Selling Equipment Rental Companies
The equipment rental industry in South Florida specializes in party equipment rental, construction/tool equipment rental, and medical equipment rental. The profitability of equipment rental companies are cyclical in the sense that demand goes up during boom times and falls during recessionary periods. Also, financing costs – critical to the equipment rental industry – are greatly affected by interest rates. Higher interest rates mean a higher cost of capital for equipment rental companies whereas lower interest rates allow equipment rental companies to purchase or finance their equipment more cheaply. Selling equipment rental companies involves maximizing the value of the physical rentable assets, organizing financial records to reflect the adjusted owner benefit, and hiring a business broker experienced in confidentially selling and presenting the business to qualified industry-specific buyers.
Valuing Equipment Rental Companies
One approach to selling an equipment rental company is simply adding up the current value of its tangible assets (including any accounts receivable) and liquidating them through an auction or by some other means to a private buyer. This is called the ‘asset-based’ methodology and sure seems to save the business owner a lot of time and hassle. The problem is that it often results in the business owner not realizing full value for their business. If the business is generating a healthy profit, then an ‘owner benefit’ based approach is more appropriate. The ‘owner benefit’ approach values an equipment rental company as a multiple of its adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) assuming all physical assets are included in the sale on a debt-free basis.
Assume Debt-Free Transaction
Since the cost of debt is critical for many equipment rental companies in order to finance the purchase of new equipment, it is imperative to treat the debt properly when valuing the business based on an ‘owner benefit’ based approach. The EBITDA does not include interest on debt or amortization (repayment) of debt. Nor does it include non-cash depreciation charges taken against long term capital assets (such as equipment). As such, one must then assume that the price of the business will similarly exclude any debt and include all physical assets to the buyer. Otherwise, the valuation methodology is unfair in not including the costs of purchasing or financing its assets when determining the earnings being used to value the business.
Quality of Equipment Critical for Sale of Equipment Rental Companies
The physical assets of equipment rental companies are typically considered long term tangible assets. This generally means that the equipment is used (actually re-used) for more than one year. Note that ‘inventory’ refers to to goods on hand that the company intends to sell in the near future (or less than one year). If an equipment rental company has a large amount of dated assets, then that may be a red flag for some buyers. It could indicate that the company is having trouble with the quality of its assets due to wear and tear, storage difficulties, or misuse by its rental customers. On the other hand, the longer that rentable physical assets may be used and rented out, then the higher the return on investment for those assets.
Factors Affecting Valuation of Equipment Rental Companies
Besides the quality of its physical rentable assets, buyers of equipment rental companies look to many factors when valuing its non-physical intangible assets. This includes the rental equipment company’s brand, customer goodwill, leasehold rights, employee relationships, and overall business model. The less labor-intensive and more efficient the business model, then the higher its intangible value. Moreover, the equipment rental company’s growth rate is a major factor in its valuation. A strong and consistent growth rate over many years signifies the company’s strong competitive positioning in the local equipment rental marketplace.
Example of Valuing Construction Equipment Rental Business
- Let us suppose that Don is confidentially selling ‘Don’s Rentals’ which rents out construction equipment and tools to both residential and commercial customers in Palm Beach County, Florida.
- How should this company be valued?
- First, a professional business broker should examine the company’s financials including its most recent tax return or profit and loss report.
- The EBITDA of the business should be identified, which is the pre-tax income of the business excluding depreciation, amortization, and interest payments.
- Then any other additional sources of ‘owner benefit’ should be added back such as personal expenses of the owner that flowed through the financial statement, unrecorded (but provable) sales, and the owner’s salary.
- Don’s adjusted annual owner benefit is thus found to be $400K.
- Also, the business broker observes that Don’s equipment has a current value of $800K with $300K of debt.
- The equipment is in excellent shape and has a rentable life on average of about five years.
- Don’s business is very efficient and requires minimal use of labor, is centrally located with high visibility, and has been growing steadily for 20 years in the same location.
- The business broker therefore prices the business at four times its adjusted owner benefit, resulting in a $1.6M valuation ($400K x 4).
- Don understands that he will have to pay off the $300K of debt at closing, and will include all of the physical assets in the sale.
- After paying off the debt, Don will realize a much higher price at closing ($1.3M or $1.6M – $300K) than by liquidating the physical assets for approximately $500K after paying off the debt.
- Note that Don’s Return on Assets (ROA) – or Net Profits / Total Assets – is 50% ($400K/$800K).
- Savvy buyers of equipment rental companies often use ROA as a good metric when evaluating their efficiency and profitability.
Owners of profitable equipment rental companies should generally value their business based on the ‘owner benefit’ based approach. It will often result in a higher value as opposed to liquidating the business for its physical assets (after paying off any debt). If the rental equipment company has long term rentable physical assets with a strong niche in the local marketplace then chances are it will sell for a premium price.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.