Mike Huber,
American MTS
At some point, all businesses change over to the next phase of ownership. Whether that means passing the baton to the next generation, selling the company outright or simply closing the doors, there will be a change. The latest Management Pulse survey examines what EASA service center owners are thinking and planning for this transition.
Almost 23% of the survey’s 128 respondents indicated that they either have the company currently for sale or will be selling in the next five years. The good news for those planning to sell is that there seems to be strong interest in our industry; 58% of those responding either get contacted regularly or have had at least one or two inquiries gauging their interest in selling. Of those who have no plans to sell, 62% are planning a generational succession.
My observation is that there seems to be a lack of understanding of how EASA companies are typically valued. Just over 27% of respondents felt that the value is based on a multiplier of revenues plus inventory. Although revenues are important, a company with $5 million in revenue that’s making $100,000/year in earnings will generally be valued less than a company with $4 million in revenue that’s making $400,000 in earnings. And 30% of respondents indicated they really have no idea how a value is assigned.
Although there is not just one correct valuation method, my experience is that the most common practice is looking at a multiplier of earnings plus inventory. The equipment is generally assumed to be what’s required to generate the revenues. Age and condition of the equipment will impact the multiplier of earnings somewhat. About the only time equipment value is a significant factor is for companies that are either closed down or have no earnings.
My first exposure to this subject of valuation was a presentation a few years back at an EASA conference. Many in the room including myself were surprised at how little value our years of efforts had produced. The basic formula presented there was:
Normalized EBITDA x 4 + Assets – Liabilities = Value
Breaking this down further, we have normalized earnings before interest, taxes, depreciation and amortization (EBITDA). This is the profit before interest, income taxes, depreciation and amortization are taken out and then corrected to a “normal” set of conditions. In other words, if you are barely scraping by and paying yourself below market salary, not paying yourself rent, etc., the EBITDA is adjusted down accordingly. If the principals of the business are being paid above market wages for the position held, you would adjust your EBITDA up.
Further, any one time extraordinary expenses such as a new piece of equipment you expensed, one time cost for an acquisition, or special owners benefits might be backed out, you would adjust your EBITDA up.
All of the assets and liabilities may or may not be included in the sale. If it’s a family transition, this will likely be a stock sale and include everything. If you are selling to an outside entity, they may be interested in just some of the core assets (equipment, employees, customers) and none of the liabilities.
The 4x multiplier is just an average. Companies with revenues above $10,000,000 and EBITDA above $1,000,000 may sell for 5x or 6x. Upward or downward trends in either or both of these areas, geographic location, and willingness of owners to finance all or part of the deal will also impact this multiplier.
ne area that some forget to consider when selling is that depending on who the purchaser is, you may have to continue to run your company for 2-3 years for the new owners. Around 36% of service owners are looking to stop working in the next 1-5 years. If you are going through a generational transition or selling to someone within the industry, it may be realistic to stop working soon after the sale. However, if you sell outside the industry you may be expected to stay on for a while and some of your money could be contingent on the company results.
learly many sales do stay within our industry. Slightly more than 47% of respondents indicated they have bought another EASA service center and another 6% tried, but could not agree on a price.
This information is just a guide to help you better understand what to expect. For all the fancy formulas and valuation strategies, at the end of the day your business, like anything else you wish to sell, is worth what someone else is willing to pay for it.
On behalf of the EASA Management Services Committee, thank you to all who participated in this survey. I believe we all benefit from staying in tune with the pulse of our industry.
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