Business Valuation 597restaurant will probably not sell very many steaks if the price is double what
the customer could buy at another restaurant. Likewise, a potential purchaser
of a business is not likely to pay significantly more than the price he or she can
purchase a similar business.
In business valuation, we must remember that buyers/investors have many
places to invest their money and they will generally not pay significantly more
for a business than the price of comparable investments. Thus, a business valu-
ation will generally benchmark the profitable private company against alterna-
tive investments. This involves an analysis of the risk of those investments as
well as those of the business being valued.
INDUSTRY ANALYSIS
ACME operates in the adhesive and sealant industry. The U.S. government’s
Standard Industrial Classification (SIC) is number 2891. Victoria researches this
industry and finds that the segment consists of approximately 1,100 U.S. estab-
lishments primarily engaged in manufacturing industrial and household adhe-
sives, glues, caulking compounds, sealants, and linoleum, tile, and rubber
cements. The annual sales in this industry segment are $16.9 billion, and the in-
dustry employs roughly 36,000 people. Also, the industry has grown at an aver-
age annual compound rate of 6.7% over the past 10 years. Victoria finds that this
industry segment is a large growing global segment. However, the U.S. portion is
highly fragmented and a significant majority of the industry participants are
small and regional companies. It is expected that the industry will consolidate as
companies seek to enhance operating efficiencies and new product development,
sales and marketing, distribution, production, and administrative overhead.
Victoria concludes that the industry outlook is positive in revenue and
earnings expectations but moderated by the level of competition from numer-
ous, smaller companies selling similar products.
THE FUNDAMENTAL POSITION OF THE COMPANY
During Victoria’s management interview, she discovers that Bob founded
ACME 20 years ago. The company’s history has been one of relative success. It
started in a small garage and grew by expanding the number of products and
its customer base. Over the years, ACME acquired new facilities, not only in its
hometown but in other cities as well. The company’s growth was primarily
funded by reinvesting its profits and with long-term financing when purchasing
real estate. During the past five years, ACME’s sales increased from $34 mil-
lion to $50 million. ACME currently expects to expand its manufacturing ca-
pacity by adding equipment to the existing locations.
Victoria’s investigation into ACME’s competitors reveals competition
from numerous companies, many of which are small, privately held businesses.