Our valuation and tax teams were recently approached to assist a client with a potential estate freeze or a sale of the company. The business had been in operation for dozens of years and had grown to over 400 employees with $95 million in annual revenue.
The client was considering the following:
a) Enacting an estate freeze to preserve the control of current management, while passing on the future growth to their families; or
b) Selling the company to a third party.
After discussing both options with the client, we were retained to determine the fair market value of the company under two scenarios:
1. A notional valuation in anticipation of an estate freeze; and
2. A notional valuation under the assumption that a “Special Purchaser” (i.e. a buyer that is able to derive additional value from the company via operational synergies) can be found.
Research and Analysis
Our work entailed a thorough review of the operations of the company, the industry in which it operates, and its historical results. Our research revealed that comparable public companies traded at multiples ranging from 6x to 8x EBITDA, while recent actual transactions for companies in the same industry ranged from 7x to 9x EBITDA.
We determined the company’s maintainable EBITDA by normalizing its reported earnings for the following:
a) Discretionary donations and benefits expenses that were not incurred for revenue generating purposes.
b) Salaries and bonuses paid to the owner/managers, as well as certain upper-level managers, which were accrued at year end to facilitate tax planning. These were adjusted to consider the market level of compensation to replace their roles and contributions.
c) Compensation paid to family members and other related parties, who did not provide bona fide services to the company, and which were paid primarily for income tax splitting purposes.
d) Unrealized foreign exchange impacts.
e) Fees for non-recurring professional services.
f) Interest expenses; and
g) Depreciation.
Notional Valuation for an Estate Freeze
Based on the adjustments above, we determined the maintainable EBITDA and applied our selected multiple to conclude that the Fair Market Value of the company for estate freeze purposes was approximately $120 million.
Notional Valuation for a Potential Sale
Our second valuation approach assumed a synergistic buyer would acquire the company, so we considered the following synergies:
a) Removal of a key competitor, which could lead to increased market share, and influence over pricing and margins.
b) Reduction on freight costs for volume orders.
c) Elimination of redundant administrative staff.
d) Elimination of redundant management and executives.
e) Reduction of costs related to increase volume of purchases.
f) Reduction of costs related to the purchasers in-house manufacturing capabilities, which the target company did not have access to.
With consideration of the noted synergistic benefits, we determined that a Special Purchaser might be willing to pay as much as $170 million for the company.
Ultimately, the client relied on the valuation expertise conducted by GG LLP to establish a price, and marketed the company accordingly. Shortly thereafter, the business was sold for $140 million. In addition to the valuations services, GG LLP assisted the company with transaction support throughout the selling process to ensure that there was no purchase price adjustment made to the original offer.
GG Observations
In addition to the litigation-related services that we provide, GG LLP would be delighted to assist with any business valuation needs, whether they are required in contemplation of a potential acquisition or sale, tax planning, or subsequent transaction support.
Authors
Tom Strezos, CPA, CA, CBV, CFE, ASA
Valuations and Litigation Support
Contact Tom
Email: tom@grewalguyatt.ca
Direct: (905) 747-5162
Claudio Martellacci, CPA, CA, CBV
Partner – Valuations & Litigation Support
Contact Claudio
Email: claudio@grewalguyatt.ca
Direct: (289) 819-1744