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Case Study – Marketing and Sales Company

Introduction

This video provides an overview of the actual valuation report for a marketing and sales company. Regardless of the business you own or the industry you operate within, the fundamental valuation tools and techniques are the same, and all business certified reports are structured in the same way. We also take confidentiality very seriously here at BizWorth, so we’re going to show you an actual report, but we’ve changed the company’s name, the valuation dates and all specific underlying information regarding the company.

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Transcript

Sheila Darby with BizWorth here. Thanks for joining me for another case study. Today we’re going to review a marketing and sales company. This type of company sits within the management consulting industry and this is a niche within that industry. Please keep in mind that if you are an owner of a marketing and sales company, or looking to find out more information, we will use some specific information particular to these types of companies and industries. Generally speaking, if you’re an owner of any type of business you are likely going to find this case study helpful because we will be discussing general valuation concepts and how we lay out our business appraisal reports.

Let’s jump into this business appraisal report for this marketing and sales company. You will see that we start every business appraisal report with the date of the valuation, and that’s important because we’re including all known and knowable information up until that date. All our business appraisers are certified valuation professionals and most all of us are certified through the NACVA organization. All of our business appraisal reports are very clear to discuss: What are we valuing? For this marketing and sales company, (for confidentiality purposes, we changed a lot of the key identifying information about this company) but for this case study, this company had 12% non-controlling and non-marketable ownership interest. That’s important because sometimes discounts are applicable for different ownerships or depending on what partner agreements say, discounts can be applicable and sometimes premiums are applicable as well.

Here are the Table of Contents. Regardless of the type of business you are, we lay out our business appraisal reports in the same way. We start with an Executive Summary, which I’ll show you. Then we go through an Introduction where we talk about the valuation engagement and the particular information that we used for this engagement. The Nature and History of the company, the Overview of the Economy and Industry (we’ll discuss why those aspects are important to a valuation), the Financial Condition and Earnings Potential of the subject company, and then we get into the Valuation. We really walk you through step-by-step how we valuate a particular business, and then there’s quite a few appendices in this report as well.

Let’s move through the first key section – the Executive Summary. We always start off with talking about “of the ownership interest that we valued, what is that percentage interest worth? What’s our conclusion of value?” Here, it’s $335,000 for 12% interest. We value this for a share redemption purpose. There were shares being redeemed within the company (12% of the shares) and the standard of value is Fair Market Value and that means there’s two parties, all the information is known and knowable, nobody’s being duressed into buying or selling, there’s no synergies involved either, so there’s no cost synergies here. That would be known as investment valuation for an example. Then there’s other Key Summary information to the right. Here we are summarizing each key section of the report: What was purpose of this valuation? What’s the nature and the history of the company? This is for people that just have a quick five minutes and they need to review the high-level information quickly.

We go into the Economy and the Industry. We talk about the Financial Conditions and Earnings Potential of the company. We show a quick graph, for example, of something that’s most applicable. Here we chose to show a graph of the revenues and you’ll see the sharp increase in revenues, and these are the growth rates. Even though you see a drop in this line, it’s not bad, there’s still growth. The growth just wasn’t as high as from 2014 to 2015 as it was from 2015 to 2016, for example. This was a fascinating company to value in the marketing and sales space. Here we are Summarizing the valuation and we show what our key approach was in the valuation, our conclusion of value that was attached to that.

Here we have an Introduction section that talks about the standard of value that was chosen, the valuation procedure, premise of value. In this case, the premise of value was a going concern. This was not a company that was winding up or going through bankruptcy.

Nature and History of the company – this again is a marketing and sales company. They

