Retail business valuation : a potential management buy-out case study
Abstract
For a transaction to be fair and equitable the purchaser and seller should exchange goods they
regard to be of equal value. Where the purchaser offers money in exchange for goods, the value
of money is predetermined. The seller has an item of value, but this value must be established.
Although a valuation is a methodical process, the probability the valuation is biased cannot be
ignored. Due to the subjective nature of the process, it must continually be evaluated against
standard valuation practices to ensure a fair and independent valuation.
Businesses have been bought and sold for as long as they have existed. The skill is in determining
a fair value for the business and convincing the purchaser the selling price is a fair one.
Substantiating the value derived by the appraiser goes a long way in garnering acclaim for the
value attached to the business.
The primary objective of this case study is to determine a fair value for Currie s Post Trading (Pty)
Ltd (Currie s Post). The current owners of the business have expressed their interest to allow
ers have not
communicated this intention to management as this evaluation is the first step in the process to
allow management equity participation . The offer will be for 100% shareholding
To satisfy the primary objective of this case study, financial
statement for the business was obtained and analysed. A strategic growth plan was discussed
with management. Projections based on the strategic plan were calculated and adjustments to
the base year 31 August 2017 made. Financial statements for years ending 31 August 2013
through 2016 were made available to the researcher together with provisional financial
statements for August 2017. After some consideration the financials for the period ending 31
August 2013 were disregarded as it was for an 18-month period which could skew the projections
and trends.
, secondary objectives were identified.
Identify reason for valuation: The reason for the valuation was identified in 3.3 as
being a valuation for current owners with the view of selling the business to
management.
Identify & select value world location: The value world location was identified as
the Empirical Unregulated quadrant in 3.4. The location of the quadrant lends itself to the valuation of a privately-owned business with the assistance of financial
intermediaries.
Identify & select valuation approach: The approach selected was performed in 3.5
with the income approach being selected as the most appropriate approach to value
Identify & select valuation method: Selecting the valuation method was performed
in 3.6. All information to compute a value using DCF was available and suited to the
unlisted property of the business.
Identify & apply discounts or premiums: This objective was treated under various
paragraphs. This is due to the nature of the discounts and premiums applied to the
DCF valuation, but also because of the timing of the discount or premium application.
The first two premiums are treated as additional costs of equity. SSP & SRP were
added to the cost of equity and was illustrated in Figure 3-11: Cost of Equity SSP
adjusted and Figure 3-12: Cost of Equity SSP & SRP adjusted. The final discount
applied was the marketability discount and was discussed in 3.11 Step 9: Identify
discounts or premiums and 3.12 Step 10: Calculate discounts or premiums