FF&E (Furniture, Fixtures and Equipment) represent tangible assets that are utilized in the regular course of business operations. Some general examples may include desks, chairs, lamps, and computers. For a wholesale or distribution business, examples may include forklifts, pallet jacks and vehicles. Equipment for a restaurant could include freezers/fridges, soda machines, grills or deep fryers.
The FF&E of a business is required to conduct business operations, generate revenues, and ultimately, to earn profits. A manufacturing firm that utilizes CNC machines would not be able to produce the required end product without this machinery, therefore they would not be able to generate revenue and operating income. It is for this reason that FF&E is inherently included in the purchase price of a business for two of the most common business valuation methods, Market and Income approaches. For organizations with expensive and highly valuable FF&E, a third valuation method, the Asset-based approach, may also be considered. The asset approach does not consider a business’ earning capacity and is generally utilized for valuing holding companies or businesses that do not generate significant (or any) profits.
Recent significant capital expenditures on new equipment can justify a higher sale multiple, but the business must be generating profits to take full advantage of this. Buyers are primarily interested in businesses with strong cash flows, and while new equipment may be attractive, it needs to support profitability for a higher valuation to be warranted. Buyers and investors are primarily concerned with one critical metric when assessing a target acquisition, Return on Investment. How many years it will take to earn back their investment, based upon the cash flows of their newly purchased business. If the equipment of a business is old or in poor working condition, then the new owner may need to make substantial capital expenditures to upgrade and maintain equipment. If this is the case, buyers may account for expected capex when determining their offering price.
We often encounter prospective sellers who try to inflate their company’s sale price by adding the value of FF&E on top of a purchase price that was calculated using a multiple of earnings. This essentially results in ‘double-counting’ the FF&E in the company’s valuation. Typically, FF&E is included in the purchase price since it plays a role in enabling the business to generate revenue and profits. Buyers are usually only willing to pay a certain multiple of cash flow for a business within a specific industry. As a result, this approach can lead to sellers struggling to find buyers due to ‘double-dipping’ on FF&E and entering the market with an unrealistic asking price based on an inflated cash flow multiple.
As one of the top business brokerage firms in New Jersey, NJ Broker Plus has a duty to educate business owners and entrepreneurs alike on how to accurately determine a realistic valuation for a business transaction.
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- What is FF&E and what role does it play in a business transaction? - September 20, 2024
- How to Prepare Your Business For Sale - September 4, 2024
