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.
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