Archive for the ‘Industry Analysis’ Category

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.

Known or Knowable Industry Events

April 28th, 2009 by Brian Alwine | Tags: , , , , | Posted in Dealerships, Industry Analysis |

Most business valuations are prepared as of a specific date. So, the issue of whether or not an event was known or reasonably knowable at that date can be crucial.

For example, what assumptions would you use in valuing a Pontiac or Saturn franchised dealership as of December 31, 2008? What about at the end of January, February or March 2009?

What difference do events like these make in valuation?

Check out the recent trading history of the publicly traded dealership groups (ABG, AN, GPI, LAD, PAG and SAH). Declines of more than 50% and gains of more than 200% within a six-month period cannot be ignored!

Final Thoughts: Valuation should never be a “plug in the numbers” exercise. Times like these require extra effort in research and in explaining appraisal assumptions. Use extreme caution to avoid being blindsided by known or knowable events!