Case Study- Valuing a Business

Under what circumstances would it be necessary to need to know the value of a business? Well, there are myriad reasons why knowing what a company might command in the open market might be a critical piece of information.

A divorce; the opportunity to offer an attractive remuneration package to a potential executive; the dissolution of a business partnership; to obtain a second opinion on a previously performed business valuation- these are all valid reasons why one might need to know the value of a business.

BWA has conducted several appraisals- read about one below.

         
 

Client Specifics

"John Doe" was part owner of two companies- one an established business grossing approximately $20 million annually, the other a startup company that saw revenues of almost $18 million in its first year, and was projected to do 2 times that much the following year, with projected increases for the foreseeable future of approximately 20% annually.

Mr. Doe owned 20% of one company, and 10% of the second.

Mr. Doe had fallen out of favour with his fellow business owners, and the business relationship was ending. In order for everyone to part on good terms, the other owners agreed to give Mr. Doe a check for his share of the value of the company. So the valuation project was initiated to accomplish a few objectives:

  • The overall value of each company needed to be determined (and Mr. Doe's gross share calculated)
  • The other business owners had already performed a valuation of both businesses; we were tasked with comparing the previously performed valuation with the one to be done by us, and justifying any differences
  • Mr. Doe's share eventually had to be adjusted to account for 2 common discounts applied when assessing the value of a minority share- Discount for Lack of Control(DLOC) and Discount for Lack of Marketability (DLOM). An opinion needed to be offered on what an appropriate percentage was for both these discounts.

The Project

Performing a business valuation is an intensive, exhaustive process that involves several key activities, all of which are interrelated, and each of which adds another piece of valuable information to the overall objective of providing an opinion of value to the business.

A few are highlighted here:

  • Interviewed key associates in both companies to obtain a sense of how each company was operated.
  • Interfaced regularly with the bookkeepers and CPAs of both companies in order to obtain all of the financial information needed to complete the valuation project.
  • Recast the financials as necessary, making the adjustments needed to view each firm in an appropriate light and to make decisions regarding the valuation independent of the particular idiosyncrasies commonly seen in privately run firms.
  • Performed an intense analysis of the industry in which both companies operated, taking note of all trends and including their effects in the final appraisal report.
  • Conducted research on previous court cases involving DLOC and DLOM for the industries in which the subject companies operated, and determined an appropriate value for each discount.         
              
 - **note**- even though this project involved scrutinizing court cases, we are NOT attorneys, nor do we claim any expertise  in  the legal field)
  • Selected several methods of performing the appraisals for each company, then weighted each appropriately in order to determine the most appropriate method for assessing value to the projects.
  • After an appropriate level of scrutiny of the previously performed valuation, offered an opinion as to why it was not appropriately performed, and why our client was entitled to a higher share of the business than first calculated.

The End Result

Due to the work performed on this project, Mr. Doe was able to receive from his former business partners a check in an amount that more accurately reflected the value of his share of the companies. He has now successfully divested himself of the untenable position represented by his former business climate, and has other business interests that he is currently pursuing.

Being able to supply such a critical piece of information for the client to assist in his long-range planning is always a great pleasure for the consultants at BWA, as we realize the importance of this function to any of the processes that involve needing to know the value of a business.

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