Share This Info:  

Valuing Machine Shops: How Equipment Effects Valuation


I was asked this question today from buyer who asked about a valuation/equipment dilemma he was pondering when looking make an offer on a business with substantial equipment included in the deal.

Here is the buyer's question:

“ I am about to make an offer on a machine shop, the asking price is $1.9M, the adjusted net income on average for the last three years has been $287K with equipment valued at approximately $600K, it seems to me the business is overvalued - with a multiple of 4 the price seems like it should be more like $1.2M. The question is do you add the equipment value to get a valuation of $1.8M or should the “equipment value” be included in the price of $1.2M?"

Several responses from our BizBen panel of experts:

From Joe Atchinson, Business Broker, CBI, CBB, CPA, MBA  - Sunbelt Business Brokers

"
My opinions on your machine shop valuation question are:

First, this machine shop is not worth anywhere near 4.2X to 6.6X SDE ($1.2M to $1.9M asking price) unless there are some extremely unusual circumstances like just landing a very large, non-cancellable, multi-year production contract from a reputable customer.  I think that the starting point should be 2X to 3X, max.
The most relevant year is the 2007 which is just over two weeks from being over.  If 2007 revenues and net are considerable higher than 2006 then value it up.  If 2007 is a down year, especially if it is the second or third down year in a row, value it down - perhaps way down.

What is the capacity utilization?  If only at 40% of capacity, value it up.  If at 90%, value it down.

What are the quality, concentration and geography of the customer base?  Value up or down depending on the answers.

As for the equipment, that is what was necessary to produce the $287K SDE so there is no adjustment for the equipment unless there is an unusual circumstance like the seller recently purchasing a high productivity piece of equipment that would reduce unit costs and improve margins and, better yet, allow them to get contracts that they did not have the capacity or capability to produce in the past.

What are the competitive threats - especially from the customer going offshore to China, India, etc.

Does the seller have long-term, talented employees?

Does the seller have a long-term lease with favorable terms?

How large of a note is the seller willing to carry?  An all cash deal will sell for a big discount compared to the price of a financed deal.

What is the sellers purchasing leverage - probably not much; and what is the seller’s pricing leverage?

Nothing was asked about the value of the inventory (raw stock, work-in-progress/semi-finished and finished goods).  That is another important question with the biggest issue being how much do I discount the cost value for excess and obsolete inventory?

-----------------------------------------

From Willard Michlin, Business Broker and Due Diligence Specialist:

"The equipment is always included in the price when usuing the income approach. . Why? The rule is that whatever is necessary to produce the income stream or to produce the product must be included.

What the seller is trying to do, in this example is to use two different appraisal methods in order to raise the price.

Under the income approach, the value of this business is based on the owners benefits approach. Your example is 4 times but can be some other number times the net income or total owners benefits. This value includes the equipment and everything else with the exception of the accounts receivables and inventory. In some cases, even these are included in the price.

If the seller is valuing the business based on the assets which includes the equipment then he might also add the accounts receivables, inventory and the value of the customers. In this case you can not also use the income valuation approach."


-----------------------------------------

From Rick Eggleton, Business Broker at BizSellers Inc.:

"Valuations for any business are not a simple matter of setting some multiple of sales or adjusted net income.  There are other factors you need to consider like premise or equipment leases, customer mix or concentration, revenue trends, inventory, and many more.

In this case $1.9 million seems  overpriced on adjusted income of $289,000 even with equipment of $600,000. Here is a quick and dirty formula for Machine Shops according to the Business Resource Guide:  65-70% of annual revenue plus inventory, or 2 times EBIT, or 1.5 times EBITDA.  In each case those prices based on recent sales don't seem to be on the same playing field let alone in the same ballpark.  I'd drill down and find out where the adjusted income number comes from and how it was adjusted.  I don't use that term, I use Seller's Discretionary Earnings defined as the last year's tax return taxable income plus amortization, depreciation, interest expense, seller's salary  (and portion of employment taxes, seller's perks, and one time expenditures. While most brokers are unwilling to provide detailed financial information you should expect to receive at minimum the worksheet leading you to the adjusted income they are claiming BEFORE you make an offer.

Another I always recommend is that you use a small business CPA to handle the financial due diligence for you. That way you are assured you are seeing the real deal.  Find someone who is a small practitioner (3-10 person office) who focuses on entrepreneurial small businesses to do this work. Don't use Uncle Manny or Cousin Fred or the business' CPA.

