ChannelE2E readers always ask me how much VARs and MSPs are worth. My standard answer is somewhere around 5- to 7-times annual EBITDA tied to recurring revenues. Of course, valuations can vary greatly based on multiple factors. Among the variables: Business model.
With that reality in mind, plenty of folks have also asked me how much an office equipment dealer business is worth, particularly if managed print services are involved. I don't have a great answer but I have two solid suggestions:
1. Ask Paul Dippell, CEO of Service Leadership Inc. Paul's company benchmarks service providers. His brain is filled with big data tied to M&A, profit margins, operational maturity models and more. And earlier this week, Paul spoke at a major gathering of equipment dealers in Georgia...
2. Check out some generic but valuable valuation guidance from Global Imaging Systems (GIS), a Xerox company. Without revealing exactly how much office dealer businesses are worth, the company points to this equation to help you quantify your company's value:
(Adjusted Operating Profit x Multiplier) – Debt + Excess Cash
More Valuation Guidance
Alas, the actual multiplier is missing from the formula above. Is your company worth 5X adjusted operating profit? Maybe 7X? More? GIS's business valuation guidance doesn't say. But the company published this six-point guide to help frame an M&A conversation:
- Operating Profit refers to your company’s most recent 12 months of Earnings Before Interest and Taxes. This is also referred to as EBIT. If you have recently completed a fiscal year, GIS uses that period. If you are in the middle of your fiscal year, GIS calculates the most recent 12 months.
- Adjusted refers to items in your income statement that would change upon acquisition. These “addbacks” to operating profit might include excess owner compensation, personal expenses, and non-recurring (extraordinary) events.
- The Multiplier is determined based on your company’s performance, size, and growth, as well as the fit with GIS’ strategic needs.
- GIS's offer is contingent on the company being free of debt. This includes bank loans, vehicle loans, shareholder notes, inventory financing in excess of 90 days, and deferred maintenance income in excess of one year. It does not include trade payables, payroll liabilities, or deferred maintenance income of one year or less. If the company does have debt, proceeds at the closing will first go to pay off the debt, and the remaining amount will go to shareholders.
- Additionally, if your company has cash on hand in excess of a normal operating amount as of the closing date, GIS can add that to the seller’s proceeds.
- In addition to this basic formula, GIS considers the management team, geographic area, service reputation, facilities, and many other items to determine the overall value.
Do the considerations above make sense -- or do they differ from the variables you're managing amid potential M&A deals? Email me your thoughts: [email protected].