Financial Modeling
When developing new products, creating business plans or evaluating new strategies, Financial Modeling becomes an essential component of the entire process. Much more than understanding the mechanics of financial and productivity programs, Financial Modeling requires a thorough understanding of the business dynamics, from products to customers, competitive strategy, financial resources and leadership. The most complete financial models are those that delve deep into detail but can be collapsed to multiple levels and deliver exactly what the executive role requires. Creating executive summaries and developing tools for business management using the fundamentals of financial modeling is an exercise that separates companies with direction and success from the also rans.
Business Valuations
While often thought as an exercise required only for a buy/sell transaction, business valuations have many other uses. From allowing new partners into a professional practice, from creating succession and inheritance plans and to securing financing, business valuations are a critical piece of operating businesses.
Valuations are a way to look at the past, the planned future and arrive at a value for a business. Considerations such as valuing for an ongoing-concern or for liquidation, influence the valuation process. When valuing businesses, a major major distinction is whether the business is public or private. Public corporations have reporting requirements and other mandated regulations (SEC, GAAP, FASB, to name a few) which require the carefull maintenance and publications of data. In addition to company internal data, valuations of public businesses benefit from large amounts of like-business information, with which models are enhanced by comparing companies in the same sector and with similar business structures. We focus on Private Business Valuations.
Private Business Valuations
Valuing a private business involves similar techniques to the ones used to value public businesses, but are nuanced by other conditions. Because private transactions are seldom shared publicly, information with which to compare the private business is very limited. Private Business Valuations require a combination of financial minded professionals injecting into the process business management savvy, to fully account for the many variables which add and detract from value but may be overlooked by simply focusing on financial information.
Just like public corporations, private business service many sectors. From manufacturing, distribution, information systems, marketing, and professional services are all serviced by private enterprises.
Professional Practices
An interest of ours are Professional Practices, such as consulting, healthcare services and financial planning. Valuing these types of organizations must include in the process a deeper look at performance, as well as the business outlook as impacted by the principal service providers. Beyond the analysis of results, investments, and debt structure/facilities, on which future financial performance estimates can be based, private business have valuable data in the form of customers, track record, management expertise and community engagement. Many of these items are very difficult to value, they do not make it into the Balance Sheets but represent assets which must be considered during a valuation process to arrive at the company’s worth. Including these non-accounting items is paramount to render proper valuations and assessment on the likelihood of future performance.
Take for instance the customer base. A thorough customer cohort analysis is necessary to understand customer lifetime value, potential churn and growth potential. Professional practices which serve specific geographies due to its services – i.e. medical practices – demand an understanding of the local potential and penetration. Industry metrics, a thorough analysis of past and planned performance and an evaluation of growth and marketing strategies must be taken into consideration when valuing private businesses offering professional services.
Conclusion
Private Business Valuations rely on tried and true techniques, such as Multiple/Comparables Analysis, Discounted Cash Flows, Scenario Alternatives (The Chicago Method) but are complemented by deeper understanding of metrics which are at times overlooked during traditional valuations which rely solely on financial information. Free Cash flows are also used to understand cash generation potential.
To learn more about valuations, write to us at [email protected]