Archive for September, 2013

Before starting with your food distributor valuation, consider these industry statistics:

In the US there are currently over 2,600 such businesses classified under SIC code 5149 and NAICS 42441. Food wholesalers generate a combined annual revenue of $160B. The industry employs over 132,000 people. The average food products distributor makes over $61M in sales with a staff of 50. Sales per employee average about $1,200,000.

Business valuation for food distributors

Successful privately owned food distributors are desirable acquisition targets for both their competitors and professional investment groups. The selling prices of similar businesses are an excellent source of comparable data you can use when valuing your own company.

To make such a comparison work, calculate the ratios of business selling prices to the firm’s financial metrics. The result is what is known as valuation multiples. You can use the multiples to come up with an estimate of your business market value.

The typical valuation multiple for this wholesale industry sector is based on the business yearly gross revenues or net sales.

Example: Food distributor business valuation based on its revenue

To illustrate the idea, let’s take a typical food products wholesaler with an annual gross revenue of $50M and inventory of $25M. Choosing a set of valuation multiples gives us the following valuation results:

Multiple Multiple value Business value ($’000)
Low 0.17 $33,365
High 1.38 $94,005
Average 0.46 $48,070
Median 0.34 $42,135
Average Business Value $54,394

The value of inventory is added on top of the business value determined using the valuation multiples. This is quite typical for wholesale companies. One reason for valuing a company in this way is that inventories in wholesale industries vary over time as owners adjust the volume of products available.

Food Distributor Valuation

Current food distribution business sale prices help you determine the value of any other distributor operation. You can refine your results by running the calculations using other financial figures such as net or gross profits, EBIT or EBITDA, cash flow, owners equity and assets.

See Example »

If you need to determine the value of a piece of machinery or business equipment, the market comparable method is the typical choice. The method is easier to apply than in valuations of other asset types such as real estate. Equipment models and makes are readily identified, the serial numbers give you the age of the equipment. The difference in value is usually related to the equipment condition.

One source of information of used equipment values is dealers. The dealers tend to know their market and the demand for a particular piece of equipment at the time. Most importantly, the dealers know what buyers are willing to pay for similar machines. Given the costs of handling a sale, the dealer can quickly estimate what he is willing to pay the present owner.

If you are in the market for a piece of equipment, you can either go directly to the manufacturer or contact a used equipment dealer for a quote. The price will likely reflect the machine’s age, condition, and functionality compared to a brand new piece of equipment.

If you are valuing a machine, a good place to start is to contact the dealers for that type of equipment. Many dealers are willing to provide the pricing information in expectation of future equipment sales.

Another way you can get a handle on equipment values is the auctions. The auctioneers go to businesses that need to liquidate equipment. The prices fetched reflect what similar machines are worth at the present time. The sales usually have the serial number recorded so you can estimate the equipment age. Be sure to note the time of each sale as the demand for certain types of equipment changes affecting the values.

You would need to account for the difference in values of equipment in place versus that offered for sale to a third party. There are additional costs involved in selling equipment:

  • Shipping
  • Layout and design of site
  • Installation
  • Testing
  • Sales taxes

These costs should be subtracted from the value of equipment to be sold. However, if the equipment is to remain in operation, the value adjustment is not relevant.

In valuing machinery and equipment for a lender, you would likely need the conservative liquidation amount. This may be quite a bit lower than the value in use that the business recognizes.