Investor Group

Business Valuation: Assessing a Business Purchase

A group of agricultural producers was presented with an opportunity to purchase a facility that had been processing and marketing their commodity for many years.  Attracted by the potential for value-added returns, they formed an investment group and asked Morrison & Company to assist with business valuation services.

The facility, built in the 1940s, was the only regional processor of the commodity grown by members of the investor group and thus their only customer.  It had changed hands several times and was now owned by a company with few other operations on the west coast.

When the owner expressed an interest in selling, the investor group quickly formed from among the growers.  Morrison & Company was engaged to provide business valuation services, review the operation, assess the asking price, and assist with negotiations.

We assessed the facility and its operating history, along with reviews of markets, market outlook, and risk.  We also analyzed several years’ operating records, obtaining details and information to facilitate detailed financial assessments and projections of its value as an operating company.   Additionally, we considered alternative uses and values for the facility and the possible proceeds of a sale of excess land that would have been acquired as part of the purchase.  We also reviewed financing options, including federal loan guarantees. 

With this information in hand, we calculated the payback period, net present value (NPV) of projected cash flows from operations, estimated internal rate of return (IRR) under several scenarios, and prepared an overall assessment of the proposed transaction and its risks. 

Our business valuation found that the value of the facility was less than half of the $40 million asking price, with an excessive payback period.  Our client made a counteroffer based on our business valuation; the owner opted to stick with their original asking price. 

The owner subsequently negotiated with several other potential buyers and was likewise unable to agree to terms.  It has been over five years since our assessment as this is written and the facility is still owned and operated by the same owner.  By requesting our assistance and getting a business valuation, our client avoided a potentially disastrous investment that would likely have saddled them with insurmountable debt and cash flow challenges.