598 Making Key Strategic Decisions
She also finds that ACME’s customers are retail distributors of its prod-
ucts and the company does not have any significant customer concentration.
Generally, relationships with customers have been long term.
The company currently has numerous products in the adhesives and
sealants area. ACME has several trademarks and several products that are well
recognized as well as ACME’s name. Victoria determines through her research
that the risk of product obsolescence or replacements by new products is a
minimal risk to ACME.
ACME has conducted research and development activities and the costs
range from $250,000 to $500,000 per year over the past five years. Manage-
ment does not expect any significant product developments in the near future.
Victoria’s financial analysis examines the dividend paying capacity of
ACME. Because the company is closely held, special analysis of the compensa-
tion paid to family members and perquisites is necessary. Victoria determines
that officers’ compensation, shareholder distributions, and perquisites over the
past five years have been as follows:
Officers’ Compensation, Perquisites,
and Shareholder Distributions
Year $ Million
2000 $7.7
1999 5.5
1998 8.2
1997 6.3
1996 6.5Closely held businesses are frequently operated to minimize taxable in-
come. Publicly held companies, in contrast, are operated to maximize earnings
for the benefit of the shareholders and public markets. A financial analysis of a
closely held company should make adjustments so that revenues and expenses
are “normalized.” In this particular case, Victoria determines the amount of
economic benefits the family members took from the business and compares
that with the market compensation for others employed in similar positions.
The difference between the two amounts is actually an economic benefit or
dividend (profit) f lowing to ACME’s owner. Victoria’s analysis strives to iden-
tify the actual profitability of the business enterprise even though it is differ-
ent from what is reported on the income statement.
ACME has approximately 240 employees at its six locations. The three top
individuals in management are family members including Bob. Should the
company be sold, it is unlikely that the three family members would remain in
the business.
Summary of Positive and Negative
Fundamental Factors
As a result of Victoria’s preceding analysis of ACME’s fundamental position,
she identifies the following key positive and negative factors for the company.