If you own an established industrial equipment rental and leasing business, plan to buy one or need to provide a business appraisal for a client, consider adding the market-based valuation methods to your toolkit.

Classified under the SIC code 7377, profitable firms operating in a well defined, protected niche, are quite valuable and sell often. This means that there are plenty of business sale comparables you can use to estimate what your company is worth. Indeed, comparison to recent sales of similar businesses offers your the most convincing way to determine and prove the value of your own business.

Business valuation by the Comparative Transactions Method

This market-based technique is formally called the Comparative Transaction Valuation Method. The typical tools are a range of valuation multiples derived from past business sales.

These multiples relate the actual business selling prices to some measure of financial performance, including the equipment rental business gross revenues, net sales, gross profit, net income, EBIT and EBITDA, discretionary cash flow, assets and owners equity.

Once you know the valuation multiples for your business, you can calculate the fair market value of your firm by applying the multiples to your company’s financial performance parameters.

For example, if the median price to gross revenues multiple is 0.4 and your company’s current gross revenues are $4,000,000; then the estimated business value is $1,600,000. You can apply other multiples to refine and cross-check your estimate.

Example: market-based valuation of an equipment rental business

Let’s take a typical privately owned equipment rental and leasing firm with the following financials:

  • Gross revenues: $4,000,000.
  • Net sales: $3,750,000.
  • Gross profit: $1,200,000.
  • Net income: $50,000.
  • EBIT: $80,000.
  • Seller’s discretionary cash flow (SDCF): $270,000.
  • Inventory: $620,000.
  • Total assets: $1,500,000.
  • Owners’ equity: $700,000.

For this example, we pick a set of reasonable valuation multiples as follows:

  • 0.4 times the business gross revenues.
  • 0.45 times the net sales.
  • 1.25 times the gross profit.
  • 25 times the net income.
  • 17 times the EBIT earnings.
  • 1.7 times the SDCF (SDE).
  • 1.3 times the business total assets.
  • 3.5 times the owners’ equity.

Applying these multiples to the company’s financials above, we get the following business valuation results:

Multiple Multiple value Business value
Price to gross revenue 0.4 $2,220,000
Price to net sales 0.45 $1,687,500
Price to gross profit 1.25 $1,500,000
Price to net income 25 $1,250,000
Price to EBIT 17 $1,360,000
Price to SDE 1.7 $1,079,000
Price to total assets 1.3 $1,950,000
Price to owners equity 3.5 $2,450,000
Average Business Value $1,687,063

A single number or a range of business values

Note that calculating the average is just one way to assess what your business is worth. You can also use the set of business valuation results to establish a range of values, from low to high. In this example, your company’s market value is likely to be between $1,079,000 and $2,450,00.

Using Market Comps for Business Valuation

3 Comments

Industrial Equipment Rental says:

In addition to the overall value of the business, it makes sense that a rental business would be a good investment because it prevents people from having to invest in expensive equipment, which they might not have the ability to do in this economic climate. Thanks for the insight!

wangombe says:

How would the future revenues from long term rental contracts affect the current valuation of the company?

Harry says:

Future revenues contribute to the company’s earnings in the long term. You can use the Discounted Cash Flow method to determine the effect of rental contracts on business value. You can run the valuation calculation twice to see this: once with the cash flows including the expected earnings from these contracts, then repeating the valuation without the contracts. The difference in business value results thus calculated would show you the effect the contracts have.

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