question archive We began our valuation of Baltimore Resins with several assumptions
We began our valuation of Baltimore Resins with several assumptions
Subject:AccountingPrice: Bought3
We began our valuation of Baltimore Resins with several assumptions. First, we cannot simply use the most recent financial data from 2011 only as it does not appear to be an adequate representation of profits. We decided instead to use the average of sales, income, and book value from the years 2008-2011 since they are more reasonable than 2011 alone. Next, we used the averages of the provided P&L statements and the tax returns. This was decided because it is common for there to be slight differences between the two documents and using an average was the best way to encapsulate both values. Finally, we wish to note that we did not include valuation metrics for EBITDA, EBIT, or Gross Profits as we felt (for various reasons) that none of those metrics would make a material change in our valuation. For example, EBITDA and EBIT can be manipulated in many ways and often is not a clear indicator of cash flows. These metrics were excluded because of this reason and because of the existing suspicions about corporate cannibalism, etc. The gross profit metric was not deemed appropriate in this valuation because the sample size of truly comparable companies was too small to reasonably compare gross profits. One really does need an apples-to-apples comparison for a noteworthy MVIC/gross profit metric.
Included in this valuation report are the most comparable industries to Baltimore Resins and their most used valuation metrics. The document titled MAIN DATA-BALTIMORE RESINS CASE-EXHIBITS A-F contains a list valuation metrics used for specific SIC codes, each set of data derived from a specific set of criteria. The data we used for our valuation comes from Exhibit A,B,C, and D. Exhibits A & B are for SIC code 2821. The exhibits provide a description of the business activities and show results for the criteria of sales between $0-$20M. Considering the goods and services provided by the company coupled with their 2011 P&L statement reporting sales around $10M, we felt this classification code was most comparable to Baltimore Resins. The sample size for SIC code 2821 however, only resulted in 3 transactions meaning the sample size is simply too small to be the only metrics used in the valuation.
Next, we considered Exhibit C & D for our comparison. The search criteria for those exhibits were SIC code 5000 and 5100 respectively, both with sales between $0-$20M. Although this search included companies much larger than Balt Resin, we felt these metrics were still a good baseline for valuation considering how small the sample from SIC code 2821 was, plus the possibility of corporate cannibalism of Balt Resin.
Exhibit E produced results for SIC code 5100 as well; however, the search criteria was for company sales between $10M-$20M. Baltimore Resins does not fit this criteria as their highest recorded sales between the years of 2008-2011 was just shy of $10M. The companies from this sample would be considerably larger than Balt Resin so we excluded these metrics from our report.
Once we determined which SIC code to derive our valuation metrics, we evaluated which metrics would be key to narrowing down the true value of Baltimore Resins. For this task, we selected multiples for MVIC/Sales, MVIC/Income, and MVIC/Book (book value of invested capital). We also considered a DCF analysis that concluded an amount of $518,459. The MVIC/Sales ratio was chosen because it is one of the most widely used metrics of valuating a company. It allows us to evaluate the company based on its sales while considering the company’s debt as well. In other words, this value shows us what it would cost to buy the company’s sales.
Another commonly used metric is MVIC/Income or discretionary earnings. This multiple is arguably the most important metric of any business valuation because it represents the net profits of the business plus any discretionary costs that the current owner incurred, but that would not necessarily transfer to the new owner. It put it simply, we calculate this by taking net income and ‘adding-back’ expenses that a new owner would not have or would measure differently. Finally, we included MVIC/Book (book value). This metric was included because of its popularity and the ease of use. There also is not any subjectivity in this metric. Business owners cannot manipulate the cost of their assets (outside the allocated depreciation amounts). We found this metric to be applicable and useful in our valuation of Baltimore Resin.
