To say that manufacturers across Michigan have experienced innumerable challenges over the past 18 months would be a tremendous understatement. Supply chain issues, the rising cost of materials, evolving health and safety protocols and talent shortages are only a few of the items that have kept leaders up at night.
But one thing remains true – no matter what curveballs are thrown their way, manufacturers are resilient. Throughout the pandemic, business owners did their best to keep their companies operating as efficiently as possible.
With things beginning to slowly return to what could be considered the “new normal,” now is the time for manufacturers to pivot from keeping the lights on to building a plan for business growth. Whether through technology upgrades, identifying new sources of capital, improving efficiencies, or retaining key personnel, the goal is to set your company up for long-term success through sustainable, methodical growth despite current market forces.
But how do you begin to pivot from managing the day-to-day fires to building out a strategic growth plan? It begins by understanding what your business is worth and defining your growth opportunities.
Measuring Value in Small to Midsize Manufacturers
Assets like cars or real estate are easier to value because there is an active secondary market for them, and there are comparable sales to help determine what they are worth. But there is no widespread secondary market for manufacturing business interests, and businesses are seldom similar enough for comparable sales to help an appraiser. That’s why appraisers must turn to other methodologies to approximate the value of a manufacturing business. It’s accepted that there are three basic ways to describe the value of a business: fair market value, investment value, and liquidation value.
- Fair market value. The hypothetical cash exchange price that a willing buyer and seller would agree upon as payment for the company with mutual knowledge of all the relevant facts.
- Investment value. The value the business represents to a specific investor — a successor in a family business or a competitor looking for a company to buy — and incorporates specific considerations above and beyond the fair market value cited above.
- Liquidation value. This value assumes that the business is no longer viable — worth more dead than alive — and the owner is compelled to sell its assets piecemeal.
Creating Value in a Closely-held Business
Value is not determined solely by present-day cash flow. In fact, the prospect of future cash flows matters more, as do prospects for future growth. Investors value investments based on the returns they can expect over the lifespan of the investment.
For a manufacturing business, cash flow can include dividends, salaries and benefits for owners, and projected sale or liquidation proceeds. That’s why those who evaluate deals — including investment bankers, valuation professionals, and equity analysts, as well as business owners and operators who acquire businesses — use expected future cash flows to estimate the current value of a company. Of course, many factors affect the value of the cash flow stream: the current cost of capital, the timing of the cash receipts, the expected growth or decline of the cash stream over time, and the risk that the expected cash flow stream will not be achieved.
Valuation specialists consider many other factors while deciding on potential future cash flows, including:
- Earnings history and nature of the business
- Industry and general economic conditions
- Company financial condition, net worth, the value of non-operating assets, and intangible value
- Current and estimated future market share
- Earnings capacity of the subject company and similar companies
- Dividend capacity of the subject company and similar companies
- Size of the interest offered by the subject company
What Does This Mean to Manufacturing Companies?
Supply chain issues and the rising cost of materials have a significant impact on manufacturing companies in the current production of goods. As a business owner, you are exploring all avenues to improve those issues already. But, what about the future? In the current business climate, look to solidify relationships with suppliers and customers to ensure that products can continue to be produced and meet customer’s needs.
Once relationships are solidified, it’s time to incorporate technology into your business plan to improve efficiencies, enabling you to understand the actual cost of manufacturing. When your production process is efficient, relationships with suppliers and customers are rock-solid, and systems are working at a high level, you begin to improve cash flow, which drives value. Improved cash flow then allows you to explore the types of products that may be beneficial to customers in the future. By positioning companies to be ready for future customer demand, long-term future cash flow position will look attractive to potential investors, which will increase the business value and allow the business to grow.
Take Action & Make a Plan
When COVID-19 exposed significant worldwide supply chains and operations problems, business owners were forced to rethink their supply chain processes. Whether it be from outsourcing and shipping to end-customer delivery, a clear and resilient strategy is crucial. Transformative solutions that lower costs, reduce risks, improve the use of capital, and support efficiencies are vital steps to growing the value of a business. In addition, technology, including automation and data analytics, can aid in the goals of every manufacturing business owner.
Partnering with experts that specialize in strategic planning for manufacturers can be essential to helping your company increase its value, gain efficiencies and achieve its long-term goals.
About the Author
Dave Nielsen is a CPA and principal at Maner Costerisan, an award-winning full-service advisory and accounting firm headquartered in Lansing. He leads the firm’s manufacturing team and may be reached at email@example.com or 517-323-7500.