Selling Your Business Continued from page 43 P/E MULTIPLES ARE USEFUL FOR NEGOTIATING PRICE, BUT HIGHLY VARIABLE. BETTER TO CONSIDER GROWTH, AND P/E/G. BUYER’S & SELLER’S PERSPECTIVEOF P/E/G 25 20 15 10 5 0 FULLY VALUED DISTRESSED P/E/G=1 5 10 GROWTH (G) Source: Aviation Resource Group International Key: P = Purchase Price E = Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) G = Annual Growth of Earnings, as a Percentage International (ARGI) has participated in numerous seminars and pre- sentations over the years to help FBO owners prepare for sale. For those having submitted themselves to NATA’s past “Fundamentals of Financial Management” seminar (a two-day, rather tortuous, affair devised by Phil Botana and yours truly), you will remember working on a business case dealing with a 2-to-1 consolidation in “Consolidation in Caseville” that deals with a buyer placing value on the seller. In the time since, I was asked to present the latest transaction trends to the NATA membership and it will be instruc- tive here to highlight how a seller can best match step with a buyer. In the P/E/G graph above, you can see the relationship between P/E multiples (think of “P” as the purchase price and “E” as EBITDA,1 so we’re talking about multiples 1 “EBITDA” stands for Earnings Before Interest, Taxes, Depreciation and Amortization. 44 of EBITDA) and growth (“G” as in annual growth of earnings, as a per- centage). Now, to be clear, a P/E/G ratio is nothing new on Wall Street… we’re just borrowing it to apply to aviation services. Let’s break it down and develop some takeaways: 1. While P/E multiples vary all over the place, there is a strong relationship between P/E multiples and growth of the business. Sellers usually want to talk about past growth, like how the last hangar filled up and increased business. That’s great, but buyers will be shifting in their seats want- ing to know about FUTURE growth opportunities. Why? Because the buyer is going to pay for today’s earnings, but the financial return on the purchase for them is much more about growth opportunities going forward. So, a smart seller will lay out how the business has 15 20 25 grown and then take a breath and start talking about growth opportunities in the next five to 10 years. Do that, and you’ll have a buyer’s full attention. Recent transactions have tended to a P/E/G=1 relation- ship, meaning that a buyer, con- vinced that a growth of 10% can be sustained, will bid a x10 mul- tiple of EBITDA. So, speaking of ratios, for every one minute you talk about past growth to a buyer…do yourself a favor and spend 10 minutes talking about the growth story going forward. 2. Obviously, the more earnings a buyer sees, the better the offering price. But, buyers and sellers often have different views of sustained earnings. The best way to set the stage for earnings-related discussions is to begin with a department-by- department P&L breakdown (a.k.a. “Income Statement”) that clearly eliminates the “befores” of EBITDA, namely the excluded expenses of inter- est, (income) taxes, depreciation and amortization. Secondly, clearly show the details of any one-time items…both good and bad. And lastly, clearly show the details of any owner-related add-backs. In other words, start with the company’s financial statement exactly the way the buyer will see the documents out of the accounting system, then show how you adjust those numbers step-by-step. When I present any adjust- ments to a buyer, I am careful to show those that increase Aviation Business Journal | 3rd Quarter 2017 P/E BUYERS SEE STRONGER E OR G, LONG LEASE, LESS CAP EX BUYERS SEE LOWER E OR G, SHORT LEASE, DELAYED CAP EX
