How to value a manufacturing business

What exactly is being valued?

Settle the subject before touching the numbers. A manufacturing valuation can be of the operating business (its enterprise value), of the shares in the company that owns it (its equity value), or of the business together with the factory it occupies. Each answers a different question and produces a different figure, and confusion between them sits behind a surprising number of arguments about price.

The factory is often held outside the operating company, by the founder's family trust or self-managed super fund, and leased back. We value the business as a tenant paying a market rent and leave the property to a property valuer. How the rent is normalised is explained in EBITDA vs EBIT in industrial valuations.

Purpose and date matter just as much. A valuation for a business sale asks what a buyer would pay. One for a shareholder exit may turn on the shareholders agreement. One for an estate or a property settlement is fixed at a date that may fall just before or just after an unusually good year. The approaches we use for each are set out on how we value.

Why start with gross margin rather than EBITDA?

In a manufacturer, most of the judgement in the profit figure sits above the gross margin line: how stock was counted, how it was costed, and how much of the year's factory overhead was carried into closing stock. We test that line first, because every later figure depends on it.

Under AASB 102 Inventories, stock is measured at the lower of cost and net realisable value, and cost includes a share of fixed production overheads allocated on the plant's normal capacity. The practical effect is that a manufacturer which produces more than it sells moves part of that year's overhead onto the balance sheet, and its profit rises without a single extra sale. The reverse happens when stock is run down.

So we compare gross margin across three years and against the movement in stock. A margin that improves in the same year stock jumps is a flag. So is a year-end stocktake that was estimated rather than counted, or standard costs that have not been updated since input prices rose. The other common problem is slow-moving or obsolete stock still carried at cost. The level of stock a buyer expects to receive with the business is covered in how working capital affects a manufacturing business valuation.

How quickly can the business pass on cost increases?

Manufacturers buy steel, aluminium, resin, packaging, ingredients, gas and electricity, and the gap between paying more for inputs and charging more for output is where margins are lost. The ABS Australian Industry release for 2024-25 shows manufacturing purchases of goods and materials rising 8.6% while the division's earnings rose 1.6%. Industry totals hide wide differences between businesses, and that is the point: the manufacturers that held their margins were the ones able to reprice.

We build a margin bridge from one year to the next, separating the effect of price, volume, product mix and input costs. A business that recovered a steel or resin increase within a quarter has a different risk profile from one that absorbed it for a year because its largest customer's pricing is fixed annually.

The evidence sits in the contracts and the price files: rise and fall clauses linked to a published index, the date of the last price review for each major customer, how long quotes are held open, and what share of inputs is bought in foreign currency or at spot prices.

Which products and customers earn the profit?

Manufacturing accounts usually report one gross margin. Behind it may sit a profitable proprietary range, a contract manufacturing line that fills the plant at a thin margin, and a tail of small customers who cost more to serve than they pay. We ask for contribution by product line and by major customer, after materials, direct labour and machine time.

This matters for two reasons. It shows which earnings are dependable, because a product with its own brand, approvals and specifications is a different asset from build-to-print volume at a price the customer sets. And it shows what a buyer would change. A buyer may plan to drop an unprofitable line or reprice a customer, but it will not pay the seller for improvements it has to make itself. Where one customer dominates contribution, the analysis in how customer concentration affects business value applies.

How do you test the plant against the earnings?

Three figures tell most of the story: the depreciation charge, the average capital spending over the last five years, and what the equipment register says the critical machines will need over the next five. When the third is well above the second, earnings have been flattered by deferral, and a buyer will price the catch-up.

We look hardest at the constraint, because utilisation matters there rather than on average. A plant reporting 60% overall utilisation may have a single laser, five-axis machining centre or filling line running two shifts and weekends. The condition of that one asset decides both the sustaining capital the business needs and whether it can grow without a large investment.

The full treatment of capital expenditure is in EBITDA vs EBIT in industrial valuations, and how the machinery itself is treated, including surplus plant and finance, is in how plant and equipment affects business value.

Which risks change the rate applied to the earnings?

Once maintainable earnings are settled, the remaining judgement is the risk attached to them. In manufacturing, the risks that most often move the outcome are these.

• People. Whether quoting, production planning and the key customer relationships sit with the owner, and whether the tradespeople who set up and maintain the older machines are close to retirement.
• Customers. The share of contribution held by the largest accounts, and what holds them: supply agreements, product approvals and switching costs, or purchase orders alone.
• Site. The remaining lease term and options, power supply, planning approvals and any licence conditions that cap output.
• End markets. Exposure to cyclical buyers in mining, residential construction or agriculture, and how the business traded through the last downturn.
• Products. Own designs, certifications and processes that competitors cannot easily copy, as against work any competent shop could quote for.

They act on the same earnings together, which is why a checklist cannot produce a value on its own. Specialised equipment can be a barrier to competitors, and a burden if it serves one customer's product. Our manufacturing business valuation page explains how we assess each of these in an engagement.

How do you get from enterprise value to the value of the shares?

The earnings-based value is the value of the operating business with a normal level of working capital. To reach the value of the shares, debt and debt-like items are deducted and surplus assets are added. In manufacturers the list is usually longer than owners expect.

• Bank debt and equipment finance, including hire purchase, chattel mortgages and balloon payments
• Invoice or debtor finance facilities, which are borrowings even when they are presented alongside trade debtors
• Employee entitlements a buyer of the shares inherits that are not part of normal working capital, particularly long service leave
• Tax payable, related-party loans and deferred payments for earlier acquisitions
• Surplus cash and surplus assets, which are added rather than deducted

Long service leave deserves attention because manufacturers often have long-serving workforces. Most employees' entitlement comes from the long service leave laws of each state or territory, and a factory with many staff past ten years of service can carry a significant accrued liability. In a share sale the buyer takes it on and will reflect it in the price.

Could a buyer fund the price?

The last check is practical. A buyer funding the purchase partly with debt needs the business to service that debt after tax, sustaining capital spending and any growth in working capital. If the cash left over would not cover repayments on a reasonable level of borrowing, the price is unlikely to be achieved, whatever a comparison suggests. We use this as a sense check on the result rather than as a method in its own right.

It also explains why two buyers can reach different prices for the same factory. A trade buyer that can absorb overheads or fill its own spare capacity may pay more than a financial buyer, but it rarely pays away all of those savings. Market value assumes a hypothetical buyer, not the one with the most to gain.

What should you have ready?

We confirm the document list when we scope the engagement. For most manufacturers it includes:

• Financial statements for three years and year-to-date management accounts
• Stocktake records and the basis used to cost stock, including how overheads are applied
• Contribution by product line and by major customer, if your system can produce it
• Price review dates for major customers and any rise and fall clauses
• An equipment register with ages, condition notes and finance owing
• Statements for bank debt, equipment finance and any invoice finance facility at the valuation date
• An employee list with start dates, so leave entitlements can be checked
• The premises lease, or the arrangement with the related entity that owns the site

Once we are engaged, documents come through the private upload link on your matter, never by email. Your information stays confidential. Fees are fixed and set by annual turnover, as shown on pricing. We confirm the fee in writing before we start. No hourly billing.