Machinery and equipment business valuation

Dealer, hire company or repairer?

Businesses built around machinery look alike from the front gate. They are valued very differently. Before we look at a single number we work out which of these the business is, or which mix:

Plenty of businesses combine two or three. A regional dealer with a hire fleet and a mobile service team has three revenue streams with different risks, and we look at each before putting them back together. Machinery manufacturers are covered in our manufacturing guide.

Why EBITDA overstates an equipment business

In an equipment hire business the fleet is the product. Every machine wears out and has to be replaced, and that replacement is the main cost of staying in business. EBITDA leaves it out completely. A fleet that averages ten years old is about to cost its next owner a great deal of money, and nothing in EBITDA will show it.

Book depreciation does not fix the problem. It is based on what the machines cost, often years ago, over lives set for accounting or tax. Replacement happens at today's prices, which are usually higher. So we estimate what it would cost each year to keep the fleet at its current age and size, and value the earnings after that charge.

We then look at the fleet itself: the age profile, hours or kilometres, how resale values have held for each class of machine, and whether replacement has been deferred to lift short-term profit. A fleet that is overdue for renewal hands that bill to the buyer. Our article on EBITDA versus EBIT explains the general point.

What does fleet utilisation tell a buyer?

Utilisation is the hire industry's core measure. Time utilisation is the share of available days a machine is on hire. Dollar utilisation is rental revenue as a share of the fleet's cost, which also captures the rates being achieved. A business can keep its machines busy at rates too low to fund their replacement, and time utilisation alone will not show it.

We ask for utilisation by machine class, not just for the fleet as a whole. It is common to find a core of hard-working machines carrying a tail of specialised or ageing units that rarely go out. Those idle machines may be surplus to the business: they can be valued at what they would realise, and the earnings assessed without them.

Revenue from damage waivers, delivery and collection, fuel, operators and consumables sits alongside hire rates. It is worth understanding separately, because it behaves differently from hire income when the market softens.

Valuing a machinery dealership

For a dealer, the most important document is often the dealer agreement with the manufacturer or importer. It sets the territory, the term, stocking and facility requirements, performance targets and, critically, whether the manufacturer must consent to a change in ownership. A dealership whose agreement can be ended on short notice, or whose sale needs an approval the manufacturer may withhold, carries that risk in its value.

Inside the dealership, we look at the balance between machine sales and the aftermarket. New machine margins are thin and cyclical, and used machines carry the risk of overvalued trade-ins. Parts and service income is steadier and earns better margins. The share of the dealer's fixed overheads it covers, often called service absorption, is a good indicator of how the business would cope with a bad year for sales.

Stock is the other big issue. Machines held on floor plan finance, aged used stock carried at trade-in values and slow-moving parts all need testing against what they would actually realise. We value inventory at a realistic level and treat floor plan finance consistently with how it is used in the business.

How finance changes what the owners receive

Equipment businesses are usually financed through chattel mortgages, hire purchase, finance leases and, for dealers, floor plan facilities. The enterprise value we assess is the value of the operating business. Finance owed is then deducted to reach the value of the shares, including balloon or residual payments that fall due at the end of a contract.

Two practical points. First, the accounting varies: under AASB 16 Leases a lessee brings most leases onto the balance sheet, while some smaller businesses still expense lease payments, so we put earnings and debt on the same basis before comparing anything. Second, equipment finance often carries security over the machines and personal guarantees from the owners, which affects how a sale is structured and what has to be paid out at completion.

Hire businesses also need to protect their own machines while they are out on hire. As the PPSR's guidance for hire and rental businesses explains, a hire company that has not registered its interest risks losing equipment to other creditors if a customer becomes insolvent. We ask how long-term hires are protected, because unprotected assets are a risk a buyer will price.

Business valuation or plant and machinery valuation?

Owners of equipment-heavy businesses often ask whether they need a valuation of the business or of the machines. They are different jobs. A plant and machinery valuation, done by a plant and machinery valuer, values each asset, typically for finance, insurance or a sale of assets. A business valuation values the operating business as a whole, including any goodwill.

We value the business. Where a recent plant and machinery valuation exists, we use it as an input: to identify surplus machines, to support an asset-based cross-check, and to see whether the earnings justify the fleet. When they do not, which happens in businesses earning a thin return on a large fleet, the asset value rather than the earnings may set the value of the business.

Repair, service and field service businesses

A machinery repairer sells skilled labour. Value depends on technician numbers and retention, how full the workshop and service vehicles are, the effective labour rate after unbilled time, the parts margin, and authorisations from manufacturers to carry out warranty work. Warranty work brings volume, but at rates the manufacturer sets, and the business depends on the authorisation continuing.

Field service businesses add a vehicle fleet, travel time and often a concentration on a few large customers such as mine sites or councils. Service agreements with set response times are worth more than call-out work. Businesses that mainly service mine sites are covered in more depth on our mining services page, and broader maintenance contractors on our industrial services page.

A fleet register with ages and hours usually tells us what we need about the equipment, so a yard inspection is seldom necessary. Where one is, we raise it when scoping and agree the visit and its cost first. Fleet lists, finance schedules and dealer agreements go through the private upload link on your matter, not email, and are kept confidential. The methods are set out on our how we value page.