Wow did I get a real world demonstration of the saying, “Beauty is in the eyes of the beholder.” If I could rephrase that to the business sale situation it could be, Strategic Value is in the eyes of the particular buyer.” We are representing a small company that has a patented and somewhat unique product. They have gotten distribution in several hardware store chains, Lowes, and are going into Wal-Mart next spring.

The owners are at a cross-roads. To keep up with their growth in volume they recognize that they require a substantial capital investment. They understand that they have a window of opportunity to achieve a meaningful footprint before a much better capitalized competitor produces a similar product and undercuts their price. Finally they realize that a one product company at a big box retailer is quite vulnerable to the inevitable rotation of buyers or a change in policy that bumps them out of 25% of their sales volume.

The good news is that their product is unique and is protected for 15 more years with utility patents. It is not a commodity so it achieves healthy margins. The product is an eco friendly product so the retailers value that. Finally, the product can be used in retailer programs where it is combined with other same category products for the spring tune up and the fall tune up. It helps drive the sales of other products.

The ideal company buyer is a larger company that provides products in the same category and sells to the same retailers. They could plug this product into their existing distribution channel and immediately drive additional sales. They would strengthen their position within their accounts by offering an additional product, a unique product, an eco friendly product, and a product that would promote companion product sales. It would also provide a unique door opener to other major accounts that would want this unique product.

With the input from our clients we located a handful of companies that fit this profile. We were pretty excited at the prospects of our potential buyers recognizing all of these value drivers and making purchase offers that were not based on historical financial performance. The book, memorandum, confidential business review, executive summary, or whatever your business broker or merger and acquisition advisor calls it, will certainly point out all of the strategic value that this company can provide the company that is lucky enough to buy it.

As part of the buying process we usually distribute the book and then get a round of additional questions from the buyer. We submit those to our client and then provide the answers to the buyer with a request for a conference call. We had moved the process to this point with two buyers that we thought were similar companies. The two conference calls were totally different.

The first one included the Merger and Acquisition guy and the three top people responsible for the product category. Their questions really indicated that they were used to being leveraged as a commodity provider by the big box retailers. Why were co-op advertising costs so high? Were they required to do that again in order to stay on the shelves? Were they on the plan-o-gram? Was Wal*Mart demanding that they be at a lower price than Lowes? What about shipping expenses? Why were profits so low? We had a very bad vibe from these guys. They were refusing to recognize that this was a high gross margin product growing in sales by over 200% year over year and had a higher level of promotional expense than a mature commodity product line. We couldn’t determine if they just didn’t get it or were they being dumb like a fox to dampen our value expectations.

The second call from the other company included the Merger and Acquisition guy and the EVP. The whole tone of the questioning was different. The questions focused on growth in sales, pricing power, new client potential, growth strategy, their status at the major accounts, remaining life on the patent and what their strategy was for new categories and markets.

Well we got the initial offers and they could not have been more different. The first company could not get beyond evaluating the acquisition as if it were a mature, commodity type product with paper thin margins. Their offer was an EBITDA multiple bid without taking into consideration that the product sales had grown at over 200% year over year and the marketing and promotional expenses were heavily front end loaded.

The second company understood the strategic value and they reflected it in the offer. It was not an apples to apples comparison, because the second offer was cash at close plus a significant earn out component while the first offer was all cash at close. However, the conservative mid-point of the combined cash and earn out offer was 300% higher than the offer from the first buyer. This was the biggest disparity between offers I have ever experienced, but it was quite instructive of the necessity to get multiple opinions by the market of potential buyers.

There are some companies that no matter how hard we try will not be perceived as a strategic acquisition by any buyer and they are going to sell at a financial multiple. Those companies are often main street type companies like gas stations, convenience stores and dry cleaners that are acquired by individual buyers. If you are a B2B company, have a competitive niche, and are not selling into a commodity type pricing structure, it is important to get multiple buyers involved and to get at least one of those buyers to acknowledge the strategic value.

The Transition Companies

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Introduction to Recycling from The Transition Companies By Nina K.

Recycling

During the 1960s and ’70s it was thought that emissions from factory chimneys and sewage pipes constituted the biggest environmental problem. But since then, due to new, worldwide “Eco-laws”, these discharges have decreased considerably. Instead, the focus has switched to the environmental problems associated with the goods that are produced and consumed in modern society. Many of the most environmentally damaging substances are currently being supplied through glass bottles, newspapers, plastic bags, coke cans, cardboard boxes and sweet wrappers just to mention a few.

