Archive for October, 2009

Do you have an identity theft prevention program?

October 28th, 2009 by Brian Alwine | Tags: , | Posted in Regulations |

Flag a pin redThe AICPA has made available a bunch of free resources about the “Red Flags” Rule issued by the Federal Trade Commission (FTC).

Based on their analysis, “if a CPA bills clients monthly, this could be considered to be an extension of credit that would require the CPA to have an internal program, subject to inspection and review, designed to detect, prevent and mitigate client identity theft.”

You have until the end of the week (November 1), if you don’t already have a program in place!

Dealerships worth 10% of sales?

October 26th, 2009 by Brian Alwine | Tags: , | Posted in Dealerships |

iStock_000008798983XSmall-10PercentAccording to Automotive News, the freeze in dealership acquisitions may be over. The CEO of Lithia Motors noted, “Typically, Lithia acquires dealerships — not including real estate — for 10 percent of the store’s revenue.”

In what might be good news for some depressed domestic dealers, there appears to be an increased interest in under-performing dealerships in small cities. “The dealership group’s management also isn’t afraid to pick up domestic-brand dealerships because of the reliable demand for trucks in many areas in which the company operates.”

Is the worst over or is this a risky “falling knife” strategy?

Free Documents from ASA BV Conference

October 26th, 2009 by Brian Alwine | Tags: , , | Posted in Recommended Reading, Valuation Approaches |

The American Society of Appraisers has made available (free!) conference materials related to estimating cost of capital, total beta, specific risk, etc. The presentations and papers cover important appraisal issues once you get past the rampant self-aggrandizement.

Delivery Business Acquisition Multiples

October 19th, 2009 by Brian Alwine | Tags: , , | Posted in Industry Analysis, Valuation Approaches |

iStock_000007037977XSmall-deliveryvanWhat is a package delivery business worth?

Based on data from Pratt’s Stats®, it depends on whether it is a FedEx delivery business or not!

Price to Sales Multiples

For recent transactions involving FedEx delivery businesses, the median MVIC price to Sales multiple was 0.95 with a coefficient of variation of 0.27.

For transactions in SIC Code 4215, the median MVIC price to Sales multiple was 0.71 with a coefficient of variation of 0.49.

Price to Discretionary Earnings Multiples

On the other hand, the FedEx businesses sold at a slightly lower multiple of discretionary earnings.

For the FedEx delivery businesses, the MVIC price to Discretionary Earnings multiple was 1.64 with a coefficient of variation 0.39.

For the SIC 4215 transactions, the MVIC price to Discretionary Earnings multiple was 1.94 with coefficient of variation 0.49.

See notes below for explanations of MVIC, discretionary earnings, and coefficient of variation.

What does it mean?

Why would the FedEx businesses sell at a higher multiple of sales, but a lower multiple of earnings?

It seems counterintuitive, but low-margin businesses often sell for higher multiples of earnings than do similar high-margin businesses. A well-run business without any “fat” might not give a buyer as much “upside” as a poorly run business. In this case, the FedEx independent contractor model provides some stability and operational efficiency, but it could also limit the ability of the self-employed operator to grow their business.

What is an MVIC Price?

MVIC (Market Value of Invested Capital) is the total consideration paid to the seller and includes any cash, notes and/or securities that were used as a form of payment plus any interest-bearing liabilities assumed by the buyer. The MVIC price includes the noncompete value and the assumption of interest-bearing liabilities and excludes (1) the real estate value and (2) any earnouts (because they have not yet been earned, and they may not be earned) and (3) the employment/consulting agreement values. In an Asset Sale, the assumption is that all or substantially all operating assets are transferred in the sale. The appraiser needs to use their experience and knowledge in the field and the buyer’s/seller’s knowledge and experience with their business to determine what is customarily transferred in an asset sale in that industry.

What are Discretionary Earnings?

Sellers’ discretionary earnings (SDE) are commonly used by business brokers in small-business transactions. Essentially SDE represents EBITDA (earnings before interest, taxes, depreciation, and amortization) plus owners’ compensation and any personal/discretionary expenses.

Coefficient of Variation in a Nutshell

The theory is that the valuation multiples with the lowest Coefficient of Variation are those with the least dispersion around their respective means and may be the better indicators of value. The value derived using these valuation multiples may be weighted more heavily than those with larger Coefficient of Variations.

Columbus Day

October 12th, 2009 by Brian Alwine | Tags: , | Posted in Current Events |

iStock_000000507916XSmall-ColumbusDiscoverer Are you working today?

The following Columbus quote is fitting for those starting a business venture.

“If the winds are favorable the distance is traveled quickly; but no one must start without being sure of the weather, and this assurance can be obtained by observing the sky, and finding out that this is very clear and that the wind comes from the side of the northern star, and blows for some days always in the same direction.”

- Christopher Columbus to King Ferdinand and Queen Isabella of Spain, February 6, 1502 from William Eleroy Curtis [introduction], The Authentic Letters of Columbus (Chicago: Field Columbian Museum, May 1895), I, no. 2:125.

To paraphrase, preparation (due diligence) is the key to success!