Equity Valuation

There are a variety of reasons

There are a variety of reasons that owners of closely held businesses such as Suburban Electronics Company (Suburban) may want to determine the value of their business. For instance, it may be to establish a reasonable price for a transaction involving the sale of some or all of the company’s stock. Fair market value must be determined taking into consideration all relevant facts and circumstances. In the case of an operating company viewed as a going-concern, fair market value takes into consideration not merely the value of the physical assets of the company, but goodwill and other intangible assets as well.

The value of a business as a going-concern must consider its ability to generate revenue, earnings, and cash flow. Valuing a business as a going-concern also assumes that there is no current intention to liquidate the company or sell the underlying assets, but that it will continue to operate as a business. Doing so also requires an understanding of the industry in which the company operates, and the risk that the company or the industry will experience a downturn. Valuation requires an evaluation of all known risks, as well as market volatility and other potential risks such as contingent liabilities.

The first problem that one must address when considering Suburban is why management is interested in taking the company public. The stated reason is to raise additional capital to help the company to continue to grow. However, the information provided in the case study suggests that up until now the companyÆs growth pattern has been exceptional. For example, in a ten-year period, the companyÆs sales went from $1.292 million to $8.0 million, and net income after tax went from $155,040 to $811,448. Most entrepreneurs would be pleased with this level of sales growth, and this rate of increase in profits. We note that the companyÆs net income after tax is more than 10% of net sales. Therefore, not only is the company …

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