To tell you what recycling is and what the word actually embodies may seem strange to you. I am sure all of you think you know exactly what it entails. But in theory recycling involves the separation and collection of materials for processing and re-manufacturing old products into new products, and the use of these new products, completing the cycle.

Glass is one of the most common man-made materials. It is made from sand, limestone and sodium carbonate and silica. The ingredients are heated to a high temperature in a furnace until they melt together. The molten glass from the furnace cools to form sheets, or may be moulded to make objects. Actually glass is completely recyclable and making products from recycled glass rather than starting from scratch saves energy resources. Recycled glass is made into new beverage bottles, food jars, insulation and other construction materials. Usually, clear glass containers are recycled into new clear glass products, while coloured glass containers are recycled into new coloured glass products.

In fact, the recycling of glass as well other products, such as aluminum and steel cans, cardboard, car tyres, newspapers and certain plastics is a growing industry in most of the world today. In South Africa however, we don’t have a very high level of recycling. There aren’t enough people who take an active interest in the environment and try to do their bit in preserving nature, by for example, taking used bottles, aluminum cans or even leaves and other garden refuse to recycling sites. This is probably due to a lot of reasons. The first and foremost being that, in South Africa, we don’t have many recycling centres and, lets face it, how many of us really sort our rubbish before throwing it in the rubbish bin?

Since it is now these products, and no longer industrial emissions, that accounts for most of the environmentally harmful substances being discharged in nature the conditions for environmental efforts have fundamentally changed. As the “release sites” or the polluters, have become so numerous, a totally new system for controlling and handling environmentally harmful wastes is needed.

One way could be to transfer the responsibility for this to the producer of goods, according to the established principle “the polluter pays.”

However, I found this principle not be all that efficient in practise. To find out what is actually being done at the industrial level, I spoke with William Footman, one of the regional managers of Nampak, which is one of South Africa’s 2 glass manufacturers. He told me that the reason we don’t have a very developed glass recycling programme in this country, is due to the fact that we only have two factories where glass can be recycled back into beverage bottles. And as it is far too expensive for the companies to transport old bottles back to their factories for recycling, they would rather produce new, rather than re-use the old glass.

But, producers who put a product on the market should, quite simply, be responsible for taking back as much as is sold. What is important for environmental policy is the creation of a system in which each producer assumes his responsibility. But should all the responsibility lie on the producers? Every consumer who buys these products should make an asserted effort to help keep our planet clean.

I searched the Internet to find out exactly how poorly we as South Africans compare to the rest of the world in recycling. The country that has been in the forefront of recycling, particularly for household waste, is Sweden. Swedes have to carefully recycle and separate their own rubbish for the refuse collectors on a daily basis. Even in the middle of their very cold winters, in raging snowstorms, the Swedish people go to the recycling stations with their household trash to perform the daily ritual of separating cardboard from plastics and glass from biological waste.

Actually nearly all 1st world countries and many developing countries have developing or already highly developed recycling programmes, and South Africa desperately needs to jump on the ‘recycling wagon’. A step in the right direction could be to build recycling plants all over the country. Every town should set up a sufficient number of collection stations and every household should share the responsibility and sort their rubbish to ensure that batteries and electrical appliances are not thrown in landfills, that glass, aluminium cans and plastic bags don’t clutter the country-side. Working together with the producers, consumers should send items back to factories, to be recycled and thereby reused.

The process of recycling, for example paper, entails the conversion of waste paper to various types of finer grades of paper. First, careful sorting is required so that items such as plastic wrapping, paper clips and staples can be removed. Waste paper is divided into categories such as newsprint; typing and computer paper; and magazines, which have shiny paper and coloured inks and need special treatment. Next, the ink must be removed. This is done by soaking the paper and breaking it up into small pieces in giant washers, then treating it with chemicals that loosen the ink so that it can be rinsed away. Sometimes more than one such chemical must be used because many types of ink must be removed. Finally, the wet, shredded waste paper is blended with other materials according to the type of end product that is desired. Old pieces of cloth, which are used to produce the finest, most expensive grades of paper, may be mixed in. Wood pulp and other forms of cellulose such as straw may also be added in varying proportions. If white paper or paper for greeting cards or stationery is to be produced, bleach may also be added to lighten it; if newsprint is to be produced, a mixture of red and blue dyes is added to reduce the greyness of the final product. Chemical preservatives are also added at this point.

