With a global focus on sustainable manufacturing, scrap metal recycling is a key growth industry segment. Classified under the SIC code 3339 and NAICS 331419, there are just under 8,200 metal recycling companies in the US alone. The industry as a whole generates some $21.1B in annual revenues and employs close to 75,600 people.
Yet an average metal recycling firm is quite small – with around $3,000,000 in annual sales and a staff of 9.
Business valuation methods for metal recycling companies
Being in a growth segment usually means there is considerable investor appetite for business acquisitions. Indeed, scrap metal recycling businesses sell quite often.
The recent sales of similar businesses offer you an excellent way to determine you company value. Valuation multiples that relate the actual business selling prices to key financial performance measures are the typical valuation tools.
Using valuation multiples derived from recent recycling business sales, you can develop an accurate estimate of value for firm in this industry segment. The most common valuation multiples used for valuing metal recycling businesses are these:
- Business selling price to business gross revenues or net sales.
- Price to gross profit.
- Price to net income.
- Price to EBIT and EBITDA.
- Price to seller’s discretionary cash flow.
- Price to business assets.
- Price to owners’ equity.
Example – valuing a metal recycling company using valuation multiples.
To demonstrate how the value of a business in this industry can be determined, let’s select a firm with the typical financial performance as follows:
- Gross annual revenue: $3,000,000.
- Net sales: $2,900,000.
- Gross profit: $1,000,000.
- Net income: $250,000.
- EBIT: $145,000.
- EBITDA: $282,500.
- Seller’s discretionary cash flow (SDCF): $750,000.
- Furniture, fixtures and equipment (FF&E) assets: $400,000.
- Inventory: $355,200.
- Total business assets: $950,000.
- Book value of owners’ equity: $600,000.
Next, we apply a set of reasonable valuation multiples and come with the following business valuation results:
|Multiple||Multiple value||Business value|
|Business value based on gross revenue||0.8||$2,755,200|
|Value based on net sales||0.82||$2,378,000|
|Value based on gross profit||3||$3,000,000|
|Value based on net income||11||$2,750,000|
|Value based on EBIT||15||$2,175,000|
|Value based on EBITDA||12||$3,390,000|
|Value based on SDCF||2.75||$2,417,700|
|Value based on FF&E assets||6.5||$2,955,200|
|Value based on total assets||2.75||$2,613,875|
|Value based on owners equity||5||$3,000,000|
|Average Business Value||$2,711,067|
Fair market value or investment value?
Market based valuation as this example illustrates tends to be a great way to determine the fair market value of your business. This is because the valuation multiples are derived from a large number of comparable business sales, establishing the “going rate” for similar business investments.
Exceptional companies may attract very strong investor interest. Professional investors that are looking for synergies to enhance their portfolio in your market segment may be willing to pay a premium for the right business opportunity. As a result, your actual investment business value may well exceed the fair market value estimate.