Case Studies

Valuation Engagement Review: Shareholder Buyout & Acquisition Considerations

Industry:

Healthcare Technology including health information systems, health information technology, consulting, and training.

Purpose:

Sun Business Valuations was recently engaged to provide a business appraisal of a Healthcare IT Company owned by three equal Owner Groups. One of the Owner Groups was in discussions and considering buying out the other Shareholders and requested the services of Sun to assess the profitability and fair market value of the IT services firm. The challenge, however, was that the acquiring Owner Group would not continue utilizing the IT Company’s services after acquisition and did not foresee the other Shareholder Groups interested in using the IT services if they were going to be charged market pricing for services provided.

Sun Business Valuations was called in by the Owner Group considering acquiring the IT Company to perform a business valuation to be used for the following purposes:

  1. Help the Shareholders better understand the fair market value of the IT Company as an earnings generating entity versus a cost center.
  2. Present the valuation conclusion to the Shareholders to assist in their consideration of becoming sole owner of the IT Company.

    Conclusion of Value:

Sun based this report on a thorough analysis of the Company’s historical financial statements. Since the purpose of this report is to determine the value of the Business for a potential shareholder buyout, we examined the Business based upon actual historical performance, as well as making certain assumptions that reposition the Company as a profit generating entity going forward.

An analysis was conducted based on the most current year ending 12-31-11 financials as well as hypothetical scenarios that involve a modest 10% increase in revenue from Non Owner Groups. Various operational and intangible factors that impacted valuation were also considered and influenced the five valuation methodologies utilized in arriving at a valuation conclusion.

Sun reviewed the Business Valuation conclusion with the Principals, which led the Principals to make an informed decision that buying out that entity would not be viable.

Valuator’s Summary of Engagement:

When valuing businesses, a significant factor influencing fair market value is customer concentration. In this case, about 80% of the customer base was comprised of the 3 company owner group. The business would not exist without the related owning groups. In order to derive value from the business as a standalone operation, the customer base must expand beyond the related companies and an independent clientele must be secured.

Valuation Engagement Review: Understanding Company Value

Sun Business Valuations conducts business valuations for a wide variety of purposes. These reasons include negotiating a sale, securing financing, settling a legal dispute, and for a shareholder buyout to name a few.

The following will provide insight into one of our recent engagements involving the Shareholder better understanding the valuation of their company to determine the best time to purse a sale of the company.

Industry:

Contract Manufacturing Company

Purpose:

Sun Business Valuations was engaged by the Shareholders to perform a business valuation that would enable the founders to better understand their exit strategy options. The Company was a family owned business founded by a husband and wife who had grown the business both organically and through acquisition over a 19 year period. Fortunately, the Shareholders were not in a position that forced a sale (i.e. health or financial challenges). The company was thriving and the Shareholders were considering a sale for in order to relocate and achieve other lifestyle goals.

Valuator’s Summary of Engagement:

When evaluating exit strategy options, it is critical to have a realistic understanding of the fair market value of the company prior to pursuing a business sale transaction. It enables the parties to make an informed decision rather than “shooting from the hip” when considering such a critical decision. It enables the shareholders to use this valuation as a benchmark and approach future negotiations on an informed basis.

Sun Business Valuations based this report on a thorough analysis of the company’s historical financial statements as well as the various operational and intangible factors that impacted valuation. Five alternative valuation methodologies were used in arriving at a valuation conclusion.

Since financial statements are generally tax driven and not prepared for business valuation purposes, Sun analyzed each line item to identify any applicable recasting adjustments to determine the adjusted EBITDA (adjusted earnings before interest, taxes, depreciation and amortization). In doing so, we examined one-time or non-recurring expenses, shareholder fringe benefits, normalized shareholder compensation, non-cash expenses, and various other applicable recasting adjustments. We also made applicable adjustments to the company’s balance sheet.

Numerous intangible and operational factors needed to be assessed in addition to the overall financial health of the business. We analyzed how the company stood up to the dozens of risk factors and value drivers that impact valuation. These include shareholder dependency, quality of the management team, customer concentration, vendor dependency, industry stability, and barriers to entry to name a few.

In this particular case, the subject Company excelled in most of these areas, having put management and processes in place to facilitate efficient operations and lessen dependency on Shareholders. A main issue arose in the area of customer concentration as the company’s largest customer accounted for 54% of the total revenue. This and many other factors were considered in performing our business valuation engagement.

Sun Business Valuations reviewed the valuation with the Principals and their professionals and they are now preparing to pursue a sale of the company from an informed vantage point.

To read more about customer concentration issues on our sister company, Sun Mergers & Acquisitions’ website.

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Valuation Engagement Review: Partnership Disputes

Sun Business Valuations conducts business valuations for a wide variety of purposes. These reasons include negotiating a sale, securing financing, settling a legal dispute, and for a shareholder buyout to name a few.

The following will provide insight into one of our recent engagements involving a partnership dispute and buy-out.

Industry:

Media Production Company of videos and commercials used in website marketing

Purpose:

Sun Business Valuations was engaged to perform a business valuation relative to a partnership dispute. There were four equal shareholders and the objective was for three of the shareholders to acquire the shares of the departing shareholder. The challenge; however, was that the parties did not have a buy-sell agreement that defined valuation in the event of a buyout. The parties were at an impasse and could not reach an agreement as to the fair market value of the 25% interest.

Sun Business Valuations was called in by the firm’s CPA to perform a business valuation to be used for the following purposes:

  1. Help the shareholders better understand the fair market value of the Company.
  2. Present the valuation conclusion to the remaining shareholders to ensure a thorough understanding of its conclusion and justification of the determined opinion of value.

    Conclusion of Value:

In this particular case, we were able to bring the feuding shareholders together, culminating in an agreement between the parties and an amicable buyout.

Valuator’s Summary of Engagement:

Shareholder buyouts (as well as shareholders buying in) occur frequently in closely held companies. It is critical that departing, remaining, or incoming shareholders believe they are being treated fairly in a transaction between the parties.

Sun Business Valuations performs many valuations relative to Buy/Sell Agreements between shareholders. In the event a Buy/Sell Agreement does not exist, a well documented professional valuation is critical toward enabling the Shareholders to reach an amicable negotiated agreement.

A third party valuation serves as a great foundation to negotiate and facilitate an agreement that appeases all parties involved in a shareholder transaction. With a professional business valuation, shareholders are more likely to negotiate successful transactions and avoid costly, distracting, and time consuming disputes.


If you are considering selling your company and would like to learn more about our sell side advisory company, Sun Mergers & Acquisitions, please visit our website. 


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