How much credit to give to equipment?
July 20, 2024
by a searcher in Toronto, ON, Canada
I've been looking at a number of deals that include $2-3M of equipment. How do you all typically value equipment when looking at SDE multiples? This is assuming the equipment is all in good working shape and appraises in line with the stated value.
from University of Michigan in Bay City, MI, USA
Obviously, the reality is a bit more nuanced than that. As was suggested, knowing the liquidation value of the equipment sets a floor for the value. It also may (or, more likely, may not) help with securing debt financing.
Even so, that's a separate way of evaluating an entity's value, not something that one should add to a valuation based on the NPV of the cash flows.
As a bonus piece of feedback, if a company has a large amount of equipment, then using EBITDA as the profit metric is going to be misleading. If it takes $3MM of equipment to run a business, you're going to have to maintain and replace that equipment on an ongoing basis, often on a level that's pretty close to the depreciation schedule. You need to take this into account, because it's a real expense.
in Kelowna, BC, Canada
It works both positively and negatively. On the positive side, having more tangible assets in the business can help in securing favorable financing and potentially mitigate downside risk to some extent. Conversely, it is a depreciating asset, and equipment-heavy companies often are valued based on multiple of EBIT rather than EBITDA since depreciation is real and equipment will need periodic replacement.
I am looking at a manufacturing deal myself and considered this as a positive in my subjective internal evaluation, as the equipment in the industry I am looking at has a relatively long economic life. However, I did not give any weight to it in determining multiple.