This past week, I had the opportunity to value an essential oil distributor business. After discussing the current state of the company and the purpose of the business, we discussed what a business valuation entails.
The market value of a business is determined through a business valuation. A business valuation for an essential oil distributor business model relies on precedent transactions and cash flow analyses.
1. Precedent transactions analysis compares your business against similar businesses that have been recently sold or acquired in the same industry.
2. Cash Flow Analysis relies on the earnings potential of a business. There are two primary cash flow analysis that are commonly used:
- Capitalization of Earnings
- This analysis looks at a single period of earnings and applies a capitalization rate (cap rate). A similar analysis is used to determine the value of real estate.
- Capitalization of Seller’s Discretionary Earnings (SDE)
- SDE is a cash-flow based measure of business earnings in an owner-operated business. It comprises the profit before tax and interest of a business before the owner’s benefits, non-cash expenses and other non-related business incomes and expenses. A capitalization rate is then applied to the cash flow to derive a market value.
Overall, no matter what business you are in, understanding the value of your business today can assist you in making more effective and efficient decisions. In the case of an essential oil distributor business, it can assist in many ways.
As mentioned at the beginning, Peak Business Valuation was asked to provide a business valuation for the express purpose of buying out a partner. The challenge of the valuation; however, was that the business did not have an operating agreement that defined valuation in the event of a buyout. The parties were at an impasse and could not reach an agreement as to the fair market value of a 50.0% interest.
Peak Business Valuation was approached based on a referral to perform a business valuation to be used for the following purposes:
- Help the shareholders better understand the fair market value of the company.
- Present the valuation conclusion to the remaining shareholders to ensure a thorough understanding of its conclusion and justification of the determined opinion of value.
Conclusion of Value:
In this particular case, we were able to present the business valuation to one of the partners. The valuation has been presented to the other partner and mediation is taking place to determine the buyout value.
Valuator’s Summary of Engagement:
Shareholder buyouts (as well as shareholders buying in) occur frequently in closely held companies. It is critical that departing, remaining, or incoming shareholders believe they are being treated fairly in a transaction between the parties.
Peak Business Valuation performs many valuations relative to Buy/Sell Agreements. In the event a Buy/Sell Agreement does not exist, a well-documented professional valuation is critical toward enabling the Shareholders to reach an amicable negotiated agreement.
A third-party valuation serves as a great foundation to negotiate and facilitate an agreement that appeases all parties involved in a shareholder transaction. With a professional business valuation, shareholders are more likely to negotiate successful transactions and avoid costly, distracting, and time-consuming disputes.