Going Bananas Case StudyA presentation by Mary Warmus, CPA, MBA, ASA
The Life Cycle of the Business Dictates what Valuation Methodologies to use. Impacts model assumptions in the DCF and the selection of multiples in the Market Approach. Exposes the risk posture of the client. Emphasizes the need for long-range strategic planning. Impacts the clients need for a valuation and other services. Dictates a client’s timeline for Exit. Highlights the need for a team of trusted business advisors.Next slide provided by attorney, Felix Gonzalez of the Archer Law Group KENSINGTON FINANCIAL CONSULTANTS, INC Copyright 2012
Going Bananas nd Produce Company Balance Sheet As of December 31, 2010ASSETS LIABILITIES AND CAPITALCURRENT ASSETS CURRENT LIABILITIES Cash $ 1,000,000 Accounts Payable $ 2,950,000 Accounts Receivable 13,500,000 Other Accrued Liabilities 75,300 Inventory 2,200,000 Current Portion of Long Term Debt 85,000 Prepaid Expenses 125,600 Line of Credit 1,250,000 Shareholder Loans 25,000 TOTAL CURRENT LIABILITIES 4,200,000 Other Receivables 10,000 Misc Other Assets 5,000TOTAL CURRENT ASSETS 16,865,600 LONG TERM LIABILITIES Mortgages Payable 2,500,000PROPERTY AND EQUIPMENT TOTAL LONG TERM LIABILITIES 2,500,000 Property & Equipment 7,500,000 Accum Depr (5,625,000) Total Property & Equip (net) 1,875,000 TOTAL LIABILITIES 6,700,000OTHER ASSETS - Land 350,000 TOTAL CAPITAL 12,390,600TOTAL ASSETS 19,090,600 TOTAL LIABILITIES AND CAPITAL 19,090,600
DCF Value Conclusion – Base CaseFair Market Value - Business Enterprise(C Corp) ControlBasis 56,143,400Plus: Non-operating Assets - Excess Working Capital 5,165,600Less: Debt (3,835,000)Fair Market Value - Equity (Control, Marketable Basis) 57,474,000Plus: S Coproration Premium - 15% 8,621,100FMV - S Corporation Basis (Control, Marketable) 66,095,100Less: Minority Discount - 24% (13,793,760)FMV - Minority Non-Marketable Basis of Going Bananas 43,680,240Less: Marketability Discount - 35% (15,288,084)FMV - Minority Non-Marketable Basis of Going Bananas 28,392,156Rounded to… 28,392,000Notes:a) Forecast based on Client Analysis - Assumes new growth areas in prepared fruits/salad kits & enhanced market shareb) Operating expenses and depreciation charges based on historical performance.c) Discount Factor assumes Mid-Year Conventiond) Excess working capital defined as (Current Assets-Current Liabiliites) determined with reference to historical average.e) This analysis was prepared for purposes of this valuation calculation and should not be used for any other purpose.f) Long run inflation rate assumed to be 2.5%.
Going BananasWeighted Average Cost ofCapitalCost of Equity Capital (BuildupMethod): 20-year US Treasury bond yield as ofRisk-free rate of return 4.13% 12/31/10Long-term equity risk SBBI Valuation Edition 2011premium 6.70% Yearbook SBBI Valuation Edition 2011 Yearbook -Size premium 6.28% 10th decileUnsystematic risk premium SBBI Valuation Edition 2011 Industry risk premium -1.55% Yearbook Company risk premium 2.00% EstimateTotal equity rate 17.56%Cost of Debt Capital Prime rate at 12/31/10 was 3.25% per Federal ReserveAverage cost of debt 3.25% Bank of St. LouisTax rate 39.00% Estimated Federal and State After-tax debt rate 1.98%Capital StructureEquity/invested capital 70.00%Debt/invested capital 30.00% Total invested capitalWACC (Rounded) 13.00%Sourcehttp://www.federalreserve.gov/releases/H15/data.htm KENSINGTON FINANCIAL CONSULTANTS, INC Copyright 2012
Some Factors Considered for Risk AssessmentIntense competition can adversely affect market participant’s financialperformance.Food distribution businesses are highly competitive and are characterized byhigh inventory turnover, narrow profit margins and increasing consolidation.The Company Produce competes not only with local, regional and national fooddistributors, but also with vertically integrated national and regional chains thatemploy a variety of formats, including supercenters, supermarkets and warehouseclubs.Many of The Company’s food distribution competitors are substantially largerand may have greater financial resources and geographic scope, lowermerchandise acquisition costs and lower operating expenses, intensifyingprice competition at the wholesale and retail levels. Industry consolidationand the expansion of alternative store formats, which have gained andcontinue to gain market share at the expense of traditional grocery stores,tend to produce even stronger competition for both retail and fooddistribution segments. Failure to implement strategies to respond to thesecompetitive pressures, can negatively impact operating results through adverseaffects on pricing (reductions), decreased sales or margins, or loss of market share.Wholesale bypass is threatening food wholesaler’s existence. The main factorthat has undermined industry revenue growth is the increasing trend of wholesalebypass. Retailers aim to source produce as cheaply as possible, which in some casesleads them to undertake their own sourcing activities.
