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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.
What 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!
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.
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.
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.
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.
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.
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.
Unfortunately, we can’t always be “nice guys” when it comes to valuation work. Much as I dislike requesting what can seem like an excessive amount of information, it pays to avoid tempting shortcuts.
In a recent project, it would have been easy to rely on ownership percentages from tax returns. However, by obtaining and reading the company’s stock ledger, we discovered that the interest to be valued might be a 21% ownership interest, not a 6% ownership interest!
Just that one “little” change may make a $1.8 million difference in value – $2.5 million as compared to $0.7 million. Rhetorical question: Is that material?
On a related note, like Aswath Damodaran, I too enjoy “financial fiction.” I’ve just begun a novel within the genre that I think I can already safely recommend. Stone’s Fall: A Novel
Looking at my last post, I think I can shed more light through a public company example. Let’s say a project involved the valuation of a publishing business – Daily Journal Corp. (DJCO).
Imagine that you wanted to determine the fair market value per share of DJCO as of 12/15/08. Also, imagine that as of 12/1/08, DJCO had acquired a business. What were the terms of the hypothetical acquisition? Pretend that…
Would you give a recent acquisition like this substantial weight in a valuation analysis? What if it was the same set of circumstances, but involving a non-publicly traded company?
Remotely related thought – DJCO and the subject company that inspired these posts seem to be real-world examples of “too good to be true” businesses!
How would you value a company that made a major acquisition a few weeks prior to the date of a valuation?
The acquirer was about three times larger than the target. The companies were competitors, with similar margins and growth prospects. The transaction was at arm’s-length.
The interest to be valued is a noncontrolling ownership interest in the acquirer. The standard of value is fair market value with a going concern premise of value.
One option is to prepare a pro forma analysis combining the acquirer and target business.
A second option is to analyze the acquirer’s past results on a stand-alone basis; then, add the amount paid for the target business to the indicated value.
Finally, one could apply pricing multiples from the acquisition to the acquirer or the combined business. Adjustments may be necessary for differences in size and risk.
In reconciling the values, adjustments for lack of control and/or marketability of the subject interest may also be necessary.
In a case like this, does the price paid for the target business say as much about the value of the acquirer than anything else does?
