mercer capital's value focus: equipment dealer industry | mid-year 2015

VALUE FOCUSEquipment Dealer Industry

www.mercercapital.com

Mid-Year 2015

General Overview 1

Agricultural Equipment Dealers 2

Construction Equipment Dealers 2

Material Handling Dealers 3

2015 Mid-Year Update 4

Macroeconomic Overview 5

Bellwether Stocks and Industry Participants 10

Equipment Dealership Valuation Considerations 12

About Mercer Capital 13

Erickson Partners Merges with Mercer Capital 14

http://www.mercercapital.com

http://mercercapital.com/insights/newsletters/value-focus-industry-publications/equipment-dealer-industry-newsletter


Mercer Capital’s Value Focus: Equipment Dealer Industry Mid-Year 2015

© 2015 Mercer Capital 1 www.mercercapital.com

General Overview

The equipment dealership sector consists primarily of closely held,

private entities that are contractually allied to a primary original equip-

ment manufacturer (“OEM”). The business model of most equipment

dealers is relatively similar to those of other dealership models

including the automotive, trucking, materials handling and vocational

segments. Dealers are typically granted territory (or branch locations)

in or from which to sell and service an OEM’s products. Dealers

employ organizational structures and operating systems mandated

by their respective OEMs. OEMs also exert significant influence over

the ownership and management structures of their dealers and work

actively in the integration of their dealer networks.

Generally speaking, equipment dealer performance corresponds to

general economic activity and territory traits. The inexorable growth

of population drives demand for resources and commodities (energy,

agriculture and basic materials), burdens and depreciates transpor-

tation and power generation infrastructures, and drives the need for

housing and general construction.

More than just wholesalers, equipment dealers are the channel

through which their respective OEMs penetrate markets, providing

territory development, sales, leasing, rental, and parts & service to

commercial, contractor, industrial and governmental customers,

usually within an exclusive geographic area. Accordingly, whether

the dealer’s equipment concentration is agricultural, construction,

mining, transportation, material handling, or otherwise, the economic

characteristics and commodity concentrations of each market dictate

the product focus of each dealer regarding core line mix as well the

dealer’s complimentary and adjacent OEM portfolio. Most OEMs

segregate their product lines by target market, using dealerships

specifically for each product segment (construction, agriculture, small

engine, etc.) although many dealers, such as those in the Caterpillar

system, have more turnkey products offerings. Each dealer’s primary

OEM exerts significant influence regarding the dealer’s other brand

offerings because brand purity is a core mandate for most OEMs as

is a well-crafted assemblage of portfolio offerings for the dealer’s

market area.

The largest and most recognizable OEMs are world-wide operators

whose manufacturing facilities and end markets span the globe.

Dealership models for the large OEMs vary significantly by the deal-

er’s native market and the OEMs overall strategy. For example, at

year end 2014, Caterpillar’s 48 U.S. dealers were all closely held,

private entities whose operations were conducted in geographically

contiguous territories. In contrast, two of the Canada-based dealers

are publicly traded, one of these has multi-national operations (and is

the world’s largest CAT dealer) and the other has a more diverse and

industrial focused revenue stream.

The following table provides perspective on the scope of equipment

offerings typically found in an equipment dealer’s portfolio. Equip-

ment dealers can be highly specialized regarding their product

offerings, as may be the case for dealers of heavy lift machines and

cranes, or may have offerings that cover a wide variety of market

needs as is typical of construction equipment dealers. Many dealers

carry products outside their core OEM product categories as a way of

diversifying their revenue streams to benefit from territory opportuni-

ties and market trends as well as to mitigate the effects of seasonality,

industry demand, customer concentration, and other downside

exposures related to the core OEM product focus. Large equipment

dealers generally fall into one of several industry groupings: construc-

tion and related; agriculture; and material handling. These dealers

require relatively specialized capabilities and knowledge to service

their customers. Differentiation and diversity of product mix due to

territory is more prominent for dealers in the construction industry

as the prevalence of forestry, mining, energy, and other resources

varies significantly by geographic region. Material handling dealers

are typically more homogenous in their product offerings, although

the capabilities of lift-trucks can vary greatly depending on a given

territory’s industrial, transportation and distribution infrastructure.

