We were engaged as Business Valuers to assess the value of a Auto Part Manufacturer for the purpose of the break down of an estate. The business had been running for many years and of recent times its financial performance had being on a roller coaster, mainly due to many of its clients are car manufacturers in Australia, and with most of these car manufacturers closing down the future of the business was very uncertain.
One of the key overruling aspects of valuing a business is to assess whether the PEBITDA or EBITDA is both sustainable and maintainable. Hence, assessing whether past incomes and profits are maintainable into the future is crucial in order to arrive at a figure in which to apply an approp333riate capitalisation.
With the above paragraph in mind this particular business was ‘hit’ on four main fronts.
- A large percentage of income was produced from clients in the Australian automotive industry, which faces a very uncertain future due to many of the major manufacturers shifting off shore.
- Limited buyers in the market to purchase such a business due to point 1.
- Also as a result of point 1, the business is currently in the process of changing direction and diversifying which, as a result, the outcome of these changes is very difficult to predict.
- Erratic income and profitability.
Whilst details of the financial analysis were completed, it was the valuer’s opinion that these four main points drew a conclusion that to arrive at any future maintainable PEBITDA or EBITDA for the business would be very difficult. As a result, the figure that was used as a maintainable PEBITDA or EBITDA would be based on many assumptions and consequently hold a great deal of risk and uncertainty. It’s the valuers opinion that in an unlikely event that the market was prepared to pay goodwill, the capitalisation rate applied to any future maintainable PEBTIDA or EBITDA would be very high, as the limited market for such a business diminishes value significantly.
In conclusion, the above does not suggest that this particular business is a poor business, quite the contrary. Its long history and ability to adapt to market must be commended. The business value is mainly affected by the timely changes within the business direction, the Australian Automotive Industry (which is still its major income source) uncertain future and the current state of the business sales market.