Question

You are a senior member of management for a development and construction company where the original two owners wish to retire and sell the business. Along with several experienced co-workers, you are considering a buyout of the business. As part of your due diligence, you have performed some analysis of the historical financial statements and determined the following:

a. Audited financial statements indicate a net book value of $4,500,000.

b. The owners recently had the tangible assets appraised and the fair value of assets is $2,000,000 higher than audited book value. Part of the difference results from the owners having acquired several development sites over a period of years that are recorded in the audited financial statements at original cost.

c. A guideline public company recent price to earnings multiple for a comparable public company times weighted average income results in a business value of $9,000,000.

d. Using a discounted cash flow approach with a five-year projection period and terminal value results in a business value of $10,000,000.

You and your co-workers have offered $9,500,000 for the company. The owners will be paid consultants for one year following the purchase of the business so that there will be no loss of key employees. The owners are motivated to sell but negotiations are at an impasse. The owners insist that they be paid $11,500,000 - $9,500,000 offered plus the $2,000,000 incremental fair value of assets over book value. How do you respond to the counter-offer of the owners?

Answer 1

From the above information it is evident the the valuation of the compnay is made based on the Historical values.

Net Book Value - 4,500,000 $

Business value based on the Public company averages - 9,000,000 $.

Using the discounted cash flows value - 10,000,000 $

Fair Value of the assets in excess of the book values - 2,000,000 $

The Members offered a reasonable Price of $ 9,500,000.

There are two ways in arriving this 1. by using the fair value of assets and the other using the book values.

Since, they are purchasing the compnay analysis need to be done at fair values. Which would increase the price to be offered.

So, we reject the counter offer made.

But we should increase the price to compensate for the fair value of the asstes.