How to Calculate the Value of a Furniture Manufacturing Firm
Everything you need to know about the valuation and how to boost the value.
Manufacturing is arguably one of the strongest, most profitable industries in the American economy. The American manufacturing industry is said to be the 2nd largest in the world, contributes over $1.9 trillion dollars to our GDP and employs over 17 million people in our country. Our manufacturing sector is so big that if it were classified as its own country, it would rank 10th largest in the world. Every single thing we use started in a manufacturing plant and trickled down through a rigorous supply chain, and while you may imagine the setting as a massive plant, 94% of manufacturing companies are considered small businesses. Contrary to what you may have hearing, the manufacturing sector in America is steady and thriving, catching the attention of entrepreneurs looking to invest in a stable, profitable business. If you currently own a manufacturing business and have been thinking about what’s next for your future, it is a great time to begin exploring your options.
Furniture manufacturing is a major sector within our manufacturing industry and our economy as a whole. The furniture manufacturing field includes around 15,700 companies and is responsible for about $70 billion dollars in revenue annually. Companies in this industry manufacturing everything from office furniture to mattresses to household items and generally see profits of around 4.2%. The industry is on track for 5% growth through 2016 and sales are up. If you have been thinking about planning for the future of your furniture manufacturing business, the best time to do so is when the industry and economy are doing well and your business has been steadily growing. It’s never too early to start exit planning and the first step is finding out what your business is worth with a professional valuation. To give you an idea of how the ultimate sales price is calculated, we have included a formula below. Keep in mind that only a true business broker can give you an accurate value of your business.
- 4-7x EBITDA
Now that you have an idea of how furniture manufacturing businesses are valued, you can start laying the groundwork to increase the value of yours. I have compiled a list of tips to help you get your business ready for sale and ultimately, secure the best possible sales price.
Online furniture sales increased by 15% between 2014 and 2015 and nearly 60% of all sales transactions will be completed online by 2017. With statistics like these, business owners in the furniture industry literally cannot afford to miss the opportunity for e-commerce sales. If you are not currently advertising your inventory online through a website, the time to begin implementing this feature is now. The internet is not going away and without a web presence, small business owners face an uphill battle when competing against larger corporations such as Ikea or Pier 1. Along with a powerful e-commerce site, every furniture manufacturing business needs a marketing campaign. Advertise your inventory through Google ads, remarketing campaigns or using social media. In our age of technology, most buyers won’t even consider a business that doesn’t utilize the web to curate leads and secure sales.
The actual plant has a lot of bearing during the valuation process and also when it comes to finding the right buyer. To get the most for your business, plant upkeep and maintenance are essential during the months building up to the sale. It can be difficult to maintain the plant while employees are constantly working in it, especially if equipment needs service. We recommend scheduling maintenance or large jobs during the winter months when the industry slows down, then completing smaller jobs during the busy season on an as-needed basis. When reviewing your plant to see what work needs to be done, a few areas that may require attention include inventory control, equipment service and maintenance, safety initiatives, and overall wear and tear. Your plant is the heart and soul of your business, make sure it stands out to buyers and helps you recoup the years of hard work you invested into building it.
In most service and manufacturing companies, vendor contracts are the bread and butter of the business. Getting raw materials at a discount through a reliable and trusted vendor is crucial to your success but unfortunately, contracts are not usually part of the deal in the furniture manufacturing field. While contracted pricing is probably not going to happen, businesses can still do their due diligence to select good vendors with decent pricing, accurate lead times, and quality product to work with. Taking shortcuts when it comes to vendor selection can cut into your profit margins quick, something buyers will be taking a close look at during the sales process. When selecting a vendor, look for someone with close proximity to your plant for ease of delivery, decent pricing and high quality products. Quality is everything in the furniture business so paying more for a better product will serve you well in the long term. Having an array of approved, trusted vendors that work well with your company will show buyers that profits are expected to remain steady and vendor relationships will not fluctuate due to a change in ownership.
Your sales numbers and reputation rely heavily on the quality and design of your furniture and to ensure the best possible quality of your product, we recommend building a team of skilled, tenured craftsmen. Having a solid team of craftsmen to ensure consistency and quality, will take your sales far and build your brand recognition. Having a reputation for quality and design is something every furniture manufacturer strives for, but due to costs, many businesses in this realm often skimp on their employees. Once you have successfully built a team, the next step is designing a strategy to retain them. Adequate pay and benefits are one way to ensure your employees stay loyal, but oftentimes, it’s the perks that really bring it home. Employee appreciation events or rewards for a job well done can motivate employees during the work day and also quell wandering eyes. Having a team of good craftsmen will reflect in your sales numbers and also catch the attention of buyers looking to invest in a good company with a steady cashflow.
Manufacturing furniture is an incredibly labor intensive occupation, which means employees are more prone to injuries and accidents while on the job. In fact, employees in the furniture building industry are 50% more likely to suffer a work-related injury than the national average. Manufacturers spend millions every year covering the expenses of workplace injuries. Implementing a few simple changes in your plant can ultimately save you thousands in lost time, damaged product, insurance claims, and rehabilitation costs. We recommend creating a detailed safety plan, explaining it to your team, then assigning safety management roles to shop supervisors. Something as simple as requiring employees to wear gloves, proper work boots, and eye glasses could go a long way for your bottom line. Implementing an incentive program may help too. For every 30, 60 or 90 days that your plant is accident-free, have pizza catered or hand out giftcards to the employees. Over time, you will see an increase in your cash flow due to fewer accidents and therefore, increased savings.
For an owner of a furniture manufacturing business, it is a great time to sell your business. There are buyers actively looking for a successful manufacturing company that has shown consistent growth. If that sounds like your business, you should begin taking these steps to further increase the value. Someday you will decide to explore your options for a sale and hopefully, these tips can help you prepare. Viking Mergers & Acquisitions can help you to understand where you stand today and how far you need to go. We offer a no-cost, no-obligation valuation for business owners. Valuations are a priceless tool that all business owners should equip themselves with and we are here to help when you are ready.