Issue link: http://psai.uberflip.com/i/985928
W EEKLY EDITION MAY 23, 2018 Buying a Rental Business …continued By James Waite, reprinted with permission of the author Trust but verify. Buyers should not be shy about requesting information before signing any documents beyond a confidentiality agreement. Potential pitfalls abound, making it essential to make a number of your own determinations as early in the process as possible, such as: • Is the seller's price reasonable? • How do you, as a potential buyer, value the business? Is there a reason the business might be worth more to you than to the seller, for example, as an equipment hub or central showroom or warehouse? Can you realize any economies of scale and/or other efficiency enhancements by integrating the seller's business with yours? • What assets will you actu ally receive? Are those assets actually owned by the seller or perhaps another company owned by one or more of the seller's principals? • Are those assets sufficient to generate the revenues reported by the seller? Or, as suggested above, might some critical assets be owned by another party, such as delivery vehicles owned by one of the principals of the seller and used in, but not owned by, the business? • Are the seller's inventory counts accurate? • What is the actual state of the equipment — age, hours, envir onmental compliance, maintenance, etc.? • Has the seller been maintaining its equipment fleet and facilities or attempting to save money and inflate its income by, perhaps, foregoing important service and/or maintenance issues? This can be important because it may understate the actual maintenance and/or repair expense required to operate the seller's fleet, it may result in material assets being unrentable and/or in need of disposal after closing and it may result in a significant overstatement of the value of the seller's business — remembering that every dollar of unspent maintenance and repair cost goes to the seller's bottom line profitability, which is then typically multiplied by an industry multiple — usually between 4 and 6.5 for privately held rental companies — to arrive at a sale price. So, $200,000 in unspent maintenance and repair costs could yield a sale price overstatement of $1,000,000 at an EBITDA multiple of 5 or more. • How good is the seller's location in terms of such considerations as acces s, potential for growth, visibility, traffic, crime, existing or potential use restrictions, infrastructure, and environmental compliance? • What is the seller's reputation in the industry? • Are the seller's financials credible, accurate and reliable, and can they be verified? • Are any payables or receivables significantly overdue, and have any scheduled receivables been paid in advance? • Do any "off - balance - sheet" liabilities, such as synthetic leases, unfunded pension, payroll, accrued vacation or sick leave, exist and, if so, how much/many? • Is the seller's market expanding or contracting? Are the seller's customers knowledgeable and reliable or are they troublesome and/or slow - payers? Does the seller rely on any one customer or small group of customers for a s ignificant portion of its revenues? • Are new or large competitors entering the local market? • Are the seller and the seller's business currently in compliance with all applicable laws, rules, re gulations, codes and ordinances? P AGE 5 CONTINUED ON PAGE 6