After you've got the real numbers the acid test is affordability as outlined in a Loan Requirements ROI Summary. Or simply by finding out if the business will qualify for an SBA loan of 70-80%."


-----------------------------------------

From Bob Klein, Business Appraiser:

"There are two things that determine the value of a business, asset value and cash flow. Use the true equipment value (not equipment book value) and all the business's assets, then use a reduced multiple. Machine shops usually have high asset values. This is not only because of the equipment but also the tooling, fixtures and inventory.
 
In the question there was no indication as to what the last 12 months cash flow was. The last three year average is interesting but the last 12 months should be the basis of the business's value. At the least a weighted 3 year average with the last 12 months at 50% of the average would be more accurate."

-----------------------------------------

From Bob Hughes, Business Broker - Hughes Properties:

"The equipment should be included, this is part of the required equipment to have the cash flow as shown.  Equipment should be part of the 1.2 million.   This would be  a great business to finance since banks love hard equipment as compared to a service business.  The standard these days is 3X cash flow with a top end of 4X, with the equipment you could go to the 4X level.  That’s is what works for me in the field."

Peter Siegel, MBA is the founder and President of BizBen.com - Businesses For Sale In California. A nationally recognized author (3 books and a syndicated small business blog) and expert consultant (national SBA small business specialist) on selling and buying businesses, he provides professional assistance to business brokers, agents, and business owners in getting maximum response in their advertising & marketing efforts in regards to selling small to mid-sized businesses. If you are selling a business and need professional assistance utilizing high performance advertising, marketing, and highly effective strategies, or individual customization with your BizBen Power Search options in buying a California business, you can reach him at 866-270-6278.


Categories: Business Valuation Issues, How To Buy A Business, How To Sell A Business



  Helpful Resources To Assist In Selling And Buying California Businesses
Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Ranvir S. Sandhu, Esq. - Legal Services For Buyers And Sellers

I've worked at top Bay Area law firms and have extensive experience with business entity formation, mergers, dissolutions, conversions, employment matters, including experience in reviewing and negotiating transactional documents such as leases and purchase agreements.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Joe Sandbank, Esq. - Legal Services

I have provided legal counsel to business buyers, sellers and brokers for over 17 years. With prior experience as a business broker and SBA loan officer, Joe brings both a practical and legal approach to all aspects of the business acquisition process.

Brad Steinberg, Broker - Laundromat Specialists

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.


  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
Top 100 List: This Week's Top Motivated Business Buyers & Their Requests!

If you're trying to sell a business - check out this week's top 100 business buyers - one of these buyers may be looking to buy your type and location of business! This list is updated weekly - make sure you check it frequently! Are you searching to buy - get on this list and reach seller direct!

5 Myths About Selling A California Business: Best Tips For Sellers & Brokers

Peter Siegel, MBA (at 866-270-6278) - BizBen Director discusses myths associated with the process of selling a business and some of them can actually cause deals to fall through. Don't let your sale be comprised, be aware of these common misconceptions related to the process of selling a business.

Find Out Why 80% Of California Business Buyers Never Find And Buy A Business

First the dreaded statistic: 80% of all California business buyers looking to buy a small to mid-sized business in California never end up doing so! Peter Siegel, MBA BizBen Founder And Director at 866-270-6278 covers successful tactics all business buyers of small businesses should utilize.

I am Buying A Business: Should I Buy The Property As Well? A Good Decision?

There are advantages and disadvantages to owning commercial property. Here are a few questions to ask when it comes to deciding whether or not to buy the property along with the business. Peter Siegel, MBA with the BizBen ProSell Program reviews this issue with potential sellers and intermediaries.

Absentee Run Small Businesses - Is That Really A Possibility For Buyers?

Is buying a absentee run small business really a possibility? Peter Siegel (BizBen ProBuy Director) gets asked this question a lot in his consulting sessions with business buyers. Read more about what other Advisors and Intermediaries feel about this topic on this popular BizBen Discussion!

How Do I Navigate Through The Negotiation Process When Buying A Business?

Negotiating the terms of a business deal is a delicate process, where one wrong move can cost you the business that you wanted to purchase. Peter Siegel, MBA (BizBen ProBuy Program) discusses the ins and outs of negotiations, and how to work well with the seller to get a deal done.

Is There Such A Thing As Paying Too Little When Buying A Small Business?

