I saw a listing for a granite fabrication company with an asking price that included a multiple of over 3.5, plus a significant additional amount for FF&E. I understand there is a lot of industrial equipment involved but, this seems like double dipping to me, is this reasonable?
You bring up an excellent point: the sellers cannot have it both ways. There is a great misconception regarding assets and the role they play in business valuations. Assets are a means to drive revenue, but a business must be valued based upon the historical seller cash it has produced or, in some cases, what it is expected to generate.
With all due respect to the accounting industry, they typically place too much emphasis on assets when valuing a business. I am not suggesting that assets are unimportant. They do in fact have their role in analyzing a business but less so in determining the actual purchase price. For example, when calculating the Owner’s Benefit or Sellers Cash Flow, one must adjust this amount downward for future capital expenditures in asset heavy businesses, and by this I mean ones with machinery and equipment (not inventory) which will need to be replaced over time.
Generally, you will find that sellers may over-value their assets altogether and present buyers with a replacement or fair market value and expect to get dollar for dollar in the sale. Unfortunately, most equipment is not worth anything near these values and all you need to do is try to sell these assets quickly and you’ll soon discover they’re worth a fraction of the amounts represented.
So to answer your double dipping question, yes it is, but on the other hand, the multiple itself may be low. One must consider numerous additional factors including:
I would suggest that you perform your valuation based upon the Owner’s Benefit and attach a multiple in keeping with the points above plus the many others that one must consider. Then, make your capital expenditure allowance and attach a multiple that provides you with an acceptable return on your investment. If the business is generating under $500,000 in OB, then a 2-3 multiple is in line. Above that, and up to $1,000,000 should be around 2-4 and 3-5 beyond.
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