Valuation: The Beginning Point in Corporate Development
A thorough valuation is the first step in any strategic decision-making, whether you are deciding whether to sell or to grow your business. If you are seeking to sell, the valuation establishes the floor of value and identifies the types of transaction structures that will meet your selling goals. If your objective is to expand the business, the valuation will provide you with today’s baseline value, against which to evaluate the success of your growth strategies.
Our disciplined approach to valuation, combined with our years of experience assisting in actual buy and sell transactions, results in a valuation that both unearths your company’s “hidden” value and reflects the actual value likely to be perceived by buyers in the marketplace. Therefore, when our valuation is complete, you will be armed with comprehensive, realistic information about your company’s worth, upon which you can base your strategic decisions.
STEP 1 – Gather Data
The valuation process begins with a review of your financial statements and an in-depth interview with you – the business owner – both of which help us to establish an information base for understanding your company. With this foundation in place, we then review the external factors affecting your company’s value in preparation for translating this data into a sound valuation of your company.
Financial data we review includes:
• Income statements
• Financial reports
• Balance sheets
• Off-balance-sheet assets
• Accounts receivable aging
• Tax returns
• Depreciation schedules
• Equipment appraisals
• Property/building appraisals
• Leases and lease holdings
In our interview with you, we will want to:
• Review financial statements
• Discuss improvement opportunities
• Consider most-qualified acquirer categories
• Review business operations
• Assess profit centers
• Discuss industry trends
• Evaluate growth potential
• Explore ways to enhance value
• Assess strengths, weaknesses, opportunities & threats
Our external review consists of relating the relevant industry statistics gathered in the first sections of the SOA. We review industry financial norms and standards using the Risk Management Associates industry profiles and the Financial Almanac.
STEP 2 – Recast Financials – Uncover Hidden Value
Armed with the complete data on your business and its position in the marketplace, we then begin to recast your financial data to show accurate operating results. This recasting has two major components: (1) normalizing your income statements and (2) adjusting your balance sheet to fair market value.
Normalizing Income Statements
Normalizing income statements involves making adjustments to indicate the company’s true profitability. If, like most business owners, you have cast your statements to minimize profits and thus taxes, normalization will paint a more accurate picture of the value your company would bring to a potential buyer. It involves recasting the following areas:
· owners benefits and compensation
· non-recurring and non-business-related expenditures
· timing of income/expenses
· capital assets expensed
· other income/expenses that impact on true operating profitability
Adjusting the Balance Sheet to Fair Market Value
Your balance sheet may not reflect the fair market value of your assets, a measurement that is crucial to the complete understanding of your business’s true worth. Therefore, in this phase we recast your financial statements to accomplish the following:
· include off-balance-sheet assets
· revalue fixed assets to fair market value
· assess the true market value of working capital: accounts receivable, inventory, etc.
· adjust for non-business-related assets and other assets not anticipated to be included
in the proposed sale
STEP 3 – Establish Value: Evaluate Possible Strategies/Outcomes
All of our data collection and financial analyses go into the database from which we quantify your business’s total value to an acquirer. We begin by calculating value 11 different ways using at least six distinct approaches. We then apply our knowledge of the marketplace to arrive at a valuation that reflects both your business’s intrinsic worth and the value that will be recognized by potential buyers. Valuation data also begins to suggest transaction structures that could result in maximum total return, as well as possible tax strategies you may wish to consider with your tax experts. In addition, at this point we begin to identify the types of purchasers who might best meet your selling criteria should you choose that option.
Six Valuation Approaches
We consider six classic approaches to the valuation of your company:
• capitalization of earnings
• present value of discounted future earnings
• excess earnings approach
• comparable business sales
These calculations give us an overall perspective on the worth of the business, from which we begin developing a range of potential values. Using the judgment we have derived from years of assisting in actual transactions, we then focus on the areas we believe will be considered the most relevant by the marketplace. This combination of insights then translates into an ultimate valuation number for your company.
Transaction Structure Alternatives
The range of values we identify for a business typically begins to suggest the broad types of transaction structures that will create maximum return for a seller. At this point, we begin to identify and evaluate these alternatives in preparation for inclusion in the SOA Report.
Our valuation work often suggests tax strategies that sellers can use to minimize the costs involved in the sale of a business. We make these suggestions for review and analysis by your own tax specialists, who will incorporate them into your overall financial picture.
Given the results of the valuation and the options identified for possible deal structures, we can begin to identify potential groups of purchasers. Purchaser categories are prioritized according to their possible motivation for acquiring and ability to pay the highest price to purchase your business. This categorization will guide the efforts to market the business, should you ultimately decide to sell.