What is a forwarding company worth?
In this article we want to give you some insights in the valuations of forwarding companies. This is the content of the article:
- Developments in the global forwarding industry
- Value and price expectations of business owners in the forwarding market
- How to value a company in general
- What determines the price of a forwarding company
- Detailed description of items that have an effect on price
- Valuation multiples we see in the forwarding market
We are very much interested in your opinion and the experiences you encounter in the area of business sales of forwarding companies. What do you see? What is crucial in your opinion regarding the value of a forwarding company? Please reply below the article.
Developments in the global forwarding industry: consolidation
The forwarding industry is continuously growing as the global population and trade increases. Given the future growth of the world population it is obvious that international trade will continue to develop further. At the same time we see technology play a much bigger role. This provides the opportunity to increase productivity via IT solutions and the usage of the internet. Changes in the industry and opportunities for new players to develop are the result.
Another important trend we see in the forwarding industry is consolidation. It is difficult for forwarding companies to grow autonomously. Hence, acquisitions are an important instrument to ensure growth is realized. We see the main players become larger via acquisitions. Sometimes these companies grow up to a size that business owners don’t want to sell to them anymore. They feel their business, that is build up with a lot of sweat, will be swallowed up completely. Business owners fear it will be integrated immediately and nothing will be left over from what was build by the owner with hard work.
The value and price expectations of forwarding business owners
A topic dear to most forwarding business owner’s hearts is how much is the business worth? In practice it is often a disappointment for business owners once they get confronted with the reality of prices buyers pay in the market place. In the end it is important to understand that each forwarding business is part of the global forwarding industry. Hence, the drivers that influence value in different regions of the world are playing a role everywhere.
Business owners often get professional advice from accounting firms who may use all types of formulae. They are indicators. The only way you will know what you are worth is when you have offers on the table. These offers are very often lower than what business owners have in mind. However, on the other hand it is real cash that you can have in your pocket directly.
In practice the main deal breaker we see in forwarding M&A transactions are the price expectations of business owners. These valuation expectations are simply to high. Buyers want to make a return on their investment and earn back the investment in four to five years preferably earlier. Do you agree to the fact that forwarding owners expect too much for the sale of their business?
How to value a company in general?
The valuation of a company is described very often. There is the technical part as well as the ‘art’ of a business valuation. There can be a difference between valuation and selling price. The difference between value and price might be explained as follows: a buyer is willing to pay a price which is based upon the value the company has for this buyer. A company can have a different value for each buyer, so the price they are willing to pay can differ. Another way to put this: ‘price is what you pay, value is what you get’.
In our practice, of European business sales, the valuation of companies is something we come across regularly. If you want to read more about the technical pieces in a general business valuation please go to the business valuation section on our website.
What determines the price of a forwarding company at the moment you sell?
Buyers want value and return on investment. Forwarding buyers want limited risks. Buyers want the business they buy to continue as it did in the past and preferably much better. A buyer is willing to pay a higher price if the opportunity is of serious interest to him or her.
Main drivers that determine the price of a forwarding company:
- Size (smaller companies have a much lower valuation multiple)
- Profitability and margins
- Interest of a buyer
- Customer base and concentration
These main drivers of value for forwarding companies are described more in detail below.
Big is beautiful and size matters. Smaller companies mostly have much lower multiples and valuations as the risk for a buyer is larger. Very often the client relations depend on the owner and a certain percentage of clients leaves after a business sale.
2. Profitability and margins
Profitability is a main driver for business value. Forwarding companies have limited assets and the value is mainly determined by the profit of a company. Obviously the people are important and the main assets of a forwarding company. The valuation of a forwarding company is normally determined by an EBITDA or profit multiple. Margins are of high importance as well. Companies with high margins obviously realize better and higher prices during a business sale.
A buyer that can realize synergies is willing to pay a higher price for a company. Hence, it is important to find the right buyer that can bring additional business into an acquisition. Buyers can also realize costs synergies in items like management or office expenses. If a buyer has good IT and accounting systems it might be able to realize further costs savings on the accounting staff and procedures.
4. The interest of a buyer
The price of a company depends very much on the seriousness of a buyer. One has to find the right buyer that appreciates the value of your company. In practice we see that each buyer assigns a different value to a company and therefore different buyers are willing to pay a different price for the same forwarding company.
5. Customer base and concentration
A balanced spread between customers is important. Customer concentration is something that buyers don’t want. If a business loses a large customer this will hurt the company a lot. No buyer wants to run the risk and depend on a few large clients. Hence, valuations for forwarding companies with a high dependency on single or a few customers are lower than forwarding companies with a good customer spread.
Valuations: EBITDA multiples of forwarding companies
We see different multiples across the forwarding industry. Most valuations we see are in the range of EBITDA multiples from 3 to 7. The majority of business sales in the lower end (up to 10M Euro in revenue and 1,5M in gross profit) sells for valuations between 3 to 5 times EBITDA. In case of larger forwarding companies we see higher EBITDA multiples happening. 5 or 6 times EBITDA is a price some forwarding buyers are willing to pay. Occasionally we see a higher valuation. Valuations with EBITDA multiples of 7 or above are almost non existing in the market of forwarding companies below 20M Euro valuation.
What is a realistic valuation for a forwarding company in your opinion? How should a forwarding company be valued? Do you think business owners are rewarded enough for their hard work?