How do you value a business with a lot of plant and equipment?
Why asset heavy businesses are priced differently, how goodwill and plant are separated, and the mistakes that cost operators money at settlement.
General information only, not financial, legal or taxation advice. Tony Pope holds Queensland Office of Fair Trading licence 4963575.
The short version
- Plant and goodwill are generally assessed separately. Plant at honest market value less finance owing, goodwill on earnings.
- A yard full of gear can lift the total price while lowering the earnings multiple, because the buyer has to fund the asset base and the replacement cycle behind it.
- Book value and written down value are accounting figures, not market figures. Buyers price what the gear would actually fetch.
- Utilisation is the number that separates a strong plant business from an expensive one. Idle machines are cost, not value.
If you run earthmoving, civil, transport or anything else where the machines are the business, the standard advice about earnings multiples only gets you halfway. Your price is built from two components and they behave differently.
The two part structure
Most asset heavy sales are assembled as the honest market value of the plant, less whatever finance is owing against it, plus a goodwill component based on normalised earnings.
That structure produces a result owners often find counterintuitive. A business with $2 million of plant might carry a higher total price and a lower earnings multiple than a services business with the same profit and no assets. Both things are true at once and neither is unfair.
The reason is what the buyer has to fund. Acquiring your business means funding the goodwill and the asset base, and then funding the replacement cycle behind it. A ten year old fleet is a capital commitment arriving shortly after settlement, and buyers price the machines they will have to buy as surely as the ones they are buying from you.
Book value is not market value
This is the most common and most expensive misunderstanding in the sector.
The written down value in your accounts is a tax and accounting construct driven by depreciation schedules. It has no necessary relationship to what a machine would fetch. Assets fully written down can be worth six figures. Assets carried at healthy book values can be worth considerably less than the accounts suggest.
Get real numbers before you go to market. Recent comparable sales, auction results, dealer evidence, adjusted for hours, condition, service history and compliance status. Two identical excavators of the same year can be a long way apart on hours and maintenance history, and buyers know it.
The same discipline applies to the finance. Payout figures, not balances. Which machines are encumbered and to whom. Whether anything is on an operating lease that will not transfer. Every encumbered asset shows on the Personal Property Securities Register and the buyer's financier will search it, so you want no surprises coming back the other way.
Utilisation is the number that matters
More than fleet size, more than age, more than brand. What proportion of your gear is earning, and what is it earning.
A buyer who sees six machines producing the revenue of four will draw the obvious conclusion, which is that two of them can be sold and the business gets stronger. That is a saving they will bank for themselves, not one they will pay you for.
So if you have idle assets, deal with them before you go to market. Sell them, or redeploy them into work that justifies them. A tighter fleet with high utilisation presents as a well run operation. A large fleet with soft utilisation presents as capital that has been mismanaged, and it invites a buyer to discount the whole thing.
Have the data ready. Hours by machine, revenue by machine where you can attribute it, maintenance cost by machine. Owners who can produce that change how the negotiation runs, because they look like operators who know their business rather than owners who bought machines when the money was good.
The things that quietly cost money
Deferred maintenance. Every hour of work you have put off is a number the buyer subtracts, and they will subtract more than it would have cost you to do.
Missing service records. A machine with a complete documented history is worth more than the same machine without one. This is the cheapest value to protect and the easiest to lose.
Compliance gaps. Registration, roadworthiness, heavy vehicle obligations, plant risk assessments. A buyer's financier and insurer will both look, and gaps found late slow settlements down.
Owner dependence disguised as plant. If you are the only person who can price a job, who the clients call, or who can run the difficult machine, you have a services business with equipment attached rather than a plant business. That is the single biggest lever on the goodwill component and it takes a year or more to change.
Allocating the price
How the total splits between plant and goodwill matters to both sides for tax and depreciation reasons, which is why it gets negotiated rather than assumed. It needs to be defensible against the actual evidence and it belongs in front of your accountant and your solicitor before it is settled, not after.
Where to start
Get the real asset position on paper. Market values, payout figures, hours, condition, utilisation. Then get a market appraisal that treats the plant and the earnings separately, because anything that puts a single multiple over an asset heavy business is not looking at it properly.
The appraisal is free and confidential. If nothing else, you will find out whether the gear in the yard is an asset or an anchor, and that is worth knowing whether you sell or not.
Common questions
Is plant included in the sale price of a business?
Usually yes, but it is assessed on its own rather than folded into an earnings multiple. The common structure is honest market value of the plant, less any finance owing against it, plus a goodwill component based on normalised earnings. How the total is split between those two matters to both parties for tax and depreciation reasons, so it gets negotiated.
Does more equipment mean my business is worth more?
Not automatically. Equipment that is well utilised and generating margin adds value. Equipment sitting idle in the yard is holding capital, insurance, registration and maintenance cost with no return, and a buyer will see that in the utilisation data. Fleet size on its own is not a selling point.
How is second hand plant valued for a business sale?
By what it would realistically fetch in the current market, informed by recent comparable sales, auction results and dealer evidence, and adjusted for hours, condition, service history and compliance. It is not the written down value in your accounts and it is frequently not what you paid less an assumed depreciation rate.
Keep reading
All notes on selling a business · All seller guides · What is my business worth?
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