What's new
What's new

CNC manufacturing business valuation

cse

Plastic
Joined
Sep 1, 2005
Location
Arizona, USA
Hello All,

I have a small CNC manufacturing business that I’m ready to move on from and have a potential buyer. Now I need to figure out what to ask for it. It was primarily a job shop for quite a few years and we dabbled in some retail parts for a hobby I enjoy. In 2017 we dropped all job shop work and focused on retail. I don’t think the business is worth enough to justify engaging a business broker, and I already have an interested buyer. I’ve seen a couple threads here on PM about valuing a job shop, but I couldn’t find anything regarding a retail-manufacturing business. I’ve put together a prospectus and have looked at it using Asset-Based and Cash-Flow valuations. Cash-Flow is going to yield a larger dollar value, but I see multipliers for manufacturing businesses anywhere from 2-14. This is a small 1.5 person shop that will need to be moved, so we are obviously on the lower end of the multiplier range, but where?

Can anyone recommend a resource that provides a valuation service? Or a good resource for determining a multiplier? Or am I off base and should just hire a business broker?

It’s a probably painfully obvious I’ve never done this before, so any advice would be appreciated,

Jim
 
Joined
Apr 14, 2018
Location
Totalitarian Ruling Capital, EastAsia
It’s a probably painfully obvious I’ve never done this before, so any advice would be appreciated,
Unfortunately, something that never seems to enter into these "business valuation" calculations is that in a small shop, the owner (aka you) is the major asset. And you won't be there.

The rest is just stuff.

Imo, a small business like yours is worth what the equipment will bring at auction, plus whatever the buyer feels prints and an established product are worth, plus whatever help you will give him, minus the expense of moving it all.

Not very much, really.

Sorry, but that's been my observation over the years. And all that wonderful equipment you have, at auction .... well ...
 

DDoug

Diamond
Joined
Oct 18, 2005
Location
NW Pa
Hello All,

I have a small CNC manufacturing business that I’m ready to move on from and have a potential buyer. Now I need to figure out what to ask for it. It was primarily a job shop for quite a few years and we dabbled in some retail parts for a hobby I enjoy. In 2017 we dropped all job shop work and focused on retail. I don’t think the business is worth enough to justify engaging a business broker, and I already have an interested buyer. I’ve seen a couple threads here on PM about valuing a job shop, but I couldn’t find anything regarding a retail-manufacturing business. I’ve put together a prospectus and have looked at it using Asset-Based and Cash-Flow valuations. Cash-Flow is going to yield a larger dollar value, but I see multipliers for manufacturing businesses anywhere from 2-14. This is a small 1.5 person shop that will need to be moved, so we are obviously on the lower end of the multiplier range, but where?

Can anyone recommend a resource that provides a valuation service? Or a good resource for determining a multiplier? Or am I off base and should just hire a business broker?

It’s a probably painfully obvious I’ve never done this before, so any advice would be appreciated,

Jim

What is the product ?
Have a website ? some pix ?
 

cse

Plastic
Joined
Sep 1, 2005
Location
Arizona, USA
Thanks for the reply @emanuelgoldstein. I completely agree with your statement that I was the major asset when it was a job shop and not worth more than the equipment auction would bring. Now that is is a manufacturing business with all build processes documented, tooling in place, ERP software and a sorted ecommerce system, I'm nothing special. Maybe part of the reason I'm ready to move on. A person with CNC setup/operation and general business experience can run it. Maybe, it's still not worth more than the sum of the equipment, but I feel like it's worth doing some research.
 

cse

Plastic
Joined
Sep 1, 2005
Location
Arizona, USA
What is the product ?
Have a website ? some pix ?

We have some fairly large distributors, so I'd like to keep the sale quiet until it looks like it's going forward. Hope you understand. I will comeback and follow up on this thread as the process moves forward.
 

Garwood

Diamond
Joined
Oct 10, 2009
Location
Oregon
I would base it around 1.5 to 2 times annual net profit plus realistic evaluation of assets.

I bought a product based business on those numbers and it worked OK. I was already the manufacturer of most the parts so there was no equipment involved, just inventory, trade secrets and a website.
 

CITIZEN F16

Titanium
Joined
May 2, 2021
Since it is hobby based, value would depend on what the hobby is and it's longevity. Some hobbies have stood the test of time, others have come and went with the wind.
 

Jeff_M_PA

Cast Iron
Joined
Oct 31, 2008
Location
San Diego, CA
Start with 4 x Free Cash Flow. You will have to do some adjustments to come to what that free cash flow is. Subtract your excess salary (anything in excess of what the new owners will have to pay a manager), and any really personal expenses you run through the business because you can (vehicle, insurance, etc). In my experience, high multipliers that you site (north of 5) are used for a) bigger businesses b) really fast-growing or businesses with very high potential.

