In this second part of a two-part article, we explore key drivers of value in the manufacturing sector, and how this knowledge can be used by business owners to generate greater value from their investment in their business.
Read the first part of our guide to how to enhance value in a manufacturing business.
Production and Processes
Production
When taking steps to enhance the value of manufacturing business, its management will tend to have the most control over the production process.
Good quality control procedures will help to enhance the value of a manufacturing company’s brand.
Internal Procedures
Reliance on key staff can be a problem area, particularly among manufacturers in the SME sector, as this increases the risk of important product knowledge or key customer relationships walking out of the factory doors at short notice.
For owner-operators who are keen to sell their business and exit, potential acquirers may also be concerned that the business cannot continue without them there.
How to add value to your manufacturing business
- Ensure that the supply chain is managed to maximise profitability and minimise obsolescence (but be careful to avoid the risk of running out of stock).
- If quality control has previously been an issue, this will be an area worth investing in.
- Ensure that key procedural knowledge is not maintained exclusively in the memory of individual employees, and document all procedures if possible.
- Ensure that all client relationships are maintained by at least 2-3 company employees wherever possible.
- Ensure a robust succession plan is in place for when key management depart the business.
Asset Base
Relative to other industry sectors, the manufacturing industry operates with a high asset base, and accordingly this will have a more significant impact on the value of businesses in this sector.
Capital Expenditures
A manufacturer that is operating plant and machinery with a long remaining useful life will tend to be more valuable than one in which significant expenditures will be required in the short- to medium-term, as this limits the cash return that will be available to investors going forward.
Recent investment in new production assets may also mean that production levels are improved, resulting in greater profitability.
However it is essential to consider whether any such additional investment will be worthwhile, as even a short remaining useful life on the existing asset base can allow for a deferral of new investment.
Surplus Assets & Property
Manufacturing companies are also prone to holding excess items on their balance sheets that do not contribute to the income streams of the business, such as excess stock or surplus machinery. Such items may be saleable separately and therefore hold value above that attributable to the ongoing business.
However, while these may be valuable, their existence on the balance sheet – when they are not contributing to earnings – may raise some questions as to existing management.
Manufacturing businesses also tend to be more likely to be operated from the premises that they own rather than lease.
An investor may therefore consider the business in two parts, being the value attributable to the manufacturing operations itself and the value of the commercial premises, as the risks and returns arising from ownership of commercial property differ from those of trading businesses.
In certain cases where the premises are located in a high value area, it may even be possible for the manufacturing business to relocate to a cheaper, leased site, while repurposing the original site for more profitable uses.
How to add value to your manufacturing business
- Consider whether an upgrade to the existing asset base would enhance production or make the business immediately more valuable (while bearing in mind the trade-off between the capital expenditure and sale price desired for the shares).
- Consider selling off assets that are not contributing to the profitability of the business, and investing the cash in other areas.
- Investigate the possibility of a sale-and-leaseback or relocation to leased premises, and whether this will benefit your business.
Find out more about Menzies manufacturing sector services.