Industrials & Services
The aftermarket is usually the business
In process and capital equipment, the ratio of aftermarket revenue to units in the field moves valuation more than almost anything else. It is also the figure owners most often understate.
Equipment businesses are routinely valued as manufacturers when a substantial part of their economics is an annuity. The owner thinks of the company as a builder of machines, presents it that way, and is priced accordingly, while the parts, consumables and service revenue attached to the installed base sits inside a single revenue line where no acquirer can see it clearly.
Two businesses in one set of accounts
New equipment is project-driven. Orders are lumpy, they track customer capital cycles, margins compress in competitive bids, and revenue in any given year says little about the next. Valued on its own, it earns a manufacturing multiple and deserves one.
Parts, consumables and service against an installed base behave in the opposite way. They recur, they are largely insulated from the capital cycle because a running plant needs its equipment maintained regardless, they carry considerably higher gross margin, and they retain through downturns. Valued on its own, that stream attracts buyers and multiples from an entirely different part of the market.
The analysis that changes the number
Much of the preparatory work in an equipment business is therefore analytical rather than operational. Four figures are needed and most owners do not have them to hand.
The installed base: how many units are in the field, where, and of what vintage. The attachment rate: what proportion of those units generate aftermarket revenue in a given year. Revenue per active unit per year. And retention: what happens to that revenue as units age, and at what point customers move to third-party parts or stop servicing altogether.
Together these convert an assertion into a model. An acquirer can then value the aftermarket stream directly rather than discounting it because it cannot be isolated.
Why the gap is usually large
Where this analysis has not been done, a buyer constructs it themselves from whatever the general ledger supports, and does so conservatively. Ambiguous revenue is assumed to be project revenue. Service work that recurs is treated as one-off unless proven otherwise.
The difference between a prepared presentation of the aftermarket and a buyer’s reconstruction of it is routinely several turns of EBITDA on the whole business, which in most equipment transactions is the largest single item available to the seller.
A useful early test: can you state what proportion of last year’s revenue came from equipment shipped more than three years ago? If not, that is the first analysis to commission, and it is worth doing irrespective of any transaction because it also tells you where to direct commercial effort.
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