Consider All Key Elements in the Valuation of a Manufacturing Entity

CPAs & Advisors

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When it comes to performing a business valuation, manufacturing companies are unique. Because of the distinctive elements of the industry, additional valuation methods may apply compared to valuations performed for companies in other industries. That is why it is important to use a valuation professional who has a manufacturing background.

What circumstances are unique to manufacturing?

Manufacturing companies are typically heavily weighted by assets, with equipment and property representing a large portion of those assets. Manufacturers may have off-balance-sheet assets such as internally developed intellectual property that should be considered in the valuation. The company may also have product and manufacturing processes that increase efficiency and value but are unique to that specific output.

Plant capacity is another asset that can bring intangible value to the business. Excess capacity could be used to create more business – without added costs of expansion – therefore making the business more intriguing to buyers looking to expand current production. Excess capacity to expand operations brings significant value to the company but may be overlooked by a typical valuator.

Assets that are not being fully utilized for production can also bring additional value to the business. Some assets may not be running at full capacity, or may not be in use at all. The income these assets could be producing, but currently aren’t, should be taken into consideration. A valuation expert with a manufacturing background will be able to identify these assets and add the necessary value to them that might not be indicated on the balance sheet.

Accurately forecasting capital outlay based on future expectations is another unique aspect of valuing a manufacturing company. In a traditional business valuation, there is an aspect that takes into consideration the amount of capital outlay it will take, per year, to keep the business operating at its current level. Manufacturing companies can be different because, with constant changes in technologies, innovations, and processes, this number can change rapidly depending on the future vision of the owners.

If the potential new buyer’s vision is to increase production, then forecasting the capital outlay becomes critically important. If the company is not operating at full capacity but has the resources to do so, the capital outlay will be lower because no additional assets would need to be purchased. If this aspect is not taken into account, a potential new buyer who wants to increase production may assume that more capital will need to be purchased. That would make the estimated capital outlay amount increase when in reality the resources are already there to increase production. On the other hand, if a potential buyer wants to innovate or restructure the business, this number could rapidly change based on upgrading to more modern equipment or leaner processes. All of these factors need to be considered during the valuation process.

Rely on a manufacturing valuation professional

Numerous circumstances need to be considered when valuing a manufacturing company. These special circumstances can drastically sway the value of the company. If ignored, many key values may be lost. If you are thinking about procuring a business valuation for your company, it is important to engage a valuation expert who has a strong manufacturing background. That will ensure your company receives an accurate and complete valuation that will benefit the buyer and the seller. After all, your manufacturing company is unique!

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