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Case Study – Video Production Company

Introduction

This video provides an overview of the actual valuation report for a video production 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.

About BizWorth

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Transcript

Hi, Sheila with BizWorth here. Thanks for joining me for today’s case study on a video production and distribution company. Regardless of what business you own or the industry you operate within, the fundamental valuation tools and techniques are the same, and the BizWorth reports are structured in the same way. Today’s case study can be very applicable for any business owner because a lot of what we’re going to cover is not necessarily specific to a video production company, but we are going to call out some specific information that video production and distribution companies can relate to most. With that being said, we take confidentiality extremely seriously here at BizWorth. We’ve changed the name of the company to something generic, the valuation amount, the buyout percentage, and the dates.

There’s nothing identifying to this company other than the industry in which it operates. With that being said, let’s jump out to the report. I’m going to walk through some high level information and some specific information. If you have any questions, do not hesitate to reach out to us here at BizWorth. Go to www.BizWorth.com to schedule a free consultation and we would be happy to talk about the business valuations and how a business valuation for your situation could be applied, as well as how we go about our engagements. I hope you enjoy the case study and I hope it’s helpful.

This is a BizWorth valuation report. It’s certified. Everyone that conducts valuations here are certified professionals This case study was for a share redemption, a buyout of 10% of the shares of a non-controlling and a non-marketable interest that was owned by one of the owners of this company. For this particular valuation, it’s important to know that we did have access to all the company information, the financials and our report was structured in a way (the same as all our reports) that people can get everything they need to get out of the executive summary at a high level.  If you read the entire report and you need a quick refresher, the executive summary is very helpful. This is where we’re going to focus the majority of our time today. There’s also the introduction. This is very specific to the standard of value that’s chosen for a particular engagement. There’s also the nature and history of the company. This section is extremely important because it really covers what’s specific to a company and all the great benefits and the earnings potential to that company is laid out here. The overview of the economy and industry. This is very important because you need to understand the economy and the industry in which the company operates. It also helps inform growth rates. Financial condition and earnings potential. This is a key section of the report. We cover the financials of the company, but we also talk about how the company benchmarks to competitors within the same industry. Then we go into the valuation and there’s quite a few appendices as well.

Going into the executive summary report, we lay it out. There’s a conclusion of value for this company which is $225,000 for 10% ownership interest. Again, we changed the valuation amount for this exact company that we’re talking about. There are three standards of value for this share redemption for the share buyback. Fair market value was the appropriate standard of value. It was a going concern. Here on the left we start to talk about and summarize the nature and history of the business. This business had been in operations for four to five years. They had lots of great things going for the company. They had grown the company with substantial growth over a short period of time. One of the risks that stood out about this video production company, a lot of businesses can relate to. In producing their parody content, videos and commentary which they distributed over multiple channels, including YouTube, Twitch, and some other popular mechanisms. They quite a few subscribers. They had a huge subscriber base and a strong following, but what was interesting is that there were a few key personalities that were a part of this content that they produced. That is one of the downsides, one of the risks. Lots of companies can relate to this because there might be a key person, a key personality that the company identifies with. While the company isn’t what it is because of that person or these individuals, it is a slight risk going forward. On the flip side, there’s lots of benefits. Usually, the benefits will outweigh the risks because that’s why the companies are a going concern. They have a lot of good things going for the particular business. This business had a great distribution channel. They were very creative in their content. Another downside was that it had to continue to produce new content and new ideas.

The economy and the industry in which this company operated was important to highlight. It was important to understand the video production, the distribution, the entertainment industry in which it operated, and to understand those growth rates. You need to understand the growth of a company can outpace that of the industry, but over the long run, it likely won’t. So, you need to understand the industry in which your business operates.

The financial condition and earnings potential of this company. This company is a service-based business. It’s asset light, so some of the key ratios may not be as applicable. What’s great about service-based businesses is that typically there’s not a lot of overwhelming capital upfront that you have to put into your business. When we do bench markings, we’ll benchmark against other service-related businesses that are also light on the assets. For company revenues, we changed all the numbers, so they won’t mean much, but the growth itself means a lot. They experienced high growth early on in the last five years, but it began to plateau when the company began to stabilize. You’ll see that will likely inform the growth rates chosen for this company for the valuation.

The valuation itself, because it was a service-based business, we did look at the asset approach, but it didn’t really inform the valuation because there were so few assets on the books. So, there is an asset approach to our methods, but for this valuation we focused on the income approach and the market approach. The income approach for this company, we chose because we felt as if the discount rate really properly reflected the risk of the company. Also, the growth rates we felt were company specific. So, the income approach was much more representative of the valuation of the company. There were lots of good comparable found for this company and you can see that the valuation for this company was very similar for the market or for the income approach. Sometimes these values are a little bit more separated than what we’re showing. Sometimes they’re even closer. Some valuation companies choose to average the different valuations that are derived from the different methods. In this case, we chose to pick a very specific valuation based on one method. It’s easier to explain how that valuation as opposed to a weighted average or an average. There are circumstances where you might do either one, but for this company, we chose a specific valuation based on the income approach. The method we chose for this company was a multistage growth method. This just means that we chose different growth rates for different times in the future expectations of this company. For example, for the next two years we may have chosen one growth rate, for the next three to four years we chose another, and then for the remaining life of the company, we chose a growth rate that was more applicable to the economy, GDP or the industry.

Just to give you a quick preview of the report itself, we go into the introduction. We talk about the standard of value, the premise of value. This is a going concern business. It was not winding down, it was not in bankruptcy. Then we talk about the valuation procedure that we chose. We talk about the nature and history of this company. There was so many great things going for this company. We talk about the products and services, the distribution channel, the videos this company produced, customers, competition, the management and personnel. You want to understand how business is run and the facilities of a business.

Then we go right into the overview of the economy and the industry. After speaking about the economy and the industry in the report we write up, we go straight into the financial condition and the earnings potential of a business. You want to understand the growth potential of a business. Examples that are important for this business might have been the facilities in which they were producing their videos and their content. Was it sufficient? If they need to grow, do they need more facility space? Do they need more computers? Do they need more people? If you’re in manufacturing, for example, do you need more manufacturing space? There might be some bottlenecks that we need to consider. Now you can unlock those bottlenecks, but it may require more capital and that’s regardless of the business you’re in. If you’re wanting to produce more content, you may have to hire more videographers to do that.

We do benchmark against industry. That’s very important to understand how the subject company is operating against its industry. The next section we go right into the valuation and we talk about the three approaches, the asset, the income and the market. We talk about the methods that we choose, and we close it out from there. There’s lots of appendices. We talk about the income statement, the balance sheet, and we benchmark those against industries.

I hope this video blog was helpful. Please reach out if you have any questions. If you go to our web site, www.BizWorth.com, you can schedule an appointment to meet with me or one of our advisors to talk about your business valuation. Even if you’re not sure it’s the right time for a business valuation, hop on a free consultation and let’s talk through that. We’re always happy to help business owners so feel free to reach out. If you like our content and would like to see more, visit our blog or follow us on Facebook, LinkedIn, and YouTube. Thanks so much.

Keywords

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