Trends in industry that need to be considered
Financial issues that effect value
Inventory is often significant
Does income level justify equity investment? High levels of inventory may result in dificulty getting a adequate return on equity
Significant levels of debt. High levels of inventory may result in high levels of debt
Alternative methods of valuing -It the above factors result in a low rate of return on equity or a high level of debt consideration should be given to the net asset value and return after debt.
Important issues include barriers to entry, uniqueness of products/patients quality of assets, capital expenditures that may be required and cost structure/break even point.
Location is most important item to understand in valuing. Retail operations are generally at the mercy of the economic and competitive environment in a relatively small area. Barriers to entry are typically low. Multiple locations important to understand individual location performances and environment and to gain understanding of trends going on in an area.
Typically have low equity base. As such value lies in the quality and strength of their customer base and the key employees. The following will be critical to understand:
When it comes to valuation there is typically little equity and future profits are closely tied to a few key people value is likely to have a small cash component and some type of contingent payment tied to future performance or customer base.
Typically competitive bid basis work that requires significant working capital for bonding. Future revenue very risky ( industry tends to be cyclical and future contracts are on a competitive bid). Value will tend to be driven by equity with difficulty justifying a premium. In some cases, EPA may be an issue.
Items to look for in building value: