Manufacturing deals: durable machinery & inventory as a component of valuation

August 22, 2025

by a searcher from New York University in Portland, OR, USA

I'm exploring some deals in the light manufacturing space and am curious of folks thoughts on the role machinery & inventory value relative to purchase price? Obviously I'm asking for broad thoughts knowing the specifics of age of machrinery, CAPEX to replace, quality of inventory, et al, is the crux. Seller is wanting a 4.1x multiple on SDE, but FF&E (mostly machinery) and inventory as valued at around 70% of purchase price.

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Reply by a searcher
from University of Cincinnati in Long Beach, CA, USA

In most of the prospective deals I have checked out over last 18 months, the seller's opinion of their machinery value is nowhere close to reality. In a few scenarios, some legacy manual mills / lathes / grinders / tooling / older 3 axis CNCs may be useful for certain specialty production output for a limited time. However, 90% of the time those legacy machines are worth scrap value less the cost of removal. If the CNCs are not 5 axis, there are worth very little, especially in hi-mix low volume projects. Famous CNC company DMG Japan believes the current installed base of 5,000,000 legacy machines worldwide will be replaced by 2050 with 1,000,000 advanced integrated machines. Whatever the seller's machine valuation, drill down big time on age / condition and future CAPEX to update.

Reply by a searcher
from Princeton University in United States

Vast majority of businesses are valued on cash flow basis. Meaning if you were to pay for machinery and WC separately, you'd be double counting. Seller doesn't get paid twice. That being said, a normalized level of working capital should convey. Sometimes there's too little. Sometimes there's too much. That's what you still have to negotiate. But the machinery and WC ARE the business (without them, there'd be no business), so your cash flow multiple already covers those. If you're asking why you're paying in excess of the liquidation value of assets: a business is a value-generating enterprise above and beyond the asset cost basis. A lot of the purchase price will naturally be goodwill.

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