How To Value A Manufacturing Business

Manufacturing businesses are at the heart of Australia’s industrial economy, producing everything from food and medical equipment to automotive parts and construction materials. Unlike service or retail businesses, manufacturing firms combine tangible assets (machinery, stock, premises) with operational factors like supply chain resilience, production capacity, and intellectual property. This means valuing a manufacturing business requires both financial analysis and operational assessment.

Key factors influencing manufacturing business value

Before diving into numbers, it’s important to recognise the operational and strategic elements that shape a manufacturing business’s market value. Below are some of the main influences on valuation:

Quality of physical assets

The manufacturing industry relies heavily on its physical assets, such as machinery, vehicles, and tools. The age and maintenance records of your equipment can significantly influence the final valuation. Modern and well-maintained assets reduce how much a potential buyer will have to invest in the future, while outdated or unreliable equipment might require upgrades sooner rather than later. A buyer will take the cost of this into account and reduce their bid to cover it, reducing the overall value of the business.

Production capacity and scalability

One of the best ways to boost the value of your manufacturing business is to meet growing client demand without proportionately increasing your costs. Buyers look at current production output against your maximum capacity to determine whether the business can scale efficiently. Facilities running below an optimal capacity might be valued less, while operations showing that they can be easily scaled often command a much higher valuation.

Reliability of your supply chain

A strong and diversified supply chain adds a great deal of value to a manufacturing business, especially during times of global disruption or uncertainty. Businesses that have long-standing relationships with their suppliers and local supplier integration are more valuable, as this can reduce risk and ensure consistent production. Similarly, if you have multiple sourcing options, your business will often be higher as you’re less dependent on just one supply chain.

Intellectual property and proprietary processes

Intangible assets can greatly increase a business’s value. For a manufacturing business, these might include product designs, patents, proprietary manufacturing methods, or exclusive supply agreements. Intellectual property also reduces competition and can create extra licensing or royalty income opportunities, which will be very appealing to buyers and potential investors.

Workforce skills and stability

Manufacturing businesses often rely on skilled labour, particularly in specialised sectors like medical device production or metal fabrication. The industry or niche you’re in will determine how skilled your workforce should be, but as a general rule of thumb, buyers will often pay premium prices for skilled labour. If your business has a stable, experienced, and properly trained workforce, it’ll be much more attractive to buyers and therefore be valued higher than a business with poorly trained staff and high turnover rates.

Industry trends and market demand

Broader market conditions, such as the rise of sustainable manufacturing, demand for local production, or technological shifts like automation, can also influence your business’s value. Businesses that can quickly hop on emerging trends are typically valued higher because of the growth potential buyers will likely see in the future. However, if your business can’t keep up with trends or shows a distain for doing so, buyers might be put off and your valuation will reduce.

Valuation methods specific to manufacturing businesses

Given the nature of manufacturing businesses, which are notorious for being asset-heavy and operationally complex, there are several methods you can use to get an accurate valuation. Here are the four most commonly used valuation methods:

Multiple of earnings (EBITDA) method

The EBITDA approach to valuing a business uses its Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA), which has a multiple applied to it to find the valuation. This multiple reflects the perceived market risk, business size, industry trends, strength of operations, and more. In Australia, the manufacturing business value is typically 2.5x to 6x EBITDA. If you want to achieve the higher end of this range, you’ll usually need a niche or highly profitable business with plenty of intellectual property.

The pros of this method are that it focuses on your core profitability, which is something potential buyers and investors are keen to see. It also works well when you want to compare yourself with similar businesses in the manufacturing industry. However, this method might undervalue your business if it’s new to the market and still scaling up.

Revenue multiple approach

The revenue multiple method uses a multiple that’s been determined by the market, and applies it to your business’s annual turnover. Manufacturing businesses generally utilise a 0.5x to 1.5x revenue multiple, depending on things like profitability, market position, and asset value. This is to hopefully give you a more accurate valuation rather than basing it solely on one metric.

This approach’s benefits include its simplicity and ease of understanding, which makes it good for owners who might’ve never valued a business before. It’s also useful for fast-growing businesses or those with predictable sales, as it gives potential buyers a good idea of future revenue streams. However, it ignores profitability, cost structure, and future capital expenditures – several metrics that buyers and investors will be interested in.

Discounted Cash Flow (DCF) method

The DCF method requires a projection of your business’s future net cash flows over several years, which can take great detail to calculate. Once you’ve acquired these, they can then be discounted back to present value using a discount rate that has been adjusted depending on risk. This method is particularly useful for capital-intensive businesses or those with long-term supply contracts.

Businesses often favour the DCF method because it accounts for future growth potential and capital expenditure, which can boost the value exponentially. It’s also suitable for complex or long-term projects. However, it’s also highly sensitive to assumptions about growth rates, and it requires financial forecasts that aren’t always attainable for manufacturing companies.

Net profit approach

The net profit method is similar to the revenue multiple approach, but instead of focusing on revenue, it uses your net profit. Net profit is simply your gross (or total) profit minus your working costs. The approach uses a multiple, adjusting it for things like non-recurring expenses, the owner’s wages, and discretionary spending, and applies it to the net profit to find the value. It’s usually considered best for smaller manufacturing businesses or family-run companies.

