Strategic Growth Valuation

A Business valuation is a process of determining the value of a business enterprise or ownership interest (the percentage of shares or stocks).  Many business buyers and sellers want to know “What is the value of the business that they are buying or selling?”  And in many instances, is it often used as part of the negotiation process to determine the price they are willing to pay or receive to effect the sale of a business.  However, value and price may not always be the same.  For example, a small business may be valued at $250,000 but the seller and buyer may agree to a purchase price that may be  lower or higher than the value (e.g. $230,000 or $260,000).  Many shareholders, investors, partnerships, and stockholders not only want to know what the overall value of the business is worth, but what is the value of their shares, stocks, or ownership interests?  In addition to the valuation of a business or business interest, a business valuation engagement is also necessary for a variety of other purposes such as:

• Sale or Purchase
• Mergers and Acquisitions
• Allocation of business purchase price among the business assets
• Estate, gift, and income taxes
• Marital dissolution
• Buy-sell agreements
• Employee Stock Option Plans (ESOPs)
• Business Damages litigation
• Family-Limited Partnerships (FLPs)
• Intellectual Property
• Reorganization and bankruptcies
• Stockholder disputes
• Business planning

Queen City Consulting specializes in Business Planning valuations, which we refer to as our Strategic Growth Valuation.  Although our Strategic Growth Valuation is designed for Internal Management and Business Planning purposes only; it follows the same Development and Reporting Standards of the National Association of Certified Valuators and Analysts (NACVA) for the following two types of Valuation Services and values: 

1. A Valuation Engagement resulting in a Conclusion of Value.
2. A Calculation Engagement resulting in a Calculated Value.

A Valuation Engagement considers all of the different methods under the Income, Market, and Asset Approaches for the Conclusion of Value, which is a detailed valuation engagement (https://www.nacva.com/standards).

Whereas, a Calculated Value is a limited scope valuation engagement that is agreed upon by the client and the business valuation firm.  A Calculation Engagement generally does not include all of the valuation procedures required for a Valuation Engagement. 

Our Strategic Growth Valuation is limited in scope and considers only the following Business Valuation Approaches and Methods:

1. Income Approach

1. Capitalized Cash Flow (also referred to as the Single Period Earnings) – based upon the historical cash flows that have remained constant or are growing or declining at a constant rate
2. Discounted Cash Flow – based upon cash flow projections that are expected to vary over a number of years

2. Market Approaches

1. The Direct Market Data Method –based upon a significant number of private transactions reported on various databases (comparable transaction data in in size, market, products, revenues, and other similar business characteristics to the Subject company)
2. Guideline Company Transaction Method – based upon transactions of reasonably comparable private companies reported in various databases (refers to acquisition and sales of entire companies, divisions, or large blocks of stock either privately or publicly traded firms)
3. Guideline Sales of Interests in Subject Company – based upon prior transactions of interests (See Footnote Reference below for additional information on the Income and Market Approaches)

These methods will be used for comparison purposes to corroborate the reasonableness of the calculated values among the two Approaches.    

The Strategic Growth Valuation (Calculated Value) establishes an estimated baseline (range of values) on the company’s market value at the “Enterprise Level” and to measure the growth values over the years in relationship to the company’s Business Growth Strategy and implementation plans. 

In other words, to evaluate, assess, and monitor the overall success and performance of the company’s Growth Strategy.  “Has the Growth Strategy increased the Company’s Net worth or Value over the years, and if so, “By how much?”  If not, “Why not?”  This allows the business owners to reevaluate and redefine their Business Growth Strategy, and implementation plans, if necessary.

Our Strategic Growth Valuation (Calculated Value) Summary Report includes the following:

Critical Elements

1. Summary and dates
2. Limiting conditions and assumptions
3. Purpose and function of the valuation
4. Standard of value
5. Methods of valuation
6. Workpapers
7. Report writing

I.       REPORT FUNDAMENTALS

         1.      Introduction and Sources of Information

II.      QUALITATIVE FOUNDATIONS

         2.      Analysis of Subject Entity and Non-Financial Information

         3.      Economic Conditions

III.     ANALYTICAL FOUNDATIONS

         4.      Information Analysis

         5.      Financial Statement Analysis—Entity/Company

         6.      Financial Statement Analysis—Industry Comparison

         7.      Financial Statement Analysis—Ratios

         8.      Financial Statement Analysis—Ratios—Normalizing Adjustments

IV.     VALUATION APPROACHES AND METHODS CONSIDERED AND USED

         Methods of Valuation—Market Approach

         9.      Direct Market Data Method —Transaction Databases

         10.    Industry Specific Multiples

         Methods of Valuation—Income Approach

         11.    Income Approach

         12.    Capitalization of Earnings Method

         13.    Discounted Cash Flow Method

         14.    Weighted Average Cost of Capital (WACC, if applicable)

         15.    Build-Up Methods (Cost of Capital/Rates of Return)

V.      REPRESENTATIONS OF THE VALUATION ANALYST

         16.    Attributes Present that apply to the Valuation Analyst

VII.    CALCULATED VALUE (Range of Estimates)

         17.    Calculated Value

• Final Comments

A copy of our Strategic Growth Valuation Agreement is available upon request for review.

1. James R. Hitchner, Financial Valuation: Applications and Models, 4th edition, 2017, Wiley & Sons, Inc.