Valuation Engagement Review: Understanding Company Value

Sun Business Valuations conducts business valuations for a wide variety of purposes. These reasons include negotiating a sale, securing financing, settling a legal dispute, and for a shareholder buyout to name a few.

The following will provide insight into one of our recent engagements involving the Shareholder better understanding the valuation of their company to determine the best time to purse a sale of the company.


Contract Manufacturing Company


Sun Business Valuations was engaged by the Shareholders to perform a business valuation that would enable the founders to better understand their exit strategy options. The Company was a family owned business founded by a husband and wife who had grown the business both organically and through acquisition over a 19 year period. Fortunately, the Shareholders were not in a position that forced a sale (i.e. health or financial challenges). The company was thriving and the Shareholders were considering a sale for in order to relocate and achieve other lifestyle goals.

Valuator’s Summary of Engagement:

When evaluating exit strategy options, it is critical to have a realistic understanding of the fair market value of the company prior to pursuing a business sale transaction. It enables the parties to make an informed decision rather than “shooting from the hip” when considering such a critical decision. It enables the shareholders to use this valuation as a benchmark and approach future negotiations on an informed basis.

Sun Business Valuations based this report on a thorough analysis of the company’s historical financial statements as well as the various operational and intangible factors that impacted valuation. Five alternative valuation methodologies were used in arriving at a valuation conclusion.

Since financial statements are generally tax driven and not prepared for business valuation purposes, Sun analyzed each line item to identify any applicable recasting adjustments to determine the adjusted EBITDA (adjusted earnings before interest, taxes, depreciation and amortization). In doing so, we examined one-time or non-recurring expenses, shareholder fringe benefits, normalized shareholder compensation, non-cash expenses, and various other applicable recasting adjustments. We also made applicable adjustments to the company’s balance sheet.

Numerous intangible and operational factors needed to be assessed in addition to the overall financial health of the business. We analyzed how the company stood up to the dozens of risk factors and value drivers that impact valuation. These include shareholder dependency, quality of the management team, customer concentration, vendor dependency, industry stability, and barriers to entry to name a few.

In this particular case, the subject Company excelled in most of these areas, having put management and processes in place to facilitate efficient operations and lessen dependency on Shareholders. A main issue arose in the area of customer concentration as the company’s largest customer accounted for 54% of the total revenue. This and many other factors were considered in performing our business valuation engagement.

Sun Business Valuations reviewed the valuation with the Principals and their professionals and they are now preparing to pursue a sale of the company from an informed vantage point.

To read more about customer concentration issues on our sister company, Sun Mergers & Acquisitions’ website.


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