This stage of the valuation process requires gathering information that is both company and industry specific. The first step would be to request and receive certain documents (financial and other) from the company. We would then meet with the client and discuss both the history and the current operations of the company. The questions we ask are typical questions that a potential buyer would ask about daily operations, marketing, competition, administration, financial performance (past and present), company expectations and industry. We would also tour the facility. After obtaining company information, we would then do independent research to assemble industry and market specific information. This leads us to the second part of the process, the Analysis.
In this stage of the process, we perform a qualitative and quantitative analysis of the company. We may compare the performance of your company to that of other similar companies and/or to the industry in general. The purpose of the analysis is to understand what factors have impacted the company's past performance and what may influence its future. Upon completion of the analysis part of the process, we are led to the next stage, the Application of Valuation Approaches.
Application of Valuation Approaches
The third stage of the process is the application of various valuation approaches. Generally speaking, there are three (3) basic approaches: (1) Income Approach; (2) Market Approach and (3) Asset or Cost Approach.
Income or cash flow is generally the most important valuation factor for a going concern. Under this approach, we analyze the company's potential and assess the risk (the degree of uncertainty) associated with obtaining the earnings or cash flow.
In the market approach, we seek to identify transactions involving minority or majority interests in the stock of companies that share similar investment characteristics with the subject company. Once identified, a comparison of the quantifiable and non-quantifiable factors is made. From this information, prevailing investor attitudes and expectations are developed. Differences are noted and adjustments are made in order to develop representative valuation multiples which, in turn, are applied to the company to develop value indications.
Asset or Cost Approach
The asset or cost approach to value is an examination of the approximate realizable value of the company's assets. This approach is generally given little weight in the valuation of a going concern.