4 Ways to Boost the Value of Your Machine Shop

Private equity firms will need their portfolio companies to make real operational improvements — and not simply grow in size — to increase their value. Photo Credit: Getty Images

The precision manufacturing industry continues to consolidate at a rapid pace, driven in part by growing capital availability and the increasingly high multiples offered by private equity (PE) groups. However, it is not clear if that strategy will continue to work going forward if asset values peak as the Federal Reserve tightens monetary policy and raises interest rates. If that is the case, PE firms will need their portfolio companies to make real operational improvements — and not simply grow in size — to increase their value, according to John Slater, team leader - Advanced Manufacturing at FOCUS Investment Banking. The same is true for companies looking to be acquired.

So, what must consolidators and the companies they acquire do to up their game in 2023 and add more value to what they are creating?

Dive into the data. Having the right data and being able to analyze it will help identify the most significant opportunities for improvement.

Decisions must be grounded in the real data of what is happening every day, on every job, on every machine. Otherwise, how do you really know how you are using your resources? Every time a part is quoted, machine shops are making an investment decision. Wise investment requires knowledge of resources and their most efficient allocation.

Track your performance and know how effectively you are using your resources. When you know utilization down to the machine level — while also creating a comprehensive understanding of the application of resources over time — you can consistently drive profitability long-term.

Focus on customers. Understand who your customers are and what you can do to help them achieve their goals, then make that the focus of your business strategy. Once you really understand your customers and the demands of their markets, then you can deploy your resources on their behalf. It creates a true partnership that is hard to replicate. We call it, “Winning on behalf of the customer.”

Emphasize resource consumption over cost. While we always know our costs and structure our pricing strategy accordingly, a more important approach is to understand the revenue generated per machine hour. Revenue generation per resource hour enables you to focus on the front end of driving value.

In a machining business, pricing is based on the resources estimated to be consumed to produce a finished product or component. They are all different, with unique engineering specifications and technical complexity. There are hundreds or thousands of products in many machine shops, making it difficult to understand your product mix and contribution to profitability — but you must. If you are not allocating your resources efficiently, you can’t make it up on price, given the competition.

Retain your people. Your most valuable resource is your people, no more so than right now while it is so difficult to find skilled staff. Retaining talent is critical. But you must be profitable enough to retain them while also investing in new technologies to remain competitive.

Advanced manufacturing companies are a unique collection of resources. All are different, and they have so much technical knowledge and organizational know-how. You are an extension of your customers’ supply chain that is critical to their success. The opportunities for value creation are huge.

About the Author

Patrick Thornton, co-founder and CFO of VfD Technologies Inc. in Bethlehem, Pennsylvania, has been a principal in more than 16 merger and acquisition transactions.