Markets and Industries Served

Agriculture Forestry Material Handling Quarry, Aggregates & Cement

Construction Governmental & Defense Mining Remanufacturing

Customer Services Insurance OEM Solutions Rental

Demolition & Scrap Recycling Landscaping Oil & Gas Safety

Electric Power Locomotive & Railway Paving Training

Generation Maintenance & Repair Pipeline Technology & Solutions

Financing Marine Power Plants Waste





Agricultural Equipment Dealers 1

Construction Equipment Dealers 2

Agricultural equipment is used primarily for the production of food,

fiber, feed grain and feedstock for renewable energy. Certain

equipment is purchased for home and garden applications, and

maintenance of commercial, residential and government proper-

ties. Deere & Company (DE), CNH Industrial N.V. (CNH) and

AGCO Corporation (AGCO) are the largest global manufacturers

of agricultural equipment and supply a full line of equipment

and parts that address the primary machinery requirements

of farmers. In addition to the major manufacturers, numerous

specialty and short-line manufacturers produce equipment that

addresses regional and niche requirements of both corporate and

hobby farmers. Agricultural equipment manufacturers typically

grant dealers in the U.S. authorized store locations from which to

sell and service their products.

There are many factors that influence demand for agricultural

equipment, parts and repair and maintenance services, including

commodity markets, interest rates, government policies, tax pol-

icies, weather and general economic conditions. Any of these

conditions can change materially in a short time period, creating

volatility in demand for products and services. Federal legislation,

such as the recently enacted Farm Bill, attempts to stabilize the

agricultural industry through various policies including (i) com-

modity programs consisting of direct, counter-cyclical and price

support payments to farmers; (ii) conservation programs; (iii) crop

insurance programs; and (iv) disaster relief programs. These var-

ious federal policies attempt to reduce financial volatility and help

ensure that farmers operate their farms and equipment during

economic down cycles, thus stabilizing demand for equipment,

replacement parts, and repair and maintenance services.

Construction equipment is purchased primarily for commercial, res-

idential and infrastructure construction, as well as for demolition,

maintenance, mining, energy production and forestry operations.

The market for construction equipment is segmented across multiple

categories including earth moving, lifting, light industrial, asphalt &

paving, and concrete and aggregate equipment. As in the agricul-

tural equipment market, sales and service of construction equipment

in the U.S. is executed primarily by manufacturer authorized dealers;

however, manufacturers’ dealership agreements in the construction

industry typically assign exclusive distribution territories.

Construction machinery is generally divided into “heavy” and

“light” subgroups. Heavy machinery includes large wheel loaders,

large tracked excavators, cranes, crawler dozers, motor graders

and articulated haul trucks. Light machinery includes backhoe

landscape tractors, forklifts, compact excavators and skid

steers. Heavy machinery is generally purchased by construction

companies, municipalities, local governments, rental fleet owners,

quarrying and mining companies, waste management companies

and forestry-related organizations. Typically, light machinery is

purchased by contractors, rental fleet owners, landscapers, logistics

companies, farmers and recreational users. Although demand

for construction equipment is affected by weather and seasonal

factors, it is usually less susceptible to seasonal changes than the

agricultural equipment industry.

Demand for construction equipment is driven by several factors,

including (i) public spending on roads, highways, sewer and water

projects, and other public works projects; (ii) public and private

expenditures for the energy and mining industries, which is driven

in part by demand for fossil fuels, metals and other commodities;

and (iii) general economic and market conditions of the construction

sector for residential, commercial and industrial development.





Material Handling Dealers

The material handling industry encompasses the equipment, sys-

tems and technology solutions for managing, transporting and

storing a wide variety of bulk materials, processed goods and final

products. There are numerous diverse OEMs that manufacture lift

trucks, racking systems and mechanical conveyors that comprise the

industry. Material handling equipment is a vital aspect of industry

supply chains and distribution channels. Material handling equip-

ment is used by virtually all sectors and industries to manage goods

and materials through the processing, manufacturing, staging, and

transportation phases in route to final markets.

