Valuation on an asset heavy business

searcher profile

May 04, 2020

by a searcher from Harvard University - Harvard Business School in Fort Wayne, IN, USA

I'm looking at a business w/ $4-6M in assets (owner says $6, I think an independent appraisal will say ~$4), $5.8M in rev, and $1.5M in annual EBITDA (broker had him thinking adjusted EBITDA was close to $2). Diversified, decent reputation, good employees, and slowly growing even through Covid. Specialty manufacturing with great margins for the industry but zero IP or truly unique products.

I offered $6-10M (earn-out based on growth) and the broker talked the buyer out of it. Official response was: I have $6M in assets and would never sell for only that. He's had two other offers over the past three years. but both of the other buyers walked away. I may need to as well...

How would you think about pricing it?

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commentor profile
Reply by a lender
from University of Missouri in St. Louis, MO, USA
The valuation given to the equipment/EBITDA multiple would probably be dependent on the capex annually. $6M in equipment sounds great unless it costs seven figures to maintain/upgrade/replace every year. Upside is financing for this using a 504 loan is shockingly cheap right now if you go that route.
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Reply by a searcher
in Los Angeles, CA, USA
If you are buying the business entity your purchase price is a multiple of the earnings as it's a private company. You don't pay for the assets, that's included in the purchase multiple as the assets are what are used to generate the revenue.

If you are doing a asset purchase, your offer is based on their resell/liquidation value, that's what banks look at when you get asset based financing.

When you are looking to purchase the company, make sure you don't get stuck with the maintenance bill. They have to provide all assets clean and debts covered to the buyer ( YOU ) that's included in your LOI.

Don't make your offer on EBITDA as it has plenty of drawbacks, they inflate the numbers and it hides too much. Your offer is based on FCF, if you want to learn more about this check Warren Buffet and Charlie Mungers response on EBITDA.

They evaluate on Free Cash-flow To Invested Capital.

As for purchase multiple, as we are in COVID and it's a private company. You are looking at a 1.5x-4.5x FCF multiple.

If they don't budge say this: Are the financials audited by a big4? No? Then why are you throwing numbers around if you don't even know the value.

Is this a publicly listed company? No? Then there is no liquidity, meaning it sells for a lower multiple.

And how did you come up with this value? And reverse engineer their appraisal method. And don't use EBITDA. Go to the bottom like, what's the FCF, and do not buy businesses with profit margins under 20% you will get in trouble if you have revenue drops.

Reach out to me if you have any other questions.
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