Valuing your glass business

Kenneth H. Marks
April 16, 2009

In spite of the turbulent economic environment, shareholders and operators of glass retailers and distributors, glazing contractors, and auto glass replacement and repair shops need to think about value-creating strategies to weather the business cycle and grow. Let’s start with how to think about valuation, and then we will explore the levers to pull to create more.

The first step in valuation is determining what you are valuing and why. Are we valuing the equity or stock of the business, or are we valuing the entire company? Value of the entire company is often referred to as the enterprise value. Reasons for valuing vary depending on the situation, but typically include: the sale of the company, a capital issuance selling part of the company, incentive plans, to establish realistic expectations, a merger, litigation, or to establish a benchmark from which to improve operating performance or test a particular strategy. For clarification, the enterprise value, or value of the whole business, is equal to the market value of the equity plus the market value of the debt, which for a privately held company is generally the book value. We will discuss the market value of the equity below.

There are several basic approaches to valuing a business, and subsequently its equity. For operating businesses, the three primary and interrelated approaches are:

  • Adjusted book value (net assets)
  • Market value
  • Discounted cash flow

Adjusted book value is often considered the minimum equity value associated with a company. The shareholders’ equity of a company is the difference between the assets and liabilities on its balance sheet as recorded at historical costs (net of depreciation and amortization). This difference is sometimes referred to as the company’s book value.

The various assets such as real estate and machinery and equipment can be adjusted to their current market values, and any non-operating assets or off-balance-sheet assets can be adjusted to their current market values as well. The various liabilities can be similarly adjusted, and any unrecorded liabilities, such as embedded income taxes on appreciated assets, would also be noted.

The difference between assets and liabilities as adjusted to their current market value is referred to as “adjusted book value.”

The market approach is based on comparing the value of the target company to those of other companies that have actually traded within a reasonable period of time from when the value is being determined. Comparables are frequently conducted with regard to competitive companies or those in the same industry.

Discounted cash flow is one of the most common valuation approaches for going concerns and is often used to determine the entity value of a business. This approach presumes that a company’s assets and liabilities are assembled for the purpose of creating earnings and cash flow. DCF value is derived by forecasting the expected future performance of the business and determining the amount of cash generated in each future period after making all investments required to continue operating the company (i.e. the cash available to distribute to the owners of the company’s debt and equity). These expected future cash flows are discounted to a present value based on the required returns of investors purchasing similar assets, or at the appropriate discount rate for the projected cash flows.

Earnings before interest, taxes, depreciation and amortization times a multiple is often used as a proxy or estimate for DCF valuation. This reference to EBITDA is often used as a rule of thumb in determining a company’s initial value. For EBITDA to be relevant for discussion purposes it needs to be normalized for unusual and nonrecurring aspects of performance as well as for excess compensation (above market-based salaries) of owners.

Current trends for glass companies

Let’s apply some of the techniques above based on actual industry data for glass companies (we used Standard Industry Classification codes 1793, 5231, and 7536 and North American Industrial Source Classification codes 238150, 327215, 811121, and 811122); we will use market data and multiples. The values below are for the sale of the entire company. Different applications have different values just as varying buyers or investors will look at value differently. For example, a strategic investor or buyer will likely see the value of your business differently--and, hopefully, higher--than a financial buyer or investor.

Larger the business, the larger the multiple paid. This is tempered by the actual cash flow of the business, i.e. EBITDA. For example, companies with revenues of less than $5 million traded at price to EBITDA multiple of about 5.0 during the past five years. Companies that had revenues in the $20 million to $50 million range traded between 5.6 and 7.4 times EBITDA. Using the same companies in our sample, we found that the businesses traded at a wide range of values as a function of revenues, from 0.4 to 1.4. The higher end of this range is for companies with significant cash flow. We would expect the norm for glass companies to fall within a tighter range of 0.4 to 0.8 times revenue for companies with revenues of $1 million to $50 million.

For example using the multiples above as a rule of thumb, a company with $4 million in revenue that generates EBITDA of 11 percent or $440,000 would be valued at $2.2 million based on EBITDA and between $1.6 million and $3.2 million based on the tighter revenue multiple range.

Keep in mind that there is a lot more to valuing a company than a few multiples being applied to the revenue or cash flow, but these “rules of thumb” can be helpful in setting expectations. No matter how you package it or describe it, at the end of the process, valuation is a function of cash flow.

The author is managing partner of High Rock Partners Inc., Raleigh, N.C., 919/256-8152,