At this time, the fully treated material is a sort of liquid sludge that is ready to be made into paper. In most papermaking operations, the sludge passes through a machine called a beater, which is essentially a very heavy roller that presses the fibres in the sludge together and squeezes out the water. The paper is formed and held together by the natural interlocking of the long cellulose or cloth fibres as they are pressed and dried. No glue is used in the process and in fact, the natural glue in wood is removed chemically before the paper is made.

A refining machine brushes the roll of sludge to smooth out irregularities. The papermaking machine presses the sludge into thin slices, which are then further dried by pressing or by being placed in furnaces. Finally, the paper is polished or chemically treated to give it the proper finish and lastly packaged and sent to customers.

The papermaking process itself is pretty much the same whether one uses virgin materials, recycled materials, or a mixture of the two. The difference is in the preparation of the sludge. Recycled material requires careful sorting. This in turn means that the paper mills must have a place to store waste paper and the staff to sort it, as well as a means of disposing of waste paper that cannot be used. Removing ink from waste paper also requires special chemicals, equipment, and equipment operators. As a result, some paper mills are not set up to use any recycled materials. That’s why the forests are getting smaller and smaller.

Also, not all paper products can be made with recycled paper. Brown grocery bags, for example, can be recycled into other types of paper, but they must be made, at least partially, out of virgin materials because only virgin materials have the long unbroken fibres that give the bags their necessary strength. Unlike glass bottles and aluminum cans, which can be recycled an infinite number of times, paper cannot be recycled indefinitely. Each time it is recycled, its quality degrades slightly because the fibres become more and more broken. At some point recycled paper has to be mixed in with virgin material, and eventually after repeated uses, it ends up in a landfill or and incinerator.

Obviously as recycling plants and collection sites have to be set up all over the country and for all the various types of materials we use in every day life, it is going to be a very expensive process to start, but it is vital that the wheels are set in motion before it is too late! In turn this will lead to many new jobs opening up for unskilled as well as skilled people in South Africa helping to keep our country cleaner as well as decreasing unemployment and thereby promoting the economy.

Posted by The Transition Companies

Introduction to Recycling from The Transition Companies

21st Century The Transition Companies Recycling Author: Beverly Clarke

RECYCLING ALL TYPES OF PAPER

Let’s assume that you don’t print out the North American average of thirty plus pages per day or buy the morning newspaper or even buy highly prepackaged goods at the grocery store, you could be astonished at just how much paper waste you render in a given twelvemonth period. Recycling paper results in monumental energy, fresh water, carbon dioxide and natural resource savings – as much as seventy-five percent in many cases.

Paper also happens to be one of the most recyclable items. Clean office paper can now be easily separated from its inks and toners, with the resulting pulp being employed in a broad assortment of products, including new paper that’s nearly indistinguishable from the old. More often, however, paper is combined together with news print and additional kinds of subordinate grade paper products to produce a lower-grade or “down-cycled” type of paper product. You will be able to achieve a big benefit by recycling what paper you are able to and composting the balance as add-ons of “brown matter” that keeps the high nitrogen kitchen waste adequately provided with carbon.

REDUCING THE WASTE MATERIAL YOU BUY

The most crucial component of the recycling power structure is the reduction of waste as a number one priority. This is most frequently managed by devoting rigorous care to the things you buy. You can establish a campaign to buy items with minimal packaging. While such decisiveness often times requires you to make a primal shifting in what motivates your buying

urge, such a thoughtful carry through is frequently attained when monetary resources are low. Let packaging comprise part of your buying decisions even as much as what’s inside. There’s just about always a low-packaging item. Select packaging that can be composted at home (like paper or twine) or recycled as often as feasible over plastics that will persist for hundreds of years.

Determining just how to make more of the items you utilize in your day-to-day life for yourself makes an enormous impact on how much rubbish for which you will even need to project. Those who produce and prepare their own food, composting the leftovers and returning them back to the soil as compost, have little (if no) trash to be concerned about.

21st Century The Transition Companies Recycling

Recycling Importance with The Transition Companies Author Shen Gerald.

What is Recycling? It is the reprocessing of old materials into new products.

What is the purpose of recycling? Basically it is for the prevention of wastage of potentially useful materials.A more detailed breakdown of its benefits are:

1. Reduction of the usage of fresh raw materials. This helps in preserving natural resources.

2. Reduction of energy usage. Incredible volume of energy are used to create products from raw materials. Recycling requires much less energy and therefore helps to preserve natural resources

3. Reduction of air and water pollution. This is achieved by reducing the need for traditional waste disposal.

4. Reduction of pollution caused by waste. Harmful chemicals and greenhouse gasses are released from rubbish in landfill sites.

