After an exhaustive search, three businesses that appear to be comparable to Duke’s are found. The Market Approach spreadsheet gives basic financial information about the businesses and recent transactions involving them and provides space for the calculations. The comparable businesses are the following:
Charlie’s Sporting Goods. Charlie’s is located in a neighboring town and has a similar clientele to Duke’s. It has been in operation for seven years and over the past three years has generated steady revenues and net income. The current majority owner, Bill, purchased Charlie’s from the founder two years ago for $1.5 million. He sold a small piece of it recently for $60,000.
Mary’s Sporting Goods. Mary’s is located a few towns away and has existed for over a decade. It specializes in women’s and girls’ sporting goods and draws from a larger market area than Duke’s. Mary’s offers free training on its equipment, which adds to its expenses, but Sally feels that this policy grows its customer base and leads to more sales. Sally, who is quite risk averse (like Mary), purchased the business outright in the current year.
Jamie’s Sporting Goods. Jamie’s is a three-store chain located on the north and south sides of the nearest large city. It has been operating for over two decades. It recently added its third store and financed this expansion with a loan from a local bank. It is paying substantial interest on that loan. While it produces a high net income, it is also more leveraged than Mary’s or Charlie’s. Jamie, the current majority owner, sold 8% of the business for $500,000 in the current year.
Ratio calculations. Calculate the relevant ratios for the comparables.
Valuation of subject company based on comparables. Use the market approach to determine a financial value for Duke’s.
Adjustments. Adjust the financial value of Duke’s for a controlling interest premium and marketability discount, if needed.
LIQUIDATION VALUE
What is the liquidation value of Duke’s? Look at the present value of all assets that could be liquidated and account for all debts . Determine the sum of those values. In other words, if the company were to be liquidated, how much cash would be left over?
