Business Valuation, Growing Value And Liquidity Realization (Part XII Of Book Series)

Written by Michael Gilburd | Posted in Business Valuation • TaxConnections

Section 2 – Financial Analysis Report

The second step is creating an understanding of the financial strengths and weaknesses, a section most valuable to a prudent business owner:

1. Financial analysis helps in assessing Your Company’s financial performance over time. Past sales and earnings, while not a guarantee of future performance, can provide an indication of
future growth potential and can put Your Company’s current performance into a historical context. For example, a company with steadily rising sales and earnings is worth more than one
with little or no growth.

2. Trends and key factors impact results, and comparing financial performance and financial statement ratios with available industry performance measures also provides an indication of the
attainability of future results.

3. Ratio analysis provides a relationship among financial statement accounts that indicates trends for Your Company. These indications of overall probability of future success or failure
often influence premiums and discounts while measuring and monitoring financial performance.

This section analyzes Your Company’s financial performance relative to itself and relative to the industry in which Your Company operates.

For example:

Score Card

Historical Projected Combined
Liquidity 92 92
Profits/Profit Margin 89 89
Sales Growth 85 86
Borrowing Profitably 89 90
Fixed Assets Use 90 90

Average 89.0 89.4 89.2

This section should include an integrated set of Financial Projections using an “other comprehensive basis of accounting” (OCBOA), which includes Income Statements, Balance Sheets and Cash Flows, and the necessary assumptions.

Section 3 – Capital Markets Assessment
The third step of a prudent Business Owner is to understand the Capital Markets Alternatives that are available and appropriate.
The Capital Markets Assessment provides the Business Owner with alternatives regarding pricing, timing and probability of success.

A CMA is part of a proven Deal Screening Process that scores and rates your business as a financing candidate. A CMA accomplishes the following for you:

 Deal rating and score computation to assess the funding potential and its cost to your business, as documented in a CMA.

 Preliminary due diligence to ensure that many of the corporate papers are in order. This effort minimizes the Deal Structure Process time.

 Deal presentation material to support the preparation required for discussions with funding sources.

 Management of consulting services to enhance your proposal to improve deal score and rating.

A Capital Markets Analysis is built on a Multipoint Evaluation Process similar to the system used by FICO for credit evaluation. A Business Advisor would then apply it to a scoring system similar to Moody’s Rating System.

Deal Ratings

All deals receive a score, which is aligned to how a financier assesses acceptable minimum scores to finance a deal. The CMA scores all sources of capital pools under the same system to remove any subjectivity.
Rating Points Audience
AAA 950-1000 All Financing Sources
AA 900-949
A+ 850-899
A 800-849 A and B Grade Financial Sources
A- 750-799
B+ 650-749
B 550-649 B Grade Financial Sources
B- 450-549

If you have a B Grade Deal and are unwilling to take the necessary steps to upgrade to a higher score, then you should lower your expectations about completing a transaction, because there are fewer capital sources willing to accept B Grade Deals. Typically, if a B Grade Deal is accepted, the costs are much higher than an A Grade Deal. If your rating is below a B- Grade Deal and you’re not willing to do what is necessary to move up to at least a B- Grade, then it is highly unlikely you will complete your transaction.
Scoring Criteria – Deal Grades.

A summary of the ten areas comprising the scoring criteria is shown in the following table along with the maximum score for each and the actual score a client company achieved.
For Example:
Category Weight Category Grade
Maximum Company
Financial Analysis Report 22.5% 225.0 200.7
Due Diligence Review 5.0% 50.0 38.0
Management Team 25.0% 250.0 106.0
Deal Potential 20.0% 200.0 154.4
Market Size and Share 10.0% 100.0 100.0
Competition 2.5% 25.0 25.0
Growth of Industry 2.5% 25.0 16.0
International Markets 2.5% 25.0 –
Competitive Advantage 10.0% 100.0 60.0

CAPITAL MARKETS ASSESSMENT − BUSINESS 100.0% 1,000.0 700.1

The specific category values and constituent component values are given in the CMA along with a more detailed definition of how the score value is derived.
Deal Ratings – All companies (deals) receive a score, and each financier determines the minimum scores they will accept to finance a deal. A Trusted Business Advisor scores all sources of capital pools under the same updated system to remove subjectivity.

Alternate Financing

Once you’ve completed a Deal Screening Process, you can investigate several alternate financing opportunities. Please note that deals are structured using one or multiples of various available instruments to maximize returns at the lowest possible risk to all involved parties.
• Venture investment
• Debenture investment
• Initial public offering (IPO)
• Gain control of public company
• Sale of certain assets
• Sale of all stock
• Sale of company assets
• Divesting a division
• Line of credit
• Debt financing
• ESOP
• Mergers
• Acquisitions
• Franchising
• Recapitalization
• Distribution alliances
• Marketing alliances
• Joint ventures
• R&D joint ventures
• Exclusive technology licenses

What to expect:

A Business Advisor would state recommendations to you very clearly before he or she would create a deal structure.
This will give you the opportunity to take necessary actions to move your business to a higher score before taking the next step.
Please note: Blueprint for Building Value™ does not include the following, which the Business Owner may seek to obtain subsequent to reviewing the results:

• Selling Memorandum for raising capital or selling the business

• Pitch Book or sufficient transaction structure for seeking investors

• Opinion of Fair Market or Strategic Value

Have a question? Contact Michael Gilburd.

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Michael Gilburd

Michael Gilburd, President of ValuCorp International, Inc., has more than forty years of experience in financial transactional services and corporate development.Founded in 1999 by Mr. Gilburd, ValuCorp is a national firm offering expert business valuation services and consulting of creating, improving and preserving value, capital markets and corporate finance advisory, transaction and fairness opinions, restructuring advisory, and management consulting. While serving many industries, ValuCorp specializes in financial institutions, healthcare companies, manufacturing and distribution, professional service firms, energy companies, construction, real estate ventures, and consumer product companies.

Prior to ValuCorp, Mr. Gilburd was:
• Managing Director of corporate finance for two American Express companies, where he assisted in raising funds for various transactions, including acquisitions and public offerings.
• National Director of Corporate Finance for BDO USA, one of the nation’s largest accounting and consulting firms, and a member of their International Corporate Finance Committee.
• Internal Revenue Agent, Manhattan District, New York

Mr. Gilburd has authored many Business Valuations, Family Limited Partnership Valuations and Loan Packages for private and confidential transactions and settlements.