5. Saves space that are otherwise used for Waste Disposal Landfill sites are filled up by a huge amount of waste products. These waste could have been recycled. Recycling allows for the proper usage of these waste products and thus saves space for landfills.

This recycling important? Yes it is. Our planet is already in a dire strait. If we do not recycle, the problems of human civilization will get worse and worse. Recycling is one of the best ways for individual like you and I to do our part to the betterment of our environment and world. Recycling is important to both the natural environment and us humans alike. Time is really running short. We must do our part.

Sell a business

Trust and Estates

It’s no secret that plenty of mergers don’t work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry.

Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of sales may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete.

Flawed Intentions
For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else has done a big merger, which prompts other top executives to follow suit.

A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later.

On the other side of the coin, mergers can be driven by generalized fear. Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world.

The Obstacles to Making it Work
Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal.

The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It’s a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity.

More insight into the failure of mergers is found in the highly acclaimed study from McKinsey, a global consultancy. The study concludes that companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders.

But remember, not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the promises made by deal makers demand the careful scrutiny of investors. The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies while maintaining day-to-day operations.

The Transition Companies Exit Planning

M&A Break Up

Increasing my profits

Increasing the value of my company

Exit Planning

One size doesn’t fit all. Many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power. By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives. Additional capital can fund growth organically or through acquisition. Meanwhile, investors benefit from the improved information flow from de-merged companies. M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.
A merger can happen when two companies decide to combine into one entity or when one company buys another. An acquisition always involves the purchase of one company by another.

Recap:

The functions of synergy allow for the enhanced cost efficiency of a new entity made from two smaller ones – synergy is the logic behind mergers and acquisitions.

Acquiring companies use various methods to value their targets. Some of these methods are based on comparative ratios – such as the price earnings and price to price ratios – replacement cost or discounted cash flow analysis.

An M&A deal can be executed by means of a cash transaction, stock for stock transaction or a combination of both. A transaction struck with stock is not taxable.

Break up or de-merger strategies can provide companies with opportunities to raise additional equity funds unlock hidden shareholder value and sharpen management focus. De-mergers can occur by means of divestitures, carve-outs spinoffs or tracking stocks.

Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations.

The Transition Companies 7 Ingredients

A large number of plastic containers and bags are used on a daily basis. Plastic waste is one of the biggest causes for increased water and soil pollution. Plastic recycling offers one of the best solutions to the increased plastic waste in the environment. Plastic recycling is the process of breaking down used scrap and waste plastics to recover usable material for the manufacturing industry. Plastic comprises of a large number of resins and complex chemical structures that are melted down to create new fibers.

Plastic recycling is a complex procedure. Plastic recycling industries can face a large number of unique challenges. One of the key principles to be followed while recycling plastic is that different types of plastics cannot be mixed before recycling. Plastics of different polymer structures and resin composition are identified by using standard codes on the basis of their melting and crushing capacity. Plastic materials identified under a particular code can be mixed and recycled with other plastics of the same code. Plastic materials consist of a few dyes, fillers, and additives, which are not easily recyclable.

The obstacles of recycling plastic can be overcome by using an elaborate monomer recycling process wherein the polymer undergoes an inverse polymer reaction of what was used to manufacture it. The end product of this procedure is a mix of chemicals that form the original polymer, which is further purified and synthesized to form a new polymer of the same type. Another solution to the problem is the use of a thermal de-polymerization process, which involves conversion of assorted polymers into petroleum. The procedure accepts the mixing of any type of polymer.

The Transition Companies Recycling Plastic

If your home is like mine, the holidays left you with a huge mess. Empty boxes and torn wrapping paper litter the floor after the kids excitedly open their gifts. It’s so tempting to gather it all up and through it in the outside garbage bin.
But this is a great opportunity to not only recycle, but to reuse. Almost all of the wrapping paper and boxes can be recycled, so consider keeping your contribution out of the landfill. And for the reuse possibilities…they are practically endless. I’m pretty sure that most of the ribbons I use have been used for several years. And many of the boxes that hold the gifts are great to use for packaging gifts next year. Do you realize that many stores now CHARGE you for a gift box? Sheesh, I’ll save mine for next year, thank you. Not to mention the gift bags. I LOVE getting my gifts in those pretty little bags. Especially since I know I will be using it for someone else’s gift somewhere down the road. Do you know how much those things cost? They are outrageous. No way would I throw them away. They are too valuable.

