Company valuation question

[cashflyer]

My business partner is looking at a company that is for sale.
Asking price is $1.8m

Net profit last 5 years are:
$125k, $175k, $169k, $189k, $153k

One owner/FT employee, one hired FT, one hired PT.
Hard assets (equipment) value is ~ $620k
Facility is leased, long term, assumable.
Business is all word-of-mouth, website, walk-in. No contracts.

In my thinking, the company is overpriced.
A) If you liquidated the assets, you still have $1.2m of debt. So the cost is not fully collateralized, and it will be hard to get a loan.
B) If you do get a 15 year business loan for the $1.8m, your loan payments would equal or exceed your profit - meaning you would be n the red all the time. IF you can inject cash for 15 years, then one day you hopefully start making a profit.

Am I overlooking something / anything?
Or am I correct to advise him to cut this fish loose?

[asphaltgambler]

My first 3 questions are: What debts are there? What competitors are there? What is the business model (profits / loss / costs) for the same or similar businesses in that area?

[Yorkie]

The type of business really influences the selling price. The M&A stuff I have done has typically been for companies with brand equity and hard assets. Multiples of EBIT is typically what we look at and if the company is a service company then you have to ask what is he actually buying? Is he buying contracts with revenue streams? Is the business where each transaction has to be acquired like construction? If the employees leave is he screwed?

From the top of my head some of the deals I have been involved with have had multiples of 8-10 for companies with brand recognition and assets to 3-5 in the service sector with good will and long term supply contracts. The multiple your friend is being asked to pay seems high but the only really good way to tell is from similar recent deals of like companies.

[cashflyer]

Unfortunately, we signed an NDA so I don't think I can/should post up their web link or company name. That would make this a LOT easier.

Air charter operation.
Established in 1999.
They own one King Air A90 and two smaller piston twins.
Located on an international airport in an area with high volume transient/vacationer traffic.
Allegedly debt free, other than the facility lease (which isn't debt, per se)

No contracts. Walk in business only, either by referral, from advertising, or etc.

I have reviewed a sales brochure that outlines the company, and have received some emails from the company manager and sales broker. I have a very basic P&L sheet for the last 5 years.

We are at the point now that to learn more and start due diligence, I need to fly to their location and sit down with the owners. I'm just worried that it's a waste of my time.

My business partner does not have $1.8 liquid to throw at this, but does have some strong ties with financial investors. If it's a good fit, he could move on the purchase. Of course all investors would want to make a profit, so .... there has to be profit.

[avi8torny]

I would pass. A90 is old. (could it be an E90?) With the current and ongoing changes in NextGen, the upgrades needed to satisfy 135 requirements will cause you to put that old girl to bed.
13 X earnings for a valuation is nuts in in the aviation business. Chances are they own the hangar and lease to the business. The net is most likely half the amount supplied.......

[cashflyer]

Yeah... 1966 model A90 with PT6A-20 engines.
At first I thought they meant C90A, but in 1966 it has to be an A90


What's going on with NextGen - other than the ADS-B requirement?

[Jrboulder]

Sounds like it's the 135 certificate for sale. Considering the hassle and uncertainty of starting one from scratch a lot of companies would rather just buy that. Even then it's no 121 so maybe a couple hundred thousand max for that.

[avi8torny]

Originally Posted by cashflyer

Yeah... 1966 model A90 with PT6A-20 engines.
At first I thought they meant C90A, but in 1966 it has to be an A90

What's going on with NextGen - other than the ADS-B requirement?

Was thinking if the airplane didn't have WAAS or Mode S, you're going to need it down the road. Don't want to see you hang yourself financially with such an old airplane. I know used B200's are expensive, but people don't want to fly in these old 90's anymore.

I can't believe how big GA airplanes are getting. Used to be the Hawkers and Citations where the common airplane on the ramp. Now a Challenger 300 is small and the G650 and Global's are more common.

[t6dpilot]

OMG how do you make a million dollars in the aviation industry? By starting with 2. Sorry couldn't resist' but been there and it is true. Those assets are old and inefficient. Common valuation is 6 times EBITDA with a normal business, but that varies widely with business type. My guess is a charter operation with out dated assets has a very low valuation. Especially with no long term contracts and mostly walk in business. I would not pay him half the asking price. Sorry...

[M.D. Holloway]

put the plane in the yard and open the outside for paintball, clear out the hanger and lay down some paint and rent it out to volleyball teams...

[porsche4life]

I know nothing about aviation, but that valuation is nuts. With no contracts, you are really buying a few assets and name. Who's to say that all that referral business isn't because everyone likes the owner, and once he's gone, it all goes too.

