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Ways an Aviation Business Can Be Valued

✈ May 10, 2017, Avicor Aviation Inc.

Valuation Approaches

There are many approaches that can be applied to valuing an aviation business. Which one, or what combination of approaches are best to determine the value of a specific company is dependent on a number of factors. A few of the key questions to ask at the outset include:

  1. What is the purpose of the valuation?
  2. Is the business asset intensive?
  3. Is there a lot of debt in the business?
  4. Is the business growing rapidly, or in a state of decline?
  5. Is there an event that made it necessary to have the company valued?

While there are many other questions that could or should be answered, all of the approaches to valuing a business fall into three general categories: asset, income and market approaches.

Asset Approach

Just like the name implies, the asset approach involves a company's assets. Many aviation businesses have a lot of assets. Charter companies that own most of their aircraft could be best suited to an asset approach. An FBO that owns the land it is on and buildings it occupies could potentially be suited to an asset approach. Or a manufacturer that has heavy investment in equipment, for example.

In its simplest form, the asset approach involves taking all of the assets and subtracting all of the liabilities to come up with a value. How the asset and the liabilities are valued can significantly affect the outcome of the asset approach.

Income Approach

Often companies that have been, and expect to continue to grow rapidly are best suited to the income approach. This is often applied to companies involved in technology and Internet-based companies, but it also applies to many aviation companies, and can be suitable for companies that tend to experience cycles in their income.

The income approach typically considers historical income and can also include projections for future growth, especially with companies that are moving into new high growth areas, or that are ready to take advantage of changes in the market such as new development, securing an STC for something newly mandated (thereby pretty much ensuring a certain amount of business in a foreseeable future period), or introduction of a product there is already demand for.

Market Approach

When applying the market approach, the key factor is comparing the aviation business to other, similar businesses and determining the value based on that comparison. Typically it involves comparing the business to others that have sold that have similar characteristics---types and levels of revenue, net income, and asset bases, for example. Based on how your aviation company compares with others, it is possible to evaluate if your company would be valued higher or lower than the comparatives and assess the value based on that determination.

Within each of these three general approach categories are a number of specific methods. Making the decision as to which is be suited to the company and the purpose of the valuation is something that is typically determined by the valuator, but it may also be mandated by the situation. In the next few weeks, we will take a closer look at these approaches and discuss them in more detail. Stay tuned!

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