Manufacturing Businesses

We are seeing significant activity in the business acquisition market-place.   For example, we closed two transactions last week.  We also had funding approved for two additional transactions and have numerous other transactions in various stages of the closing process.  We attribute the activity to better economic performance by our client companies, increased confidence in the economy, as reflected by rising real estate values and the stock market, and the willingness of lenders to make commercial loans for solid transactions.

             
Historically, manufacturing businesses have been a category of businesses in strong demand, but not all manufacturing businesses are created equal.  This month's featured article addresses some of the issues involved in valuing a manufacturing business.

Proprietary Products 

All other things being equal, a manufacturing business with proprietary products will generally command a higher EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiple than a service, distribution, or retail business, or a contract manufacturer.

Having proprietary products means that a company owns the intellectual property of a product or process, usually through patents or trade secrets, and can protect its control of the product.

Defensible Position 

A defensible position includes several factors:  having manufacturing products that won't be sent off-shore for production, owning properly protected intellectual property that cannot be pirated, and maintaining market dominance (perhaps due to branding), even after similar products have entered the market place.

Recently, some businesses have brought their manufacturing  back to the United States, as costs of production have increased overseas, due to higher labor rates and poor quality control.
 
Capital Assets 

In general, manufacturing businesses require significant capital requirements.  Complex CNN and laser cutting equipment can cost in excess of a million dollars per machine.
 
Manufacturing Equipment Appraisal

As part of the valuation process, it's typical to have a qualified appraiser perform an appraisal of the manufacturing equipment.  Machinery and equipment often comprise a significant portion of the value of a manufacturing company, and capital equipment is usually financeable for lending purposes.

Trends in Manufacturing

For valuation, certain types of manufacturing businesses can typically command higher EBITDA multiples than others, as they're considered more viable than others.  For example, given the large population of Baby Boomers and their growing need for healthcare, medical device manufacturing remains a hot commodity, now and for the foreseeable future.  This robust activity in the medical  products industry is driven by growing demand, high margins, and the need for strict quality control.  Certain medical devices are manufactured in the U.S., because users aren't willing to risk quality control issues.  This increases the value of the business, due to its defensible position.

Other high value manufacturing niches include emerging technology and aerospace applications.

Although complex, manufacturing businesses remain in demand, as illustrated by a manufacturing client we represent in Denver.  This business currently has multiple offers in place from a diversified mix of strategic and financial buyers. 
 

(originally published in the April 2013 eNewsletter)