valuing asset heavy manufacturing businesses
March 04, 2024
by a searcher in USA
I'm looking at a few manufacturing businesses. Brokers are valuing them at 5-10x ebitda. The land, building, and machinery are getting included in the valuation. I'm trying to make the numbers work with an SBA interest rate and some salary for myself to replace the owner as manager. Can anyone offer any advice on how to structure a deal with the land and building making up a big portion of the purchase?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
The one challenge that can exist with breaking the two out is that you need to make an adjustment for rent. If fair market rent is being paid for the real estate based on its value, then you remove that from adjusted EBITDA when valuing the business. If there is no rent being paid for the real estate (or too little or too much rent for that matter), then you need to make an adjustment for fair market rent and remove that from cash flow when valuing the business and determining a multiple. On the business alone I can tell you it is almost impossible to get the cash flow to work on an SBA deal with a multiple much above 5 and certainly no way to do so at 10x, unless you are putting some significant cash down.
As for the equipment, since you need that equipment to operate that should be coming with the business value. If they are looking for you to pay for that equipment on top of the business value, then the deal is likely not going to work. However, we see brokers and sellers requesting additional value for the equipment often in equipment heavy businesses. There are many cases where the cash flow for the manufacturer is weak so they cannot get the value they want for the business without getting you to pay for the equipment separately. Although that equipment may have outside value, the business does not have value if the cash flow does not support both the equipment and business as part of one purchase price. One other thing you need to factor in with the equipment when you look at the deal is if they are adding back depreciation, you need to be sure you are making an adjustment for future CAPEX needs on the purchase as well. Often I will see brokers add back 100% of deprecation and not adjust for future CAPEX. If the company is consistently spending $200,000 a year on fixed assets, then you need to factor that in going forward. Any lender looking at the transaction is going to do so.
Although you need to separate the real estate and business from a valuation perspective, you can certainly finance both together. If the real estate is 51% or more of the purchase price you can do one SBA 7A loan and finance all of the debt over 25 years. If the real estate is less than 50% of the purchase price, then you can use a blended amortization when financing the business and real estate together and end up with an amortization between 10 and 17.5 years. This will typically lead to a payment savings of 5 to 15% depending on how large the portion of the real estate debt is versus doing the real estate and business purchase in separate loans.
If you need help analyzing the cash flow on any specific deals, we would be happy to help you out. We do not charge anything to look at deals from a lender perspective and provide feedback about what can actually be financed and provide strategies for securing more financing. You can reach me here or directly at redacted Good luck with the search.
from University of Texas at Austin in Houston, TX, USA
- Underscoring ^redacted' comments on PPE DD, I have seen manufacturing businesses use the purchased value of PPE and capital upgrades in valuations. Depreciated PPE value is not the same as market value or operational viability. Some machines have extended life due to repair/rework, and low usage/wear. Some may have less useful life than the depreciation tables if maintenance is deferred. Replacement cost at actual condition may be harder to track down but as Matt suggests, getting the replacement cost of critical PPE is a start. Some machinery suppliers also have financing to reduce CAPEX outlay.
- I have heard lenders will lend up to 70-85% of PPE fair value, and some considerably less given the realities of trying to recover against those assets on default. But I have no direct experience here and would be interested to hear lenders/brokers chime in.
- You didn't ask, but my mind goes to NWC needs as manufacturing businesses may have high inventory (raw material) costs, or long AR cycles. Depends on the industry, but I have seen Net 60, 90, and even 120 in Oil and Gas given the large discrepancy in Buyer vs Supplier power. This is especially brutal given raw material costs can be a significant chunk of the final product price, and cash goes out the door weeks before the AR clock starts.
- Lastly, not sure what type of manufacturing this is, but I would do a quick check that there are no environmental liabilities (compliance, disposal, management of hazardous waste). It might be worth doing a Phase 1 Environmental Report if you think there may be contamination risks for the surrounding land. A machine shop may be lower risk but I have seen a facility with spray booths on-site that had paint pigment on the main road leading you to the facility.