So you think you are ready to sell your machine shop business? After all the years of dedication you have put into starting and building a successful machine shop, you'll want to cash in on that investment.
The machine shop and precision machined products industry is a very desired business type and thus can be very sellable. While only a professional business broker can provide a thorough business valuation, looking at the following six factors can give you a little idea of how your machine shop business stacks up.
Customer Concentration is a Key Risk Factor
"Customer concentration" refers to the resiliency of your customer base to risk of lost customers. For example, if you only have four customers who account for 25% each of the annual revenue of $1M dollars, loss of a single client (for whatever reason) would result in an immediate 25% drop in revenue. This is a high customer concentration business and carries a lot of risk. Compare that to a business with the same annual revenue, but with 100 customers with average tickets of $10,000 and loss of a single client, even a 10, doesn't have near as much impact on the bottom line. This would be a low customer concentration business and is less risky. Customer concentration affects value because it has the potential to determine the success or risk of a business future and can significantly affect the closing price. Business buyers want to buy a business that does not have too high a level of risk.
You can do your own preliminary assessment of customer concentration with a simple report available on Quickbooks - “Income by Client Summary” (Here's how you can open the report) This report shows how total revenue is distributed among your customer base.
Types of Customers Help Predict Future Business Growth
Manufacturing in the United States is very sensitive to effects of shifts in the economy, many of which are outside of your control. Your customers will be effected by these changes, which will then affect your business success. Look at the industries that your clients serve - medical, automotive, aerospace, oil and gas, maintenance products, construction, retail, something else - each one of these sectors are affected by supply and demand, changing regulations, and other economic factors. For example, if your customers are in the fossil fuel industry, that industry is likely to shrink and shrink your revenues along with it. If your customers are in the alternative energy segment, they are more likely to grow over time and your business with them likely to grow as well. Business buyers are looking to buy a machine shop that is, or has the potential to grow rather than shrink.
Certifications Will Increase Value
Businesses that have well-organized processes are more valuable than those that have less structure. Certifications are a good objective indicator of systems and process that you have in place for your business. The International Organization for Standardization (ISO) provides a certification that is important to strategic buyers (buyers that are currently in a similar industry or an industry that could benefit from owning a machine shop) and has an impact on the impression of financial buyers (this is a buyer that is primarily interested in the profitability of the business). Certifications such as ISO 9000 traditionally help the value of the machine shop significantly.
Key Employees Is Essential
From Skilled machinists to an experienced Quality Control personnel, good employees are difficult to find, so if you have them, that provides an important value component to your machine shop. Customer base or past revenue numbers don't mean much if a new buyer cannot continue on with a predictable level of skilled work. Employee turnover is always a issue with shop help; machine shops with low turnover rates are more desirable to potential buyers, especially key employees. You may even need to lock-in contracts for key personnel as part of the business sale.
Technology Should be Up-To-Date
The condition of machines and the level of technology within the shop are significant influences that can affect the price of your machine shop. Short run machine shops using design and prototyping capabilities can demand a premium. Any equipment that needs to be repaired or replaced should be taken care of before attempting to sell your machine shop. A business buyer wants to know that the existing technology will allow the business to remain competitive and profitable after sale, even if there are later plans to further upgrade equipment.
WIP and Raw Materials Are Indicators of Steady Business
Work in progress is extremely important when selling your machine shop, as are raw materials. Production costs include materials and labor used in producing goods as well as allocated overhead. Backlog, a line-item expense for repairs and maintenance, availability of qualified labor, and client industry trends are all issues a potential buyer will investigate in valuing a machine shop. If your records of these things is not in accord with industry standards, it can dramatically and negatively affect the value of your business. No fear, however, such things can be corrected before placing the business for sale with the guidance of an experienced business broker.
Are you ready to see what your machine shop is worth?
Once we have accessed the area’s above we can begin looking at the financial performance of the machine shop. While only a professional business broker has the proper expertise to provide the business valuation of your machine shop, the following formulas can give you an idea of what the value of your business will be and how our business brokers determine the sales price.
In general, increased revenues and cash flow result in higher valuation multiples.
- 50 to 65 percent of annual revenues include inventory
- 2 to 3 times SDE plus inventory
- 5 to 7 times EBIT
- 3 to 5 times EBITDA
Now that you have an overview of some key factors in valuation and sale of a machine shop business, you can begin the first part of your exit planning journey which is getting a business valuation with a professional business broker. Sigma's professionals have sold numerous machine shops over the years and have the expertise to guide you in preparing your business for sale at its best price, and then finding you the right buyer. Sigma will provide you with a no cost, no obligation business valuation before doing anything else. Feel free to contact us today and we can get that process started for you.