Key players in the lift truck segment of the industry include Toyota,

Linde, Hyster-Yale, Mitsubishi, and Crown. Lift trucks are the principal

product of the industry’s dealer network. OEMs and their underlying

brands and products are differentiated by size and load capacity, fuel

type, and wheel type. For example, machines operated in close,

environmentally contained facilities are typically powered by electric

batteries, while large machines operating in open environments may be

diesel powered in order to manage large and/or heavy loads. Demand

for material handling equipment is driven by several factors but is prin-

cipally correlated to the overall economy and the movement of goods

and materials through industrial, commercial and consumer markets.





2015 Mid-Year Update

Despite gains in construction through the first half of 2015, many

equipment dealers face challenges for the balance of 2015. Of

course, dealer performance is highly regionalized; however, certain

aspects of the economy tend to influence performance across many

markets. Oil and gas prices remain depressed by historical stan-

dards and agricultural commodity prices remain well below those of

the prior several years. Whether the commodity is grown from seed

stock or harvested from prehistoric life in the form of fossil fuels,

lower prices for commodities have a dampening effect on the buying

power of contractors and farmers. With a depressed energy sector

and low agricultural commodity prices, construction activity is lim-

ited in its ability to lift the equipment dealer industry.

Construction markets generally improved in the first half of

2015 with total construction value for the LTM at June 2015 approx-

imately 4% higher than 2014. Bright spots included manufacturing

(up almost 30%), commercial (up 16%), lodging and office (each

up 13%-14%). Power generation investment was down almost

13% while residential construction was up only 1.1% for the same

period. Highway and street construction increased 2.2%, but given

the disrepair of transportation infrastructure, current investment is

contributing to an accumulating backlog of needs. Despite the per-

sistence and potential paradigm of current motor fuel pricing, there

has been no legislative movement on funding measures.

Stock prices for primary OEMs mixed in the first half of 2015.

Caterpillar (CAT) saw its shares decline 7.3% in the first half of 2015

while John Deere stock increased 9.7%. CAT’s Q2 filings cited a

weak first quarter with some improvement in the second quarter.

Guidance for the balance of 2015 suggested a modest miss on

target 2015 revenue, thus the focus of efforts from CAT is one of

dealer enhancement (with the “Across the Table” initiative) and

expense management. In addition to general economic conditions,

the strength of the US dollar is contributing to lower revenue as over-

seas markets lack buying power and many world markets continue

with stagnant GDP performance. John Deere sounded similar con-

cerns with its core agricultural machinery sales down 20% so far in

fiscal 2015.





Macroeconomic Overview

$0

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$20,000

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-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

GD

P (in Billions)

Ann

ualiz

ed R

eal G

row

th R

ate

Quarterly Annualized Real Growth Rate Annual Real Growth Rate

GDP (Current Dollars) GDP (Chained 2009 Dollars)

Source: Bureau of Economic Analysis

$0

$250

$500

$750

$1,000

$1,250

$1,500

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

2007

Q2 Q4 Q1 Q3

2009

Q2 Q4 Q1 Q3

2011

Q2 Q4 Q1 Q3

2013

Q2 Q4 Q1 Q3

2015

GD

P (in Billions)

Ann

ualiz

ed R

eal G

row

th R

ate

Quarterly Annualized Real Growth Rate Annual Real Growth Rate GDP (Total Construction)

GDP (Residential Construction) GDP (Non-Residential Construction) GDP (Total Highway & Street)

Source: Federal Reserve Bank of St. Louis

The real Gross Domestic Product

(GDP) increased at an annualized rate

of 2.3% during the second quarter of

2015. Performance was slightly lower

than economists’ expectations of 2.6%,

though growth is expected to accel-

erate in the second half of 2015. GDP

growth was driven largely by consumer

spending, which increased 2.9% in

the second quarter of 2015, relative to

increases of 4.3% and 1.8% in the fourth

quarter of 2014 and the first quarter

of 2015, respectively. Durable goods

growth increased 7.3%, following an

increase of 6.1% in the fourth quarter of

2014 and an increase of 2.0% in the first

quarter of 2015.

