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THE NEW MATH FOR OPERATORS: Defining 'Market Value' In Today's Industry Is Vital In Selling A Business

by Marc Rosset, President, PVC Inc
Posted On: 4/24/2008

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Recently I've read a series of articles by an industry consultant discussing how to position a company for sale and how to determine the market value of an operation. While the author's thoughts were informative and accurate, he didn't go far enough. While it's a given that the total overall condition of your company (i.e. your assets, financials, employees, accounts, and regions you service) forms a base for market value, there are other circumstances that will affect your price and marketability: the economy, the industry and potential buyers.


1. THE CURRENT ECONOMY: As I write this article, the economy is in turmoil. Gasoline prices are at an all-time high, consumer confidence is at a 20-year low, Ford has announced another workforce reduction of 2,500; jobless claims are up; and consumer spending is down. Most commodities like sugar, corn, copper and oil (to name just a few) are either at or near their historic highs. Many economists predict that 2008 is the start of one of the worst recessions we have seen in years.

Are they right? All economic indicators suggest they probably are. And this recession will be larger and longer because of the housing issues we are experiencing and the liquidity problems the major banks and investment brokers are facing. Bear Stearns, one of the countries premier investment banking firms, is now insolvent and with a bailout by the Fed and JPMorgan Chase, will be purchased for $10 a share. Its stock was at $150 a share just a year ago. Most predict that others will follow. OK. You get the picture.

These indicators have prompted a number of operators to call me to investigate the sales of their companies. Why? We have had recessions before. Why do they feel this one is different?

2. CURRENT INDUSTRY CONDITION: We need to examine the state of the industry, how we got here and how we are affected. If we go back five years, to the beginning of the war in Iraq, we see a number of negatives that touched off a downward spiral for the industry and still define the current conditions.

The price of gas at the pump began its climb at that time and has never looked back. With populous developing nations like China and India rapidly growing their economies, the worldwide demand for oil, food and industrial metals will continue to put upward pressure on costs for many years.

The same holds true for most other commodities. Your suppliers have been relentless in increasing their prices in the past 18 months. The skyrocketing prices for oil, foodstuffs, healthcare and transportation ensure more near-term increases. I guarantee that the operator's cost of goods and overall expenses will increase again this year.

Since the buyout of Best Vendors by Compass Group, the competition for national vending accounts has become heated. Right now, I can identify more than 30 vend management companies in the U.S. Most vendors I speak with feel this isn't a good situation for the operating community. They may still service some of their same clients, but at higher costs and with less control.

Pepsi and Coke, in order to gain market share, became very aggressive with terms for pouring rights at major universities in the U.S. They now have virtually all the business at these locations. Your most important suppliers have become your biggest competitors.

The obesity problem with our youth began to concern school boards and state legislatures throughout the country. New regulations in the schools have been beneficial for some, but disastrous for most.

Many U.S. industrial companies began to downsize and/or relocate operations to cheap overseas labor markets 20 years ago, and the continuation of this practice is eliminating the type of blue-collar accounts that were the backbone of the vending industry from the start. Our economy will survive by re-educating workers for new technology and service-oriented jobs but the loss of these factories will impact every vending operator's bottom line. Office workers just don't buy vending products like factory workers.

And certainly a major problem, one that will help define your future, is that most young people (even those with healthy backs) just don't want to do physical labor any more. The change to a predominantly service-based economy and the rise of the Internet has made finding honest and qualified personnel for labor-intensive service jobs more difficult then ever.

3. TRADITIONAL BUYERS ARE SCARCE: This last consideration may be the most important of all. You need to take a close look at the area in which you operate and try to figure out who is still seeking to buy -- and has the financial strength to do so. What many appear to forget is that your company is only worth what an interested buyer is willing to pay for it. If you are located in a depressed economic area, your company's condition is worse than it would have been in the past. Similarly, if   your largest competitors are also contemplating selling, your assets and accounts won't be as attractive to potential buyers. Without aggressive buyers, your market value is greatly diminished.

