What are you hearing? What do the “multiples” look like in my [insert sub-industry] in manufacturing? 

These are two common questions that I get asked a lot by owners and executives at manufacturing companies. Granted, we are involved in many M&A transactions – particularly in the lower middle market. We represent buyers and sellers, and over the past five years, we have been involved in a lot of transactions. 

For buyers, our clients tend to be “strategics” or “corporates” that are looking to acquire other manufacturing companies for a various reasons. Sometimes, strategics are looking to diversify their product lines or expand their customer base. In the past few years, sometimes it is simply to obtain “talent” at both the executive and non-executive levels. A number of companies were flush with cash on their balance sheets after COVID-19 and are looking to deploy capital. 

We also have clients that are “financial sponsors,” including private equity firms. There is no shortage of PEs that are looking to acquire (typically at least a majority interest) of manufacturers in certain industries. The hottest industry for PEs typically is aerospace and defense although be careful not to generalize that interest as PEs focus on certain sub-sectors of A&D companies to acquire based on the market.

For sellers, we typically represent small to mid-size privately held manufacturers – many of which are family-owned and operated. Sometimes, the sellers hire investment bankers to aid in that process – sometimes not. Sometimes, there are “auctions” where several potential suitors are brought in to bid and other times there are so-called “proprietary” transactions where one lucky buyer has exclusive rights to negotiate with the seller. 

One theme throughout all of these transactions is the never-ending search for a proper business valuation. The short-hand way that many companies get there is through a “multiple” that compares the total value of a company’s operations relative to its earnings before interest, taxes, depreciation, and amortization. There are a number of people out there who write countless articles about whether EBIDTA multiples make sense or not. This is not the point of this post.

Rather, when manufacturers call me to ask what other companies in their sector are getting for “multiples’ they likely want to just multiple that “X” (e.g., 5X, 8X, 12X) times their EBIDTA (typically over the trailing twelve months, as may be adjusted) to get a sense of the enterprise value if they were to sell. Oftentimes, they may not want to sell. Sometimes they do. 

As one of my CEO clients tells me, “multiples are NOT a random force on value. There are many factors driving it.” As an example, the ultimate transaction price is often driven by customer contracts, margins, a track record, sound management, etc. And, it is not coincidence that higher multiples come down the pike when a company’s EBIDTA is higher. 

What is my main message when I get those calls? Just be careful not to distill your business down to one number. A manufacturing business is a complex, living, breathing organism and there are lot of factors that go into valuation. We can help with the legal aspects of the acquisition or sales process obviously – just go into it with an open mind about the potential outcomes.