Businesses are more valuable in a low interest rate environment because investment alternatives yield less (see the current stock market valuation). The valuation formula a few years ago was 3 x.
 

cse

Plastic
Joined
Sep 1, 2005
Location
Arizona, USA
I would base it around 1.5 to 2 times annual net profit plus realistic evaluation of assets.

I bought a product based business on those numbers and it worked OK. I was already the manufacturer of most the parts so there was no equipment involved, just inventory, trade secrets and a website.

Thanks for the input based on your experience. Regarding a realistic evaluation of the assets: I know what all the equipment cost new, have you seen any guidelines for an accepted percentage for 1-10 year old equipment? I've been using 30-50% of the new value in an effort to avoid doing all the legwork of finding comparable market values. I'll do some more research and see what I can find on that front.
 

cse

Plastic
Joined
Sep 1, 2005
Location
Arizona, USA
Start with 4 x Free Cash Flow. You will have to do some adjustments to come to what that free cash flow is. Subtract your excess salary (anything in excess of what the new owners will have to pay a manager), and any really personal expenses you run through the business because you can (vehicle, insurance, etc). In my experience, high multipliers that you site (north of 5) are used for a) bigger businesses b) really fast-growing or businesses with very high potential.

Businesses are more valuable in a low interest rate environment because investment alternatives yield less (see the current stock market valuation). The valuation formula a few years ago was 3 x.

Thanks for the response. I did figure I was towards the bottom of that multiplier range. As a sanity check, I used 4x and looked at what the loan payment would be the for buyer and it would leave plenty for a reasonable salary.

Good point on the current low interest rate environment.
 

DDoug

Diamond
Joined
Oct 18, 2005
Location
NW Pa
We have some fairly large distributors, so I'd like to keep the sale quiet until it looks like it's going forward. Hope you understand. I will comeback and follow up on this thread as the process moves forward.

No I don't understand.

You have a product ?

Post it here, it will get worldwide exposure, and not upset the distributors, as any new customers (from seeing your stuff here) will go to the distributor to purchase, YOU control this.

And there are many talented people here that can help you figure out answers to your question.

So far, all I see from you is vague "arm waving".
 
Joined
Apr 14, 2018
Location
Totalitarian Ruling Capital, EastAsia
Now that is is a manufacturing business with all build processes documented, tooling in place, ERP software and a sorted ecommerce system, I'm nothing special.
I have seen two of these with the same situation - owner isn't necessary anymore, everything running well - and both of them went tits-up within a year of ownership transfer. It must work sometimes but I personally haven't seen it happen.

Seems like in a small company, the owner really is important. If I were going to do this, I'd want the original owner to be onboard for an extended period of time. At least a year ...
 

PDW

Diamond
Joined
Jul 24, 2006
Location
Australia (Hobart)
No I don't understand.

You have a product ?

Post it here, it will get worldwide exposure, and not upset the distributors, as any new customers (from seeing your stuff here) will go to the distributor to purchase, YOU control this.

And there are many talented people here that can help you figure out answers to your question.

So far, all I see from you is vague "arm waving".

He probably figures, rightly so, that the first thing you'll do is put shit all over whatever he is doing.

I'd not tell you the specifics of anything, frankly.

It's his biz, the questions he's asked have zero to do with what he makes & sells, wanting to know is just you being nosy for the sake of it.

PDW
 

Garwood

Diamond
Joined
Oct 10, 2009
Location
Oregon
Thanks for the input based on your experience. Regarding a realistic evaluation of the assets: I know what all the equipment cost new, have you seen any guidelines for an accepted percentage for 1-10 year old equipment? I've been using 30-50% of the new value in an effort to avoid doing all the legwork of finding comparable market values. I'll do some more research and see what I can find on that front.

As a buyer I would value necessary equipment in place and making my product at a higher than average market value given the circumstance.

On the flip side, if there is equipment included that really isn't utilized for the products that may not carry much weight in the big picture.
 

gbent

Diamond
Joined
Mar 14, 2005
Location
Kansas
Its a small business. The valuation is 80% of auction prices for the inventory, equipment, and product line. Anything more you can get from the purchaser is blue sky.
 

LOTT

Hot Rolled
Joined
Nov 28, 2016
If this business really is at the point of not needing you, can you hire a manager, sit back, and let the passive income roll in? Or do you need the lump sum of a sale for future endeavors? I like that as a safe way to preserve value.

And I expect to be in your shoes eventually, maybe ten years or maybe forty, so I hope you post the outcome.
 








 
Top