Breaking Out of the Valuation Box

Many manufacturing companies are in a “valuation box.” That is, the value of the company, based on a market multiple, is not equal to the value of the assets. Or worse, once debt is paid off, the net proceeds would actually be negative. Here are some tips for getting out of the box.

Now, how can the value of the company be less than the assets? It typically happens when:

• Net operating income and/or adjusted EBITDA is less than 10% of sales
• A/R plus Inventory less A/P is 50% of sales or higher
• The market multiple for the business is in the 4–6X range

For example, for a $10 million revenue business, if adjusted EBITDA is about 10% of sales or $1 million, a 5X multiple would be around 50%, or $5 million. This valuation would include all assets and accounts payable, but not include cash or debt. If A/R is about 20% of sales, inventory (including WIP) is 30%, and A/P is 10%, net assets would be around $4 million. If equipment is worth $500,000 to $1 million, an owner would rightly wonder why sell it at all. Plus, if debt is deducted from closing proceeds, or if terms are 80% cash, the owner is left with less than the theoretical liquidation value of the company.

Of course, liquidating assets would not net nearly full value, however, it still feels wrong in the mind of the owner.  No one wants to sell their company and be left with nothing but a “bucket of chicken” after closing. This is just a simple example. If EBITDA percentage is higher, the calculation is better for the seller. If lower, the calculation is less favorable.

In those cases, what should an owner do? There are several main choices:

Do Nothing and Keep Milking the Business for All It’s Worth

Why not? The owner’s making a million bucks a year. The equation may get better in the future, or if the owner keeps running it for a few years, the cumulative proceeds (including profits for a few years) will be higher than the net asset value of the company.

Settle for the Current Market Rate

If the owner is really ready to retire, there are no successors, and a management buyout or ESOP are not options, an owner can settle for today’s valuation. It might not be a champagne-popping moment, but it is better than liquidating or just simply shutting the doors. It is also much better than waiting too long and having the market unexpectedly turn down or the owner suffering a major health issue.

Invest in the Company and Break Out of the Valuation Box

This takes guts and time, but there are many ways to break out of the box. Simply put, a company must increase margins, increase productivity, and/or become more efficient. For example:

• Invest in sales and marketing: Many companies that are “in the box” have not invested in sales and marketing. Maybe when the company was young, the owner and the team ran around talking to customers, but somehow that was abandoned like an old VW van on the side of the road. A lot of companies have also tried hiring salespeople or outside reps but did not get enough value out of them and cut that out during the last recession (maybe 2008). I am not sure how to run a sales organization, but I see companies that are growing by having sales teams, attending trade shows, great marketing materials, and are actually answering the phone when you call. Go after new, cutting-edge orders, which should be at higher profit margins than legacy projects.
• Improve equipment and facilities: If the employee of the month is the maintenance guy six months in a row, you might have a problem. Customers, employees, and buyers know when there is a CapEx deficit in the company, which will be subtracted one way or another from the valuation. Improving the company’s equipment by one or two pieces a year will not break the bank and often will pay for themselves. Nicer facilities will attract better talent.
• Update systems: Customers and buyers are asking for more data every day, which makes it harder to keep up. Updating software systems is expensive and time-consuming, as is making sure all cybersecurity is up-to-date. Tracking performance is a great way to identify issues and improve profitability.
• Hire great talent/delegate: Yes, it is hard to find any talent these days. It is especially hard if the owner has not been investing in the company.
• Focus on competitive advantages: Not only will this improve margins, but it can increase the attractiveness of the company and get higher multiples. Whether it is medical devices, defense systems, or high-density substrates, a company needs to have one or two specialties to stand out and attract better multiples.
• Seek out government subsidies: Due to the CHIPS Act, reshoring, and other programs/trends, there is a lot of government money available for companies in the electronics industry. Your local politicians would love to get a photo op with you and your shiny new facility that is helping to secure our nation’s security.
• Make acquisitions: Many of the top companies in electronics have grown substantially through acquisitions. It is not just the acquisitions, though; it is also necessary to make investments. Smart acquisitions are a great way to grow quickly.

The valuation box can be like a nice, comfy chair, whereas investing in the company is like getting up at 5 a.m. to go to the gym. If an owner would like to create a better legacy and reap the profits in the future, taking a few aspirins and getting out of the chair is the way to go. 

Tom Kastner is the president of GP Ventures, an investment banking firm focused on sell-side and buy-side transactions in the tech and electronics industries. GP Ventures has offices in Chicago and Tokyo, with five people in total. Tom Kastner is a registered representative of, and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida, member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.