When you are looking to sell a wood cabinet manufacturing company, it is important to be prepared to go to market. In this article, we are going to discuss the factors that are involved in selling a cabinet manufacturing company as well as areas that you are able to benchmark to help improve the value. Sigma is always here to help as you navigate this process.
In recent history, cabinet manufacturing in the US has improved due to an increase in construction. The increased demand and improvements in residential construction have really accelerated the cabinet and vanity manufacturing industry forward. As the housing market continues to grow, we can expect rapid growth to continue in the overall construction industry. As we will discuss later, this fluctuation in the residential housing industry is both a positive and a negative factor when it comes to selling the business.
Factors That Influence Value
Cabinet manufacturing is considered in the categories of other light manufacturing operations, and since demand for all manufacturing is at a premium, pricing will command higher multiples. This is primarily due to the buyer demand for manufacturing.
Considerations that strongly influence the ability to sell, as well as the price, are the housing market and construction industry. This is great when the industry is on a rise, but can be a drag on the valuation when the industry is headed down. Keep in mind that the best time to sell a cabinet manufacturing company is when the industry is on the rise not decline. Industry buyers are willing to pay a premium when the economy is rising and looking for bargains when it is in a decline.
When your business serves a specific niche, it will set your business apart from the competition and give an uptick on the value. This niche can be a type of product such as custom or it can be a specific customer type that you service. “Riches are in the niches,” is especially a true statement in the cabinet manufacturing industry.
As in any industry, the number of customers is an important factor when looking to sell a cabinet manufacturer. The industry standard is the largest customer being around 25% of the revenue of the business. Close behind this calculation is the number of customers that it takes to make up 80% of the businesses revenue. If that number is greater than 5, it will create an uptick in the business valuation.
Equipment & Inventory
One of the specific factors for a cabinet manufacturer is an issue of how the business handles production efficiency. This can mean higher labor costs, raw goods costs and production delays for the amount of revenue and profit that the business produces. Some wood cabinet manufacturers have state-of-the-art equipment that increases this efficiency. When analyzing this matrix it ultimately has a strong impact on the value. Equipment can add or decrease value when pricing the business. It is not uncommon for a custom shop to have automated equipment that, in turn, results in a higher price even compared to other shops that have the same level of profit.
The following is an industry analysis based on IRS data as provided on tax returns. This is based on a percentage of revenue:
- Cost of Goods: 25%
- Facility Costs: 10%
- Payroll/Labor Costs: 35%
When comparing your business to the above three factors it can help determine where you may need to adjust your business if your seller earnings are not where you would like it to be.
The best way to determine a factual value/price for a cabinet manufacturer is to look at the market. Ultimately, what other cabinet manufacturers are selling for will have a strong impact on what your business will sell. The following is a chart that outlines that price of the business as a percentage of SDE, EBITDA, and Revenue.
|SDE as a % of Revenue||5.90%||35.93%||17.53%|
|EBITDA as a % of Revenue||3.54%||29.99%||13.68%|
|Multiple of Revenue||0.16||1.00||0.53|
|Multiple of SDE||1.50||5.54||3.00|
|Multiple of EBITDA||1.85||6.17||3.96|
The efficiency of earnings is typically the largest factor in a cabinet manufacturer’s value. The best determining factor for the efficiency of earnings is based on SDE or Sellers Discretionary Expense or profit. At the end of the day, the performance of the business is the most important factor. The number that stands out the most is the Multiple of SDE of three. Revenue is typically not the best way to determine the value as it really isn’t an indicator of how efficient the business is in making a profit. The reason we included revenue here is more as a benchmark for you to see where the profitability typically is for the industry.
The reason the SDE is a major determining factor is that buyers are interested in ROI or how long it took them to get their initial investment back. Looking at the chart above, the average ROI that is expected in this industry is three years. While the high ROI is 5.54 when you dig deep into the data it is easy to determine as we said earlier that efficiency and state of the art equipment drove up these specific business sales.
If you are interested in receiving a formal business valuation then contact us today. We will analyze three to four years of your business performance to better determine where your specific business falls in the range above.