When I first began negotiating transactions in this industry in 1993, some said my business model would prove short-lived. They told me that selling was easy: When you were ready to get out, all you had to do was call Canteen or Aramark and they would buy your operation. This is not the situation any more.

The best buyer has always been a larger local competitor. But economic realities also have changed that area of M&A. In the past 18 months, I've had calls from some of the larger operators in the country who are contemplating selling. Currently, I have the largest operator in his state under listing, the second-largest in another state and five more prospective sellers I'm speaking with; each reports an average of $12 million annually.

If your best possible buyers are more interested in selling than buying, this will certainly affect your chance of a quick cash transaction. Small, one- or two-route operators may still be able to find local mom-and-pop buyers for their businesses. But if your gross is in the millions, you will need a much more sophisticated buyer, and the number of traditional large local buyers has dramatically declined.

Another reason a competitor is your best prospective buyer is because most banks are asset-based lenders, but only lend on 50% of the assets. By combining companies, the lender will see the total assets of both companies as its collateral base, thereby helping to secure the funds needed for the transaction.

What about industry outsiders? I have spoken with dozens of investment and venture firms and individuals outside the industry for years. They look at the figures, but in most cases they just don't like the low profit margins or the business model and end up walking away. Overall economic and industry conditions, mentioned earlier, are also deterrents.


In order to make the right choices for your future, you must consider ALL available market data along with company-specific information when you contemplate selling your operation. This includes real world economic and industry information, and the identity of your potential buyers as well. Only then can you arrive at a realistic expected sales price. Otherwise, you are bound to be disappointed.

How, then, do you define values today? Here's a workable approach:


Fifteen years ago, companies were selling for 40% to 60% of their gross sales. About five years ago, as expenses increased and business prospects diminished, that was down to 35% or 40%. Where are we today?

In order to assess the value accurately, I developed my "Industry Evaluation Model" eight years ago. After negotiating my first 12 transactions, I understood what data most interested buyers -- the important information they need to arrive at a potential purchase price. Some of the criteria have changed since then, but this approach continues to show me a truer picture of a company's value.

It is divided into three sections.

The first is financial data: These include the current financial condition of the operator: gross sales, bottom line, EBITDA, percent of commissions to sales, etc.

Next is operational data: Equipment, vehicles, account and employee information, contracts, third-party accounts, service area, and more.

The last is historical and demographic data: How has the company looked in the past three years, where is it today, what are the growth prospects of the region and who are the likely buyers for the operation? Will it be a combination "fold-in" acquisition that will generate some synergies for the buyer, or a standalone acquisition that may not?


Basically, you start with your EBITDA. That's your "earnings before interest,  [corporate] taxes, depreciation and amortization." Then add your own actual reportable wages and compensation (and other family members') that will not be needed after the sale. We call this EBITDA+.

If this is a fold-in -- another operator in your area buying you -- you may be able to add certain synergies such as rent, some office staff and other items that the buyer may be able to eliminate from his operation. The resulting number is added to EBITDA+. But only when you know who the buyer is will you be able to see what synergies exist. If this is a stand-alone transaction, they can't be included.

Once you know your EBITDA+, you need to apply a multiple to that number to determine the price. A multiple is basically a number that defines ROI for the buyer. A multiple of one would mean the buyer reasonably could expect to earn back the money he paid for the company in one year after the purchase, assuming no accounts were lost and all economic conditions remained the same. A multiple of two means the buyer expects to earn back the money after two years, and so on.

This is where most sellers become unrealistic. Your judgment will be clouded by emotion. (After all, you have worked hard at this business for many years, and have put your life and finances into your operation.) Unless you apply the right multiple, your expectations for a sale will also become clouded.


