Three most basic fact-based ways to evaluate a business are: 1) asset valuation; 2) historical earnings valuation; and 3) future maintainable earnings valuation.
Investors do not use only these methods to arrive at what they are willing to pay for a company. They often use combination methods. Statements of earnings before interest, taxes, depreciation and amortization are used to evaluate an acquisition target’s potential contribution to profit and overhead.
VALUATION METHODS VARY
There are countless variations of financial measurements used. One example of a contribution formula often used is as follows:
Operating Revenue – Operating
Expenses + Other Revenue + Add backs – CAPEX = Contribution.
CAPEX refers to funds used by the buyer to upgrade or add assets such as buildings, equipment or vehicles to maintain or increase the capacity of newly acquired operations.
When best estimates of non-financial, intangible factors are linked together with the empirical data available, it’s decision time. The buyer either makes an offer or moves on to other opportunities
Once the decision to buy another vending company has been made, the 25-point “Buyers want to know” and “Seller’s due diligence check list” that were given in my February article offer good starting points.
These key elements are listed in bullet point form on pages 29 and 30 in the February issue, and can be accessed over the Internet at: www.amonline.com/print/Automatic-Merchandiser/Is-It-Tim-To-Sell-The_Business/1$20892. These check lists will give a buyer a good indication as to how well the prospective operation has been managed.
For Buyers, Diplomacy Always Pays in the End
Acquisition requires diplomacy, as many buyers have learned the hard way. Consider this case study. A selling operator is being threatened by the bank to cut off his line of credit and call his notes. One of his primary suppliers has him on COD, and his largest two accounts are sending out “cattle call” RFPs specifying technologically current equipment and guaranteed commissions.
The buyer, with the scent of blood in his nostrils, moves in for the kill and offers the seller a way out; a no cash down, low ball offer. The seller, who has little fight left in him, does have his pride. He agonizes for a while, then decides to go down with the ship. Better to lose everything than to be made a fool of, he tells himself.
In my opinion, the buyer has made a serious strategic error. All he has accomplished is to fracture the relationship with the seller who now vows never to sell to this buyer, even if he was the last company on earth.
A much better approach is to treat the seller with all of the respect and affection that you show your best client. Think of the seller as a highly valued potential customer, not a piece of meat. I will skip all the old rhetoric about “win-win.” However, I do advise that from a pure business strategy standpoint, this approach will always work better for the buyer in the end.
Key Benefit of Larger Company: Dedicated Sales
One of the advantages that larger vending and foodservice companies have is a full-time sales person. To get someone with good potential will require a base salary of $50,000 to $70,000, plus fringe benefits, liberal commission draw and a company car. Then they have to be adequately trained; skip this step and you will live to regret it. Industry specific sales training is expensive, and if you’re thinking of doing it yourself, chalk up another blunder.
There exists only a limited number of consistently high performing, professional sales people in the vending industry. They are justifiably the most highly treasured of all employees. If you’re planning to lure one of these prized people from another company, be prepared for an employment contract with at least six figure earnings guarantees and heavy on perks.
Tom Britten, NAMA Knowledge Source Partner, is an analyst, intermediary and professional consultant with more than 30 years of industry experience. He functions as a full service resource available to all vending, OCS and foodservice companies, large and small. Contact Britten Management Services LLC for a free and no obligation consultation at 813-469-5437 or via email at: firstname.lastname@example.org.