Valuation for My Shop - EBITDA Multiple

Hello,

I had another machine shop owner approach me about buying my business. I am looking for information on how to value my business. I am especially looking for ranges of valuation multiples of EBITDA, Net Income, or Seller's Discretionary Income. My EBITDA margins are around 35%. The potential buyer values the reputation, employees, and customer base of my business , which includes 12-17 customers over the last three years with revenues between $2-$3 million. I have read that 3-5X EBITDA multiples is common in this industry. Is this accurate or could the EBITDA multiples more/less based on margins. Any information as how to get an idea of what my company is worth in a sale would be appreciated.

Your business is worth what your equipment can get at auction today.

Unless you have any products that you make and have steady sales this will be a shock to you.

Customers do not have to stay with your company if it is sold. They could all disappear when the new ownership gets in touch with them.

I have seen this time and time again in manufacturing. In most cases it is cheaper to buy new machinery with all the tax incentives than to buy used machinery at auction at a steep discount.

If you can find any other situations that have worked out like you described please share them. I would be interested in reading up on these things. I dont think things have changed much though.

+1 to the above. How easy is it to replace you? I long ago worked at a shop where the owner knew next to nothing about machining, but he could sell ice to an Eskimo and a blind man eye glasses. He also had no problem greasing the hands of purchasing agents, which got him no bid work at amazing rates. He made great money, but if he sold that business it would likely fail, as he built it with very shady relationships, and I doubt he would share that with anyone he was selling it to, and most people would not stoop to operating like him anyway. He wasn't just sending out a bottle of whiskey at Christmas time.

Yea it is hard to "value" a machine shop.

Let's just assume you're an average job shop in the US. By average I mean you have a reasonable split between general machining, maybe one medical customer, maybe 1-3 aero subcontracts annually and a lot of the "general" machining jobs for engineering firms. Maybe some Xometry jobs. You're worth what your machines are worth "at auction" because you aren't really providing anything special.

Now that all changes when you are specialized. If you're like some shops I have seen or visited where you specialize in extremely high end work for aerospace or the like, well that might be different. Being bought out might involve things like EBITDA valuations because you are dealing with high dollar contracts, have high dollar equipment, and high dollar employees.

Throw in some "tactical engineering" capabilities and the situation also changes. You can be considered more valuable because of that. Your product/business is not merely making widgets and parts. Your company is selling a product lifecycle service.

Anybody with a Haas and a garage can make general purpose widgets. You need to differentiate for the higher value, OR have your own product...a company like Area 419 where they make and engineer their own product is different from a 3 person shop with a handful of bridgeports, a machining center and a turning center doing parts for customers (small or big).

So as stated the potential buyer sees value in my business beyond the value of the equipment. I did not approach this person. He came to me. More than likely I will stay on for 3-12 months to allow for a smooth transition. The customer accounts I have in place are long term accounts that the potential buyer wants to purchase and values. He already has a shop, so if he wanted to he could goo out and buy new or used equipment. If anyone can give me information on actual valuation multiples that would be greatly appreciated. There is no reason for me to sale my lucrative business for the salvage value of the equipment.

EBITDA is only one method of valuing your company. You need to look at more methods. Auction value is a great baseline. You can get numbers that are accurate to 10 or 20%. Return on investment is another measure worth considering. I wouldn't trouble myself with all the hassles of integrating a new business if I couldn't return at least 20%.

And the big question. What are you going to do with your AFTER TAX money? Is it enough to live on, and is it enough to compensate you for the loss of all your business perks?

DO you know this individual personally?

They say they are a machine shop owner what does that mean?

Did we not just have a thread about crooks stealing machine shops from owners?

Be very skeptical, for the above reasons, about why they want your business

Spend a little time valuing your business in your mind, at a nice number you would be happy with.

Then double it. Or triple it.

Have Mr. Machine Shop Buyer over, throw out a synopsis of your operation and it's value, then throw out the inflated number.

He just might bite.

If not, then you both have a known starting point from which to make an offer.

Remember capital gains taxes (and others) will apply to the cash you get. So you need to up the final number by 1/3 or so, to pay the taxes with.

ToolCat

If you had a high-tech startup growing 200% per year, you would get 20x next year profits.

If you had an optometry or doctors practice, you would get 0.5 x revenue.

Machine shop: all over the map, dependent on whether you have intellectual property (e.g. products) or multi-year locked in contracts. If not, could be worth less than the value of your pre-existing machinery. 3-5x EBITDA is just not a general rule.

drcoelho said:

Machine shop: all over the map, dependent on whether you have intellectual property (e.g. products) or multi-year locked in contracts. If not, could be worth less than the value of your pre-existing machinery. 3-5x EBITDA is just not a general rule.

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Exactly, long term customers without contracts can be next to worthless. I lost 3 customers of 10 years plus in a short span, and they were 1,2,and 3 in yearly profit for me. One went to China, finally found a company that made good parts there for him, another brought machining in house, the other one died and his wife just closed the business.