DCF Assumptions – Case Changes BASE Case 2 Case 3 WACC 13% 14% 13% Risk Average More Average Revenue Growth 8% to 2.5% 8% to 2.5% 5% to 2.5% Gross Margin 82% 82% to 80% 82% Fair Market Value (1) $ 28,392,000 $ 33,104,000 $ 25,021,000 (1) S Corp Basis, Minority, Non-Marketable Basis KENSINGTON FINANCIAL CONSULTANTS, INC Copyright 2012
Publicly Traded Guideline Companies•Nash-Finch Foods Nash-Finch Company operates as a wholesale food distributor in the United States. The companys Military segment distributes grocery products to the United States military commissaries and exchanges in the United States and the District of Columbia, Europe, Puerto Rico, Cuba, the Azores, and Egypt.•United Natural Foods United Natural Foods, Inc. is a national distributor of natural, organic and specialty foods and non-food products in the United States and Canada. The company operates through three operating divisions: Wholesale, Retail and Manufacturing.•Spartan Stores Spartan Stores, Inc. operates as a grocery distributor and retailer principally in Michigan and Indiana. The company operates in two segments, Distribution and Retail.•Core-Mark Holding Company Smokes and snacks are at the center of Core-Mark Holdings cosmos. The company distributes packaged consumables (including cigarettes and other tobacco products, candy, snacks, grocery items, perishables, nonalcoholic beverages, and health and beauty aids) to about 26,000 convenience stores; mass merchandisers; supermarkets; and drug, liquor, and specialty retailers.
Mergerstat: Size Premiums Small vs. Large Companies: Median P/Es Offered Size Total # Median Year P/E > $100MM P/E < 25MM Discount Transactions P/E All 2006 22.8 17.6 22.8% 464 26.1 2007 23.9 21.2 11.3% 498 28.8 2008 23 8.9 61.3% 289 21.7 2009 18.4 8.5 53.8% 210 20.7 2010 21.8 9.2 57.8% 301 24.4 Average - 5 Years 41.4% 24.3 Source: Mergerstat 2011 for transactions 2010 and prior. Pages 20-21 KENSINGTON FINANCIAL CONSULTANTS, INC Copyright 2012
Guideline Publicly Traded Company Method Multiples of Revenues and EBITDA LTM Most Revenues Ending Recent MVIC MVIC/REV MVIC/EBITDA Company $000 (FYE 0) $000 LTM LTMNASH-FINCH $4,991,979 2010/12 2010/12 $ 810,136 0.2 6.1UNITED NATURAL FOODS 3,925,338 2010/10 2010/07 1,965,413 0.5 13.4SPARTAN STORES 2,520,370 2010/12 2010/03 558,659 0.2 5.5CORE-MARK HOLDING COMPANY 7,266,800 2010/12 2010/12 402,995 0.1 7.5LOW LOW 0.1 5.5HIGH HIGH 0.5 13.4MEAN MEAN 0.2 8.1MEDIAN MEDIAN 0.2 6.8 Selected Multiple (1) 0.4 8.1 Size Adj - 41.4% (2) (0.2) (3.4) Adjusted Multiple (Min/Mkt) 0.2 4.7 Control Premium - 42.5% (3) 0.1 2.0 Adjusted Multiple (Control/Mkt) 0.3 6.8NOTES:(1) Multiple as if freely traded - minoirty, marketable value indication(2) Mergerstat discount for size - 5 year Average(3) Mergerstat control premium - 5 year Average KENSINGTON FINANCIAL CONSULTANTS, INC Copyright 2012