Automatic Merchandiser has carried several articles over the years on how an operator determines a selling price for the business. The factors that determine the value of an OCS business, however, are different from that of a vending operation.
Automatic Merchandiser recently interviewed Dawn Sanders, director of acquisitions for Filterfresh Coffee Service, Inc., a company that has made numerous acquisitions in recent years, on considerations in determining an OCS company's sale price. Filterfresh is the U.S. subsidiary of Van Houtte, Inc., a fully integrated coffee roaster and equipment manufacturer.
Sanders joined Filterfresh in January 2005 as director of acquisitions after serving as vice president at Branch Banking and Trust Co., where she was instrumental in underwriting, structuring and negotiating deals. Previously, she was vice president of mergers and acquisitions at Five Star Food Service, Inc., based in Dalton, Ga., senior vice president at Sun Trust Bank, and president of Whitfield County at Bank of America.
Following are her answers to questions in an exclusive Automatic Merchandiser interview.
AM: How does a buyer value an OCS business?
Sanders: Although different buyers may value companies differently, most buyers value companies based on several factors, including a multiple of the stabilized recurring earning's stream.
In other words, the most current EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is calculated, then adjusted for nonrecurring and extraordinary items.
Usually, this EBITDA is adjusted for any operational changes the buyer expects to make, especially if there is a planned consolidation of operations such as changes in rents, personnel and benefits. These adjustments can both add and subtract from the original EBITDA number.
Other important factors which also determine value are size, quality of assets and accounts, stability (of accounts and personnel) and market size.
AM: Why would the buyer's adjustments lower the EBITDA?
Sanders: Keep in mind the buyer is projecting what the newly acquired company will generate for him/her on a going-forward basis, so adjustments of increased personnel benefits including health insurance or increased equipment and vehicle maintenance may be factors.
Another factor often overlooked is the projected capital needed in the next few years. Many times, companies delay replacing depleted equipment when they are looking to sell. After the sale, this equipment will have to be replaced or maintenance costs will rise, which impacts the calculated earnings stream, so most buyers will adjust the EBITDA to account for capital required to bring this equipment up to par.
AM: What do buyers look for?
Sanders: The simple answer is buyers are purchasing the earnings stream, so they look for a fair return on their investment. Beyond that, they look for stability among the accounts, route density, quality of equipment, including vehicles, strength of management and quality of personnel.
AM: How important is growth?
Sanders: Growth can show a healthy, vibrant company, so a buyer may place a higher value on a company experiencing increased sales. However, sometimes growth in a marginally profitable business can decrease value when you consider the cost of equipment. Again, keep in mind, value is established from the recurring earnings stream. It is important to remember here that although a growing company may bring higher value, buyers won't pay for sales that aren't already booked or equipment already installed.
AM: What's included in the sale of the business?
Sanders: Generally, all the assets necessary to generate the earnings, including the equipment, vehicles, accounts receivable, inventory and customer deposits. The assets are purchased free and clear from any debts, and it would be the responsibility of the seller to pay off the liabilities, including the accounts payable and any bank debts.
AM: How can a seller create more value?