Asset Heavy Company - How to value equipment (Party Rental Company)

October 04, 2021

by a searcher from Tulane University - A. B. Freeman School of Business in Austin, TX, USA

My partner and I are negotiating an acquisition for a Party Rental Company, which has a large amount of equipment. They do about $650K on average for the past three years in free cash flow but have spent over $1MM in each of the last three years in new equipment to modernize their service offerings, and have around $10 MM in inventory for their equipment total. We wanted to know if anyone has experience in valuing or purchasing a similar style company and looking for advice on structuring this type of transaction, the seller is open to an earnout and other creative ways for closing the deal.

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Reply by a professional
from The College of New Jersey in La Verne, CA 91750, USA

First, I'm a business appraiser, not a personal property appraiser. That being said, I deal with a lot of post-acquisition purchase price allocation work that involves equipment valuations, so have a good grasp of the general concepts.

^redacted‌ is correct, sellers often overstate the value of their tangible equipment, even post acquisition. You may want to obtain an appraisal given the significant value that the seller is attributing to those assets. An appraisal will consider issues of age, usability, obsolescence, etc. What may not be contemplated in a standalone equipment valuation will be the economic benefit that the equipment is able to provide to the business. Like Mark indicated in his post, if the value of the equipment on its own outweighs the value of the business overall via a valuation multiple or DCF/income capitalization, you likely have an issue of what we call "economic obsolescence." In these cases, the value of the equipment is limited by the income that the equipment is able to generate for the business.

Let me know if you are interested in discussing further or want to be connected with an equipment appraiser.

Reply by an intermediary
from City University of New York (CUNY) System in Tinton Falls, NJ, USA

I've sold a few of them. We are selling a business like this now (closing in 13 days). The big issue always comes down to annual CAPEX. In a party rental business, the different items have different useful lives. Forgetting about the large assets like trucks, but tents, linens, party supplies, they get used/damaged sometimes at an alarming and unpredictable rate, and no matter how successful you can be in a given year, your allowance for CAPEX and normal operating expenses for smaller items can eat away FCF. These types of businesses, IMHO, are difficult to grow or become financially rich with.

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