Download When Valuing a Manufacturing Business, Work With a Pro

When Valuing a Manufacturing Business,
Work With a Pro
October 2014
Prepared by: Matt Crane, CPA, Partner
Appraising manufacturing businesses isn’t an easy task.
Multiple aspects of these companies have intangible
assets that may provide value in addition to the value of a
company’s hard assets. However, qualified appraisers can
ascertain the value of your clients’ companies by applying
various valuation methods, such as the income, market
and cost (or asset-based) approaches. By considering
these methods and choosing the most appropriate,
valuators can come up with reliable value estimates.
Finding the right approach
To value manufacturing companies, valuators consider
and use one or some combination of these general
approaches:
Income. This method converts anticipated economic
benefits, such as earnings or cash flows, into a present
value that takes into account the risk associated with a
company.
Market. Using this approach, valuators analyze valuation
multiples from acquisitions of similar businesses or
from the stock prices of comparable publicly traded
companies and adjust for the subject company’s particular
characteristics.
Cost or asset-based. Valuators use various methods
to determine the replacement cost or market value of a
company’s assets, net of liabilities.
A manufacturer’s value generally is tied to its underlying
hard assets, most notably receivables, inventory,
machinery and real estate. So the cost approach is often
relevant. But most manufacturers also possess a variety of
intangible assets, including customer lists, brands, patents,
formulas and proprietary processes. Because the income
and market approaches can incorporate the value of
intangibles, these approaches may more reliably estimate
a firm’s entire fair market value.
But because manufacturing companies are quite assetintensive, asset-based methods may have greater
relevance and, therefore, may be weighted more heavily.
As a result, appraisals of equipment, machinery and
inventory play an important role in these valuations.
Regardless of the appraisal approaches used, your
valuator will need to visit the manufacturer’s facilities to
view the hard assets.
Factoring in intellectual property
Despite the importance of hard assets to manufacturing
operations, intangible assets also have a huge impact on
value. In many cases, valuators can identify intangible
assets manufacturers didn’t know they possessed. For
example, a company that develops a unique manufacturing
process, technique or tool may be entitled to a patent
or some other intellectual property protection. By taking
steps to register or otherwise protect these assets, a
manufacturer can enhance its value.
Understanding the workforce
Depending on the extent to which a manufacturer
depends on skilled labor, the value of its “trained and
assembled workforce” may be significant to its overall
value. Typically, the most appropriate valuation approach
for a manufacturer’s workforce is a cost approach. For
example, the valuator might estimate the cost — in terms
of recruiting, hiring and training — of duplicating the
manufacturer’s workforce. Or he or she might hypothesize
a more cost-efficient workforce — a smaller number of
more highly skilled employees, for example — that could
match the current workforce’s output. The right method
depends on the nature of the business and its industry.
Grasping the big picture
Foreign manufacturers may enjoy cost advantages
— including cheaper labor, lower taxes, less stringent
regulatory oversight and reduced risk of litigation — over
domestic companies. Some countries, such as Mexico
and Canada, benefit from free trade agreements with the
United States.
However, offshore production has drawbacks — such
as shipping and tariff costs, cultural differences, quality
control issues, communication delays and oversight
limitations — that may persuade customers to choose
domestic suppliers. Manufacturers also face supply chain
power imbalance. Valuators assess the relative power
along a company’s supply chain and identify companies
Boulay 7500 Flying Cloud Drive Suite 800 Minneapolis, MN 55344 (t) 952.893.9320 (f ) 952.835.7296 BoulayGroup.com
Member of Prime Global, A Global Association of Independent Firms
1
When Valuing a Manufacturing Business, Work With a Pro
that represent 10% or more of a firm’s annual material
purchases or revenues. Additional risks exist if the
company doesn’t secure key relationships with long-term
contracts or if contracts are soon to expire.
Knowing when to ask for help
Bringing in a qualified appraiser is essential to obtaining an
accurate valuation of a client’s manufacturing business. In
addition to understanding how to obtain an accurate value,
he or she can help your business with accounting, finance
and tax issues.
To learn more about “When Valuing a Manufacturing
Business, Work With a Pro,” contact your Boulay
advisor at 952-893-9320 or learnmore@boulaygroup.
com.
Boulay provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting
services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation
with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional
adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used,
and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is
provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express
or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
2