Determining value with a gross receipts multiplier ???

[getnbusy]

i don't understand how a gross income multiplier can determine the value. I hear 2x 3x 4x 5x all the time in this industry. It makes no sense to me. Can someone please explain this logic ???? In my mind, any property is only worth the amount of debt the NET income will support, minus a reasonable rate of return. That is what the bank will loan money on. At least in my experience.

Is there a way to present the gross multiplier to a bank that I am not familiar with ???

Not sarcasm. I am always looking for an easier way to borrow money.

 

[Randy]

It’s just rough rule of thumb. There is a lot variables in determining the value of a car wash. Up here it’s pretty much land value, our land prices have gone out of sight. Most car washes are sold for other uses. A 4 bay self-serve just sold for $937,000, they plan on putting a 5 story condo project on the property.

 

[robert roman]

“….don't understand how a gross income multiplier can determine the value….It makes no sense to me. Can someone please explain this logic?”

The general approaches to estimate business value are asset-based (cost), market-based (comparables) and income-based.

Income-based approach is further divided into gross income multiple, present value of future earnings, capitalization of excess earnings and multiple of discretionary earnings methods.

Ten years ago, accepted equation to test value for 100 percent of company for combination self-serve was income multiple of between 4.0 and 6.0. This range equates to an earnings multiple of between 6.0 and 9.0.

Are these arbitrary numbers?

As you mentioned, value in the eye of the beholder also considers rate of return as well as the beholder’s capital structure.

So, higher or lower valuation multiples are affected by the corresponding difference in the rate of return (i.e. 3-year versus 5-year pay back).

Arguably, a logical way to present a multiplier to a bank is opinion or calculation of value.

Opinion of value (i.e. appraisal) considers market conditions, comparables and replacement cost new.

Calculation of value (i.e. consultant) considers market conditions, valuation guidelines and value in the eye of the beholder (risk).

 

[Sequoia]

A lot of run-of-the-mill businesses sell for three times SDE, which is seller's discretionary earnings. The SDE is kind of like net profit, but with a LOT of adjustments. Many of those numbers make the SDE higher than a typical year of net profit. Most business owners do things to reduce net income, at least for tax purposes, so many "deductions" go out the window when calculating SDE. As a real estate broker that handled business broker transactions, I've noticed that a common multiple is to sell a garden variety business for three times SDE. That changes wildly, based on individual circumstances, of course. Someone who invested twenty years writing a software package probably isn't going to bite at three times SDE.

I paid six times gross revenue for my car wash. Some would say that is stupid, and too high a multiple. But you need to figure more factors before that can be determined. My wash included the real estate, thus, also the land value. So I have land value, improvements value, a revenue stream, and goodwill. For me, it was a good multiple to purchase at. The return of what I make compared to what I invested has turned out well.

 

[Greg Pack]

Is your bank asking you to present it this way? If not, I wouldn't worry about it.

Many years ago Pat Crowe wrote the "carwash appraisal handbook" and did a decent job of explaining valuation based on a gross income multiplier. It's a useful rule of thumb for a lot of situations and serves as a sanity check. But it only works if you're buying the carwash solely for the income it produces and not some sort of real estate play, and you have no atypical expenses (leasing the land, etc.). I think for Pat around 3X gross was his number that he felt was in the fair price range. Between 3x and 4X seems to be a range that will work me, with the higher multiple for higher income washes. But for valuation that could swing the price several hundred K, so from an appraisal standpoint I don't see the value. GIM also does not work well on either side of the extremes. extremely low volume or high volume washes.

 

[getnbusy]

Bank hasn't asked for anything. Ive just never understood why people use the multiplier method. It seems to me that it is just some arbitrary figure pulled from the sky that people use for a reason unknown to me.

thanks to all who responded. I still think its useless. The swing between multiples is too far, and no difinitive way to determine what multiplier is applicable and when to use it. I like the capitaliztion formula. The bank understands that, and it can be backed up with math.

I'm not trying to persuade anybody in any direction. Just tryin to learn why others think the way they do. Doesn't make me or you right or wrong.

 

[rph9168]

I agree with you. I think sometimes formulas and multipliers are really only a part of the picture and usually are only useful to bean counters" at lenders that only understand "rows and columns" instead of what makes a business tick. I think there are several variables that help in making a decision of buying a wash or any other business for that matter. For instance, maybe a wash shows little profitability but from information gathered you notice the current owner is spending a lot of money on repairs and maintenance done by a distributor when you would be capable of doing much of that yourself. If it needs some renovating maybe it is something you could tackle or have done reasonably. These and other items can eat seriously into profitability. One of the most important factors is whether the wash can pay for itself with some left over and whether you plan to make a living off it or use it as extra income and use it to build up your assets. While most of the statistical data you gather is important when making the final decision it pays to look carefully into the operation of the wash to see how you might be able to do a better job at managing the finances and repair as well as how much income you can realize that fits your situation.

 

[Greg Pack]

Most bankers like their lending folders full of professional paperwork to back up their purchase. The info inside can usually be garbage if it is presented well enough, has lots of three and four syllable words, and a few impressive looking formulas. The GIM does not suit that need.

But if someone says "Hey, I've got a wash for sale, It's grossing 100K. I'll take no less than 600K for it." Then I've heard about all I need to know.There's no need for me to see the appraisal or any other paperwork.