The Senate Small Business & Entrepreneurship Committee has given bipartisan approval to the Made in America Manufacturing Finance Act (S. 1555). This legislation proposes raising the loan limits for SBA 7(a) and 504 loans from $5 million to $10 million for the small manufacturing industry[1], enabling small businesses to access the capital they need to invest in new equipment, hire employees and enhance workforce skills, reshore critical supply chain operations, and expand operations[2]. Additionally, the Small Business Administration (SBA) has announced 0% upfront guaranty fees for manufacturing 7(a) loans under $950,000[3] and 504 Loans, including both new and refinanced loans under 504 options[4]. The annual service fees will also be reduced to 0% for all 504 loans.
The proposal is particularly relevant as the current administration has implemented various policies and tariffs aimed at boosting domestic manufacturing. Considering all of these changes point towards growth in SBA lending for the manufacturing industry, it is important for lenders to understand the factors that drive values and multiples within a business valuation for this industry. The items below discuss these considerations, and how they impact the multiple of a business:
Supplier Concentration
Purchases (typically reported under COGS) are one of the largest factors affecting overall profitability for manufacturers. Manufacturers that rely on a single supplier face greater risks, as sudden price shifts can significantly impact margins. They are also vulnerable to competitors potentially “poaching” their sole supplier.
When reviewing a company, it is important to assess the length and strength of supplier relationships, as well as any contracts in place, since these factors can materially affect cash flow stability. For example, if the company is signed to a 3-year fixed rate contract, there is less risk for changes in COGS despite economic factors for those years.
Equally important is understanding the mix of domestic versus international suppliers. International sources may be subject to tariffs, which can increase the cost of raw materials.
Analysis of Financial Projections
Talking with ownership and reviewing detailed financial projections can provide valuable insight into how tariffs may affect performance. For companies that rely on imported products, profit margins may shrink if additional costs are not passed on to customers. It is important to analyze the company’s historical financial performance on a year-to-year basis to better understand what a normalized level of sales and earnings are and if any extraordinary occurrences took place that result in an outlier year. Analyzing performance on a month-to-month basis can also help paint a clearer picture of the potential impact tariffs may have on both sales and earnings, as well as any potential seasonality that occurs throughout the year. Consistent fluctuations in sales and earnings can impact how an appraiser weights certain years and may result in a lower valuation multiple due to the unpredictability of earnings a buyer can expect going forward.
Equipment
The proposed higher loan limits could help manufacturers invest in new equipment or expand facilities. It is therefore critical to assess the age and condition of a company’s machinery.
Businesses with newer equipment typically face lower repair and maintenance costs, along with fewer future capital expenditure needs. Companies with significant equipment also tend to operate more profitably, given their greater production capacity. In addition, these businesses often benefit from stronger collateral positions, reducing company-specific collateral risk and increasing the multiple.
Statistics[5]
In addition to the above valuation considerations, margins and valuation multiples can fluctuate for manufacturers based on factors such as growth, sales and earnings, customer concentration, etc. Below are the typical ranges of important metrics found within the industry:
