When preparing to sell an RV dealership, we “normalize” the numbers to present the best version of our client’s financial performance. What do we look for, and what do we do in advance to help the sales process? In this article, we briefly identify the most popular normalizing adjustments which give us the best chance at selling our clients RV dealership at the highest price.
Why Normalize EBITDA?
EBITDA is generally taken as a proxy for operating cash flow. While EBITDA can be interpreted in different ways, it is often used to value companies such as RV dealerships by applying a multiple (such as 3x TTM EBITDA for example). Therefore, because EBITDA can drive the valuation of your dealership, normalizing it to present the best financial representation just makes sense. Many buyers will look beyond EBITDA and pay more attention to free cash flow to value the dealership (which would consider capital expenditures, interest, taxes, etc.) along with product lines available, market size and the dealership location. However, the calculation of valuation usually starts with EBITDA and goes from there, so knowing how to normalize EBITDA and present as high a number as possible is a very valuable tool.
EBITDA Adjustments Before Selling
So how exactly do we normalize EBITDA? Here are 7 of the most frequently used normalizing adjustments (in no particular order).
1. Owner Salaries and Bonuses
Owner salaries are often higher or lower than the regular salary that would be paid to a third-party manager. Also, when owners manage the business, a bonus may be declared at the end of the year to reduce income taxes. This bonus and any extraordinary owner salaries need to be added back to calculate recurring EBITDA. An estimate of the third-party manager compensation would be deducted. The typical result, particularly if large year-end owner bonuses have been paid, is an increase in EBITDA.
2. Rent of Facilities at Prices Above or Below Fair Market Value
Some RV dealers do not own the facilities they occupy, but instead rent them from a holding company owned by a shareholder or private party. This is similar to related party transactions that need to be adjusted, but we tend to single it out as a separate point. The rent is often arbitrarily set above the going market rent. EBITDA would be adjusted upwards by adding back the arbitrary rent and subtracting the true market rent.
3. Start-Up or Expansion Costs
If a new business line has been launched during the period when the historical results are being analyzed, the associated start-up costs should be added back to EBITDA. This is because the costs are sunk and will not be incurred going forward. Examples would be the costs associated with adding a new location or the costs of building a new or expanding an existing service facility.
4. Lawsuits, Arbitrations, Insurance Claim Recoveries and One-Time Disputes
Any extraordinary income or expenses that may have been settled during the review period would not recur. Therefore, they would be deducted (in the case of income such as an insurance claim recovery) or added back (in the case of an expense such as a lawsuit settlement).
5. One Time Professional Fees
We look for expenses incurred that relate to matters that do not recur in the future. An example is legal fees a dealership may incur in settling a legal dispute. Not only would we add the settlement expense back to EBITDA, but we would also add back the related legal expenses. The same applies for accounting fees on special transactions or marketing costs if you did a one-time marketing or ad campaign.
6. Repairs and Maintenance
Another overlooked category we review is repairs and maintenance. Often times, dealership owners will aggressively categorize capital expenses as repairs in order to minimize taxes. While this practice may reduce annual taxes, it will hurt the valuation when the dealership is sold by reducing historical EBITDA. Therefore, an adequate review to separate and add any of these capital items back to EBITDA is important.
7. Other Income and Expenses
This financial statement category is usually loaded with items that may be added back to EBITDA. It is also sometimes the dumping ground for expenses that cannot be coded elsewhere. We pay careful attention to these accounts, and make sure that anything that is not recurring gets added back. For example, some RV dealers record one-time employee bonuses or special donations or other expenses in this category. These should definitely be added back to EBITDA.
To summarize, numbers are not always black and white, especially if EBITDA is used as part of the calculation to sell an RV dealership. Often times, we will prepare a three to five-year summary of normalized EBITDA as a baseline to value the dealership. Ultimately, a multiple of a higher EBITDA is always better.
