The valuation of a manufacturing company should consider all three approaches to determining value, the asset approach, the income approach and the market approach. However, given the nature of the company, one method may be more relevant than another. One consideration to take into account is that a manufacturing company often has significant investment in property, plant and equipment. Due to the capital intensive nature of the business, one must consider the asset approach, which values all the assets of the business at fair market value. In using this approach, one must take into account the fact that the company may have unrecorded assets such as internally developed technology, patents, know-how, workforce and goodwill that may have significant value.
In some instances, the income approach may be the most relevant method since it considers the earnings power of the assets including all the property, plant and equipment and any intangible assets that may or may not be recorded on the balance sheet. The income approach values the business based on the expected future cash flows of the business. Since manufacturing companies often need to make significant investment in equipment to continue operations and to grow the business, these significant capital expenditures must be subtracted from the forecasted future cash flows.
Another approach that cannot be ignored is the market approach, which determines the value of a company based on what similar companies have sold for. These transactions of comparable companies can be found in proprietary databases. All of these approaches require experience and knowledge in their application. If you need help in determining the value of your manufacturing company, please contact a member of the Schneider Downs Business Advisors and we will be happy to assist you in the valuation of your company.
Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.