The Valuation Process - Value Management Inc

THE VALUATION PROCESS
By William J. Pembroke
Value Management Inc.

STEPS
valuemanagementinc.com
1. Data Gathering

2. Analysis

3. Application of Approaches

DATA GATHERING
• Starts with document request

• Schedule due diligence meeting/call

• Ask about: operations, marketing, administration,
ﬁnancial performance and future outlook

• Tour facility

• Independent research on the company’s industry
and markets

DATA GATHERING
• Financial documents

• Shareholder agreements

• Employment and management contracts

• Product & Marketing Brochures

• Projections

• Details on prior oﬀers and/or transactions

• Past valuations or consultant reports

DATA GATHERING
• History

• Markets & Marketing Eﬀorts

• Competition

• Management

• Operations

• Facilities & Equipment

• Financial Overview

DATA GATHERING
1. Industry

2. Demographics

3. Economic Review

ANALYSIS
•Purpose: analyze past performance to determine
inﬂuence on future performance

•Qualitative & quantitative analyses of the subject

•Comparison vs. other companies and industry

ANALYSIS: INCOME STATEMENTS
Eliminate
non-recurring
items
Adjust for
Discretionary
Items
Accounting
Related
Adjustments
Eliminate
non-operating
items
Comparisions

THE THREE APPROACHES
1. Income Approach

2. Market Approach

3. Asset Approach
TO VALUE

INCOME APPROACH
Earnings or cash ﬂow are general the most
important valuation factor for a proﬁtable operation

INCOME APPROACH
Most Widely Used Approach
•Discounted Cash Flow Method

•Capitalization of Cash Flow Method

INCOME APPROACH
Based upon the theory that the value of a business
depends upon the future economic beneﬁts it
produces.

INCOME APPROACH
Future economic benefits are defined as the likely level of earnings or
cash flow that a potential buyer could expect to realize. After
analyzing the Company's potential, the investor assesses the risk
(degree of uncertainty in obtaining future projections) involved in the
situation. A buyer, realizing that alternative investments are available,
seeks to maximize return while minimizing risk. For a given level of
risk, investors select the investment promising the highest return. For
investments yielding similar returns, the investor chooses the one
with the lowest level of risk.

MARKET APPROACH
Based on the premise that prices paid for one company provide an
indication of what a buyer would be willing to pay for stock in another
company sharing similar characteristics. This approach entails
examination of the relationship between prices that buyers have been
willing to pay for stock in kindred companies and various quantifiable
factors. The relationships are adjusted to reflect the differences
between the comparative group and the subject company. At that
point, derived ratios are applied to the subject company in order to
establish a value.

ANALYSIS
• Guideline Public Company - identify publicly-traded companies that share similar
investment characteristics with the subject

• Guideline Mergers & Acquisitions - identify recent transactions involving majority
interests in target companies that provide a reasonable basis for comparison to the
relevant characteristics of the subject company

• General Market Benchmarks - GF Data

• Rules of Thumb - sometime used as a starting point in the sale of a business

• Prior Transactions in Subject Company - can be the best indicator of value

• Buy/Sell Agreement

ASSET APPROACH
Examines the value of the tangible assets the
company has accumulated to date.

ASSET APPROACH
Examines the value of the assets that the Company
has built to date on a:

•Going Concern Basis

•Liquidation Basis

This approach is generally given little weight in the
valuation of a going concern

PRELIMINARY VALUE
We review our preliminary conclusion of value with
the client (owner(s), attorney and/or ﬁnancial
advisor) and discuss the pertinent factors impacting
our conclusion.

REPORTING
Our conclusion is presented in the form of a written
report discussing the factors listed in the following
slides in conformity with Revenue Ruling 59-60
(establishes guideline for appraising the stock of a
closely-held corporation) and the Uniform
Standards of Professional Appraisal Practice
(USPAP)

REPORTING
Revenue Ruling 59-60 factors to be examined:

• An understanding of the business and its evolution: Knowledge of the company's
development may shed insight as to its future performance.

• Degree and level of competition.

• Book Value

• The ﬁnancial condition of the business. Financial statements should be examined
for a representative period prior to the valuation date and an analysis performed of
the pertinent ratios, trends and changes.

• The earnings capacity of the company.

• Its dividend‑paying capacity.

• Whether or not the company has goodwill or other intangible value.

• Transactions in the stock of the company.

REPORTING
Revenue Ruling 59-60 factors to be examined:

• The national economic condition and outlook and, if the company's market is
concentrated in a speciﬁc geographic region or regions, the condition and outlook
of the economy in such regions.

• The condition and outlook of the industry to which the company belongs and the
company's performance in comparison to the industry.

• The attitude of investors toward companies which are comparative to the subject
company.

CONTACT INFORMATION
William J. Pembroke
Financial Analyst

215.343.0500

wjp@valuemanagementinc.com

2370 York Road, E2 Jamison, PA 18929-1031
Value Management Inc.

The Valuation Process - Value Management Inc

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