Sellers often put too much weight on valuation multiples. Business appraisers use a wide array of tools to build a “value case” and the best results often come from blending at least three of the approaches most common to the industry. Here are some of the non-earnings issues that can heavily impact a company’s sale price.
Quality of Tangible Assets – we have sold a number of transportation and storage related companies and often an independent appraisal of the equipment is required. For instance, in the trucking industry, are the tractors relatively new but in high-mileage service? This will weigh heavily when compared to well-maintained older vintage tractors that have fewer emission control devices. Specialty equipment that is fully depreciated is always a wild-card when determining its contribution to the sales prices.
Contracts Supporting Sales – a buyer will pay more for a company with three-year assignable sales contracts than for a company with equal volume sales relationships that are untethered. In these cases, buyers will talk about the “quality of earnings”. Contracts not only can cement sales volumes but they can also assure pricing formulas, again adding to the quality of the earning upon which the buyer is building his purchase price.
Intellectual Property – patents, service marks, brand names, and digital footprints will all be specified as the assets being purchased by a buyer. They obviously have value to the buyer, but how does it get monetized in the company sales price? Depending on the industry, the EBITDA multiple will capture some of this value but there can be a big price swing between a company that has already successfully defended its intellectual property in the past compared to one that has just been challenged by a competitor.
Employees – EBITDA multiples will anticipate that the staff required to generate earnings will be consistent between the Seller and the Buyer. That is a leap of faith that the Buyer typically likes to nail down before firming up a price. There are also metrics within industries that assign values to supervisors, dispatchers, maintenance staff, drivers, and sales people. We have frequently seen buyers or sellers get hurt when key people head for the exits just before a company sale or just after.