Growth Stage Valuations Position Businesses for the Next Phase
When a company reaches certain technological milestones, gains regulatory approvals, or moves beyond breakeven profitability, leaders ask, “Now what? The focus of the business shifts from concept and survival to establishing market position, increasing sales, and improving profitability. Along with a change in perspective comes a change in valuation needs.
Combining valuation and financial modelling can help you envision the implications of strategic decisions.
Valuation can impact strategy
As a business transitions beyond the start-up phase of its life cycle, leaders need accurate valuation measurements, so they can realistically and strategically plan for the future.
- Valuations to raise capital
From a strategic or synergistic perspective, the company is now an attractive acquisition target or may need to raise additional capital. Both situations require a valuation of the company’s invested capital and/or equity.
- Providing incentives
Providing equity incentives to key employees to fuel the growth of the company is an excellent strategy, but it will also require a complex capital valuation to properly report the granting of stock options, warrants, or other equity awards.
- Purchase price allocation
During the growth phase, businesses may need valuations for strategic purposes, like bolt-on acquisitions to expand geographically, capturing market share, or complementing existing products or services.
- Impairment testing
An impairment test confirms that certain assets on the balance sheet are not overstated. Testing definite and indefinite-lived assets may require the valuation of a company’s reporting units, assets groups, and/or underlying tangible and intangible assets.
The common theme with all these initiatives is the need for accurate, timely, and defensible valuations. Being able to rely on experienced valuation professionals provides management the ability to focus on the business knowing all valuation needs are covered.
Valuation case study
The following real-world example highlights the variety of situations that require valuations for a growth stage business.
A North American data center and colocation provider had an ambitious growth plan focused on organic investment in existing markets and acquisitions to enhance market share and expand geographically. The company was purchased a few years ago by a large private equity group, which provided the financial support needed to fuel this strategy. As a result of the private equity acquisition, the company needed to perform a purchase price allocation on the acquired tangible and intangible assets.
CLA had a kick-off call with the company’s auditors to ensure alignment on scope and methodology. We then helped the company assess the appropriate level and number of reporting units and determine the identifiable intangible assets to value. We also coordinated the valuation of the real and personal property with partnering firms.
The allocation was performed in a bottoms up manner consisting of eight, market-based reporting units, each requiring their own business enterprise valuation and asset allocation. The CLA team delivered the complex multi-discipline project and guided the client through a seamless audit review process.
As the company continued to develop, it made additional, strategic, bolt-on acquisitions in new and key markets, which required additional equity capital financing. CLA assisted in these purchase price allocations. We also completed an equity valuation for the company to support its private equity owners in securing a new round of financing. This included extensive conversations with management regarding future expectations for the company, strategic initiatives, and the associated execution risks to provide a sound and defensible analysis. The equity value was triangulated by considering the outlook for the company and expected future cash flows, as well as industry and market indications of representative multiples for comparable public companies and similar transactions.
As the company’s growth accelerated, leadership wanted to incentivize key employees and granted profits interest equity awards. CLA prepared a valuation to assist the company in determining the participation threshold of the awards and the stock compensation expense for financial reporting purposes. This required a complex capital analysis using an option-pricing model to properly allocate the company’s aggregate equity to the multiple classes of stock, which carried different rights and preferences.
Most recently, as the complexity of the company continues to expand, management elected to outsource the annual impairment testing to CLA, in order to streamline the process and avoid the strain on internal resources.
How we can help
Simply understanding what your business is worth is the most basic challenge, but purchase price allocations, impairment testing, and equity compensation all influence value. Throughout these processes, we’ll also help you explore a variety of opportunities that could help you build value in the future. CLA can seamlessly expand our relationships with clients as their needs grow. Because of the depth of our experience and the breadth of services, many businesses find all the resources they need in one place.
CLA uses a thoughtful, objective, and industry-focused approach to help you meet your valuation needs so you can continue to build the enterprise you envision.
- Nate Loest