provided contract sales. They went out and placed products with large grocery store chains, and they had a niche market within natural products, and they had deep relationships within that particular industry. They had multiple owners and they also had unique services. They worked intensely on providing not only a high-touch customer service, but also proprietary technology platforms that assisted them with their sales. We go through many interesting things, we talk about revenue, customer concentration. This client had very good customer diversification, but there was one client that really stood out here as being a really large percentage and this one client represented more than the entire share of the profit. That’s not necessarily a bad thing. There was a lot of diversification within this client, but this shows that there was maybe a slight more risk to this company than another company that was completely well-diversified, but that doesn’t necessarily mean terrible things for the valuation. This company had a wonderful valuation and had a lot of great things going for it. It just means that there’s one client that represents a majority of the shares. It’s just a slightly higher risk profile, maybe a slightly higher uptick in the discount rate for example. We’ve valued clients that have only had one customer and sold their business quite successfully. It was a very strong business and lots of other mitigating factors. We also look at Key Person risk. For example, if there’s one person in the business that does everything, there might be a bit of an uptick in their risk profile of that as well as opposed to having lots of people involved, good policies and procedures, and if anyone went absent for a month, the company just kept plugging away. So, lots different things that we look at. Because this is a marketing and sales company, this particular company didn’t have tons of assets. It was service-driven. The competition – there’s quite a bit of competition within this sector, but it wasn’t like a gas station that’s on every single corner for example. So, there was lots of competition but there was also unique and different things within the competition. We talked about the facilities: where they were, and if a company has lots of facilities, we’ll look at how long the leases are in place. We look at the assets, but overall, this company had built up a very strong customer base. They’ve built up good sales procedures and was a very competitive marketing and sales business within the management consulting industry.

The overview of the Economy and the Industry. This is a very important to a valuation and it’s important to understand where the company resides in the geographic region. What are the trends within that region? It’s equally important to understand: what’s happening within the industry? Is the industry in growth mode? Is it in decline mode? What’s the particulars? For a marketing and sales business, like many other businesses, you and your business sit within an industry. The marketing and sales company sat within the management consulting industry in general, but they were serving another industry. They were serving a niche product area of product placements. We also have to look at: what are the growth patterns identified with the niche industry that they’re serving in and that they’re selling for? That’s important as well. We look at both industries in that respect. We look at the opportunities and threats within a particular industry and then we pull it all together and we make a summary. Here we’ll talk about the growth of the industry, consumer spending, in this particular case, and the GDP because that tied back to the consumer products industry that they were serving, and so that’s important for long-term growth. As a valuation company, we don’t want to just guess what a valuation growth rate is. It’s very concrete and we can point to sources. It’s important that just generic growth rates are not used in a valuation.

The Financial Condition and the Earnings potential of the company is reviewed. It’s also benchmarked to competitors and that’s important. Having a thorough look at the financial analysis of the company and the earnings potential helps in many ways. It helps us to identify strengths and weaknesses of a company over time and it provides a basis for comparing the company to others within the same industry. We don’t want to compare to other companies down the street necessarily, but we want to compare to companies within the similar industry. We do a review of the income statements and the balance sheets. We look for not only trends in growth, but we’re also looking for if anything stands out, should there be any normalizing adjustments? Should there be any non-operating type asset adjustments? For example, if a particular company was sitting on a million-dollar piece of real estate, but it wasn’t being used in the business (maybe 10 years down the road it would) we typically normalize for that – we make an adjustment for that non-operating asset and then we add the value of that asset back dollar for dollar at the end of the valuation so it’s not lost in valuation. We look at the profitability. We look at Key ratios for Liquidity Asset Management. This particular company generally was above and doing better than its peers. We look at the debt management, whether they’re carrying a lot of debt. That’s very important particularly for service companies. Sometimes it could be trickier for a service company to carry lots of debt if there aren’t assets sitting behind a company, but that is not always true.

The Valuation of the subject company. We then go in and we talk about the valuation and we talk about all three approaches: the income approach, the market approach, and the asset approach. For this marketing and sales company, we considered multiple methods and the method and the conclusion of value that we ultimately decided upon was based

on a multi-stage growth method. The industry growth had a lot to do with informing us of the growth rates that we used and then ultimately, we ended up with a terminal value that had a growth implied of more general economy and consumer spending growth. We walk through step by step of everything we do within that income approach and that method that we chose down to the discount rate and how we drive the discount rate. Then we move into the next approach, that’s the market approach, and we talk about which method we used. For this company, there was a lot of comparable companies and we chose an EBITDA multiple. EBITDA all is Earnings Before Interest, Taxes, Depreciation and Amortization. We chose the median for that valuation and we placed a value for that market approach. Then the asset approach, we looked at various methods, but ultimately decided not to use the asset approach because the company was a service company and was very asset light, and overall that valuation wasn’t as insightful. We do have sections on potential discounts for this company because we were valuing in a minority interest that had no control and no easy marketability. We considered all those factors. We ultimately talk about where we conclude in the valuation for that 12% interest for this marketing and sales company. After this section, we have lots of appendices. This is really the end of this case study, but don’t hesitate to reach out to us. Feel free to go to www.BizWorth.com. Ask us a question through the Contact Us page. Feel free to set up a free consultation. We’re happy to talk about your valuation needs.

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