The nature of the business valuation environment requires us to remain independent and report on our opinion of value as an objective third party. However, there are times when we are engaged to consult with a client to help identify the specific value drivers of a business and estimate its range of value for the owners. In either case, business owners and their trusted advisors can glean from the insight gained from performing a valuation. Sometimes it takes an objective third party assessment to see things from a different perspective and reveal new insights about a business.

We recently valued a small family owned parts supplier. The majority owner and manager of the business wanted to buy out his sibling pursuant to their buy-sell agreement. The business had been in the family for over 50 years. It owned the real estate where it was located, which was on a busy street in New York City. Behind the storefront was warehouse space with a garage entrance from a side street. There was another warehouse owned and used by the company a few miles away in an industrial district.

One part of performing a business valuation includes analyzing the subject company’s financial information, generally over the past five or more years. We also perform ratio analysis and compare the subject company to its industry peers. This overall financial analysis gives us insight into the business helping us determine its ability to compete in its market and helping to assess the risks specific to the subject company.

In this case, when compared with the averages of over 2,000 of its industry peers, balance sheet comparison and turnover ratio analysis indicated that the company was less efficient than it should have been with respect to managing its inventory. It was carrying as much as three times more inventory than its industry peers at any given time. After further management inquiries, it was determined that excess warehouse space allowed them to unnecessarily hang on to old and obsolete inventory, an estimated 30 percent. This led to extreme inefficiencies in the costs associated with poor inventory management and created an opportunity cost from excess real estate space that could be rented out.

Industry research indicated that management in this industry should choose whether to focus on service and delivery or carry sufficient inventory in its walk-in location to be an effective “cash and carry” provider. Management had realized they were trying to do both. Their philosophy had been that since they had the space, why not use it. Upon reflection of which was most important, it was determined that service and delivery should be the focus since walk in traffic alone would likely not support the business.

Once management saw the comparative evidence, the answer was simple. Reduce the use of excess capacity of storefront and warehouse space that could not be supported by the local demand and make it available to rent out to third parties. This reduced inventory carrying costs of the business and created a new revenue source for the owners. Operationally, management could then focus on maintaining the proper levels of inventory to maximize the utility of the reduced space.

In this case Advent’s due diligence and analysis used for purposes of the appraisal of the company provided key insight to both the owner and his trusted advisor. They leveraged that insight into significantly improved company operations and profitability.