CNC Multiples

Hi Adam - this, as ever, is just an opinion from somebody who has acquired a manufacturing business. I would say the valuation multiple is mainly driven by the quality (recurrency, stability, etc) of the revenue stream and the growth prospects of the industry and the business. In that regard, a manufacturing or CNC-driven business is no different to others. The specifics that you will want to look for:
- Obviously CAPEX is a major one. As a buyer you may want to adjust any EBITDA or earnings metric with both "recurring CAPEX requirements" as well as "immediate CAPEX requirements". The same company on the same financial performance may require urgently some machinery investment or may not so they will command different valuations. On the flip side, a seller may try to add in the valuation certain assets or B/S items connected with very recent CAPEX/investments. Exceptions aside, I would personally try to resist this (in practice, a seller will have known for some time the intention to sell the business so more often than not the business will be underinvested rather than overinvested).
- A less obvious one is utilisation/capacity. Manufacturing businesses have a big operational gearing (ie fixed costs and hopefully decent gross margins) which means they can vary dramatically in profitability on smaller variations in capacity/turnover (once you've recovered your overheads/fixed costs, additional turnover adds quickly to the bottom line). A manufacturing business with spare capacity to allow some growth in turnover may provide a great opportunity to increase earnings significantly (vs a business that would require significant investment/transformation to continue growing).

I sold two machine shops this year. One went for slightly over a 2x multiple of SDE (under $800k revenue) and the other was about a 3.7x multiple (over $2..3 million revenue). The first was highly dependent on several customers while the second was much more diversified. A lot depends on the size of the business, customer mix, type of machining. Generically I would say a shop highly dependent on the owner and under $1 million in revenue, somewhere between a 2-2.5x multiple. Strong shops with lower owner involvement and niche business can get over 3.5x. Expect significant competition for the larger shops. Acquisition of talent is almost as important as any other variable in today's market.