Using my Industry Evaluation Model, I am able to determine an accurate, non-emotional multiple for any company. Let's examine an operation doing $1 million in gross sales in a typical Midwest city. The company's EBITDA+ is determined to be $100,000. Looking at the financials, we see decreased sales and a flat bottom line. Vend pricing is slightly under market, the average age of equipment is seven years, and the average age of vehicles is eight. Based on historical sales for similar operations in the area, the multiple should be around 2.5x. That's 25¢ on the dollar, or a sales price of $250,000, plus inventory and cash, for an operation grossing $1 million.

But we are able to find an interested buyer who will fold this operation into his. He is willing to allow some of his synergies to be applied to your EBITDA+, increasing it from $100,000 to $140,000. Applying our multiple of 2.5x to your new EBITDA+ of $140,000 increases your purchase price to $350,000. Finding the correct buyer for your operation is essential in order to maximize your sales price.

Remember that, in almost all cases, this will be an ASSET SALE (only 3% of our transactions involved the sale of stock), which means you are responsible for paying off all your current and long-term debt at the close. This company had $100,000 in total debt obligations and $70,000 in inventory, coinage and receivables. The owner's net at close would now be $350,000 (purchase price) minus $100,000 (debt) plus $70,000 (cash) or net at close of $320,000. You need to make your decisions on "walk-away" money, not on the sales price.

Fifteen years ago, I was able to negotiate multiples as high as five. But as the industry becomes more difficult, 3x to 3.5x is currently on the high end, with just a handful of companies justifying more. The higher multiples would be applied to companies that showed profits for the past three years, with modern equipment, top pricing in machines, transferable contracts for their largest accounts, 100% equity financed assets, very few or no vend management accounts, and serving a good demographic region. I have to tell you that there are very few companies that can boast all these conditions.

The average company today has a multiple of 2.5x or 3x.


A company I recently sold had not kept up with needed price increases and, because of lower sales and profits, was behind in replacing equipment and vehicles. Most of the equipment was in the 10+ years range. Soda was still priced at only $1 for 20 fl.oz. Due to the poor economic situation in its area and some operational deficiencies, this company had lost 35% of its sales over the preceding two years. Now the owner was trying to sell a company with low pricing, aged equipment, no profits and decreasing year-over-year sales.

At this point, the owner was fortunate to find a buyer at all. If he had decided to sell five years earlier, there would have been at least three local competitors who would have written a check without much negotiation. The multiple at that time would have been 3x or 4x. I approached those same three when I listed it, and none of them were interested in the company at all. Fortunately, I was able to find a small competitor who was starved for growth and purchased the operation for about 25% of net sales. The seller was obviously disappointed. I think he was fortunate to get that much and move on with his life.

I was happy to get 25% of net sales, which was a multiple of 2x, because the buyer was folding in the operation and he was able to find enough synergies to justify that price. Without those synergies, the company would have sold for much less, if at all.

The accompanying chart (Figure No. 1) should help you understand where you might fit on the scale of multiples.

Most companies won't fit perfectly into one column. If your company has half the qualities of 3x and half those of 4x, your multiple would work out to 3.5x.

We can now see that your purchase price will be determined by your EBITDA+ times your multiple, conditioned by the availability of willing and financially able buyers in your area.


Selling your company is much more complicated than selling your vehicle or your home, both financially and emotionally. This is your life's work. The results will determine your future. You need to be knowledgeable.

Many operators who do not understand how to determine true market value go directly to their competitors to propose a sale. They are inevitably disappointed in the offer, if in fact they even get one. In addition, they run the risk of showing their entire operation to a competitor who was never going to buy them in the first place.

It's essential to understand economic indicators, the condition of the industry in general, and who are the potential buyers in your area. You also need to be able to calculate an accurate multiple for your company based on an evaluation model similar to the one suggested here. Collectively, that knowledge will allow you to determine whether selling now is in your best interest, and if so, what price you should reasonably expect to be offered.

MARC ROSSET is founder and president of Professional Vending Consultants Inc. (Chicago). PVC has sold over $800 million in vending and OCS gross sales, and has done more than 200 appraisals for operators since it was formed in 1993. Rosset can be contacted by calling (312) 654-8910.