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Business Valuations

Much like a real estate appraisal, a business valuation has the goal of concluding upon a fair market value of what the business is worth should it be sold to another on the open market. In order to properly analyze a business and make a decision about its worth, the appraiser must undergo a period of comprehensive research to collect data relevant to the company, its business, its performance, and its market. In fact, the research collected during this preliminary period is similar to the type of information required when creating a business plan.

 

Frazier Capital Valuation’s trained staff goes through the following procedure in order to collect the amount of comprehensive data they need to conduct a business valuation:

Learning the company history. Bylaws and agreements between owners can shape the valuation process. Interviewing the owners might give a better idea as to what type of partnership exists, as well as providing information about any particular problems that the business has encountered, as well as information about discrepancies between owners.

Inquiring about other subjective issues that may affect the present or future value. These issues include details of past and pending lawsuits, workers compensation issues, copyrights and patents, deeds, leases, pricing strategies and more. This information provides the appraiser with a good idea of how the company is functioning internally.

Collect financial statements from the company. Balance sheet and income statements should go back at least three years, but preferably five years of financial statements should be included. Bank statements and checkbooks should also be reviewed as these can give the appraiser good insight to the patterns of the owners in operations.

Collect information concerning competition. The effects that competition has on a business greatly affect its value. Interviewing competitors will help the appraiser get a better understanding of market conditions as well as differences in products and services offered between similar firms.

Compile lists and find estimated values on the machinery, equipment, and inventory of the business. These things can affect the value of a business.

A business valuation is much more complex than an appraisal of commercial real estate. Because of the wide variety of industries and companies, as well as the large amount of accounting methods practiced by different companies, there are several different methods and approaches to valuing a closely held business.

Each industry generally has its own rule of thumb; a quick way to gauge the validity of a concluded value on a business within that industry. However, it is important that users of “Rules of Thumb” are aware that this is by no means a way of gauging the definite fair market value of any business. Companies vary too much for any rule of thumb to be applied universally. A rule of thumb may look like this: “30% – 40% of annual sales”, meaning that the sale price of the business should fall roughly between that range. However, these rules are dangerous to use.

However, four things remain relatively standard despite what industry the business is in. These four steps are:

Forecasting the company’s cash flow for a specified amount of future years

Estimating the cost of capital to be included in the valuation analysis

Determining the continuing value of a business beyond the date of the appraisal

Analyzing and interpreting the results of all calculations and assumptions that are made during the analysis.

For many companies, historical earnings data is a crucial financial variable that is used to help determine the future cash flows of a certain company. In order to make accurate analyses of this data however, the appraiser needs to have access to the company’s accounting records and methods. Without knowledge of the methods, the analysis of financial statements is worthless.

Below are a couple useful tables for determining your valuation needs.

Figure 1:

Figure 2:

Frazier Capital conducts our analyses using these methods to make sure that your business is accurately valued. Since each business is unique, we choose the method that is best catered to capture the true value of the subject business. 

 

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We have years of experience in this industry for the valuation of the business, equipment and real estate. Let us help you with our valuation consultation in all areas of the valuation of lumber yard businesses. Below is a brief synopsis of the industry.

Description of Business

Establishments engaged primarily in selling lumber to the general public. These establishments may also provide a line of general building materials.

General Industry Information

Businesses categorized as lumberyards typically include operations which specialize in wood sales, however larger warehouse hardware stores which retail other goods can also be included in this category. The bulk of revenues are obtained from customers engaged as professionals in home construction, contract work or other areas of building. Occasionally, lumber sales are made to individuals engaged in “do it yourself” projects.

Lumber dealers typically purchase their inventory from lumber wholesalers in the Pacific Northwest or Southeast regions of the United States. This business can be very cyclical, for many reasons. Access to materials from logging companies can be halted due to environmental reasons. Futures contracts for lumber can be purchased to hedge the risk of rising costs. Demand for lumber products is affected by construction cycles.

Wood-specific retailers numbered approximately 9,200 as of the recent census. As is the case with many industries, massive consolidation and the dominance of few firms has squeezed out many small operators. Leaders include Home Depot, Lowe’s and Menard Inc, which are credited for expansive franchising and advanced inventory systems. Total industry sales during 2002 were approximately $78 billion, or an average of $8.5 million in sales each.

Red Flags and Risks

As noted earlier, it is important to understand two fundamental concepts about this industry. First and foremost, the lumber business fluctuates dramatically, as it is subject to construction cycles, sudden price increases, and drops in the supply of raw materials. Secondly, it can be very difficult for smaller lumberyards to survive with the rapid expansion of the larger warehouse centers. Survival of the smaller lumberyards is often obtained through mergers and by providing specific value-added services to customers. Worker’s compensation expenses can be high for this business, where workers are dealing with large pieces of wood, heavy pallets, and cutting materials.

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We will try to answer you within the next 24 hours