We turn to business valuations for so many different reasons. Sometimes a business has a shareholder dispute that needs to get resolved through litigation. Other times a business owner wants to gift shares to their grandchildren. And sometimes there’s a merger or acquisition on the horizon. Whatever the reason, we want owners to feel knowledgeable about the process before they commission a formal valuation.

Often, the best place to start is learning which factors influence business value.

What affects the value of a manufacturing business?

Quality and Sustainability of Earnings

Earnings is often the most cited factor in determining business value, but valuators will look at more than just sales volume. They’ll look at the underlying drivers of margins, like production costs, equipment utilization, labor expenses, and the ability to pass on increases in raw materials costs. But whatever they’re looking at, it’s the quality and sustainability of margins that’s most relevant. A company with predictable margins over many years shows that they are resilient, often making them more attractive than a company with earnings that fluctuate or are difficult to predict.

Growth Potential

The first place valuators start when considering growth potential is the market itself. Does the market support growth in the company’s chosen niche? If customer demand is rising, can the company realistically scale, and can they do so efficiently? When a business can show their ability to quickly scale when the market allows (or their ability to weather economic slumps when the market constricts), there’s a better argument that they’ll have consistent future earnings.

Operational Strength

Valuators will look at the efficiencies of day-to-day operations. Here are just a few things they might consider:

• Management bench strength: Having a deep bench of strong leaders supports business continuity because valuation professionals know that critical information isn’t concentrated to just a handful of key employees.
• Talent availability: The manufacturer needs access to a qualified workforce to meet current and future production demands. Labor has never been easy to come by, but companies that show strong recruitment skills and have lower than average turnover rates might be able to demand larger multiples.
• Efficient processes: Production processes directly affect margins. Valuation professionals may consider how efficiently a manufacturer manages its production schedules, inventory, quality control, waste, and labor or equipment downtime.
• Adequate technology: A manufacturer’s technology stack should support its production requirements, but it also needs to be competitive. Having outdated ERP systems or failing to use the functions of your existing tech solution creates inefficiencies and could potentially put a company at a competitive disadvantage.
• Strength of assets and machinery: Equipment age, condition, and capacity all influence the ability for a manufacturer to meet current and future demand. Valuation professionals may consider how existing machinery plays a part in overall profitability and growth potential.

Risk Profile

A manufacturer’s risk profile influences how confidently a valuation professional can predict future earnings. The risks they consider can be both internal and external to the organization.

• Internal risks include things like key person risk (relying too heavily on one person), debt and capital structure risk (high debt could limit financial flexibility), or communication risks (poor communication between departments or with vendors can cause costly delays and mistakes).
• External risks include supply chain exposure (too small of a supplier list can make you vulnerable to disruptions), geopolitical risks (tariff environments or trade wars can threaten going concern), or product obsolescence risk (manufacturers that fail to keep pace with changing customer preferences will struggle to maintain relevance).

This limited sampling shows how each type of risk can make a valuation professional think differently about the viability of your business.

What can you do to boost business value?

Addressing any of the above factors above will likely be worthwhile before you commission a formal valuation. But let’s dig a bit deeper into some of the big hitters… the low-hanging fruit… the solutions that are low-cost and low-effort but bring the biggest return to business value.

Improve operational efficiency.

Look for opportunities to fix some of your largest inefficiencies. Bottlenecks are a great place to start. If you focus on streamlining workflows, you’ll likely see a positive financial response. One of the reasons we like to encourage our clients to focus on process improvements is because it makes your day-to-day life better, too. When managers and employers are satisfied with the work they do, and feel like the process supports the moves they want to make, they may stick around for longer.

Manage risks.

Risk management almost always supports higher multiples during a valuation because eliminating or reducing risk makes earnings much more sustainable. But how do you best manage risk? Think first where your business is most vulnerable. A manufacturer that supplies specialized components to only a handful of OEMs in a niche market may be at risk for high customer concentration, while a manufacturer that builds and sells a variety of standardized products to hundreds of customers won’t have that same risk. Those two businesses will not have the same risk profile, therefore their solutions for managing those risks will be very different. Once you understand your vulnerabilities, you and a trusted advisor can determine how to address them.

Consider new or different technology.

What worked for you ten years ago likely isn’t the solution that’s best suited for your business of today. Completely replacing entire systems may not be feasible, but integrating newer applications with your existing ERP systems can address inefficiencies.

Choosing the right technology might be easier than you think, too. We encourage our clients to start with their problems. What are their (and their employees’) biggest pain points? Often, solving those solutions first can give employees and managers valuable time back, letting them focus on other operational improvements and higher-value activities.

And when it comes to tech solutions, we never want you to blindly copy what your peers are doing. Each business is different, even those operating in the same market. Trust that by following your unique pain points, you and your advisor can find tech solutions that produce the biggest bang for your buck.

Why [else] might you need a valuation?

Before we leave you, let’s bring it back to the why. Why might you want to consider a valuation?

Manufacturers may not realize that valuations can be proactive ways to improve their businesses, not just something you’re required to commission in response to a strategic move or change. Here are a few less common reasons you may consider getting a business valuation.

Annual check-ins.

Some of our clients want informal check-ins to see how they are doing. Valuations look at a business holistically, which will provide different information than a financial statement review or audit would.

To better understand your business.

Business valuations have a way of uncovering things that managers aren’t always primed to see. You can use this tool, even if it’s an informal engagement with a valuation professional, to better understand your own operations.

To better understand your industry.

Business valuation professionals with experience in your industry have invaluable knowledge about how other businesses operate that can help you be more strategic and competitive. Partnering with a quality professional is key, of course, but once you select the right one, they can act as an informal advisor in how to position yourself better in the marketplace.

To protect existing value.

Existing value isn’t guaranteed. Value erosion can happen without much fanfare or alarm. By keeping an eye on your valuation over many years, you won’t be surprised at your figures when it actually comes time to sell.

If you want more information about our valuation services, we can connect you with the right team. Reach out to our valuation professionals today.