Warehouse and storage business valuation

The lease and contract mismatch

The typical 3PL commits to a warehouse lease for seven or ten years, fits it out with racking and equipment, and fills it with clients on two or three year agreements. While the building is full, the model works well. When a large client leaves at the end of its term, its revenue goes immediately and its share of the rent does not.

So we line up every client contract against the lease of the site it occupies. We look at each client's revenue and contribution after direct labour, when its contract ends, whether it has renewed before, and how long it would take to refill the space. A business whose largest client's contract expires a year before the lease does, with no renewal signed, is carrying a risk that its earnings do not show.

Contract structure matters too. Under an open-book arrangement, the client pays the actual costs of the operation plus a management fee, and rent and labour risk sit largely with the client. Under a closed-book rate card, the provider sets prices per pallet, per movement or per order and carries the cost risk itself. Open-book earnings are usually more secure and lower margin; closed-book earnings can be higher and more volatile.

Rent, AASB 16 and an EBITDA that looks better than it is

For most warehousing businesses, rent is the largest cost after labour. Under AASB 16, which applies to reporting periods beginning on or after 1 January 2019, a lessee recognises a right-of-use asset and a lease liability for leases longer than twelve months. Rent no longer appears as an operating expense. It is replaced by depreciation and interest, both of which sit below EBITDA.

The effect is that a 3PL reporting under AASB 16 can show EBITDA well above the cash it actually earns after paying rent. Many private businesses do not apply AASB 16 at all, so two similar businesses can report very different EBITDA. We put every business on a consistent basis, usually earnings after rent, and treat lease liabilities consistently in the step from enterprise value to equity value. See EBITDA vs EBIT in industrial valuations.

A warehouse business that reports its rent below the EBITDA line has not become more profitable. It has changed its accounting.

Site dependency: the building is half the business

A warehouse close to a port, a rail terminal or a major freight corridor, with good truck access, the right floor and clear height, and room for the racking clients need, is hard to replace. Moving a running 3PL operation means new racking, downtime, a risk of service failures and a test of every client relationship. We treat the site as a key part of the business even though it is leased.

• Term remaining and options: a strong site with eighteen months left and no option is a real risk to a buyer
• Rent review mechanism: fixed annual increases against market reviews, and how current rent compares with market
• Make good obligations: removing racking, repairing floors and restoring the building at the end of the lease can be a large liability
• Assignment and change of control: landlord consent may be needed for a sale, and some landlords use it to renegotiate
• Rental security held by the landlord, such as a cash deposit or bank security, which a buyer will usually need to replace
• Related-party ownership: if the owner's trust owns the building, we value the business at market rent and treat the property separately

Utilisation: how full, how busy, how productive

A warehouse earns on space and on labour. We look at occupied pallet positions against capacity, month by month, for at least two years, alongside throughput: pallets in and out, orders picked, lines per order. Seasonal peaks around end of financial year and the Christmas trading period are normal; a site that sits half empty outside the peak is not.

Labour productivity is the other half. Picks per hour, labour hours per pallet movement and the use of casuals and labour hire through peaks tell us whether the operation is well run. Warehouse employees are generally covered by the Storage Services and Wholesale Award unless an enterprise agreement applies, so wage increases flow into cost each year. Whether the rates charged to clients move with those increases is the next question.

High utilisation supports current earnings but limits growth without another site. Low utilisation leaves room to grow but means rent is being carried on empty space. Both are relevant to what a buyer will pay, and we say which one applies.

Rate cards, minimums and cost recovery

Closed-book pricing usually combines storage per pallet per week, handling charges per pallet in and out, pick and pack charges per order or line, and fees for value-added work such as kitting, labelling and returns. We check whether rate cards include annual reviews linked to wages or CPI, whether clients have minimum volume or minimum revenue commitments, and when rates were last increased.

A business that has not lifted its rates for three years while rent and award wages rose is earning less than its history suggests, and its next round of increases will test client loyalty. A business with indexed rates, minimum charges and a record of passing through increases has shown pricing power.

WMS and integration: switching costs that work for you

A warehouse management system that is integrated with clients' ordering, ERP and ecommerce platforms is part of their operation, not just the provider's. Replacing the provider means rebuilding those links and testing them through a peak. That switching cost is one of the strongest supports for contract renewal in this industry.

We look at whether the WMS is owned, licensed or provided by a client, whether the licence transfers on a sale, how many integrations are live, and who in the business built and maintains them. A system that only one contractor understands is a risk. A well-documented system supported by a vendor and an internal team is an asset that a buyer will recognise in the price.

Customs, biosecurity and heavy vehicle duties at the site

Some warehousing businesses hold approvals that competitors cannot get quickly. A warehouse licence under section 79 of the Customs Act 1901 (Cth) is granted for a named establishment at a specific address, and the applicant and everyone in management or control of the warehouse must be fit and proper. Depot licences work in a similar way. Biosecurity approved arrangements under the Biosecurity Act 2015 (Cth) let an approved operator carry out specified biosecurity activities on imported goods at an approved site.

These approvals are a real barrier to entry and can support higher margins. They also attach to the site and to the people running it, so a sale that changes the people in management or control needs planning with the regulator and the lawyers. We treat the timing and approval risk as part of the deal risk, not as a reason to add a separate value for the licence.

Warehouses where five or more heavy vehicles are loaded or unloaded each day have a loading manager under the Heavy Vehicle National Law, and loaders, packers and consignors at the site share the primary duty for heavy vehicle safety, outside WA and the NT. Loading procedures, mass checks and records are part of the compliance picture a buyer will review.

How we value a warehousing business

Most established providers are valued by capitalising maintainable earnings after rent, adjusted for client contracts that are due to end and for space that is unlikely to refill on the same terms. Where one large contract dominates and has a known end, a discounted cash flow over its remaining life can be the better primary method. The general approach is set out in how we value industrial businesses, and our guide to valuing a logistics business covers the related transport side.

Our pricing page sets out the turnover bands. To start, request a quote with a short description of your sites and clients. Where the value sits in client contracts and services rather than the site, our 3PL and contract logistics guide goes deeper. For buyers of a 3PL, see acquisition valuations; for owners restructuring property and operating entities, see tax and restructuring valuations.