Case Study - Business Valuation
An environmental services company required a detailed business valuation. The grounds for the valuation stemmed from the fact that several of the minority shareholders of the company were concerned about the perceived value in their shares and litigation was imminent.
The company was earning approximately $10 million in revenue. However, over the past four years the gross revenue amount was declining at a rate of 8.5% per annum. Furthermore, there was neither investment in equipment nor any significant client retention.
Despite the client’s spiraling revenue and EBIDTA, the industry was prosperous both nationally and regionally, with 11.4% average growth over the last four years.
The initial issue was that the founder of the company had passed away. In the years since his death, the company was not able to obtain the same contracts that had been available through the founder’s network. To make matters worse, the other co-founder did not have the skills or interest in becoming CEO. As a result, the company was forced, by agreement, to buy out the co-founder at $500,000.
The resounding question was whether there could be value found in the company in spite of the founder’s death, negative EBIDTA, spiraling client base, and a dysfunctional inherited ownership structure / board.
A senior executive who was with the company for over 20 years became CEO upon the death of the founder. Even before the sudden death, the company was experiencing issues due to the lack of equipment upkeep and expansion outside the local geographical region. For the next two years, EBIDTA was negative.
The minority shareholders attributed the losses to “incompetent interim management” and terminated the interim CEO.
This resulted in a family member being appointed to run the company on a day-to-day basis. During this trial basis, the new executive was able to restore many of the prior clients and obtain necessary lucrative government contracts within the industry that had been lost upon the death of the founder. However, the company had deteriorated from $10 million in gross revenue to $2.5 million.
Finally, the bank was becoming distressed with the increasingly delinquent status of the company’s account, particularly given the debt load and the need for constant short-term financing. The bank requested a plan and a professional valuation within 30 days.
After meeting with all the stakeholders, Lakelet Advisory Group was selected for the engagement based on references and credentials as an Accredited Business Valuator (“ABV”), recognized by the American Institute of Certified Public Accountants.
LAG started by benchmarking the company against itself, others in their respective industries, and regional competitors. LAG visited all the facilities and met with individuals at all levels of interaction with the company, including prior employees, current employees, vendors, investors, and clients.
Based on the information collected, it became clear that the company was no longer relevant in their industry. The combination of debt, number of lost employees, negative client interviews, and the status of the overall operation resulted in LAG’s professional opinion that the client would no longer be able to meet the criteria of a “going concern.”
The conclusion of this assessment was that the company was now to be valued as an orderly liquidation. LAG met with all the stakeholders and outlined the ramifications of this classification. Over 15 different analyses were performed to determine the right weight / allocation of value for this special situation.
LAG prepared a detailed valuation report. A unique succession of meetings were conducted to work with all the stakeholders to confirm that valuation over a short period of time could allow for the sale of the company and ensure the bank that its risks were mitigated.
The company is making substantial gains in its attempt to re-build its reputation. LAG serves as an advisor to the stakeholders, regularly leveraging knowledge of the situation with the intention of ensuring tangible economic value.