Many small- to medium-sized businesses find this approach works for them as it’s straightforward and familiar to most business owners. It also focuses on the profit left after expenses, which buyers are often very interested in. However, this method might not show the full value of physical and intangible assets in the final numbers, leaving you with an undervaluation.

Common mistakes when valuing manufacturing businesses

Thanks to how complex manufacturing business valuations can be, it’s not uncommon for owners to make mistakes during the valuation process, leaving them with an inaccurate final result. Here are some of the most common mistakes we see owners make:

Overlooking depreciation and maintenance costs

Manufacturing businesses are highly dependent on machinery and equipment, all of which depreciate over time and require ongoing maintenance. Unfortunately, this is a very real, unavoidable cost that needs to be considered in your valuation. If your valuation ignores future capital expenditure requirements, it often overstates the value. Buyers will often notice this and scrutinise the condition of your assets during negotiations, hoping to reduce the value to account for the maintenance they’ll need to complete once it’s in their name.

Ignoring fluctuations in stock levels

In the manufacturing industry, inventory can significantly vary, especially if you’re dealing with seasonal demand or long supply chains. It makes sense to have less stock when sales dip seasonally and more when business is booming, but ignoring the fluctuations can lead to inaccurate valuations by misrepresenting working capital requirements and profit margins. Potential buyers may pick up on an overvaluation and negotiate the price to be much lower than you initially hoped for, while undervaluations will leave you with a much lower sale price than you deserve.

Underestimating the impact of supplier dependence

If your manufacturing business relies heavily on a single supplier, particularly for your essential materials, it involves a degree of risk that wouldn’t be there if you had a range of suppliers whom you could call on. Imagine you’re dependent on only one supplier, but they sell out of the material you need urgently – your entire operation could be put on hold. Businesses without a diverse range of suppliers might lose value because of their exposure to things like pricing fluctuations, disruptions to their supply chain, or contract disputes.

Failing to adjust for owner involvement

Many smaller manufacturing businesses rely heavily on their owner for sales, operations, and technical expertise. However, what some owners don’t realise is that this can leave your company dependent on you, greatly reducing the value of your business. Once you leave, the business will falter under your absence. Without putting the necessary measures in place to account for this in a valuation, you might find less buyer interest because they won’t want to spend the necessary money on training someone else up to your qualifications and expertise.

Enhancing your manufacturing business’s valuation

If you’re planning to sell your manufacturing business or are looking for potential investors, here are some of our tried and true value-boosting strategies to try:

• Keep your assets well-maintained and up to date: Buyers will pay more for premium assets like machinery and vehicles because they won’t have to go to the trouble of updating it themselves.
• Diversify your supplier base: Reduce your business’s risk by securing multiple supply options for your most important materials.
• Focus on long-term customer contracts: Forward sales agreements give you income certainty and strengthen your business forecasts, making you more appealing to potential buyers.
• Document proprietary processes: Clearly outlining your unique production methods or intellectual property can increase your goodwill and competitive advantage in the market.
• Invest in staff training and reduce turnover: A skilled and stable workforce adds resilience to your operations and, therefore, business value.
• Improve your financial reporting systems: Transparent and consistent financial records can improve buyer confidence and streamline their diligence process.
• Align yourself with sustainable manufacturing trends: Businesses prioritising eco-friendly processes and local sourcing are increasingly attractive to modern investors thanks to the countless benefits that these come with.

FAQs

What’s the average EBITDA multiple for manufacturing businesses in Australia?

Most manufacturing businesses sell for 2.5x to 6x EBITDA, with higher multiples being applied to businesses in niche, highly profitable, or intellectual property-driven businesses. A business valuation expert can help you determine how large the multiple should be for your company.

Does machinery age affect a manufacturing business’s valuation?

Yes. Older, inefficient, or poorly maintained equipment can reduce your business’s value thanks to the risk of higher future capital costs and operational risk to the new owner. Buyers will often try to negotiate a lower price to account for how much they’re going to have to spend on updates and maintenance.

Are future customer contracts factored into a valuation?

Yes, long-term, binding contracts boost a business’s value by guaranteeing future income and demonstrating customer loyalty. Potential buyers will like the look of a company with multiple customer contracts over one that has fluctuating numbers and inconsistent sales.

What is goodwill in a manufacturing business valuation?

Goodwill represents the intangible value of factors like brand reputation, customer relationships, proprietary processes, and industry position. Numbers can’t be attached to these things, which often make them more difficult to account for in a valuation. However, goodwill can often be very appealing and important for buyers, so it’s important to utilise it in the valuation process somehow. Referencing goodwill is a great way to get a better price for your business without discounting intangible assets.

Get in touch with a business valuation expert near you

Valuing a manufacturing business to the most accurate degree requires specialist industry knowledge. This can include an understanding of operational systems, supply chain structures, capital asset management, and more. Our team of experienced valuers work with manufacturers across Australia, providing tailored, market-based valuations for business sales, acquisitions, restructures, and finance applications.

We have business valuation experts across Australia, and you can get in touch with them by following the details below:

• Get in touch with our business valuation experts in Brisbane
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