What is it worth?
By Jason Fraler, managing principal, Anchor Peabody, LLC
There is no doubt you can make a lot of money buying a business or selling the one you own. The flip side is also true: You can also lose a lot of money or leave a lot on the table. These thoughts also beg the question: How do you actually value a business?
There are many ways to perform a business valuation, some of which can be quite complicated (i.e. DCF, CAPM, WACC, etc.). Fear not. The most commonly used approach in our industry is an asset-based approach or a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) — whichever is greater. Since most of our earnings are depressed due to the current environment, an asset-based valuation is the more relevant approach at the moment, because most companies don’t have a lot of earnings to speak of.
Valuing a business is also not always about pure math. To illustrate the valuation methods and to show how two people can view the same business differently, Home Channel News and Parker Lumber have agreed to let Anchor Peabody review Parker’s existing Palm Springs, Calif., operation as a potential seller using actual historic and real-time financial data. Anchor Peabody acts as the adviser to the business and sheds light on some hidden value, which may be embedded in the business. Scott Parker, owner of Parker Lumber, also gives his views on how he would value the operation as a potential strategic acquirer, as if he were buying the business.
Click here for Anchor Peabody’s view.
Click here for Parker Lumber’s view.
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The Strategic Acquirer’s View
Scott Parker, Owner, Parker Lumber
We spend a lot of time reviewing deals like this all over the country, as we are always in the market to acquire small, one-unit operations, all the way up to a medium-sized chain of stores. If we are lucky enough to find a business like this, I can tell you first and foremost, we care about the quality of the people inside the organization. We’re not afraid to pay for a group of stellar performers, and in this case we feel we have that.
Next, we want to further understand the value we are receiving for the price: How is the location — are we buying an old, outdated operation that needs a lot of work? Or is this business turnkey? What is the competitive environment like, and will this market provide significant upside in the future? Since the location here is above average, there is moderate competition, and we see significant upside in Southern California’s future — we have sufficient to favorable outlooks on all of these points. Albeit not perfect, these dynamics won’t bring down our valuation, but aside from the latter, they also aren’t reasons for us to go completely crazy on the valuation, either.
No deal is complete without addressing the numbers, of course. Initially, we want to see whether or not the business is profitable. This particular business is cash-flow positive, which is good because if a business isn’t cash-flowing, our valuation is significantly different because of the risk involved, and depending on how bad the losses are, we might not even look at it.
If we were to come across a deal like this, we are looking at a net book value deal, plus a slight bit of good will in the form of a non-compete for the selling owner. We feel this valuation is market, it’s fair, and we feel Parker can make a sufficient return on investment at a reasonable level of risk.
We will purchase cash, inventory and fixed assets. We will also come to an agreement on assuming the current liabilities, less debt. We typically don’t buy accounts receivable but will help the selling owner collect for a certain period of time.
We will also need to discuss the real estate. We approach real estate on a case-by-case basis, as it is the hardest thing to put a price on in today’s market. In this case, since the owner owns the property in a separate company and doesn’t want to sell today, we would look to sign a market-rate lease with them and negotiate a purchase option at an agreed-upon price.
Ultimately, we feel we are the best group out there to sell to. We feel so strongly about this, we even encourage sellers to speak with those who have sold to us in the past. We have a track record of treating people in a fair and equitable manner, and will look out for your employees once they become part of the Parker Lumber family. That’s worth a lot among the many horror stories out there.
Parker Lumber is an 18-unit chain of home centers headquartered in Beaumont, Texas. The Do it Best dealer has locations in the southeastern region of Texas and in Southern California.
The Adviser’s View
Jason Fraler, Founder, Anchor Peabody
We find ourselves giving out the same advice over and over again these days: Don’t sell today unless you have to. This advice applies here.
During the boom times, this business probably traded at 3.5 times to 4.5 times adjusted EBITDA, or approximately $3.5 million to $4.5 million. Even if we never see those lofty EBITDA multiples in the future, if the business can improve and achieve around $2 million in EBITDA in several years, it will be worth almost $7 million at the low range (3.5 times)! Clearly, if the client can stick it out, we are going to recommend doing so. This always isn’t the case, of course.
The current market valuation for a profitable business this size is net book value plus some amount of good will. This business has a lot of things going for it: Management team, a diversified customer base (low customer concentrations), high-margin products for sale, a great position in a market with a lot of upside, and they’re right there with the business metrics.
What is working against this business is its historic performance. Even with the management adjustments, adding back in some one-time events that affected performance from 2004 to 2008, we feel this business has underperformed from a profitability standpoint. We like to see businesses that operate in this segment around 8.0%+ adjusted EBITDA, as we can make the case to potential buyers they are paying for a top performer.
We would push for a net book value deal plus another $1 million in good will paid via earn-out (additional cash paid over time, based on performance). Our argument would be (i) the client doesn’t have to sell, (ii) you can only sell your business once, and our client is selling at the bottom of the market, (iii) we ran a discounted cash flow (DCF) analysis on the business, and expect a buyer to make 5.0 times their money on the business at our valuation. For a variety of reasons — which we would share with the potential buyer — we feel a strategic buyer can afford to increase the purchase price to entice the current owner to sell and still make a sufficient return on investment.
We would also try and structure the deal a little differently. If the accounts receivable is not purchased, it adds risk to the client, as customers are less likely to pay you because they don’t need you anymore. Regarding the real estate, the hardest thing to come to an agreement on today is the value of real estate. We suggest including some language in the purchase option, which values the real estate via a third-party appraisal at time of purchase.
Without a doubt, the seller should run a competitive process to maximize this valuation. We agree with Scott: Parker Lumber may be one of the best groups out there to sell to. However, this does not mean they are the only game in town — especially in Southern California.
Anchor Peabody is a private equity investment and M&A/debt advisory firm that focuses exclusively on the building products and construction industry.