This Month’s Company Challenge

Valuation Date:  December 31, 2020

Annual Revenues: $2,505,821.00

Seller’s Discretionary Earnings (SDE): $539,306.00 

Earnings before Interest, Taxes, Deprc., & Amort. (EBITDA): $449,306.00

Pertinent Facts

This is a young owner with a young company specializing in heating, ventilation, and air-conditioning (HVAC). It is in an extremely hot real estate market in Idaho due to the influx of California retirees. So hot, in fact, that the owner needs to find and provide housing for his crew! He just recruited a new shop manager from Virginia, who can also assist in sales. The owner is selling to spend more time with his growing family. There is a small office/warehouse, but most of the assets are vehicles and equipment, owned assessed at $317,000.

Average revenue growth over the last five years has been relatively consistent with one flat year in 2018 due to labor shortage. With the addition of the new manager, the is much more capacity in that area. Average 5-year Revenue, SDE and EBITDA are $1,666,729, $197,102, and $111,491, respectively. What should the final number be on a Purchase & Sale?

Explanation of Value

$1,422,000.00 was the value determined by Rosetta Valuations. Given the strong growth potential of the firm due to staffing, local market conditions, and increased demand, the long-term, or terminal, growth rate was selected as 5.0%. As companies grow, the same dollar increase in revenues translates to a lower growth rate each year because of the company’s growing revenues. The upper limit for any terminal growth rate is the growth rate of the world economy, roughly 7%. Any faster and that company would eventually become the world economy. Welcome to the new Amazon World Order!