, such as a stock or purchase price.
There are many other ways that these and other approaches can be tailored to more accurately reflect the valuation of any given business. This is a process you want to be handled by experienced professionals.
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Finding the Right Partner to Prepare for a Business Valuation
To ensure that your manufacturing business is positioned for the best valuation, you can put your trust in the experienced professionals at Michigan CFO.
Our team of tenured CFOs provides a wide range of both on-site and virtual fractional CFO services. We will help improve your business’s financial position without the need for long-term contracts, letting your business benefit from years of manufacturing industry-specific CFO experience at affordable costs.
You can reach out to our team today for a consultation for our fractional CFO services.
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