We all understand the idea of paying too much for a small business. But is there such a thing as not paying enough? That seems like an odd notion, but I'm familiar with situations in which a buyer acquired a small business for a figure substantially under what probably was market value.

Before Buying A California Business, 10 Questions You Should Ask Yourself

Before buying a business, all serious business buyers should ask themselves some key questions about possible buying a small California business, franchise, or opportunity - from Peter Siegel, MBA (Business Purchase Financing Expert, ProBuy & ProSell Program Advisor with BizBen) at 866-270-6278.

See All News, Tips And Events


Business Purchase Financing SBA Loans
Larry Larsen Laundromat Broker
Redwood Escrow Bulk Sale Services
Joe Ranieri Orange County Business Broker
Facebook
Twitter
Linkedin
Google Plus You Tube
Vlogs and Podcasts


Auto Related
Business Services
Children Related
Communication Related
Computer, Internet Related
Construction Related
Entertainment Related
Financial Services
Health, Beauty Related
Home Improvement Related
Maintenance Related
Manufacturing Related
Media, Publishing Related
Pet Related
Photography/Video Related
Real Estate Services
Restaurant, Food Related
Retail Related
Service Related
Sports Related
Transportation Related
Travel Related
Wholesale Related

Auto Body Shops
Auto Repair Shops
Bakeries
Bars, Sports Bars
Cafe Restaurants
Car Washes
Cleaning Services
Clothing, Apparel Stores
Coffee Shops
Convenience Stores
Deli Restaurants
Discount, Dollar Stores
Dry Cleaners
eCommerce Websites
Fast Food Restaurants
Florists, Flower Shops
Full Service Restaurants
Gas Stations
Gift Shops
Gyms, Fitness Facilities
Home Health Agencies
Hotels/Motels
Ice Cream Shops
Juice, Smoothie Shops
Laundromats
Liquor Stores
Markets, Marts
Nightclubs
Pizza Restaurants
Postal, Shipping Stores
Preschools, Day Care
Print Shops
Salons, Beauty Shops
Sandwich Shops
Smog Test Only Shops
Smoke Shops
Spas, Med Spas
Sushi Restaurants
Tire Shops
Towing Services
Vending Routes
Wireless, Cellular Shops
Yogurt Shops

Alameda
Alpine
Amador
Butte
Calaveras
Colusa
Contra Costa
Del Norte
El Dorado
Fresno
Glenn
Humboldt
Imperial
Inyo
Kern
Kings
Lake
Lassen
Los Angeles
Madera
Marin
Mariposa
Mendocino
Merced
Modoc
Mono
Monterey
Napa
Nevada
Orange
Placer
Plumas
Riverside
Sacramento
San Benito
San Bernardino
San Diego
San Francisco
San Joaquin
San Luis Obis
San Mateo
Santa Barbara
Santa Clara
Santa Cruz
Shasta
Sierra
Siskiyou
Solano
Sonoma
Stanislaus
Sutter
Tehama
Trinity
Tulare
Tuolumne
Ventura
Yolo
Yuba

0 to $99,999
$100,000 to $249,999
$250,000 to $499,999
$500,000 to $999,999
$1 million to $2 million
over $2 million



BizBen - Where California Deals Get Done! 888-212-4747
7172 Regional Street #364 · Dublin, CA. 94568
BizBen · Copyright © 1994 - 2019, All Rights Reserved

               Vlogs and Podcasts  
Join Us On Social Media - Content Updated Daily
Sign Up Today - For Our FREE BizBen Weekly Email Newsletter
Includes The Best Info On Buying, Selling, Valuing, Financing California Businesses:
Articles, Blog Posts, Podcasts, Videos/Vlogs, Discussions, Q&A, Workshops, Webinars,
Resources. Watch For An Email Confirmation After Signing Up Above. Thank you.
Clost Login


Please confirm your registration by clicking the link we've sent to .

If you can't see it, please check your junk mail folder.

If you have any problems registering, or need assistance with your new BizBen User Account please phone BizBen Customer Support at 888-212-4747.



First Name:*
Last Name:*
Email Address:*
Confirm Email:*
Create Password:*
Confirm Password:*
Phone:
(   
 


You Are A:
Individual
 
Intermediary
 

Email Address:
Password:
 
Search BizBen.com

500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
4 Reasons Why Business Brokers Do Not Cooperate With Other Brokers & Age...
Read More News
Find Out Why 80% Of California Business Buyers Never Find And Buy A Busi...
Read More News