Total construction spending increased

12% year over year to a seasonally

adjusted annual rate of $1.1 billion in

June 2015. Private construction fell

0.5% over the revised May estimate,

while private residential construction

increased 0.4% and private non-

residential construction increased

1.3% over the prior month. Public

construction also saw an increase

month over month, growing 1.6%

over May 2015.3 Construction activity

is expected to continue increasing

throughout 2015 due to rising

construction of manufacturing facilities,

and greater spending on offices, hotels,

and retail facilities.4

Gross Domestic Product

Construction Gross Domestic Product





Macroeconomic Overview (cont.)

Annual Value of Construction

(Millions of dollars. Details may not add to totals due to rounding.)

Annual Value of Construction Put in Place 2010-6/30/2015 % Change 2014-

LTM 6/152010 2011 2012 2013 2014LTM

6/30/2015

Total Construction $806,040 $788,343 $861,245 $910,764 $960,586 $997,964 3.9%

Residential $249,112 $252,657 $286,847 $342,203 $354,222 $357,948 1.1%

Nonresidential $556,928 $535,686 $574,399 $568,561 $606,363 $640,019 5.6%

Lodging 11,635 9,129 10,836 13,585 16,107 18,180 12.9%

Office 37,850 36,011 37,800 37,620 44,630 50,678 13.6%

Commercial 40,100 42,816 47,335 50,992 57,276 66,407 15.9%

Health care 39,344 40,204 42,544 41,484 38,979 39,160 0.5%

Educational 88,405 84,985 84,672 77,996 78,429 80,870 3.1%

Religious 5,288 4,239 3,846 3,678 3,566 3,307 -7.3%

Public safety 11,153 10,407 10,431 9,652 9,334 9,160 -1.9%

Amusement and recreation 16,943 15,995 15,480 15,513 16,672 18,707 12.2%

Transportation 38,340 34,737 37,862 39,731 41,865 43,665 4.3%

Communication 17,730 17,685 16,165 17,294 16,075 17,460 8.6%

Power 77,945 75,185 97,434 90,639 100,752 88,086 -12.6%

Highway and street 82,529 79,322 80,546 81,212 84,013 85,886 2.2%

Sewage and waste disposal 25,991 22,710 22,261 21,676 22,691 24,834 9.4%

Water supply 15,322 14,163 13,218 13,515 12,941 13,587 5.0%

Conservation and development 7,172 7,538 6,228 6,028 7,509 7,946 5.8%

Manufacturing 41,178 40,559 47,741 47,945 55,526 72,090 29.8%

Total Private Construction $502,074 $501,936 $581,935 $641,146 $686,647 $715,860 4.3%

Residential 238,819 244,133 280,574 336,209 349,017 352,185 0.9%

Nonresidential 263,255 257,803 301,360 304,937 337,630 363,677 7.7%

Total Public Construction $303,966 $286,407 $279,311 $269,618 $273,939 $282,104 3.0%

Residential 10,294 8,524 6,272 5,994 5,206 5,763 10.7%

Nonresidential 293,672 277,883 273,038 263,624 268,733 276,343 2.8%

Source: US Census Bureau






According to the U.S. Census Bureau,

new privately owned housing starts were

at a seasonally adjusted annualized rate

of 1,174,000 units in June 2015, 9.8%

above the revised May rate of 1,069,000

units, and 26.6% above the June 2014

level. The seasonally adjusted annual

rate of private housing units authorized

by building permits (considered the best

indicator of future housing starts) was

1,343,000 units in June 2015, 7.4% above

the revised May estimate of 1,250,000,

and 30.0% above the June 2014 level.

The June 2015 data indicates that the

housing market recovery continues,

though growing inventory could be a sign

of trouble ahead. Slow wage growth and

higher interest rates also pose ongoing

risks to the housing market.

0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4

Private Housing Starts Single Family Starts Source: U.S. Census Bureau Note: Permits at a given date are generally a leading indicator of future starts. Beginning with January 2004, building permit data reflects the change to the 20,000 place series.

Private Housing

Single Family Housing

Housing Starts

(millions of units)






Single family housing starts declined in

June, as most of the gains in starts and

permits were in multifamily construc-

tion. However, homebuilder confidence

has continued to grow, as demand for

single-family housing is expected to

increase as the labor market tightens.

