Summary: Stout determined the fair market value of 100% membership interest in a privately held ammonium sulfate distributor. This valuation was critical for the company’s corporate planning, necessitating swift action to meet its deadlines. Facing tight timelines, our team performed a rigorous analysis to deliver a precise and insightful valuation.

The Challenge: The challenge laid in defining and mitigating risk particularly when linking a positive forecast for the next 10 years to the historical financial statements that showed net losses. This also required nuanced expertise due to the lack of comparable companies in the marketplace and the company’s significant leverage.

The Solution: To determine the value of the interest, the team used the Income Approach, utilizing future cash flow forecasts and calculating the net present value of those cash flows. Developing the discount rate involved using market-based inputs adjusted to accurately reflect the company’s unique circumstances.

To determine the company’s comprehensive value, potential risks, and enterprise value for a hypothetical buyer, our approach was thorough and detailed. We reviewed an array of essential information sources, including:

1. Audited Financial Statements: A deep dive into the company’s audited financial statements spanning three fiscal years provided us with a foundation of historical performance data.
2. Internally Prepared Finance Statements: In addition to audited statements, we reviewed internally prepared finance statements as of the valuation date, offering insights into the company’s financial health and operational efficiencies for this period.
3. Projection Model Analysis: The company’s projection model was a cornerstone of our analysis. By rigorously evaluating this model, we gained a clear understanding of management’s expectations and future growth trajectories.
4. Key Distribution Agreement Examination: A thorough review of the key distribution agreement provided critical insights into revenue streams, market access, and strategic partnerships.
5. Executive Information Memorandum Provided to Creditors: Delving into the executive information memorandum provided to creditors offered a detailed glimpse into the company’s strategic vision, operational strategies, and market positioning.

Furthermore, Stout held in-depth discussions with the company’s leadership, delving into its business operations, industry dynamics, historical performance, and outlook. These conversations were instrumental in arriving at a comprehensive statement of fair market value.

The Methodology

In developing the discount rate, our team utilized market-based inputs and adjusted these to reflect factors relevant to the company. Despite the company’s balance sheet showing a negative book value of equity, if the company can execute on its projection model, the calculated value of equity should be higher than the negative book value stated on the balance sheet.

Considering this, we factored in risks associated with the projection model in our discount rate calculation. These risks included the execution of the plan, refinancing of debt, and construction projects to produce/distribute ammonium sulfate.

1. Execution Risk: The successful execution of the company’s strategic plan was a primary consideration and assessing the feasibility of its operational and growth strategies.
2. Debt Refinancing Risk: Given the company’s high leverage, we evaluated the risks associated with refinancing existing debt as well as changes in interest rates, market conditions, and the company’s creditworthiness.
3. Construction Project Risks: The company’s plans for constructing facilities to produce and distribute ammonium sulfate introduced project-specific risks such as construction timelines, cost overruns, and market demand forecasts for ammonium sulfate.

We also looked at external factors that could influence the value of the company, such as macroeconomic indicators, consumer behavior and sentiment, business activity indicators, international trade and finance, and industry-specific data.

We utilized free cash flow as the measure of economic benefit. Free cash flow projections were provided by company management and incorporated in the Discounted Cash Flow (DCF) Method.

Additionally, projected free cash flows were discounted to its present value equivalent using a rate of return that reflected the relative risk of the asset and the time value of money. We applied the Capital Asset Pricing Model (CAPM) to estimate the required return on equity based on empirical information derived from studies of investment returns on publicly traded equity securities.

Outcome: With the insights derived from our valuation model, the company now possesses a strategic advantage. These insights equipped the company with the necessary tools to make well-informed decisions.