Now what are we to do with the tree? If you use an artificial tree, it’s a pretty easy decision. You fold it up and store it for next year. Simple. And if you are lucky enough to live in a warm environment and purchased a live tree including the root ball, you can get to work planting it in your yard to enjoy for years to come. But what about cut trees? Most communities offer some sort of Christmas tree recycling. The lucky ones have curbside pickup to recycle their trees. The rest of us need to decide what to do. What convinces me to haul the tree to the recycling facility is a couple of things.
I was willing to haul it home after I purchased it, so I can just as easily take it to be recycled.

Some communities use the old trees to shred and cover pathways and trails through parks. This helps to repair and reduce the damage we create as we enjoy our hikes.

Some communities turn the old trees into mulch and then provide it to the public for free! What a deal. Spring is just right around the corner, by the way.

So that pretty much covers what we can do to reduce our holiday effect on the environment. Now it’s a new year and we can begin thinking about getting a fresh start.
Some resolutions to consider:

- Resolve to begin recycling if you don’t already. You can start small. This site provides a wealth of information about getting your recycling efforts off the ground.

- If you already recycle, step it up a notch. If your curbside recycling service doesn’t accept a particular item (like glass or cardboard), resolve to begin taking that item to the drop off facility in your area.

- Resolve to purchase more products packaged with post consumer recycled materials. The higher the percentage listed on the package, the better.

- Resolve to purchase more items made from recycled materials. Paper towels, toilet paper, napkins, and many other paper products fall into this category.

- Resolve to purchase more items in bulk, thus reducing packaging waste.

- Resolve to create at least one creative craft using something you might otherwise throw away. This is fun, gets your creative juices flowing, can reduce stress, and is a g reat way to spend some quality time with your family.

The Transition Companies Recycling Resolutions

Recycling is a priority in the United States. In fact, the United States recycles more than 24 percent of its waste. This is the highest percentage in the industrialized world. This is only appropriate considering the United States also produces the most amount of waste in the industrialized world. Recycling can bring out about economic and environmental benefits.

The recycling industry has made a vital contribution to job creation and economic development in the United States. In 2000, the recycling industry was responsible for more than 1.1 million jobs and a yearly payroll of $37 billion. For every 10,000 tons of waste that is recycled, 36 new jobs are created. If you were to incinerate the 10,000 tons of waste instead, only one job would be created. In addition, for every employee there is collecting items that can be recycled, there are 26 employees that turn these items into new products. There are as many employees in the recycling industry as there are in the automobile and truck manufacturing industry. Also recycling industry employees make more money than employees in other industries.

Recycling helps prevent global climate changes by reducing greenhouse gas emissions. Greenhouse gas emissions can result from the manufacturing, use and disposal of products. Greenhouse gas emissions are a part of nature and they help create climates that sustain life on earth. If greenhouse gas emissions reach dangerous concentration levels, then you might see rising global temperatures, sea level changes and other climate changes. Recycling can help reduce greenhouse gas emissions in the following ways:

Manufacturing paper, plastics, glass and metal from recycled materials requires less energy than manufacturing these products from virgin materials because the recycled materials have already been processed. Also if you were to use virgin materials, you would have to spend additional energy extracting and transporting the virgin materials. For example, recycling aluminum cans saves 95 percent of the energy required to make new aluminum from virgin materials. Recycling steel and plastics would require 60 percent and 70 percent less energy, respectively, than making these products from raw materials. Recycling nearly any material will require less energy than producing the material from virgin materials. In 2005, recycling saved over 900 trillion BTUs, which is the same amount of energy used in 9 million households annually. This energy conservation results in less fossil fuels being burned. This means that less carbon dioxide, a greenhouse gas, is released into the atmosphere. If 6 tons of glass and one ton of aluminum were recycled, then 1 ton and 13 tons of carbon dioxide, respectively, would not be released into the atmosphere.

Recycling also keeps materials out of landfills. This is important because materials in landfills can decompose and release methane gas. Methane gas is a greenhouse gas that is 20 to 30 times more dangerous to the environment than carbon dioxide. Municipal solid waste landfills are responsible for 34 percent of methane gas emissions attributed to Americans.

Waste combustion from incinerators can release greenhouse gas emissions into the atmosphere. Recycling can reduce these emissions by keeping materials out of incinerators. In 2003, recycling kept 72 million tons of material from incinerators and landfills.

