Welcome to our “How to Sell” series with industry-specific information on how companies are valued and key factors affecting final sale price.
Machining refers to the process of forming or cutting of metal, plastics or composites using machine tools to create finished products.
Metal fabrication companies forge, stamp, bend, form, weld, machine and assemble a variety of intermediate or end-user products from purchased metals.
Top Valuation Considerations
- Customer Concentration: High customer concentration is common, particularly in Metal Fabrication. Reliance on a few customers drives down valuation multiples and final sale price as company success directly correlates with client success. It will also affect payment terms in a sale as buyers may seek to mitigate concentration risks by deferring payments over time and tying those payments to revenue retention. This poses significant risk for buyers, particularly if there are indications that customer relationships are dependent on the owner. Finding a willing buyer may become more difficult as well. Long-term contracts with key customers can offset risk and may negate high customer concentration. The customer list is a critical component to valuation and salability.
- Industries Served: Job outlook is dependent upon the industries served and ability to shift industry focused based upon demand. For metal fabrication companies, the ability to use products across multiple industries is beneficial. Certain industries tend to command higher multiples, medical and aerospace result in the highest multiples.
- Equipment: Company profits are directly linked to engineering expertise and operating efficiency. Type, age and condition of equipment is a critical consideration along with machinery run rates. Machines with modern technology, including automation, and a diverse set of capabilities are highly valued. The need to update, replace, and purchase new machinery will be taken into consideration by buyers. Shops with design and prototyping capabilities are in demand.
- Backlog: The number of incomplete and overdue customer orders may indicate operating inefficiency or maximum capacity, limiting growth potential or requiring additional investment from the buyer. In addition, strategic buyers commonly seek unused capacity.
- Other Important Considerations:
- Capital Expenditures
- Value Added Services
- Proprietary Products and Processes
- Geographical Concentration
These are only a few variables. A professional valuation is strongly recommended for accuracy. Contact us for a simple, free valuation today or for information on our full suite of valuation services.
1 Adjusted EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization where the EBITDA is adjusted for unusual expenses and compensation, then normalized to align with market based benefits and compensation required to operate the business.
2 SDE: Seller’s Discretionary Earnings is EBITDA plus all owner compensation and benefits.
3 Based upon statistics from M&A Source, First Research reports stating average Market Value of Invested Capital/EBITDA is 4.1 for Machine Shops (11-16-15) and 4.0 for Fabricated Metal Product Manufacturing (10-26-15).