EMERGING TRENDS IN THE VALUATION OF MAIN STREET BUSINESSES

Transcription

1 Maryland Association of CPAs May 16, 2014 EMERGING TRENDS IN THE VALUATION OF MAIN STREET BUSINESSES Rob Schlegel, FASA, MCBA Principal Houlihan Valuation Advisors Indianapolis, Indiana 2 1

2 What is a Main Street Business? Smaller revenue, probably under $5 M Likely family owned Probably long term history of operations May have non operating assets and liabilities Draws customers from local area to sell products or provide services Usually walk in, consumer based customers CPAs do tax work, maybe write up Vulnerable to changing economics and demographics Often poor quality financial records 3 Who is on Main Street? Hardware store Self storage facility Physician s office Family restaurant Local bank No tell Motel Travel agency Bowling alley Gas station/c Store Car wash Shoe store Dentist Grocery store Funeral home 4 2

3 Who is not on Main Street Businesses where location isn t important to the customer traffic Industrial manufacturers Service firms Wholesalers, distributors Complex, multi locational businesses 5 SBA Loans to Going Concerns Conflict with real estate appraisers, who have valued main street businesses for years SOP 50 Now BV accreditations; may expand Issue is going concern as a premise, but in reality, some customer patronage inures to physical location, not the equity which may own (or lease) the physical property asset Real estate appraisers are asked to do going concern valuations implying real estate value as an operating entity, with equipment improvements, and likely continuing customer patronage Example: Capitalizing lease rates or management fees of a very profitable gas station vs. one that is not as profitable Real Estate appraisers do not do equity valuations 6 3

4 Let s look at our 14 business types: 7 Emerging Trends Change in economic buying patterns is threatening many Main Street business: WalMart, Meier, Target, Kroger, Big Box Stores Internet ordering and delivery Demographic changes in customer population Value is in sustaining (or diminishing) cash flows, seen through risk and industry demand Buyers (family?) are local (some exceptions) 8 4

5 So, how do we value these? Know what is being conveyed equity? assets? Rely on tax filings or the secret set of books? Understand the local SWOT competition, customers Mechanical income models using CAPM or BUM can lead to spurious conclusions Look at the market similar businesses, talk to brokers, research the industry, know the locale Factor in risks of absence of the seller personal goodwill flight (or retention) of the customer base Use a combination of income and market models to conclude value 9 Value is a combination of likely future reward and perceived risk HIGH $ VALUE MORE VALUE LOW LESS HIGH RISK LOW 10 5

6 We use Standard Valuation Approaches Asset based Mark to market Hard to get independent goodwill/going concern premise Income based Which level of benefits? Discount rate or Cap rate? Includes all operating assets & liabilities Market based More localized income approach, usually discretionary earnings Guideline Public Companies ( but maybe for trend analysis) Transaction analysis Comparability? Dirty data Rules of Thumb Acquisitions/divestures/offers Internal transactions/buy sell agreements 11 Financial Metrics Benefit Streams ( equity or invested capital?) Revenue Gross margin EBITDA, EBIT, SDE (variations) Net Income Gross Cash Flow Net Cash Flow Measures ROI ROA ROE Metrics Income Approach generally measures future benefits with CAP or Discount rate Market Approach generally measures historical benefits with a CAP rate, assuming growth 12 6

7 13 Why Do We Use Databases? Ease Moderate cost Analytical tools provided Easy downloading of data But beware of simplistic use that misunderstands the underlying transactions Often best method to capture operating fixed assets (not real estate) and goodwill under going concern premise, adjusted for current assets, other assets, and all liabilities 14 7

8 Key M & A Databases Public Company Databases Done Deals Mid Market Comps Mergerstat Pratt s Public Stats is available through Bvmarketdata Others citing acquisitions by public companies Private Company Databases Institute of Business Appraisers BizComps Pratt s Stats Special Industry / Regional Databases MAIN STREET BUSINESSES 15 Database # Transactions Earliest Data Typical Value Range Typical Value Concentration IBA 32, s $1 M or less 88% under $500 K 46% under $100 K BizComps 14, $1M or less 61% under $500K 39% under $100K Pratts Stats 15, $100K to $1 B 47% under $1M (MVIC) 28% under $100K (MVIC) 16 8

