Several years ago, we were asked to value a bottling company for the purposes of the Company acquiring the stock of a selling shareholder. The Company’s buy/sell agreement simply stated – the Company and the selling shareholder would each hire a valuation expert and if those two experts could not agree – the experts would together hire a third appraiser. Whichever valuation to which the third appraiser came closest – those two valuations would be averaged, and that average would determine the price of the shares to be acquired.
The buy/sell agreement at least specified the Level of Value upon which the valuations would be valued. The agreement specified the shares would be valued on a marketable/control basis. In other words, there would be no discount on the selling shareholder’s stock for lack of marketability and no discount for the selling shareholder’s lack of ability to control the affairs of the company.
However, there were two other critical concepts that were not discussed in the buy/sell agreement –the Standard and Premise of Value.
As a result, the valuation prepared by DCF (representing the selling shareholder) was twice the value given by the Company’s expert. Both valuations were correct – but each firm assumed different standards and premise of value.
Standard of Value is the identification of the type of value being utilized in a specific engagement; for example, fair market value or investment value. DCF assumed the standard of value should be the investment value which is the value to a particular investor, based on individual investment requirements. The bottling company in question was surrounded by three very large regional bottlers, all of which had been aggressively acquiring contiguous bottling operations. In addition, the bottling industry was consolidating. We valued the Company based on what those three surrounding regional bottlers would pay for the Company – investment value.
The Company’s valuation experts based their value on fair market value – which is the theoretical price at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
Premise of Value is related to Standard of Value and is the assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation; for example the company will be a going concern (to be valued as if the company will continue to be operated in the same fashion it is currently operated) or be valued as if being sold to a strategic buyer (a contiguous regional bottler). Our premise of value was obviously, based on the bottling industry consolidating, that the Company would be sold to one of three contiguous regional bottlers. The Company’s expert assumed the Company should be valued as if it would continue operating as it had for the 75 years since its founding.
As mentioned, the conclusion was our investment value was twice the price of the fair market value calculated by the other experts. Thankfully, for our selling shareholder client, the Company agreed with our Standard and Premise of Value and acquired the seller based on DCF’s valuation. One year later the Company was sold to one of the three regional bottlers for about the price in our valuation. Quite frankly, the Company liked our valuation and determined it was a good time sell.
There is so much more to business valuation that meets the eye. That is precisely why DCF professionals have obtained the two most respected valuation credentials – the Accredited Senior Appraiser (ASA) and Accredited in Business Valuation (ABV). We have been valuing companies for the past 50 years and have been involved in transactions totaling over $15 billion in value. Before selecting a valuation consultant, make sure they have the most respected valuation credentials and have real-world experience to go with those credentials.
Please call Tom Decosimo at 423-266-4000 or email him at TomDecosimo@dcf-llc.com if you would like to discuss your valuation needs.