Calculating your Company’s Valuation

by Jan H. Raymond

The first question any seller asks themselves and their advisors is “what’s my company worth”? The simplest answer is that it is worth whatever a willing buyer will pay. We at Logisyn pride ourselves in our experience and ability in preparing a company for sale and sourcing the best buyer fit in order to maximize “what a willing buyer will pay”.

At Logisyn, we start the valuation process by internally analyzing what we believe the market valuation will be bearing in mind that it will be a range and not a single number. Our job is to get the seller the top of the range wherever possible.

There are numerous ways to value a company. Only after a thorough analysis of the financials and review of the nature of the operations is it possible to determine which valuation methodology best reflects the true value of the company.

THERE ARE MANY DIFFERENT MEANINGS TO THE TERM “VALUE” INCLUDING

• “Book Value” — which represents the value of the company as stated in their balance sheet.
• “Market Value” — which is generally restricted to publicly traded companies and represents the number of shares outstanding multiplied by the then current trading price for those shares

However, in our opinion, neither of these standards represents the actual value of the business either at the snapshot present time or the moving target future growth potential (which is a factor in determining the actual current value). For example, book value does not reflect any growth trends, margins, profitability, etc. Market value reflects only what investors are willing to pay on a single day based upon numerous factors many of which are unrelated to the fair market value of the company in a sale transaction.

So when discussing valuation, either as an investor, shareholder or as a potential buyer or seller, one needs to determine the “intrinsic value” of the company.

By intrinsic value, we refer to the actual value of the company today which necessarily must include its potential going forward. Thus, two companies that have identical balance sheets and market capitalization could have very different intrinsic valuations precisely because one of the companies could be much better positioned to have a significantly superior balance sheet and P&L in the mid to long term than the other company. Obviously, the challenge to the investor, buyer or seller is to accurately evaluate the intrinsic value so that they buy or invest at a price that will afford them a reasonable return on investment going forward or they sell at a price that fairly reflects the value of the company to the best strategic buyer.

There are numerous methodologies/formulas for determining the intrinsic value of a company. Which one most accurately reflects the actual intrinsic value for a specific company depends upon many factors about the company being valued including, but not limited to, the industry, the management team, barriers to entry, infrastructure buildout, strength of competitors, broader economic trends and even intangibles such as corporate culture.

The current standard methodology for determining valuation in the logistics industry is a multiple of EBIDTA (earnings before interest, depreciation, taxes and amortization). Most investors/buyers attempt to determine intrinsic value by adjusting the multiple to reflect the various valuation-affecting factors. Due to the capital-intensive nature of asset-based businesses, more investment is required to operate the business and therefore it is more difficult to attain the same return on investment as one could achieve (if wisely invested) in non-capital-intensive investments such as non-asset-based businesses. As such, the EBIDTA multiple range for transactions involving asset-based logistics companies is typically lower than that used for non-asset-based logistics companies.

During the significant economic downturn from the Covid-19 pandemic, logistics companies have suffered revenue declines typically in the range of fifteen to twenty percent (15% — 20%). For many companies, this is the difference between profitability and losing money. Typically, non-asset-based companies can react more swiftly to such economic fluctuations due to a higher variable cost: fixed cost ratio (i.e. their fixed costs being lower for lack of major hard assets).

This downturn has put financial pressure on many companies that may force them to either severely cut back their operations or even market their companies for sale. This also means that small and medium sized logistics companies may be hard pressed to fund potential acquisitions, thereby reducing the number of potential buyers at the same time as the number of potential sellers is rising. By comparison, many financial buyers have large amounts of untapped resources they need to invest on behalf of their clients. The “buyer’s market” that may result from this may produce a reduction in the EBIDTA multiple range for such transactions and/or a shifting of the cash/earnout ratio of completed transactions.

The multiple afforded to a logistics company typically falls within a range. In a buyer’s market, the range shifts down and in a seller’s market the range shifts up. Likewise in a buyer’s market, the cash/earnout ratio shifts down and in a seller’s market it shifts up.

The companies believed to have higher intrinsic value (based on the variable factors) are afforded the upper end of the multiple range and get a higher cash/earnout ratio whereas those with perceived negative variable factors are given multiples on the lower end of the range and lower cash/earnout ratios. However, while this is the current standard for buyer valuation methodology in the logistics industry, it is often an attempt to fit a square peg in a round hole as it starts with a valuation standard, EBIDTA, that may not fairly reflect the nature of the business and then tries to round the edges off the square peg by roughly adjusting the multiple range. Depending on the nature of the business, other valuation methodologies may more logically and accurately determine the intrinsic value of the business.

EXAMPLES OF OTHER VALUATION METHODOLOGIES INCLUDE:

• Economic Analysis Of Discounted Cash Flow
  This approach to valuation presumes that the intrinsic value of a company is equal to the present value of the cash flows which will be generated by the business in the future and would, therefore, be available for distribution to the shareholders.
• Market Analysis Of Comparable Companies
  This approach to valuation presumes that the intrinsic value of a company is equal to the market valuation of comparable publicly traded companies
• Market Analysis Of Comparable Sales Transactions
  This approach to valuation presumes that the intrinsic value of a company is equal to the sale price (or sale price formula) of comparable companies sold in the recent past. As EBIDTA multiples is the standard methodology for the logistics industry, the market analysis approach is really just the EBIDTA multiple approach by another name.
• Asset-Based Analysis Of The Balance Sheet
  This approach to valuation presumes that the intrinsic value of a company is equal to the market value of a company’s assets. This methodology is reasonable only where the company’s business is asset-intensive and its operating margins are low.
• Averaging Of Multiple Valuation Methodologies
  This approach to valuation presumes that no one valuation methodology will accurately reflect the intrinsic value of a business as each methodology has its pros and cons which can be counterbalanced by averaging the valuations produced by multiple valuation methodologies.

KEY PERFORMANCE INDICATORS

No matter what valuation methodology is utilized, there will be room for debate/negotiation as to where in the range of valuation the business being evaluated fits as well as what companies are “comparable” (where comps analysis is utilized in whole or in part).

The most common way to determine this is to review specific performance indicators for the business being evaluated and comparing them to industry averages and specific data for “comparable” companies.

Typical Performance Indicators Include:

• Revenue growth trends
• Operating Margins
• Earnings growth trends
• Ratio of earnings growth rate to revenue growth rate
• Return on Equity (ROE)
• Return on Investment (ROI)
• Operating free cash flow
• Debt/Equity ratio
• Current Ratio

As part of our valuation process, we at Logisyn review these KPI’s both in order to determine the likely range of valuation but also to develop “the story” about your company in order to negotiate the highest valuation possible from the ultimate buyer.

Contact our team today to find more about our valuation services and get a free consultation!

© Copyright 2020 Logisyn Advisors, Inc. All Rights Reserved. This article is not to be duplicated or edited without written permission, unless used specifically as a quotation with author attribution.