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    INDEPENDENTS REPORT: Analyze this

    A business valuation is not only complex, it can be emotional, too. Get professional help.

    Whether you operate a single store or own a small chain of supermarkets, it can seem impossible to determine the value of the business you've devoted an entire lifetime to building.

    The elements that should be factored into the equation are many: time, money, emotion, commitment to the community, well-trained associates. They're all important in calculating what your operation is worth, according to Bruce Kamph, v.p. of strategic development for North Canton, Ohio-based BridgePoint Solutions Group, LLC.

    There is a multitude of reasons that a grocer might need a business valuation, including buy/sell agreements, mergers and acquisitions, employee stock ownership plans (ESOPs), collateral valuations, charitable contributions, bank loan applications, solvency and insolvency opinions, and eminent domain proceedings. Kamph says in most instances his clients seek a valuation for estate-planning and gifting purposes.

    Whatever, the reason, it should be articulated upfront, especially if, as Kamph recommends, the grocer works with an outside analyst on the valuation.

    For what it's worth

    Kamph advises storeowners to keep in mind three important factors: "First, secure the services of that qualified valuation analyst who understands the food business. Second, be prepared to provide that analyst with as much valid information as possible, and allow him or her to determine what is relevant and what is not. Third, and probably most important, everyone participating in the process must understand the emotions involved."

    That last concern is not least, he emphasizes. "Most closely held businesses, including family-owned supermarkets, usually have a unique story to tell, a history. They've poured their heart and soul into the business, and have built it from its infancy, so the emotional attachment is understandable."

    That doesn't mean emotion translates directly into cold, hard value, however. "While soft factors such as good will, human capital, and clean facilities are taken into account and can to a degree be quantified when performing valuations, we must eliminate as much subjectivity as possible. Overall we're responsible for identifying the present value of the future benefit stream that can be generated from the business."

    Here are Kamph's basic steps for an analyst to take in a valuation:

    --Define the purpose of the valuation and premise of value. "We must spell out limiting conditions and follow any and all legal and regulatory requirements," he notes.

    --Complete a financial analysis and economic and industry analysis, perform a site visit, and interview key players.

    --After learning as much as possible about the store, the analyst must calculate a future benefit stream. "The determination is project-specific, and factored in are the trends of the business, the historical performance, etc.," says Kamph.

    --Perform a risk analysis, and determine cap and discount rates. "These rates are calculated based on the risk an investor would assume by investing in the subject being valued. Such risks include external risk factors (general economy, the industry), internal risk factors (competitive position, size, stability of subject, etc.), and investment risk factors (portfolio percent, capital appreciation, etc.). All of these factor into the calculation of a specific capitalization or discount rate for the subject being valued.

    --Apply the information gathered to three valuation approaches: one that considers assets, another that's based on earnings, and a third based on a market or comparative approach.

    --The analyst must next select which of the three approaches is the most appropriate for the overall valuation.

    --Apply relative discounts or premiums to the valuation. "For example, a lack of control discount or the opposite, a controlling interest premium, will be applied based on the percentage of ownership of the interest being valued," says Kamph. "For purposes of discussing business valuation, controlling interest assumes at least a 51 percent ownership position. Lack of marketability is another good example; a lack of marketability discount would apply if the potential buyers of the valuation subject were limited as compared to selling a security on the open market."

    --Take sanity checks, including reviewing industry rules of thumb (multiple of sales, multiple of earnings). An analyst will use a justification of purchase method. In essence, can this business generate enough income to justify its "value" or purchase price, and still provide a fair return to an investor? There are public company guidelines and other databases that an analyst relies on to keep within a reasonable value range.

    --Determine the conclusion, or estimate of value.

    --Compose a report and present it to the business owner.

    A grocer with one store should expect to pay somewhere between $6,000 and $8,000, plus expenses, for a complete business valuation, with a turnaround time of six to eight weeks.

    "There's really no best or worst process for securing a valuation assignment," says Kamph. "Upfront, the valuation analyst and business owner must define the purpose of the valuation and the scope of work. A good valuation practicitioner will use the opportunity to educate the owner about what to expect from the process.

    "Most business owners feel they have an idea of what their business is worth," he concludes. "Working with the valuation analyst, the owner will have a better understanding of the components of value. If the valuation process is followed correctly from start to finish, the business owner should have an even greater feel for the value, and the end work product will validate and justify that value."

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