Asset Heavy Acquisitions

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January 31, 2025

by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA

Anyone have experience with asset heavy acquisitions? Wondering how FMV of something like heavy machinery / equipment can impact valuation. Seeing a business that is maybe valued around $2m based on cash flow with equipment probably worth at least that much and wondering how this might impact the valuation.

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
^redacted‌ thank you for the tag. The issue you have with equipment is lenders are going to order an equipment appraisal. That equipment appraisal is going to provide several values including a Market Value, an Orderly Liquidation Value, and a Forced Liquidation value. Lenders are typically going to lend off of the Orderly Liquidation Value or Forced Liquidation Value, which will be a discount from market value. Lenders will then use an advance against that value, typically between 75% to 90%. So at the end of the day you are going to be borrowing well less than the market value of the equipment.

The other thing to keep is that most lenders are going to ultimately make their lending decision based on what the cash flow will support. Often in these equipment heavy businesses if you adjust for future CAPEX needs, there may not be enough cash flow to even support the equipment needs. That can make it hard to pay a value for both the equipment and business when those situations occur. If you would like to discuss further or have someone look at the cash flow, we do that for free. You can reach me here or directly at redacted
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Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA
Likely easier to finance, which is nice given the deal will be fully collateralized. From an investment standpoint, unless you can utilize the equipment substantially better than the current owner, they don't really make sense. All your cash is going to go towards replacing and growing your fleet of equipment.

When you subtract maintenance/replacement CAPEX from EBITDA, sometimes these companies really aren't worth anything to you. For example if this is a 5X deal, you are talking about 400k in EBITDA. If your equipment replacement cycle is every 7 years, your maintenance CAPEX is 285k, which gives you cashflow of only 115k. I generally don't want to spend more than 5X on cashflow so I would max my offer out at only $575k, which is ~1/4 of the equipment value. Pretty clear that offer wouldn't be accepted and even offering a FMV price for the equipment is overpaying from my persepective.
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