The largest increase in single-family

permits year over year was in the South,

with a 37% increase from June 2014 to

June 2015. The largest decrease over

the same period was in the Northeast,

with a 16% decline in housing starts in

June 2015.

Regional Housing Starts – Single Family

June 2015

Housing starts in June 2015 rose 9.8%

above the revised May 2015 estimate

and 26.6% over the June 2014 rate.

The Northeast saw the largest increase

in housing starts year over year, while

the Midwest saw the largest decline

over the same period. Housing starts

increased 47% from May 2015 to June

2015 in the Northeast.

Regional Housing Starts

June 2015



Units (thousands of units)

≤ 14.8

≤ 19.4

≤ 26.7

≤ 51.8

Units (thousands of units)

≤ 4.3

≤ 10.7

≤ 15.9

≤ 39.0

West 26.7

West 15.9

Midwest14.8

Midwest10.7

South51.8

South39.0

Northeast19.4

Northeast4.3






65.0%

67.5%

70.0%

72.5%

75.0%

77.5%

80.0%

82.5%

85.0%

Jan-04

Apr-04

Jul-0

4

Oct-04

Jan-05

Apr-05

Jul-0

5

Oct-05

Jan-06

Apr-06

Jul-0

6

Oct-06

Jan-07

Apr-07

Jul-0

7

Oct-07

Jan-08

Apr-08

Jul-0

8

Oct-08

Jan-09

Apr-09

Jul-0

9

Oct-09

Jan-10

Apr-10

Jul-1

0

Oct-10

Jan-11

Apr-11

Jul-1

1

Oct-11

Jan-12

Apr-12

Jul-1

2

Oct-12

Jan-13

Apr-13

Jul-1

3

Oct-13

Jan-14

Apr-14

Jul-1

4

Oct-14

Jan-15

Apr-15

Jul-1

5

Federal Reserve Bank of St. Louis

Seasonally adjusted capacity utilization

was 78.4% in June 2015, after measures

of 78.5% and 78.2% in April and May,

respectively. Capacity utilization for the

second quarter measured 78.4%. High

rates of capacity utilization (generally

above 80%) can be a harbinger of higher

inflation as incremental output becomes

more difficult to achieve without higher

wages and capital investment. Continuing

increases in utilization measures suggest

the potential for a renewal of business

investment in the foreseeable future.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

Bureau of Labor Statistics

According to the Labor Department’s

Bureau of Labor Statistics (“BLS”), the

unemployment rate was 5.3% in June

2015, down slightly from 5.4% and 5.5%

in April and May, respectively. The June

2015 unemployment rate is the lowest

rate since April 2008, though some

experts believe that is due to a shrinking

workforce as the labor force participation

rate is also lower at 62.6%, relative to the

mid- to high-60s prior to the recession.

Economists surveyed by The Wall Street

Journal anticipate an unemployment rate

of 5.1% by year-end 2015 and a further

decline to 4.9% by June 2016.

Unemployment

Capacity Utilization





Bellwether Stocks and Industry Participants

Stock Price (USD)EnterpriseValue a/o 6/30/15 (USD)

TTM Financial & Operating Results Comparable Multiples

as of 6/30/15

52-Week High

% of52-Week

HighRevenue

(USD)RevenueGrowth

EBITDAGrowth

EBITDAMargin

EV/ Revenue EV/EBITDA

Debt/EBITDATTM NTM TTM NTM

Dealer/Distributor

Finning $17.84 $26.08 68.4% 4,044.8 5,049.7 -5.3% -9.8% 10.0% 0.8 0.8 7.5 7.7 2.3

Rush Enterprises, Inc. $24.00 $32.88 73.0% 2,530.5 5,110.1 28.4% 30.2% 5.6% 0.5 0.5 9.1 13.2 5.3

Titan Machinery, Inc. $14.73 $16.73 88.0% 1,019.1 1,788.0 -20.5% -26.8% 3.6% 0.6 0.7 15.7 20.5 12.5

Toromont Industries Ltd.

