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Case Study – Advisory Engagement for a Machined Parts Company
Case Study #6 – Advisory Engagement for a Machined Parts Company
Company X (company details removed for privacy purposes)
- InteleK was referred by a financial advisory firm to assist a family-run company with over 30 years of experience in the machining industry. The company specializes in providing precision and quality machined parts, including prototyping, design, and engineering solutions for the manufacturing process. Due to the company's asset-intensive nature, management sought InteleK's expertise to determine a reasonable valuation range for a minority stake in the company, aiming to facilitate strategic planning.
- In recent years, several changes have occurred within the company, impacting the quality and reliability of the financial information provided for this engagement. As specialists in SME valuations, we are well acquainted with the common limitations and inadequate accounting practices often encountered in such businesses. In this case, these limitations included: improper allocation of labor expenses between operational and administrative areas, inconsistent accounting of depreciation charges, transactions with related parties conducted above or below market rates, the presence of surplus assets (in this case, real estate) that would not be included in a potential transaction, and incomplete information, among other factors.
- Before arriving at an indication of value, it was crucial to "reconstruct" a comprehensive overview of the business by implementing the best accounting practices in the industry for accurate financial reporting, while considering the unique aspects of the subject business. By gaining a clear understanding of the company's financial landscape, we were better positioned to advise management on the financial aspects most relevant to their specific situation.
- Despite being an asset-intensive business, we demonstrated the presence of goodwill (the value beyond tangible assets used in the business) and applied both the income and market approaches. This allowed us to consider not only the historical (adjusted) financial trends of the business but also the dynamics of the industry in which it operates.
- Finally, we incorporated a set of discounts that typically apply to minority stakes in privately-held businesses, including a discount for lack of control and a discount for lack of marketability. This resulted in a relevant valuation range. However, our engagement did not conclude there. Leveraging our understanding of the business and the industry, we provided valuable guidance on enhancing the company's value. For instance, we recommended specific accounting practices to improve the quality of financial information, identified opportunities for revenue growth, and highlighted the importance of preserving the above-average profitability that the business had been enjoying (which had been previously "invisible" due to improper accounting practices).
- By delivering comprehensive insights and actionable recommendations, we empowered the company's management to make informed decisions and maximize the value of their business.
