Acquisition valuations: before you buy an industrial business

How reliable is the vendor's adjusted EBITDA?

Information memoranda for industrial businesses almost always lead with adjusted EBITDA: reported earnings plus a schedule of add-backs. Some add-backs are fair. Others quietly move costs a new owner will carry out of the numbers. The ones we test most often in industrial deals are the owner's salary added back with nothing allowed to replace the owner's work, repairs described as one-off that recur every year because the plant is old, a large project or shutdown contract treated as the new normal, and rent paid to the vendor's property entity at less than market.

We rebuild maintainable earnings from the financial statements and the general ledger, not from the memorandum, and we explain every difference. The way we normalise earnings and choose a method is set out on how we value industrial businesses.

What will the plant cost you after completion?

EBITDA ignores the capital a business needs to keep producing. In a plant-heavy business that is often the largest number the information memorandum leaves out. We look at the asset register by age and use, the replacement cycle for the main machines, vehicles and tooling, and how capital spending in the last three to five years compares with the depreciation charge. A vendor who has deferred replacements to dress up the sale year has, in effect, borrowed from the buyer.

• Finance over the plant. Chattel mortgages, hire purchase and leases are debt or debt-like, and come off the price in a cash-free, debt-free deal. A search of the Personal Property Securities Register, the government register of security interests in personal property, shows who else has a claim over the equipment.
• Who owns the tooling. Dies, moulds and fixtures are often owned by the customer, not the business. They support the revenue but are not yours to sell.
• Owned or hired. Plant hired from a related entity of the vendor needs a market hire agreement after completion, or the earnings change.
• Capacity. A plant running near full capacity cannot grow without new capital. One running at half capacity has room, if the work exists.

Our article on how plant and equipment affects business value covers this in more depth. A formal plant and machinery valuation, if your lender asks for one, is a separate discipline done by a plant and machinery valuer.

Will the customers and contracts stay after a change of owner?

The revenue in an industrial business often rests on a small number of relationships: a supply agreement with a manufacturer, a panel appointment with a mining company, a maintenance contract with a food processor, or a government or defence contract. Before you rely on that revenue, check what each contract says about assignment and change of control. Some need the customer's consent; some let the customer walk away; tier-one customers may require a new owner to go through supplier approval again. A large customer on rolling purchase orders, with no contract at all, is a relationship the vendor holds personally until proven otherwise.

Concentration matters as much as contract terms. If half the revenue comes from one mine site, part of what you pay is a bet on that site's remaining life and on how its next contractor review goes. Our article on customer concentration explains how that reaches the value.

Which licences and certifications have to survive the purchase?

Industrial businesses often cannot trade without them, and they do not always transfer. For each one, ask who holds it (the company or an individual), whether it survives a share sale or has to be reissued after an asset sale, and how long and how much it would cost to obtain again.

• ISO 9001 quality certification, which many manufacturing and engineering customers require of their suppliers.
• AS/NZS ISO 3834 certification for welding quality, common in structural and pressure fabrication work.
• Defence Industry Security Program membership and any clearances, for suppliers on Defence tenders and contracts. Whether they carry through a change of ownership is a due diligence question in its own right.
• For transport operators, the systems that support Chain of Responsibility duties under the Heavy Vehicle National Law, which make parties other than drivers, including executives, responsible for heavy vehicle safety. A buyer inherits those systems, or the gaps in them.
• Environmental and site licences issued to the operator or the premises.

How much working capital should come with the business?

Most industrial acquisitions are priced on the basis that a normal level of working capital is left in the business at completion, with a completion adjustment if the actual level differs. Setting that level is where buyers lose money. A food manufacturer builds stock before Christmas; a mining services contractor carries debtors on long payment terms from large miners; a fabricator on long-run jobs may have billed customers in advance, which means the vendor has already collected cash for work you will have to do. We set a normal level that reflects the business's actual cycle and flag the items that need a specific completion mechanism. The detail is in our article on working capital in a manufacturing valuation.

How does the valuation feed into price and deal structure?

The valuation gives you a reasoned market value and the risks behind it. Where the vendor's expectation sits above the evidence, the gap is often bridged with structure rather than a straight price cut: an earn-out tied to a key contract renewing, deferred consideration, vendor finance, or a paid handover period while the vendor introduces you to the customers that matter.

Keep market value separate from value to you. You may be able to pay more because the business will run through your own plant, sales team or freight network. Those savings are yours, created by you, and you do not have to pay the vendor for them. Our report states market value, and where the engagement covers it we can show your own cost savings separately. We do not negotiate on your behalf or recommend whether to buy; that decision is yours, with your accountant and lawyer.

When should you commission it, and what does it cost?

The most useful point is after you have the information memorandum and before you sign a binding offer or heads of agreement, with an update if due diligence turns up something new. We work from the vendor's data room and the information you can obtain; documents reach us only through the private upload link on your matter. If a bank is funding the purchase, tell us at the start so the lender can be named as an intended user where appropriate.

The fee is fixed and follows the target's turnover; the bands and delivery times are in the fee table below and on our pricing page. Targets often come as more than one entity, such as a trading company and the trust that owns its plant, and each additional entity is $795 + GST. We confirm the fee in writing before we start. No hourly billing.