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News & Publications
Mergers & Acquisitions for Medium to Large Companies
Engaged in Mergers & Acquisitions since 1989
We typically perform each valuation utilizing nine to eleven different methodologies. Most valuations run fifty or more pages in length and are quite extensive. We typically incorporate or analyze various reports, company historical and projected balance sheets and income statements, comparable sales of similar companies, industry trends, worksheets, analysis, recast financials, goodwill analysis, the core management team bio's, etc. The report explains the valuation assumptions, methodologies, and provides the final value range. Unlike valuing an automobile or a residential property (where comparable sales figures easily determine value) a business valuation is not that straight forward and financial buyers, strategic buyers, banks, and buyout funds tend to have different methods which they prefer. This is why we try to cover most methods utilized in the marketplace. Two companies that appear identical as far as type, revenue and earnings can have vastly different values because of a variety of factors. These include;
how much they each spend on R&D and patents/copyrights
to whom and where they sell their products (end users vs. OEM’s or distributors)
overseas or domestic marketing alliances
sales and marketing team
management team and employees (age, training, turnover, experience, non-compete agreements)
manufacturing plant (age, condition) and procedures (JIT, inventory turnover, efficiency, etc.)
Since synergistic buyers (as opposed to financial buyers who mainly look at the future return and risk on their investment) use a different yardstick altogether we tend to think about the new entity being a combination of lower overhead, duplicated equipment and personnel, lower costs, increased buying power/leverage, more management depth, stronger borrowing capacity, and revenues higher than the total of the two parts (moving the target’s product through the acquiring company's distribution channels and its product through the target’s in order to increase sales), etc. Expertise is required when soliciting these synergistic partners/buyers and the ability to demonstrate to them how the new combined company might look significantly different than might initially appear on the surface. There may be a need to retain or spin off certain pieces or divisions of the business in order to maximize value. Oftentimes there are divisions that generate lower returns on equity and put a dampener on the overall value of a company. Many times these divisions should be retained and with the proper focus, energy, and allocation of capital, turned around to appropriate levels of profitability. Even if not profitable they could be sold for some multiple of revenue as a stand alone. If they were sold with the rest of the business they add no value and can actually depress the selling price of the company significantly. This is especially true where earnings are often a major focal point to overall value.
The Formal Fair Market Valuation is formal and highly specific in nature. We analyze the company’s operational and financial information in detail and consider valuation approaches on all of the following methodologies:
• Asset Method (Book Value plus Goodwill Value)
• Allocation of Cash Flow Method (Debt Capacity Approach)
• Industry Standard Method
• Rule of Thumb Method
• Iteration Optimization Analysis Method
• Price based on Annual Gross Sales (larger comps)
• Price based on Annual Gross Sales (smaller comps)
• Price based on Seller Discretionary Cash Flow (larger comps)
• Price based on Seller Discretionary Cash Flow (smaller comps)
• Price based on Assets
• Price based on Stockholder’s Equity
There are several reasons why this Formal Fair Market Valuation should be performed:
• As a significant personal asset, knowing the value of your company is important for your estate and personal financial planning. Even though most business owners know the value of their real estate holdings, stocks, bonds, vehicles and other possessions, they really have no accurate sense as to the value of their business in the marketplace.
• In order to maintain or increase the value of a business an owner must know specifically what enhances or distracts from the value of their particular company. This valuation allows you to see what areas you can improve on or modify in order to increase the overall price you ultimately receive for the company.
• If taking the company to market having us perform this valuation allows us to guide potential buyers or investors in their own value analysis. We are then frequently able to demonstrate value to them or uncover incorrect assumptions or analysis in their own methodology. Without having gone through the valuation process we are limited in our efforts.
• To facilitate bringing buyers or investors to the table they want to be confident the company they are looking at has reasonable price expectations. By nature of the fact we have performed a valuation this gives a high level of reassurance that our client's expectations are reasonable. Otherwise, they often assume they may be wasting their time on a deal where it is a case of "anything is for sale for more than it's worth".