Multiples for Machine Shops in the sub 2MM EBITDA Range?
March 19, 2024
by a searcher from University of Massachusetts at Lowell in Worcester County, MA, USA
I'm not finding a lot of good relevant comps for machine shops in the US for the last couple of years.
For the leads I'm getting from my funnel, multiples on 1-2MM EBITDA are in the 5-6X range, which seems high? It really forces you to the edge of DCR that most SBA banks are looking for.
Curious to see what everyone's experience is.
in Colleyville, TX 76034, USA
Most Machine Shops for sale at an SBA level are "me too" businesses...the market is flooded with them. Lots of Boomers liked the idea of "making" stuff, and several made a decent living doing it.
But, ^redacted is correct, they are usually tied to "relationships"...Owner to Customer...Employee to Owner, etc. They are very tough, and usually not "special".
IMO, the machinery is only worth scrap value...there is a lot of excess equipment in the marketplace (everyone has a CNC and a Laser). In fact, if you need some, I can get you a deal :)
If you really think they are special, strike a great deal for YOU...
Expect to dip to "half" before there is growth (half the revenue, half the EBITDA, half the staff). That would leave you with a low valuation and then try to find real objective reasons to come up from there. Like a solid, long-term Customer PO or something.
I would say 3.5x is at the very high end of a valuation, as you can likely find hundreds of them in the area you are targeting (speculating).
The Seller and Broker will try to convince you they are "special", so use that to your advantage and ask for a minimum of 30% Seller Financing...try to get 50%.
Use this as a "test"...could you easily replicate their business by leasing space and equipment, even if it was at a premium? If the answer is "yes", you will realize they aren't that special, so don't overpay for their "stuff". As the cost to "lease" is probably lower than the Bank Note at $2M EBITDA. If the answer is "no", then maybe they are "special", so ask them to "lease" the assets to you...let the Seller be the Holding Company. See if they will put their money where their mouth is. I realize this is a little opinion-based, but I hope it's helpful nonetheless.
from Texas A&M University in Elizabethton, TN, USA
3x-4x is market range. Higher than this and it's probably got an in house product, or highly protected aerospace/defense customer base. Lower than this is what you should offer. I've walked on some "good" add-ons that want 6x EBITDA on $1.6M EBITDA. You should too.
Machine shops in general have owners that will dip in and make parts themselves, even at larger outfits, to cover up problems. Is your target one of them?
This can be a difficult industry, even if you have experience as a machinist, engineer, etc.
Don't overpay. The Orderly (or even Forced!) Liquidation value of the equipment is probably the right price for most shops, though some may warrant some goodwill. Take the deal to an ABL shop and see what they will finance on the equipment, that could be a good starting offer. They're going to discount the Orderly Liquidation value by maybe 20%+. Production shops should be more valuable IMO than "job shops".
I personally find the industry fun and rewarding, but tread carefully on price. Target 20-30+ employees for best results.
DM if you or anyone here wants to chat machine shops. I'm in the middle of a refi / recap myself on my own operation.