Valuing a business is a complex and involved undertaking. Numerous textbooks have been written on the subject and many professionals spend their entire careers developing the skills necessary to perform quality valuations. As a result, it is impossible to provide you with all the information you would need to perform a detailed valuation yourself Nonetheless, there are a few useful rules of thumb that buyers of plastics companies use to quickly estimate the value of a potential acquisition. Remember: These are rules of thumb and sophisticated buyers and sellers support this initial analysis with a more detailed and thorough valuation. 

These rules of thumb are based on two approaches to value. The first considers the cash flows generated by the business and the kind of return the buyer is looking for on his investment. The second considers the fair market value of the company’s assets.

Profitable Plastics Companies

Buyers first determine the cash flow of a company after excess owner compensation and unnecessary or non-recurring business expenses are added back. Buyers then apply a multiplier to these adjusted cash flows to determine the value of a company. The multiplier is determined by the return the buyer is expecting, For example, if the buyer expects a 20% return on his investment, he would use a multiplier of 5. If the business generated adjusted cash flow of $500,000, this would result in a value of $2,500,000 for the company. The less profitable or more risky the company, the higher the return the buyer will expect, and hence the lower the multiple. The following table sets forth what our experience indicated buyers are paying for profitable plastics companies in today’s market. 

Plastics Company Multiples (Jan. 1997) 
• Low margin companies 2.8-4.9 times cash flow. 
• High margin companies 4.0-6.2 times cash flow. 

Seller financing such as an earnout, and/or contingency payments usually range from 10% to 30% of the total purchase price. Sellers wanting all cash at closing should be prepared to accept a lower total purchase price in exchange for more favorable terms.

Unprofitable Plastics Companies

There is a market for companies that are not profitable or do not generate positive cash flow, In these cases buyers look at the value of the company’s assets. Buyers will pay fair market value for the assets (both Tangible and intangible less any debt used to acquire them) plus a premium of 2%-6% of the company’s annual revenues. Ask your equipment dealer to verify your estimate of the market value of your equipment. Remember that the fair market value of your equipment is generally more than book value as recorded in your financial statements. 

Once you have done an initial analysis of the value of your company, call in a professional to help you refine this estimate before you actually sell your company.