Valuation for a manufacturing company

I own a small brewery and I need some help valuing it.

• In operation 18 months
• Annual gross revenue is around $30,000 (like I said, we're small)
• $200,000 in cash
• We expect to use about $110,000 of cash on hand to expand
• Revenue after expansion is expected to be $327,000 year 1, growing to $2,000,000 year 5.

I am planning on leaving the company around year 5 so my partner & I would like to agree on a buyout valuation method before we run into a urgent need to figure it out.

Question: how are manufacturing companies typically valued?

The hardest valuation of companies is when they are in the start-up phase, and I guess that having almost 3X as much cash as revenues initially qualifies as a start-up. That said the most helpful "valuation formula" is one that is based on market multiples and performed by a person who is a valuation professional.

I am asked many times to provide a valuation formula in the context of a buy-sell agreement - which I may add is essentially what you asking advice upon. If I am incorrect, my apologies. Our approach and advice is to understand how companies in your industry and sub-industry are priced. More often than not it is based on earnings and earnings potential. The key parameters are the sustainability and transferability of the earnings stream.

One of the responders indicated "fair market value" as a definition of value. In most instances I agree with this definition or standard of value, especially in the context of a buy-sell agreement - the key is to define if any adjustments to value for lack of control or lack of marketability are appropriate. Again in many cases I do not recommend either, but it as the classic answer responds - "it depends" - on the fact pattern.

My advice, as you build out the business be sure to have someone as an advisor, to assist in the valuation process. One who understands the business within which you operate and to have an informal valuation done on a current basis. This is largely dependent on the growth of the enterprise. In essence your value is gong to benchmarked to others in your space.

Normally manufacturing companies are valued based on assets (patents, trademarks, machinery etc), combined with financal situation, profit, debt, etc. Additionally market exposure and general business viability. It really depends on the buyer though, not a really general question. If you get MBO (management buyout) financing, each equity firm has their own formulas and algorithms, and they weigh risk heavily in them. I would say write up a contract now as far as ownership goes (i.e. 50%/50%), and agree to value by a professional accounting firm. Additionally, one thing I'd suggest for a small business don't look for an exit strategy before start, just put in your all and the exit will work out much better.

In established markets, there are almost always established norms around what's considered a 'fair market value' (or FMV) for a company. These can, of course, vary over time. And five years is a long time.

In my experience, most people in your situation choose a credible and objective third party (often an accounting firm), and write into the shareholders' agreement either

1. That the third party will be asked to determine the FMV annually (say), and that this will be the basis for the transaction, or
2. That as, if and when either party wishes to exit, the third party will be instructed to determine the FMV

This approach is also pretty common if you want to construct equity or equity-like compensation for employees, but retain control of the shares.

You might also want to consider the question of whether the buy price should be the FMV, the FMV with a discount, or some kind of tapering scale (e.g. no predetermined provision for exit in years 1 and 2, year 3 at a 30% discount to FMV, year 4 at 15% discount, year 5 at par).