$23.73 $25.95 91.4% 1,909.9 1,335.1 7.7% 12.1% 15.2% 1.5 1.4 9.9 9.2 0.7

Average 2.6% 1.4% 8.6% 0.9 0.8 10.6 12.6 5.2

Median 1.2% 1.1% 7.8% 0.7 0.7 9.5 11.2 3.8

Rental/Secondary

Ritchie Bros. Auctioneers Incorporated

$27.92 $30.85 90.5% 2,773.0 511.8 7.2% 10.7% 39.1% 5.6 5.2 14.5 13.6 0.6

United Rentals, Inc. $87.62 $119.83 73.1% 16,314.5 5,852.0 12.0% 19.2% 30.9% 2.8 2.7 9.2 5.5 4.7

Wajax Corporation $16.38 $29.55 55.4% 518.5 1,066.0 -2.3% -2.2% 5.6% 0.5 0.5 8.4 7.9 2.2

Average 5.6% 9.2% 25.2% 3.0 2.8 10.7 9.0 2.5

Median 7.2% 10.7% 30.9% 2.8 2.7 9.2 7.9 2.2

Source: Capital IQ





Stock Price (USD)EnterpriseValue a/o 6/30/15 (USD)

TTM Financial & Operating Results Comparable Multiples

as of 6/30/15

52-Week High

% of52-Week

HighRevenue

(USD)RevenueGrowth

EBITDAGrowth

EBITDAMargin

EV/ Revenue EV/EBITDA

Debt/EBITDATTM NTM TTM NTM

Manufacturers

Construction Mfg

Astec Industries, Inc. $41.82 $45.48 92.0% 960.4 1,016.5 6.7% 7.4% 8.3% 0.9 0.9 11.2 9.2 0.1

Caterpillar inc. $84.82 $111.46 76.1% 83,840.1 52,812.0 -4.4% -8.3% 16.2% 1.5 1.7 9.4 14.4 4.5

Komatsu Ltd. $20.12 $24.26 82.9% 23,472.9 16,085.8 0.3% -2.3% 17.0% 1.4 1.5 8.2 8.6 1.8

Average 0.9% -1.1% 13.8% 1.3 1.4 9.6 10.7 2.1

Median 0.3% -2.3% 16.2% 1.4 1.5 9.4 9.2 1.8

Agriculture Mfg

AGCO Corporation $56.78 $57.26 99.2% 6,217.7 8,411.9 -19.3% -31.1% 8.9% 0.7 0.8 6.7 9.2 2.0

Alamo Group, Inc. $54.64 $64.45 84.8% 793.9 882.2 21.5% 45.0% 10.0% 0.9 0.9 9.8 8.4 2.3

Buhler Industries Inc. $4.15 $4.94 84.0% 172.0 211.7 -13.5% -84.2% 1.3% 0.8 na 41.7 na 16.9

CNH Industrial N.V. $9.28 $10.37 89.5% 36,279.4 20,949.0 4.1% 11.4% 14.8% 1.2 na 12.1 na 10.4

Deere & Company $97.05 $98.23 98.8% 66,262.0 32,940.0 -10.9% -22.8% 15.5% 2.0 2.5 13.0 21.1 7.3

Kubota Corporation $15.90 $17.06 93.2% 25,780.0 13,414.4 8.7% 2.1% 15.3% 2.0 2.0 12.9 13.2 3.0

Average -1.6% -13.3% 11.0% 1.3 1.5 16.0 13.0 7.0

Median -3.4% -10.4% 12.4% 1.1 1.4 12.5 11.2 5.2

Other Mfg

Columbus McKinnon Corporation $25.00 $29.69 84.2% 565.3 572.9 -2.5% -1.6% 11.8% 1.0 1.0 8.2 8.0 1.8

Joy Global Inc. $36.20 $65.36 55.4% 4,618.0 3,523.7 -17.5% -26.5% 16.5% 1.3 1.4 8.0 8.2 2.2

Terex Corporation $23.25 $42.53 54.7% 3,998.7 6,923.3 -4.9% -17.2% 7.9% 0.6 0.6 7.1 6.4 3.5

Average -8.3% -15.1% 12.1% 1.0 1.0 7.8 7.5 2.5

Median -4.9% -17.2% 11.8% 1.0 1.0 8.0 8.0 2.2

Manufacturing Composite Average -2.6% -10.7% 12.0% 1.2 1.3 12.4 10.7 4.7

Manufacturing Composite Median -3.4% -5.3% 13.3% 1.1 1.2 9.6 8.9 2.7

Source: Capital IQ

Bellwether Stocks and Industry Participants (cont.)





