# Business valuation multiples for car rental companies

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:

Low 1.34 \$1,005,000
High 2.99 \$2,242,500
Average 1.79 \$1,342,500
Median 1.99 \$1,492,500

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.

### Peter Goodman says:

How do you handle depreciation and interest on the cars in calculating seller’s discretionary cash flow? The car rental industry is special in that the depreciation and interest are real expenses of operating the business and can’t be simply ignored in an EBITDA calulation.

### Harry says:

Please see the definition of the Seller’s Discretionary Cash Flow, used in private business valuations. Note in particular, that the reasonable depreciation and interest expense are added back when calculating SDCF.

EBITDA = earnings before interest expense, taxes, depreciation and amortization. By definition, neither interest expense nor depreciation are ignored in this measure of earnings. Do not confuse SDCF and EBITDA, they are quite different.

By convention, companies are valued on the business enterprise value basis. Thus the cash flow should include incomes to total invested capital, both equity and debt. Interest expense is income to the creditors, thus must be included in the cash flow for valuation.

Compare SDCF to another important earnings basis, Net Cash Flow. Notice that NCF includes the capital expenditures.