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1 What Drives Corporate Value? Michael Massey, CFA, CPA/ABV January 21, 2014.

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Presentation on theme: "1 What Drives Corporate Value? Michael Massey, CFA, CPA/ABV January 21, 2014."— Presentation transcript:

1 1 What Drives Corporate Value? Michael Massey, CFA, CPA/ABV January 21, 2014

2 2 ABOUT MOSS ADAMS Established in 1913 Largest accounting and consulting firm headquartered in the West and one of the largest in the nation Nearly 2,000 personnel, including approximately 265 partners Founding member of Praxity, AISBL, a global alliance of independent accounting firms

3 3 OUR SERVICES Tax Assurance Consulting Wealth Services Transaction Services Valuation Services

4 4 OFFICE LOCATIONS 22 offices in: Washington Oregon California Arizona New Mexico Kansas

5 5 The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant- client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. DISCLAIMER

6 6 ASSET VALUED Common stock Preferred stock Restricted stock Debt Intellectual property Stock options Partnership or LLC interests

7 7 VALUATION PURPOSE Estate planning and reporting Financial reporting Mergers and acquisitions Employee stock ownership plan Tax reporting Personal financial planning

8 8 BUSINESS VALUATION PROCESS OVERVIEW Economic environment Industry analysis Company analysis Income approach Market approach Asset-based approach

9 9 ECONOMIC ENVIRONMENT National Regional Local How does the current economic environment impact value?

10 10 INDUSTRY ANALYSIS Impact of the economy on industry Industry trends Industry outlook Growth expectations Valuation methods commonly utilized in the industry How do industry factors impact value?

11 11 COMPANY ANALYSIS – NON-FINANCIAL FACTORS History +Long, profitable history -Startup stage company

12 12 COMPANY ANALYSIS – NON-FINANCIAL FACTORS Products or Services +Diversified product or service base +Products with patent protection +Products or services with a high degree of differentiation or brand recognition +Recurring revenue streams -Reliance on one product or service, especially if obsolescence is an issue -Commodity products or services -Non-recurring revenue streams

13 13 COMPANY ANALYSIS – NON-FINANCIAL FACTORS Markets and Customers +Geographic diversification +Diversified customer base -Geographic concentration -Customer concentration

14 14 COMPANY ANALYSIS – NON-FINANCIAL FACTORS Competition +Niche dominance +Markets that value differentiation +Patented technology and/or quality advantages +Excellent brand recognition +First mover advantage -Competition based primarily on price -No recognition of differentiation -New entrants

15 15 COMPANY ANALYSIS – NON-FINANCIAL FACTORS Suppliers +Diversified suppliers +Consistent quality -Dependence on one supplier -Inconsistent quality

16 16 COMPANY ANALYSIS – NON-FINANCIAL FACTORS Management +Management depth +Succession plan in place +Verifiable results -Dependence on a key person

17 17 COMPANY ANALYSIS – NON-FINANCIAL FACTORS Employees +Many long-term employees +Good availability of skilled labor -High level of employee turnover -Labor shortages

18 18 COMPANY ANALYSIS – FINANCIAL FACTORS GROWTH + Solid, sustainable growth rates + Accelerating growth rates -Low growth or declining revenues -Growth that is too rapid (especially if working capital and capital expenditure requirements are high) 2009201020112012Average Sales Growth80.0%20.0%15.0%10.0%31% Pretax Income Growth100.0%30%20%(5.0%)36% Total Asset Growth80.0%60.0%20.0% 45%

19 19 COMPANY ANALYSIS – FINANCIAL FACTORS PROFITABILITY + High, sustainable profit margins + Growing profit margins -Low profit margins -Declining profit margins -Volatile earnings 2009201020112012Average Gross Profit79.0%82.0%81.0%78.0%80.0% Operating Profit5.0%7.0%8.0% 7.0% Pretax Profit6.0%8.0%10.0%9.0%8.25%

20 20 COMPANY ANALYSIS – FINANCIAL FACTORS EFFICIENCY + High ROA, ROE and asset turnover ratios + Improving trends + Low capital expenditure requirements -Low ROA, ROE and asset turnover ratios -Declining trends -High capital expenditure requirements 2009201020112012Average Sales to Assets1.0x2.0x2.5x 2.0x Return on Assets5.0%14.0%20.0% 15.0% Return On Equity10.0%20.0%25.0%29.0%21.0% Sales to Net Fixed Assets12.0x20.0x25.0x26.0x21.0x

21 21 COMPANY ANALYSIS – FINANCIAL FACTORS LIQUIDITY + Above average level of cash and working capital + Low levels of working capital requirements + Particularly important for companies in seasonal or cyclical industries 2009201020112012Average Current Ratio1.1x1.3x1.5x1.4x1.3x Quick Ratio0.9x1.0x1.1x0.9x1.0x Days Receivables4045506049 Plus: Days Inventory3027303130 Equals: Operating Cycle7072809179 Minus: Days Payables4036403538 Equals: Cash Cycle3036405641

22 22 COMPANY ANALYSIS – FINANCIAL FACTORS LIQUIDITY -Below average level of cash and working capital -Declining trends -High levels of working capital requirements 2009201020112012Average Current Ratio1.1x1.3x1.5x1.4x1.3x Quick Ratio0.9x1.0x1.1x0.9x1.0x Days Receivables4045506049 Plus: Days Inventory3027303130 Equals: Operating Cycle7072809179 Minus: Days Payables4036403538 Equals: Cash Cycle3036405641

23 23 COMPANY ANALYSIS – FINANCIAL FACTORS SOLVENCY + Lower than average level of debt + High level of cash flows for debt service + Particularly important for companies in cyclical industries -Higher than average level of debt -Low level of cash flows for debt service 2009201020112012Average Debt to Worth1.4x1.2x1.1x1.0x1.3x LT Debt to Capital40.0%38.0%30.0%32.0%35% Interest Coverage20.0x25.0x30.0x44.0x30.0x Cash Flow to Debt5.0x4.5x3.8x2.5x4.0x

24 24 INCOME APPROACH Capitalization of cash flow method Discounted cash flow method

25 25 EXAMPLE CASH FLOW CALCULATION

26 26 EXAMPLE CASH FLOW CALCULATION

27 27 MARKET APPROACH Guideline public company method Merger and acquisition method Prior transaction analysis Rules of thumb?

28 28 EXAMPLE MARKET APPROACH RESULTS

29 29 Stock Transactions > $1 Million; Source: Pratt’s Stats www.bvmarketdata.com TRENDS IN US M&A MULTIPLES

30 30 TRENDS IN PUBLIC COMPANY MULTIPLES Source: CapitalIQ www.capitaliq.com

31 31 ASSET-BASED APPROACH Discrete revaluation Collective revaluation

32 32 EXAMPLE ASSET-BASED APPROACH CALCULATION

33 33 DISCOUNTS AND PREMIUMS Control Lack of marketability Key person Blockage Lack of voting rights

34 34 INVESTMENT VALUE CONSIDERATIONS Synergies Buyer’s cost of capital Buyer’s valuation multiples

35 35 THANK YOU

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