Equipment Dealership Valuation Considerations

Equipment dealer networks of all types have and continue to consol-

idate. Some dealer networks have achieved their respective OEM’s

desired composition while others are still working towards tomor-

row’s dealership/distribution system. Mercer Capital has significant

valuation and advisory experience concerning equipment dealer

ownership succession and consolidation over the past 20+ years.

It is no secret that valuations for many equipment dealerships gravi-

tate to certain norms. We also understand that almost every dealer

deviates from a central valuation concept due to one or more dif-

ferentiating factors based on product focus, operational or financial

composition and/or numerous other factors. Some networks tend

toward valuations substantiated primarily by adjusted asset values

while others are driven by cash flow performance. Obviously, cash

flow begets the capacity to invest in assets and assets are required

to produce cash flow. In many cases a mix of both income and asset

based methodology is needed to properly articulate credible valua-

tion. As with valuations in general, rules of thumb often fall short of

properly capturing the value of a given equipment dealership due to

many underlying issues. A rule of thumb for the core OEM business

activity may be more or less appropriate; however, many dealers

have adjacent and/or complimentary business activities that must

be viewed with special consideration and in some cases using sepa-

rate or distinct modeling. Capital structure, balance sheet treatment

of rental fleets, and numerous other financial and operational attri-

butes can cause one dealership valuation to differ from another.

Trends in construction do not follow those of agriculture. Special-

ized equipment dealers have unique attributes that can significantly

differentiate their valuations from larger more diverse dealers.

Another complicating challenge regarding dealership valuation is

the uniqueness of the overall business model and the significant

influence and control of the OEMs. The definition of “fair market

value” postulates a buyer and a seller with no compulsion, equal

capability and knowledge, and willingness. In the real world, most

equipment dealerships are at best tenants in their territories and

transactions of both the dealership as a whole and ownership inter-

ests therein are strictly overseen by and subject to the approval

of the respective OEMs. Most dealership agreements contain

stringent guidelines regarding a primary owner’s active business

participation, approved succession and contingency plans, and

numerous other vital operational and financial requirements.

Accordingly, valuations must reflect a proper understanding and

consideration of a dealership’s real world circumstances and the

range of risks associated with a specific equity interest, whether

minority or controlling, in a dealership entity.

Sources1 Summary narrative from Titan Machine, Inc. Form 10-K, filed with the U.S. Securities and Exchange Commission for the fiscal year

ended January 31, 2014. Certain narrative has been edited and/or augmented by Mercer Capital.2 Ibid.3 https://www.census.gov/construction/c30/pdf/release.pdf.4 http://www.aia.org/practicing/AIAB105516.



Mercer CapitalEquipment Dealer Industry Services

Contact Us

Copyright © 2015 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media

quotations with source attribution are encouraged. Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Industry

Focus does not constitute legal or financial consulting advice. It is offered as an information service to our clients and friends. Those interested in specific guidance for legal or accounting matters should

seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list to receive this complimentary publication, visit our web site at

www.mercercapital.com.

Mercer Capital has expertise providing business valuation and financial advisory services to companies in the equipment dealer industry.

Mercer Capital has an extensive background servicing the financial advisory and business

valuation needs of equipment dealers throughout the country and across numerous OEM

networks. We assist dealers and their shareholders in wide range of activities including sales

and acquisitions, ownership planning and succession, estate tax compliance and IRS audits,

corporate reorganizations, marital dissolution, OEM purchases, financial reporting pertaining

to consolidation activities, among other purposes. We also assist OEMs in promoting efficient

dealer succession and ownership transition. Our publications and insights are often the basis

for proactive planning and dispute resolution.

Services Provided

• Valuation of equipment dealerships and OEMs

• Transaction advisory for acquisitions and divestitures

• Valuations for purchase accounting and impairment testing

• Fairness and solvency opinions

• Litigation support for economic damages, valuation and shareholder disputes

Contact a Mercer Capital professional to discuss your needs in confidence.

