How do you value an asset heavy company?

by an member from University of Washington

3 weeks ago

Hello all,

We're currently trying to make an offer to a company with some cash flow ($895k), but a significant amount of assets ($4.5M inventory). We doubt the seller will ignore these assets and agree to a simple competitive multiple on the cash flow. The seller has not provided an asking price, so we're firing a bit blind here.

How should we approach these types of situations?

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25 comments

searcher from Towson University

I love this question. OpEx is a moat, so owning good equipment that can provide a healthy return on assets should be valued as such. Figuring out how often that equipment is turning over revenue and on what kind of services lines and at what price is crucial. This business sounds like it generates a poor return on assets, so If you can unlock more, there's your improvements. But why is it so poor? If you can buy the business with the key processes people and sales channels and rent/partner/access the needed equipment in an alternative manner, maybe you can negotiate without the equipment and let the owner liquidate if they think they can sell it for more. Accounting-wise, figure out the lifecycle of the equipment, depretiation schedule, historic and projected maintence cost, replacement cost, and anything that may help you paint a picture for the true cost.

2 weeks ago | like reply | 0 likes

searcher from Cleveland State University

Many asset heavy businesses don't generate an adequate return on capital. Why does the business need that much in asset value to generate comparatively so little in earnings? Is that the FMV value of the assets today or the in service value? Is it depreciated at all?

2 weeks ago | like reply | 0 likes

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