Case Study – Valuation Consulting

Case Study #6 – Valuation Consulting

Company X (company details removed for privacy purposes)

  • We were engaged by one of our prior clients and its accounting and tax advisor, to provide strategic guidance in making value-based decisions in response to a buy offer received by Company X.
  • In early 2023, Company X received an offer from a private equity firm (PE). The PE presented its valuation analysis, which was based on historical EBITDA analysis, comparable transactions, market conditions, and potential for future value creation after an eventual agreement. The offer included a payment in cash, a go-forward salary for the owner, and a significant equity rollover stake post-close (estimated by the PE at $8.4 million).
  • The PE firm proved to be a well-informed and sophisticated party with relevant experience in the sector and investments in similar business models. They presented projections, economic expectations, and professional advice from different agents in the private equity space.
  • Our challenge was to assess the reasonableness of the proposal by considering the key valuation drivers of the business and identifying the critical assumptions in the PE's offer, while maximizing the present and future value for Company X. Timely and accurate delivery was key, given that a poor or uninformed decision could cost millions of dollars.
  • Our deep understanding and knowledge of business valuation and the PE / VC space, allowed us to quickly identify the key value drivers and the underlying assumptions and risks affecting Company X. Naturally, there were points of convergence and divergence resulting from our independent and properly documented analysis.
  • The points we generally disagreed with were those that had the most significant impact on the valuation. For example, the assumption of an imminent recession (and not just the consideration of a recession scenario), the biased baseline used by the PE to show a reduction in market multiples (by comparing against the 'bubble' of a market abnormally fueled by the low interest rates in 2020-21), and an erroneous selection of a peer universe were among the factors that undermined the true potential value of Company X.
  • We refuted more than ten critical assumptions in the offer and attached supporting evidence to guide management in the process. We recommended rejecting or renegotiating the offer, which was several million dollars below the intrinsic value of Company X, and provided action points and suggestions to improve the attractiveness of the business and achieve more favorable terms in the future.

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