Timothy R. Lee, [email protected]

Nicholas J. Heinz, [email protected]

Matthew R. Crow, ASA, [email protected]

Madeleine L. [email protected]

MERCER CAPITAL

Memphis5100 Poplar Avenue, Suite 2600Memphis, Tennessee 38137901.685.2120

Dallas12201 Merit Drive, Suite 480Dallas, Texas 75251214.468.8400

Nashville102 Woodmont Blvd., Suite 231Nashville, Tennessee 37205615.345.0350


BUSINESS VALUATION & FINANCIAL ADVISORY SERVICES


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Erickson Partners Merges with Mercer Capital

Mercer Capital, a national business valuation and financial advisory firm specializing in Cor-porate Valuation, Litigation Support, Financial Reporting Valuation, and Transaction Advisory Consulting, and Erickson Partners, Inc., a Texas-based Valuation and Litigation Support firm, announce their merger effective July 1, 2015.

Mercer Capital, with its strong presence throughout the Southeast and Midwest, and Erickson Partners, with its strong presence in Texas and Oklahoma, are a perfect fit.

Both firms maintain the highest standards of quality for financial analysis and client service and believe deeply in hiring and developing the best professionals.

“The culture of both firms is so similar and that was important to us. The professionals of Er-ickson Partners are well-known in the valuation profession as some of the best and brightest. Their work product and reputation are stellar. This merger not only allows us to broaden our geographic reach but also our industry expertise,” said Matt Crow, President of Mercer Capital.

Erickson Partners enhances Mercer Capital’s broad base of industry concentrations with their exceptional history working with and knowledge of professional sports franchises and the energy sector.

“Over our 30 plus year history, Mercer Capital has developed several industry concentrations. By adding the knowledge, insight, and expertise of Don Erickson, Bryce Erickson, and the rest of the professionals of Erickson Partners, we now bring deep experience and insight to a broader range of industries than we could as separate firms,” said Chris Mercer, CEO of Mercer Capital.

“Combining with Mercer Capital, we will now be able to offer new or expanded services that complement our existing services, as well as additional industry expertise,” said Bryce Erick-

son, Managing Director of Erickson Partners. “In addition to our sports franchise and energy industry concentrations, we will be able to offer deep industry concentrations in construction and building materials, agribusiness, manufacturing and financial institutions, which includes depository institutions, insurance companies, fintech companies, asset management firms, and PE firms.”

“The combined firm will have over 40 valuation professionals positioned in five markets through-out the southwest and southeast. Such a deep bench will provide us with a tremendous op-portunity to better serve the expanding needs of our clients,” said Don Erickson, President of Erickson Partners. “Joining with Mercer Capital gives us national resources that will benefit our clients in Texas and beyond.”

About Mercer Capital

Mercer Capital is a national business valuation and financial advisory firm offering corporate valua-tion, litigation support, financial reporting valuation, and transaction advisory consulting services to a national client base. Clients include private and public operating companies, financial institutions, asset holding companies, high-net worth families, and private equity/hedge funds.

About Erickson Partners, Inc.

Erickson Partners is a professional valuation and advisory firm specializing in business valuation, litigation support, financial investigations and strategic corporate advisory services. Founded by Don & Bryce Erickson, Erickson Partners has served large and small clients by providing complex financial and economic analysis, leading to reasonable valuation opinions that withstand scrutiny.


CONTACT US

Z. Christopher Mercer, ASA, CFA, ABAR

901.685.2120

[email protected]

Matthew R. Crow, CFA, ASA

901.685.2120

[email protected]

Donald Erickson, ASA

214.468.8400

[email protected]

Bryce Erickson, ASA, MRICS

214.468.8400

[email protected]

MERCER CAPITAL

Headquarters

5100 Poplar Avenue, Suite 2600

Memphis, TN 38137

901.685.2120

Dallas

12201 Merit Drive, Suite 480

Dallas, TX 75251

214.468.2120

Nashville

102 Woodmont Blvd., Suite 231

Nashville, TN 37205

615.345.0350


COMBINING CULTURES OF EXCELLENCE

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mercer capital's value focus: equipment dealer industry | mid-year 2015

Economy & Finance