3 times annualized revenues is a reasonable debt limit for most small billboard companies. Here’s why.
If you borrow less than 3 times gross revenue, your plant will be worth more than debt even if revenues drop and multiples contract during a recession.
Industry revenues declined 20% during the 2008-2009 recession. Billboard values have averaged 5-6 times gross revenues but can be expected to drop to 4 times gross revenue during a recession.
If you borrow no more than 3 times annualized revenue against your boards you will be able to sustain a 20% drop in revenues during a recession and still have enough value in your plant at a 4 times revenue sale multiple to cover your debt.
Let’s assume your plant is generating $20,000/month in gross revenue or $240,000/year. At a 5 times revenue multiple your plant is worth $1.2 million. You take a loan for $720,000 or three times gross revenue. A recession hits. Your revenues drop 20% to $192,000. Valuation multiples contract from 5 times revenues to 4 times revenues. Your plant is now worth $768,000. This is not a fun state of affairs but you still have enough value in your plant to be able to cover your debt and have a little left over.
3 times annualized revenue is too high if you are in the 8 sheet business (valuations are lower), if you have short term land leases or if you are in the transit business where you rely on short term contracts with transit agencies or municipalities. 1-2 times annual revenue is a better debt limit.