[aschen]

I think the valuation is precisely 620k

[Seahawk]

There are a number of ways to assign valuation to a company.

https://www.bdc.ca/en/articles-tools/start-buy-business/buy-business/pages/how-value-company.aspx

I have done this three times in the last seven years. Unless I am missing something, $1.8M is way outside the strike zone.

[Mark Henry]

I know nothing about aviation, but I'd have to say my accountant would laugh at those numbers.

[Seahawk]

Originally Posted by Mark Henry

I know nothing about aviation, but I'd have to say my accountant would laugh at those numbers.

So will the potential investors.

Cash I am in the midst of this right now - Investors want specific numbers, at least three years of future earning, EBITA, company structure, capitalization structure, growth plans, etc.

[jwasbury]

I'm not experienced with aviation businesses, but as CFO of a global financial services firm I have been involved in a lot of M&A situations (both on the buy and sell side). Everyone who has posted prior regarding EBITDA or revenue multiples is on point. Typically you'll try to find comparable companies that have sold (or are publicly traded) so you can use the implied multiples from those businesses applied to the target. You may be hard pressed to find the perfect comparable though. Aside from the comparable company valuation approach, its also customary to to a discounted cash flow valuation approach.

Conceptually (beancounter talking now), anything you pay above tangible net asset value (TNAV) represents intangible asset value, such as goodwill, intellectual property (trademarks, tradenames or software in the case of IT businesses), customer lists, non-compete etc. In your example, this is the $1.2m premium over the liquidation value of hard assets. Doesn't sound like their is much if any IP or customer relationship value, so that's all goodwill.

[berettafan]

Originally Posted by cashflyer

My business partner is looking at a company that is for sale.
Asking price is $1.8m

Net profit last 5 years are:
$125k, $175k, $169k, $189k, $153k

One owner/FT employee, one hired FT, one hired PT.
Hard assets (equipment) value is ~ $620k
Facility is leased, long term, assumable.
Business is all word-of-mouth, website, walk-in. No contracts.

In my thinking, the company is overpriced.
A) If you liquidated the assets, you still have $1.2m of debt. So the cost is not fully collateralized, and it will be hard to get a loan.
B) If you do get a 15 year business loan for the $1.8m, your loan payments would equal or exceed your profit - meaning you would be n the red all the time. IF you can inject cash for 15 years, then one day you hopefully start making a profit.

Am I overlooking something / anything?
Or am I correct to advise him to cut this fish loose?

Email me last 3 yrs tax returns and I'll give you 30 min of free education on this (I in turn feel I've contributed to the bird community and earn the right to continue posting) I do a fair amount of small bsns valuations in my work.

[wdfifteen]

On the surface it doesn't sound like there is much value here over and above the hard assets. Is he in a location where he can operate exclusively or something?
What is to keep someone from setting up shop next door with newer equipment, flashier signs, and an agent to bring in contracts? In fact, what would it cost to setting up shop next door with newer equipment, flashier signs, and an agent to bring in contracts. I'm guessing less than the asking price.

[cashflyer]

Thanks for all of this input.
I think I will go ahead and tell my partner to bail out now. No need to waste my time or the sellers any further.

Sounds like it's the 135 certificate for sale.

This is a little bit more than *just* the certificate.
I have seen several certificates for sale around $100k. For somebody not wanting to wait for the FAA to review and approve a new application package, that's not a bad way to get into operations right away.

If this were a properly priced company, it would be a way to not only have a certificate, but to also have a turn-key operation. Planes are in place. Hangar is in place, and in a desirable location. There is some value to that, however not as much as they are asking (IMO)

Was thinking if the airplane didn't have WAAS or Mode S, you're going to need it down the road.

It does have a WAAS GPS/NAV/COM, so I would have to add a newer transponder - such as the GTX-345

With no contracts, you are really buying a few assets and name.

In your example, this is the $1.2m premium over the liquidation value of hard assets. Doesn't sound like their is much if any IP or customer relationship value, so that's all goodwill.

The uncertainty principle is what gets me. No guarantee (contracts) for continued profit. Everything is purely on faith that the economy strengthens, tourism does not flounder, and the company does not suffer any setbacks. And if you're using 100% of your net to service a loan, then were does the money come from when you have to replace a PT6 engine, or when a new route opens up and you need to buy another plane?

[cashflyer]

Originally Posted by berettafan

Email me last 3 yrs tax returns and I'll give you 30 min of free education on this (I in turn feel I've contributed to the bird community and earn the right to continue posting) I do a fair amount of small bsns valuations in my work.

I don't want to waste your time either!
First off, I don't have their tax returns yet. Just a very rudimentary P&L sheet for the last 5.
Second off, I think everyone here has pretty compelling arguments that this is way overpriced.

Thanks for the offer!