9 IBA Database 32,000 + transactions Oldest database, transactions back to 1970 s Provides indications of overall market dynamics by type of business rather than extensive data on specific transactions. 7 data points; real property is not included 2 multiples of fixed assets and goodwill: Price/Revenue Price/SDE (note: EBIT + owner s comp) Available only to ADAM members; subscription 17 BizComps Widely available through several sources 14,000 + transactions Small main street businesses with revenues of less than $1 million 16 data points Inventory is shown, but not included in price Fixed assets is shown, but could be book value, owner s estimate, broker s estimate, or even new cost Real property is not included 2 multiples of fixed assets + goodwill: Price/Revenue Price/SDE (Note: EBITDA + owner s comp) 18 9

10 Pratt s Stats 15,000 + transactions Compiled from 1990 forward More than half of transactions are for business interests (MVIC) valued at more than $1 million Over 60 data points; real property is not included 10 valuation multiples 19 Common Transaction Troubles & Mistakes Comparability to subject Synergistic effects difficult to analyze Single point multiples of asset sales No financial depth; cannot see trends Flaws in data reporting Annualizing stub periods What property was exchanged? Establishing a cash equivalent exchange price What is included in an asset sale? A stock (equity) sale? 20 10

11 Analysis Procedures Identify transactions in the industry, size range, recent period, yield performance Obtain adequate data on the private transactions. This may entail calling the intermediary to obtain additional information about trends, or good/bad aspects of the sale Refining the initial selection based on additional information and quality of data. Remove duplicates and transactions with data problems Adjust if necessary Develop multiples for the assets being exchanged (typically asset deals) Revenue Seller s discretionary earnings (SDE) Invested Capital (Pratt s Stats) Analyze and select multiples Mean, median, percentiles within the ranges Yield rates are common basis for distinction Apply the multiples to LTM performance; conclude value of operating fixed assets and goodwill does your subject have normal or abnormal fixed assets? Add Current Assets, Other Assets, subtract Liabilities to get 100% equity presume normal methods of transition, including a non compete agreement and support after the sale (may be troublesome in divorce cases in certain states) 21 Main Street Family Restaurant SIC (Family Restaurant) Data from Revenue $100,000 to $600,000 (Subject $375,000) SDE/Revenue 15% and 30% (Subject 21.5%) Owns Current Assets, Real Estate (appraised) and owes Liabilities 22 11

12 BizComps Data SIC Date of Revenue SDE SDE/ Price Price/ Price/ Code Transaction Company (thousands) (thousands) Revenue (thousands) Revenue SDE /31/2012 Restr Family % /30/2012 Restr Family % /15/2012 Restr Family % /11/2012 Restr Family % /16/2012 Restr Family % /6/2012 Restr Family % /7/2012 Restr Family % /31/2011 Restr Family % /30/2011 Restr Family % /28/2011 Restr Family % /31/2011 Restr Family % /1/2013 Restr Family % /30/2013 Restr Family % /31/2012 Restr Family % /31/2013 Restr Family % /15/2013 Restr Family % /1/2013 Restr Family % /31/2012 Restr Family % Low % % % Mean (Average) % Median % % % High % Std. Deviation Coff Variation How to Apply the Market Data Multiple selected Company measures 375,000 80,600 Extrapolated value 151, ,663 Weights 1 2 Values 151, , ,325 Total all weighted values 443,299 Divide by Total weights 3 Value indication, Fixed assets and Intangibles 147,766 Add Current assets 46,000 Add Real estate assets (as appraised) 120,000 Add Other assets 1,000 Less Total liabilities (50,000) Value indication, Non marketable, Control $ 264,766 Value indication, Non marketable, Control (rounded) $ 265,000 Note: Spreadsheet rounding may affect footings 24 12

13 In Conclusion things to think about 25 Take Away Concepts Main Street businesses are small, common themed, family run operations that nearly all communities have Main Street businesses are under broad economic threats and consolidations within particular industries. Poorer quality of internal accounting, non operating assets, and other unique aspects of operations make pure income capitalization risky. Study the management of assets and liabilities over time Ensure understanding of competitive atmosphere and demographic shifts Market transactions may offer a blend of asset incomemarket evidence that support pure income based techniques. 13