Archive for November, 2012

Car rental companies are ubiquitous at airports, inner cities, suburbs near auto dealerships. Temporary transportation has become so important that the industry has grown by leaps and bounds. In fact there are over 6,300 such companies in the US and their number is growing at about 28% every five years.

The industry generates combined revenues of $23.8B annually and employs almost 132,500 staff. The average privately owned auto rental business is small with annual revenues of $3.8M and 21 employees.

Car rental companies that are highly successful in their market, show profitability and above average revenues tend to attract a number of interested acquisition offers. When such companies change hands, the selling prices establish the actual market value of such businesses. Using this type of data you can come up with a good idea of what a car rental company is worth at any point in time.

Car rental company valuation

Since no two businesses are the same the idea is to use the selling prices of comparable companies and relate them to common financial performance measures. This gives you the valuation multiples that you can apply to the financial numbers of a target car rental firm to get a sense of its value.

Some of the more common ways to develop market valuations is to use these multiples:

  • Business selling price to annual revenues plus inventory.
  • Business sale price to seller’s discretionary cash flow plus inventory.
  • Sale price to net income or EBITDA.

Example: Market valuation of a car rental company

Since cash is king in business, let’s take a look at how a car rental company can be valued based on its cash flow. We pick a sample business with $4,000,000 in annual revenues, $2,500,000 in inventory and $750,000 in seller’s discretionary earnings or SDE.

Let’s pick a set of valuation multiples as follows:

Multiple Multiple value Business value
Low 1.34 $1,005,000
High 2.99 $2,242,500
Average 1.79 $1,342,500
Median 1.99 $1,492,500
Average Business Value $1,520,625

The numbers above are less business inventory. Thus the total business value will be the sum of the multiple result and inventory or $4,020,625.

Car Rental Company Valuation

Here is an example of how a company can be valued based on a market comparison with recently sold similar firms.

See Example »

You can see from our discussion of business valuation that there are a number of ways to determine what a company is worth. In theory the results you get by using the different methods should give you very similar answers. That often is indeed the case, yet the actual business values calculated with various methods are not identical.

So if you apply all three approaches to your business appraisal, you are likely to see three different numbers. If one of the results is out of line with the rest, you may want to revisit your assumptions.

Business people usually expect a crisp number for a business value. One way you can get a single figure that is reasonable is to apply a weight to the results you get from the different valuation methods. The selection of the weighting to do this is one reason professional business appraisers and their experience are sought after.

Correlating the valuation results is a matter of judgment. Hence, it is possible that your conclusion will differ from someone else’s. In fact, it is not unusual for two professional appraisers to disagree on business value within plus or minus 10%. Regardless of the number you pick, your business value analysis must be founded on a set of defensible assumptions. Anything less will likely invite a challenge on the part of the business valuation report reader.

This is especially likely to happen if the business appraisal is reviewed in court or by tax authorities.