Manufacturing business valuation multiples in Australia

What does a multiple represent?

A multiple compresses two judgements into one number: the return a buyer needs for the risk it is taking on, and the growth it expects in the earnings. A higher multiple means lower perceived risk, stronger expected growth, or both. That is why one multiple can never suit a two-person powder coating shop and a food manufacturer with national retail contracts, even though both are called manufacturers.

A multiple also means nothing without the earnings it is applied to. EBITDA, EBIT and net profit after tax give very different figures in a business with heavy plant, and the same transaction can appear to have happened at very different multiples depending on which measure, which year and which adjustments were used. Our article on EBITDA vs EBIT in industrial valuations explains why the choice of measure matters more in equipment-heavy businesses.

For that reason we do not publish a multiple for manufacturing, and we are wary of anyone who does without explaining exactly what sits behind it. What we can explain is what moves the number, and how to tell whether a figure you have been quoted applies to your business at all.

Why do published average multiples steer owners wrong?

Owners often arrive with a figure from a broker's article, an industry survey or a conversation at a trade show. The figure may be accurate for the deals it describes, but it rarely transfers to a particular business. The table sets out what typically hides behind a headline.

Deal structure causes the most confusion. A price paid partly as an earn-out over three years, conditional on a major customer renewing, is not the same as cash at completion. A price that included a large stock holding is not comparable with one where stock was bought separately at valuation. When a figure is quoted without those details, the multiple it implies cannot be known.

The private market also produces little reliable public data. Most transactions involve private companies, many with confidentiality clauses, so the deals that are reported are a small sample and not necessarily a representative one.

What moves a manufacturing multiple up or down?

The factors below do most of the work. None of them is unique to manufacturing, but each takes a particular form in a factory.

The factors interact rather than add up. A manufacturer with modern plant but one dominant customer presents a very different risk profile from a diversified manufacturer on long-term contracts with older equipment. Specialised plant can be a strength when it keeps competitors out and a weakness when it serves only one customer's product. A checklist can show the direction of each factor; it cannot produce the multiple.

How do buyers test the number?

Experienced buyers rarely start with a multiple. They start with cash: what the business will generate after the capital spending it needs, the working capital tied up in stock and debtors, tax, and the cost of servicing any acquisition debt. The price they can pay is the one that still leaves them their required return. The multiple is how the answer is described afterwards.

Due diligence then tests the inputs. A buyer of a manufacturer will usually want a quality of earnings review, a stocktake at or near completion, debtor ageing, the equipment register checked against what is on the floor, and conversations with the major customers. Each finding feeds back into the price or the terms: a warranty, a retention, a stock adjustment, or an earn-out tied to a customer renewing.

Lenders run their own tests. A bank funding an acquisition looks at whether the business can service the debt and what security is available over plant and receivables, and that often caps what a buyer can pay regardless of the multiple a seller has in mind.

How does a valuer test a multiple?

Under the capitalisation of maintainable earnings method, the multiple is selected by reference to the risk and growth profile of the business, using market evidence where it is reliable and comparable. It is then cross-checked rather than taken on trust.

• Net assets. The goodwill implied above net tangible assets should make sense given the earnings and the risks. A large implied goodwill in a business with one customer and an owner who does all the quoting needs explaining.
• Cash flow. Where the future will differ from the past, after a major contract win, a new line or a lost customer, a discounted cash flow model tests whether the capitalised value holds.
• Return on capital. The return implied by the price should be consistent with the risk a buyer takes in a business of that size and type.
• Funding. The value should be one a rational buyer could finance and still earn a return on.

The report sets out the reasoning, including why the multiple chosen sits where it does relative to the evidence. The approaches are described on how we value, and the manufacturing-specific analysis on our manufacturing business valuation page.

Can you use a multiple to estimate your own business?

As a rough starting point, with care. If you use one, apply it to properly normalised earnings that include a market wage for your own role and a market rent for the premises. Deduct the debt and equipment finance the business owes. Treat the result as a wide range, then work through the factors above and ask honestly whether a buyer would see your business as better or worse than typical.

Our value estimator takes a different route. It does not produce a dollar figure. It shows which factors in your business strengthen or weigh on value, which is usually the more useful first step. When a figure is needed for a business sale, a shareholder exit, a dispute or tax, an independent valuation sets out the method and the evidence behind it. Fees are fixed and shown on pricing. We confirm the fee in writing before we start. No hourly billing.