Company X (company details removed for privacy purposes)
A tax and audit firm, one of our referral clients, recommended us to a company in the medical device space to assist in the strategic planning and exploration of exit opportunities for three separate business units backed by a set of intangible assets including patents, industrial designs, brands and licenses.
No financial statements were provided for this engagement. Management presented unstructured accounting entries, and there were no audited financials nor forecasts; it represented an extra layer of complexity by obstructing access to key financial information to external parties, including current and potential investors. Our in-depth knowledge of accounting practices and processes led to building a reliable picture of the financial and economic situation of the businesses providing insightful information to the parties involved.
As the company was preparing for a formal audit process, the three separate business units required to be independently tested for impairment from the initial purchase price; the company’s tax and audit firm lacked the independence and level of expertise required for this valuation purpose, and as a result engaged InteleK.
Our extensive knowledge of impairment testing allowed us to separate the case facts and value drivers from temporary factors affecting expected revenues and profits, and structural factors that could lead to a permanent erosion of revenues and profits.
As part of our engagement, we identified quantitative aspects affecting value (historical performance, perspectives, industry data), environmental factors such as COVID-related supply chain shortages but more importantly contextual factors apparently hidden or not easily quantifiable such as management biases. Although relevant, not all of the factors identified had the potential to materially impact the sustainable performance of the subject business units.
Contrary to what management expected and what most superficial information suggested, no business unit was subject to impairment, not even those that had experienced losses in recent years. The flagship business unit was valued higher than expected while the money-losing businesses were valued above their purchase prices after considering the trends in the markets in which they operate and the lifecycle of the technologies they used.
Our conclusions were accepted by the auditors with no revisions.
A central element of the discussion with management was the purpose of the valuation and its impact on the overall conclusion of value. The business owner was conducting a 409a valuation at the same time, rendering a materially different valuation. Having a deep understanding of the fair value standard, we determined that the acceptable methods in a 409a valuation (for example, the latest round of financing) were not adequate to represent the economic value of the intangible assets under a fair value standard given the level of scrutiny for financial reporting purposes and impairment testing. We took the time to explain and educate the client as to why these values were different.