On June 6th, Lee Schafer published an article in the Star Tribune about the Lund’s – Byerly’s family and the difficulty that they had finding a proper valuation of their Lund’s & Byerly’s grocery stores. Kim Lund, one of the siblings that inherited 25% of the business, wants to sell her portion of the business to her other siblings. Unfortunately, there was much debate over the actual valuation of the business. After much deliberation between her and her siblings, it was decided that her stake was worth 45.2 million dollars. Surprisingly, this is actually 35 million dollars less than what her investment bankers claimed that her 25% stake in the grocery store chain was worth. However, the expert representing Lund’s & Byerly’s claimed that such a high valuation was complete nonsense, that the entire company was only worth 91 million, making her 25% stake worth roughly 23 million.
How these two experts came to such different valuations largely falls on differing assumptions on future inflows of cash into the business. Finding the proper value of any company can be incredibly tricky, and the process can often involve lawyers, business valuation experts, and court hearings. One of the most common forms of business valuation is called discounted cash flow analysis, or DCF. This process involves forecasting cash to be paid to the owner in the future, then discounting it back to the value of that cash today based on the cost of capital associated with the business. This is where Lund’s & Byerly’s faced issues, they were unable to agree on what the cost of capital was with the business. Mrs. Lund’s experts said the cost of capital was only 9%, whereas Lund’s & Byerly’s said it was as much as 12%.
Even though this difference may seem small to you, it led to the difference in valuation of the company that amounted to nearly 100 million dollars. Properly valuating a business requires incredible attention to detail, and should be handled with the upmost care. Consulting with experts like your financial advisor, business law attorney, and CPA may prove to be invaluable resources when you are buying or selling your business.