Valuation of a manufacturing company

Basic valuation

The basis of the valuation is more or less identical for all companies. The Nimbo Guide to Corporate Value provides you with useful background information and everything you need to know about the topic.

Calculation example for a manufacturing company

Example of a manufacturing company

We use the multiplier method (also called multiples ), in which the company value is calculated based on a factor of profit (EBITDA) and/or sales. Specific internal and external value drivers are taken into account when determining the multiplier.

For the calculation we make the following assumptions:

Sales revenue	10,000,000
EBITDA	2,500,000
Assumptions about internal and industry-specific value drivers	Large degree of independence from the owner, good market position, estimated 5% sales growth per year over the next five years, no concentration risks and 50 long-standing qualified employees. The industry-specific factors take into account that the company has the intellectual property rights of the product that generates 50% of sales, that 60% of the value creation takes place in-house and that the machinery still has an estimated lifespan of 10 years. The product range is standardized.
Typical average EBITDA multiples of the industry in Europe	4 – 8
Applied multiple due to the influence of value drivers	6.2

Calculation of company value:

Enterprise value = EBITDA × multiplier = 15,500,000

General value drivers

It is not only the profitability and size of a company that determine its value. A number of internal value drivers also impact the selling price – both positively and negatively. Based on the base valuation, the value can increase or decrease by up to 25%. The most important value drivers here are:

Independence from the owner : For a buyer, the question arises whether the success would continue without the current owner. The less the company depends on the activities and relationships of the owner, the higher the average bids are.
Growth prospects and potential: Investors are interested in the future prospects of a company. Questions that are important here: Is the main market growing? What percentage growth do I forecast for my company over the next three years? Is there potential within the core competence that could be exploited profitably? Is there a shortage of skilled workers or is it easy to recruit new employees? Is there sufficient cash flow for replacement and expansion investments?
Market position: This takes into account the catchment area and the pricing policy of the company. Companies that operate not only regionally and companies that can enforce prices that are above the market average receive, on average, significantly higher purchase offers.
Balance: How dependent is the company on individual customers or business partners (e.g. suppliers)? Companies without large concentration risks receive, on average, higher purchase offers.
Employees: One motivation for purchasing companies can be access to new qualified employees who are difficult to find on the labor market. Companies that can attract and retain sought-after employees receive, on average, significantly higher purchase offers.

Industry-specific value factors for software companies

If your company presents itself positively in all of the following points, which are particularly relevant for manufacturing companies, this can mean an overall increase in value of around 15% on the base value.

Rights to the intellectual property of products: While the value of individual patents or the intellectual property of their products is only shown in individually and laboriously prepared company valuations, it is certainly of interest for the value of the entire company whether a company has product rights/intellectual property. Product rights and intellectual property can significantly increase the value of a company by providing competitive advantages through more difficult market entry, additional sources of income, for example through licensing abroad, and legal protection against imitators.
Production in large quantities: The value of a manufacturing company also depends on its production method. Mass production allows the company to take advantage of economies of scale, which reduces production costs per unit. Automation and standardization of production processes improve efficiency and reduce waste. This can lead to higher profit margins. Overall, companies that produce in larger quantities receive higher ratings than companies that limit themselves to one-off production. Of course there are exceptions here too. If the company occupies a high-priced niche in a specialized market, e.g. the construction of yachts, the company’s value also increases here.
Standardized product range: On average, companies with a standardized product range are rated higher. The impact on corporate value depends largely on how the company leverages the benefits of standardization and manages the disadvantages. Companies that efficiently produce standardized products can achieve significant cost advantages and a stable market position. At the same time, however, they must cope with intense competition and price pressure by differentiating themselves through quality, brand strength and efficient operations. A successful company will use the efficiency gains from standardization to invest in research and development as well as marketing in order to differentiate itself from the competition in the long term and build a strong market position. If products have to be customized for each customer, companies can often achieve higher margins and stronger customer loyalty, but they also have to manage higher costs and risks. If products have to be customized for each customer, companies can often achieve higher margins and stronger customer loyalty, but they also have to manage higher costs and risks.
High proportion of self-generated value creation: As a general rule, it can be said that companies that generate more than two-thirds of their manufacturing value creation themselves achieve a higher company value. Reasons for this: The company has control over the entire production process and can therefore better guarantee the quality of the products. Market changes and customer requirements can be responded to quickly and innovations can be implemented directly. Through internal value creation, processes can be continuously optimized and made more efficient. This increases profitability and thus improves valuation. Critical know-how and intellectual property remain within the company. This represents a strategic advantage.
Age of the machinery: If all the required machines are modern and will still be functional for a number of years, this will have a positive effect on the valuation. If, on the other hand, it is foreseeable that the machines required for production will have to be replaced in the near future, this will tend to reduce the value of the company considerably, depending on the amount of the upcoming investment.

The market-oriented Nimbo rating for manufacturing companies

Nimbo uses the market-oriented multiplier method for its company valuation. This means that your company is compared with similar companies of the same size. The Nimbo rating also takes into account the specific factors of manufacturing companies.