An equipment rental company (ERC) is usually a highly profitable business model, so if you are thinking of selling it, the most important thing before setting your asking price is to make the correct valuation, in order to take the most profit from the sale. Equipment rental companies are considered profitable firms that operate in a well-defined and protected niche. They are quite valuable and sell often. This means that there are plenty of business sales you can use to estimate what your company is worth, so pay attention on that aspect as well. A broker will be able to help you find the value of your business, but understanding how they get to the amount is essential and beneficial to you as the business owner — because, in the end, receiving the maximum value for your business is your main concern. In this article, we will touch on points of how to figure out the value of your ERC.
What Goes Into a Valuation
You will find that there are many different approaches when it comes to finding an accurate valuation. When you find the best method, the valuation progress can begin.
Below are quick definitions of the types of valuations you can do and what they are based off of. Do keep in mind that there are a variety of factors that play a part in the valuation of a business that determine what your business is worth, such as growth trends and finances.
- Asset Methodology — This method is based off of the value of the assets that the company owns (e.g. plant and equipment).
- Future Earnings Methodology — This method will give you a valuation based on the estimate of monies received from an investment in the future, discounting the time value of money.
- Comparable Sales Methodology — This method bases its value on the sales of a similar business and how closely the other business compares to yours.
The Average Multiple
Usually, the average multiple that ERCs sell for is 2.25. What does this mean? It means the average business in this niche sell for 2.25 times net profit. We have taken data of business sales that range in the $50,000 to $10 million valuation range in the last 10 years and have broken it down for a closer look at understanding how the average multiple plays a part in the value.
Looking at the data collected, you can see that in 2015 the average multiple was 2.25, but to have a complete understanding, you also have to look at the other data points as well, such as the average sale at $302,456 and the median sale at $202,500, that will all be factors in your business valuation. Take a look at the example to further explain the data set.
Valuation Example
Equipment rental work is not simple. From basic to high-end equipment, construction, transporting, landscaping, or any other kind, the owner has to know exactly what to purchase, or else his equipment will stay idle. For example, let’s say we have a medium-sized ERC. This company is successfully making around $100,000 per month. Below, you can find the data that is an estimate of their sales and profit projections based on the data collected and analyzed.
- Year 1 — Sales of $366,362 and profit of $150,000
- Year 2 — Sales of $ $545,000 and profit of $156,000
- Year 3 — Sales of $261,002 and profit of $ $108,001
- Year 4 — Sales of $ $197,991 and profit of $ $88,652
Looking at the data we analyzed, we can assume the business’ value at each year:
- Year 1 — Profit of $150,000 @ 1.5X multiple = $225,000
- Year 2 — Profit of $156,000 @ 2.3X multiple = $358,800
- Year 3 — Profit of $108,001 @ 3.1X multiple = $334,803
- Year 4 — Profit of $88,652 @ 3.7 X multiple = $328,012
As stated earlier, you can see that the larger your business, the higher the amount of money you can ask for when ready to sell.
How Does Your Business Compare?
Keep in mind that there are always fluctuations on a daily basis in the market, and different variables will give you different values of a business. So, comparing your business directly to a firm next door will not get you the answer you seek; but, generally, the bigger your business, the more money you can ask for.
The graph below represents the total deals made at each valuation range. For example, in 2014 (light blue line), there were three ERCs sold between $500,000 and $1 million.
The data below breaks down the analysis we have conducted on 60 business sales in the last 10 years and, as you can see, as your revenue increases, the higher your multiple becomes. What does a higher multiple get you? A better return on your investment.
The next graph represents the valuation multiple for deals completed at each valuation range. For example, in 2014 (light blue line), deals sold between $500,000 and $1 million received an average multiple of 3.4X yearly net profit. So, if your business sold for $800,000, it was likely making $235,000 per year in net profit ($800,000 divided by 3.4).
What If I Want To Sell My Equipment Rental Company?
Broker — best for deals of under $1 million in sales per year. Smaller and micro-businesses are usually best sold by brokers. Find a broker from these marketplaces:
- Bizbuysell.com — the largest marketplace for buying and selling small supply chain businesses
- Bizquest.com — the second largest marketplace for buying and selling small supply chain businesses
M&A Advisor — best for medium businesses ($1 million to $50 million in sales per year). Medium-sized businesses are best sold through brokers who help with finding buyers, negotiating and structuring the deal. To sell your medium-sized business, check out:
Investment Banks — best for large businesses ($50 million+ in sales per year). Larger businesses are best sold through investment banks or merger and acquisition companies. To sell your large business, check out:
Factors That Increase Valuation
When it comes to the valuation of your company, there are many factors that can increase or decrease the value. Potential buyers will look at things such as sales and profits as well as the length of time your business has been around; however, those are not the only factors that increase a valuation because they do not completely tell the story of your business.
Take a look at the factors below and make sure that you can answer all these questions in order to get the best valuation for your business.
- What are the sales?
- What is the profit?
- What are the growth trends?
- What is driving new sales and is that sustainable?
- What channels do new customers come from and what is the breakdown of each channel?
- What is your market position?
- Is your location favorable?
- How reliant is the center on the owner?
- What systems and processes are in place to run the center?
Are You Ready?
Deciding to sell your business is not an easy decision for most. It can become overwhelming at times and it may be for a different reason than for other business owners. But whatever your reason, be sure that you possess the necessary tools and understanding of the correct value of your company.
To help you as a confident business owner, we have implemented a tried and true step-by-step process to give you the best valuation for your business. Many essential steps are forgotten or overlooked by some business owners in the selling process, but by completing all the steps we’ve put forth, you are sure to receive the maximum profit for the sale of your business.