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Case Study – Valuation of a Company with Three Different Operating Segments

Case Study #8 – Valuation of a Company with Three Different Operating Segments

Company X (company details removed for privacy purposes)

  • InteleK was engaged to value a company’s shares accounting for 10.0% of common stock outstanding on a noncontrolling nonmarketable basis for potential sale purposes. The Company is a special trade contractor offering installation and reparation services of roofing, gutters, and insulation. These 3 three segments had completely different financial performances and risk profiles.
  • To address the key value factors generated by the presence of different operating units, InteleK’s approach was to value the company as the sum of its parts. This process ensures that the individual earnings capacity and risk profiles from each segment are accounted for, ensuring an accurate and defensible valuation.
  • A detailed look into the company’s segments and its financial performances showed:
  • Significant differences in historical revenue trends including high growth, volatile, and mildly positive;
  • Significant differences in levels of historical profitability, and
  • Different trends in profitability including high improvement and mild volatility.
  • Considering each segment as an individual company and valuing them as so, translated into the following process:
  • Normalizing the earnings of each segment – key to understanding their earnings capacity under a fair market value standard and generating appropriate expectations for each,
  • Application of 4 different independent valuation methods under the Income and Market Approach, as applicable for each segment considering their individual performances and risk profiles.
  • To provide insight into the difference on how expectations can differ and impact the final value of a company if the consolidated results only are analyzed. Hence, we valued the company on a consolidated basis ignoring its operating units. The analysis and process included:
  • In summary, the consolidated results presented a positive but volatile revenue trend and significant volatility in historical profitability with a mild improvement across the years analyzed,
  • 3 different valuation methods were applied within the income and market approach.

The midpoint of the valuation range resulting from valuing the company as the sum of its parts yielded 27.20% higher than the value resulting from the value of the consolidated results.

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