Justin Powell of Huntington Outdoor asked the following question after reading our article on Billboard Cashflow: I understand that general depreciation shouldn’t count….but how about digital display replacement costs? Those are real and significant expenses you have every 10 years or so. If you don’t include those what you might actually be paying for a b2b digital could be 15X+ BCF.
Billboard Insider asked several out of home investment bankers to comment.
Max Drachman of Drachman M&A Co. says many buyers are using a digital depreciation recapture for older digitals.
We do not include digital depreciation as an expense in our Billboard Cash Flow (“BCF”) formula. The reason being is simple – the usable life of a digital panel is not only in the eye of the beholder, but it is often different from the multiple applied to a portfolio of assets. If you include the usable life of the panel and divide it by its replacement cost and add that figure as a BCF expense, this will result in an inaccurate formula for valuation. For example, let’s say there is a portfolio of assets with $2m in BCF that includes 20 digital displays (for simplicity – 20 displays, replacement cost at $100k per, and 10-year lifespan and they are all five years old) and the market for the asset is 12x BCF. The digital depreciation inclusion of $200k (20 x $100k / 10 = $200k) in the BCF formula would artificially inflate the expense above its actual full replacement cost by 20%, and in a tight market that would cost the buyer the deal. On the other hand, another buyer values the deal at 12x, but bases their digital depreciation recapture on usable time remaining and reduces their $24m valuation by $1m, as opposed to $2.4m, and secures the deal. Example illustrated below.
Jim Matalone of Mad Dog Consulting says the age of digitals should influence a valuation.
He’s correct about digital display age. Display age is usually factored into a valuation by buyers when looking at a digital acquisition. Depreciation on structures is usually not factored in on an asset sale in my experience.
Jim Johnsen of Johnsen Fretty says this isn’t what buyers have been doing.
In the “old” days Lamar and a bunch of others used to push digital depreciation as part of bcf. Honestly though, we havent seen it in the past 7 years or so. It certainly is a real expense…the hard part is what will digital replacements cost in 10-15 years? The should be a fraction of what they cost today. In addition I think if someone wanted to do real math here…maybe its value ignoring digital depreciation and then run a present value on digital depreciation and subtract that from gross value. To me its not fair to apply a bcf multiple to the digital depreciation.
Lou McDermott of Kalil and Co says sometimes yes for older digitals.
Depends on where the boards are in the cycle (new or older). Buyers will look at it differently but the older the boards the more likely the buyer will take the upcoming expense into account as they formulate their offer. In short, a negotiable item which is different in every deal.
To receive a free morning newsletter with each day’s Billboard insider articles email info@billboardinsider.com with the word “Subscribe” in the title. Our newsletter is free and we don’t sell our subscriber list.
Paid Advertisement