The Transition Companies Benefits of Recycling

The Transition Companies is hereby providing information on valuing a business or business valuations for the purposes of a business sale. The Transition Companies can also provide the management consulting to increase earnings and optimize a company to increase its business enterprise value.

Valuation Methodologies

There are various methods of valuation. Within each method, different standards, characteristics, and premises of value apply depending on the valuation purpose and its context. In general, the three valuation approaches are: Discounted Cash Flow Method, Market Approach, and Asset Approach.

Discounted Cash Flow

Discounted Cash Flow is the most widely accepted professional valuation approach in the M&A arena and the approach used most by buyers. Under this approach, value is the sum of the future projected cash flows of the business, discounted back to the present value at the appropriate discount rate.
The difficulty here is determining the appropriate discount rate. The discount rate should reflect the risk of the business (and its likelihood of meeting cash flow projections) as well as estimates of return on investment (ROI) and cost of capital, current interest rates, and current and projected inflation rates.

In addition, premiums or discounts are applied for control and marketability of the business. Other qualitative factors taken into account include the company’s reliance on key individuals, limited product diversity, heavy reliance on one account or supplier, and a multitude of other factors, many of which are industry-specific or specific to the particular company. The Discounted Cash Flow method shows how much a buyer can pay based on their ROI expectations. The market approach (detailed below) indicates what a buyer will have to pay for the business in a competitive sale.

Market Approach

Under the market, or sales comparison approach, data is gathered on transactions of similar businesses for review of capitalization rates and multiples. If valid comparables are available, they need to be adjusted to reflect the difference in marketability. Two issues need to be considered:

1. Data on the sales of privately- held companies is limited. Often the owners of privately-held companies do not disclose the details of their private transactions.
2. No comparison can be made between the value of a privately-held company and a publicly traded one. Due to the “mass market” and liquidity options available, publicly traded companies “trade” at higher values than privately-held companies.

Asset Approach

Adjusted Net Book Value (adjusted for obvious overstatements and understatements), Replacement Cost (the cost of duplicating from scratch the company’s assets on an “as-if-new” basis), and Liquidation Value (the value of the company’s assets when converted to cash in short order) are all asset-based valuations. These valuations all result in very conservative estimates of the value of a business, based upon only its tangible assets. These methods do not consider the value of a company’s intangible assets, such as the company’s name and image, customer lists, internal systems and procedures, future opportunities, etc. The Asset Approach is not considered applicable to M&A unless the business is distressed.

A Note about Formulas and Rules of Thumb

Formulas and rules-of-thumb are usually based on a multiple of sales or earnings. These are informal valuations that pay little if any attention to the vast differences among individual companies. They generally have little or no basis in reality unless substantiated by one of the recognized methods of valuation.

Valuing a Business for Sale

Determining or predicting a fair market value is often more accurate if the evaluator has actual M&A market experience.

Valuing a business for sale requires a critical analysis of the history and future of the business. From a historical perspective, the company’s financials should be adjusted — or normalized — to show the true profit potential of the business.

Market research should cover the topics of: industry size, industry growth, competition and barriers to entry, alternative and substitute products, external trends affecting the industry and geographic influences. In addition, an assessment of the company including market share, customer acceptance, product superiority, and technological position should be made to determine revenue and profit potential. The level of M&A activity and condition of the capital markets at the time also impacts the value.

Some value enhancers that increase value are:

• Second tier management team in place
• Diverse customer base with no specific customer dependence
• Proprietary or patented technology; if not defensible market positions
• Historical track record of consistent earnings
• Growth in the economic sector or vertical market
• High barrier to entry into the market
• Some unique operational platform
• Critical mass of the business
• Velocity in the company’s industry.

Some risk factors that mitigate value are:

• Owner dependence
• Key person dependence
• Lack of Non-Competition Agreements for key people
• Customer concentration with a few key customers
• Commodity products or industries
• Supplier dependence
• Changing technologies.

Valuing a company or business is ultimately the rendering of an opinion by an individual(s). The opinion, like all opinions, is subjective and is as credible and accurate as the experience, background, credentials, and perspective of the party presenting the opinion. Several opinions of value can be issued by several sources each having the same set of information but each providing differing opinions of value. Who’s right and who’s wrong?

While overviews of several theories of valuing a company have been reviewed, the best method of identifying value is through the open market. Proper analysis and presentation of a company to the open market should result in a competitive situation whereby the value is ultimately determined by the open market. The open market is in fact the court of final opinion on the value of the business.

© 2009 The Transition Companies . All rights reserved.