The Portable MBA in Finance and Accounting, 3rd Edition

Business Valuation 599

Positive

ACME has been in existence for 20 years.

ACME has a long-term history of growing sales and profits.

ACME owns several trademarks for products that are well known.

ACME has diversification in the number of its manufacturing locations.

ACME’s industry outlook is moderately positive.

The demand for ACME’s products is expected to continue.

Negative

ACME is highly dependent on the three family members who hold the

top management positions.

ACME’s products face significant competition and are regionalized.

FINANCIAL STATEMENT ANALYSIS

An analysis of a company’s historic financial statements is important (unless it
is a start-up business), as the past is usually relevant to estimating future busi-
ness operations. If a company has had high growth in recent years, that may in-
dicate significant growth potential in the future. If past earnings have been
volatile, this is an indication of increased financial risk for a buyer of the busi-
ness. While an analysis of the financial statements is important, the process
does not stop with looking at the company’s past performance. The ultimate
goal of the quantitative analysis is estimating the future profitability of the
business since that is what a prospective buyer is looking to receive. Future
earnings may or may not be similar to the past.

Balance Sheet Analysis

Victoria prepares Exhibit 18.1 that presents ACME’s historic balance sheets in
condensed form for the most recent five years. She finds that total assets grew
an average of 15% per year over the five years and a similar amount in the most
recent year. The current assets consist primarily of accounts receivable and in-
ventory. Fixed assets primarily consist of land, buildings, and improvements,
machinery and equipment, factory construction in progress, and transportation
equipment. As of the most recent year ’s end, ACME’s depreciable fixed assets
were depreciated to 69% of their original costs.
The most recent year ref lects unamortized intangible assets, consisting
primarily of goodwill (that had been recorded in accordance with generally
accepted accounting principles) in connection with ACME’s acquisition of a
manufacturing facility.
Current liabilities consist of accounts payable and the amounts due within
the next 12 months on promissory notes and obligations under capital leases.
ACME is moderately leveraged. During the past five years, ACME’s in-
terest bearing debt (both current and noncurrent portions) increased from $6.6