Many manufacturing business owners have a rough estimate of their company’s value. However, a professional valuation is essential if you’re considering selling your business, applying for a loan, seeking financing, drafting a buy-sell agreement, or estate planning. It can also play a crucial role in strategic business planning. 
Why Relying on Informal Valuation Methods Isn’t Enough
A quick search for “valuation formulas for manufacturers” may yield a common rule of thumb: four to five times earnings before interest, taxes, depreciation, and amortization (EBITDA). However, businesses often sell outside this range due to factors like market conditions, management quality, and financial performance. While this formula offers a basic reference, you shouldn’t depend solely on it for selling your business, one of the most important decisions you’ll make. Partnering with an experienced valuation professional ensures a more accurate estimate tailored to your company’s unique attributes.
The Value Beyond Tangible Assets
While tangible assets like receivables, inventory, and equipment are vital, intangible assets—such as customer relationships, patents, and goodwill—are also significant in today’s tech-driven, relationship-based market. Valuation professionals typically consider two approaches for assessing manufacturing businesses:
- Market Approach: This method compares your company to similar public or private businesses. However, small private manufacturers often differ from large conglomerates, making meaningful comparisons challenging. Professionals may adjust for differences like financial performance and noncash transaction terms, such as earnouts.
- Income Approach: Here, future cash flows are converted into present value. Adjustments may be made to reported earnings, including depreciation, market-rate rents, and discretionary expenses. The discount rate—reflecting investment risk—plays a critical role in determining value under this method.
Making Essential Financial Adjustments
Before appraising a business, valuation professionals often make financial adjustments, such as:
- Normalizing: Aligning financial statements with accepted accounting standards or industry norms.
- Eliminating nonrecurring and nonoperating items: Focusing on future potential rather than historical results.
- Adjusting discretionary spending: Ensuring compensation aligns with market rates if the owner plans to exit.
Consult the Experts
Valuing a manufacturing company is complex, and relying on your balance sheet or general industry guidelines won’t provide the comprehensive insights needed for sound business decisions. A professional valuator with expertise in the manufacturing sector can give you the clarity and support you need. Let us help you make informed decisions with confidence.
