Eye on Multiples
What they mean in the buy/sell process, from an FBO analyst's point of view
BY Greg Ross, executive vice president/coo, aviation resource group Int'l
The deeply theoretical like to say, value is reflected by the amount someone actually agrees to pay. In other words, value is the purchase price. While hard to argue with such logic, it's essentially impossible to predetermine the price an unknown third party will pay for the right to own and operate an existing business.
Accordingly, we look to practical, albeit imperfect, analytical methods to objectively estimate the value of an operating enterprise.
In the FBO industry, the comparable transaction multiple is the most commonly utilized and accepted barometer for forecasting value. The theory is, a multiple of earnings paid in one transaction — or the average multiple paid through a series of comparable transactions — is a relatively accurate and bona fide measure of the value the marketplace will assign to a specific future transaction of similar size and scope.
This approach has enjoyed wide acceptance among the financial community, lenders, investors, and merchant bankers alike, due to its relative simplicity and broad applicability. In essence, it represents the number of times the purchase price of a business can be divided by its earnings.
EBITDA (earnings before interest, taxes, depreciation, and amortization) is the preferred proxy for earnings in the FBO industry, as it is thought to represent free cash flow — free from non-operational considerations and free of influence by the structure of the balance sheet (debt versus equity). In theory, EBITDA is common to any operator, not withstanding differences in financial structure.
The common EBITDA theory does not necessarily hold true, however, particularly in respect to operating assets such as charter aircraft. Many operators treat aircraft lease payments as direct operating costs of the flight or charter department, while others exclude interest payments on company-owned aircraft from either direct or indirect cost. We routinely recast financial information to ensure that an owner's preference as to the financial structure of the business does not affect value. The proper approach to recasting may be cause for debate; however, recognize the potential impact on value of such issues, ascertain actual treatment, and adjust to a consistent basis when the impact is material.
Monitoring the Industry
Intelligence regarding multiples on an actual transaction is available, to varying degrees of accuracy, from a number of sources: press releases, corporate reports, trade publications, transaction insiders, and the rumor mill. Such monitoring of an FBO transaction helps discern both accurate multiples and underlying qualitative and quantitative considerations that enhanced or detracted from the price.
We track and validate such information and maintain a database in which transaction multiples and key considerations are coded to protect confidential disclosures. That way, it's possible to differentiate any single FBO transaction from many others, adjust actual multiples as appropriate, and produce a more comparable and accurate estimate of value.
Our methodology encompasses a comparison across a broad spectrum of evaluation criteria of a subject FBO to other FBOs that have actually changed hands. We adjust the transaction multiples for both significant variances and an analysis of strategic and emotional considerations that affected the closing price. Finally, we weight the comparable adjusted multiples based on time, with recent transactions being more relevant.
There are dozens of factors to consider when drawing comparisons, including: record of growth and the opportunity for further improvement; existence and quality of on-field and regional competition; dispersion of market share; remaining tenure and other key lease terms and conditions; competitive advantages; size, utility, age, and condition of facilities; stability of revenue and earnings; opportunity to realize cost savings, revenue enhancements, and operational synergies; and strategic and emotional factors employed by the buyer. Also examine operating asset financing and balance sheet accounts and structure to ascertain whether these items represent additional value over and above that of the free cash flow.
A top consideration: the ’here and now'
An argument was advanced during NATA's Strategic Management for Fixed Base Operators Executive Management Seminar (pages 17-22) that the industry should base FBO valuation on discounted cash flow (DCF) methodology. We regard DCF as a practical buyer's pricing methodology that is generally focused on medium to long-term expectations.
Sophisticated FBO buyers often employ DCF methodology in determining price and whether a potential acquisition meets internal hurdle criteria. However, our experience is that FBO buyers look primarily at the "here and now" in determining the price they want to pay for an FBO, rather than on what they may be able to afford to pay based on future expectations.
DCF methodology suffers from the same imperfections proffered by critics of the traditional approach. As with the comparable transaction multiple methodology, when employing DCF methodology one must construct a true and consistent measure of earnings from which to construct future forecasts. And, selection of the appropriate discount rate and time horizon under the DCF methodology is as difficult or more challenging than identifying a realistic transaction multiple. The wide variance among potential purchasers as to cost of capital (which greatly impacts the critical discount rate), expectations of future performance, and strategic and emotional motivations may render DCF methodology relatively unscientific for the purpose of projecting value from the seller's perspective.
Comparable transaction multiple methodology, however, is a "here and now" analysis that is practical, time-proven, and conceptually less complicated than DCF.
Multiples andFBOs Today
In recent years there's been a trend of rising multiples that reflects a couple of developments. First, prosperous times for general aviation have produced a relatively short history of accelerated growth and sustained and improved earnings for many FBOs. As a result, successful operators have sought opportunities to expand and replicate their successes. And prospective purchasers have become much more confident and optimistic as to future revenues and earnings and can thereby rationalize paying higher prices. Profitable times have also attracted new entrants to the industry, bringing with them lower costs of capital, longer term investment horizons, Wall Street investment strategies, industry ignorance, and aggressive mandates to acquire assets. This incremental competition has generated FBO pricing pressure and produced stronger multiples. The pressure is not likely to abate in the near term.
The typical range of multiples has risen from 4.5-5.5 in early 1997 to 5.5-6.5 in 1999. Some observers will argue that the range is much higher due to transactions like The Carlyle Group's acquisition of Piedmont-Hawthorne, Signature Flight Support's acquisition of AMR Combs, and the sale of the Vail-Beaver Creek Jet Center. However, the unusually high multiples paid in these transactions can be attributed to extremely compelling strategic, synergistic, and emotional motivations that permitted the rationalization of purchase prices that appeared to others to be wildly inflated. Were a new FBO acquisition opportunity to present similar strategic and synergistic opportunities, its sale could yield a multiple significantly above even that range.
Many larger, pure fueling FBOs have traded in recent years and acquisition opportunities in this arena have become limited. While some buyers have since sought smaller scale, pure fueling opportunities, these generally offer relatively limited opportunity for growth. Consequently, major full-service operations — once avoided — have become more attractive targets because they offer superior opportunities for revenue growth. Operators with strong capabilities and reputations in technical services and flight operations will attract greater interest, and stronger multiples, in the near-term than they have in the recent past.