How to account for recent purchases in valuation
May 30, 2022
by a searcher from Harvard University - Harvard Business School in Boston, MA, USA
If one is acquiring an asset heavy business based off a multiple of EBITDA how do both parties account for a situation in which the business recently purchased assets that have a lot of useful life left? For example let’s say you’re buying a business for 4x $500k EBITDA and the owner bought 10 new trucks for $500k 2 years ago. Trucks have 10 year useful life so there is ~$400k left on BS. I understand the expense of the purchase isn’t captured in this years EBITDA (aside from depreciation add back), but surely you’d value this business a bit differently than a business in which those 10 trucks were old and had 1-2 years of useful life left before needing to be replaced. How is this normally handled? Thanks for any input.
from Monash University in Perth WA, Australia
Are the assets additional capital? or are they replacements for existing items?
Potentially there is going to be some kind of adjustment for "EBITDA", given perhaps greater earnings capacity (additional new assets) or reduced maintenance costs (replacement of existing items).
Quite a bit of judgement will be needed to determine what that adjustment consists of. I think it also depends on which side of the fence you are sitting as to what you think that adjustment will be- buyer or seller!
from California State Polytechnic University in San Diego, CA, USA