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
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.