number of factors, such as revenues, earnings, cash flow, or book value. However, transactions occur at a broad range of valuation multiples, so proceed with caution when using a valuation multiple as anything more than an approximate indication of value.
As an example, data from DealStats, a leading private company transaction database, is highlighted in the accompanying chart. Note there is some correlation between median EBITDA margins and the respective median multiples, but remember that every transaction is specific to that company’s financial performance, operations, and management. There are outliers on both ends of the spectrum and assessing which transactions to include in a valuation analysis requires appropriate diligence.
EBITDA is a common measure of a company’s profitability. What was the range of EBITDA valuation multiples observed by DealStats over the past five years? The lowest valuation multiple was less than 1.0 times EBITDA, and the highest valuation multiple was nearly 25 times EBITDA. As the saying goes, results may vary! Although EBITDA margins fell in 2020 according to the DealStats data, the EBITDA valuation multiples were strong during the year, indicating that the negative impacts during the COVID-19 pandemic were viewed as temporary by buyers in the market.
3. Asset Method
Don’t forget the most fundamental way of looking at the company’s value — the net value of assets minus liabilities. When looking at value in this manner, be sure to consider the market value of transportation equipment, and the costs associated with selling equipment. This net total is called Adjusted Book Value. Owners desire to sell their companies for at least as much as this Adjusted Book Value, making this amount a potential floor value, or the lower end of your valuation range. The value premium paid for a company above the Adjusted Book Value is commonly referred to as Intangible Value or Goodwill.
We’re Here to Help
To learn more about the value of your transportation business and the factors that drive your profitability and growth, contact us or your KSM advisor.
Andy Manchir, Director with KSM ESOP Services Group and Valuation Services Group
Wil Denari, Senior with KSM Valuation Services Group
Value Drivers: How Does an Owner Grow Company Value?
Positive Cash Flow
Profits are good, but cash flow pays the bills. Efficient operations will convert net income (as shown on the profit & loss statement) to cash flow. Converting receivables to cash and efficiently managing the level of capital equipment are keys to positive cash flow.
Develop Tangible and Intangible Assets
While it is easy to focus on tangible assets such as cash, working capital, and equipment, the development of intangible assets cannot be overlooked. Any purchaser of the company will care about issues such as the quality, experience, and tenure of its drivers, long-standing customer relationships, and the know-how that comes from an experienced management team.
Manage Debt
The valuation multiples discussed in this article relate to the debt-free value of a business. Trucking companies often must use financing
to purchase equipment, and in this era of low interest rates, the cost of capital for this debt financing can be attractive. But beware of using too much debt to finance the company. A balance between debt and equity must be maintained for a healthy balance sheet.
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