Finance
Julia_B
Final-Project-Report.pdf
CONSULTING PROJECT By Ammerman & Associates (Kleddao Jitchuenchote)
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The current value of the business
The current value of the company is $119,405, in which it is the present value of the
future cash flows. To explain more, value of the firm is determined by the cash it will generate in
the future. To find out the firm’s current value, there are the process of doing the projection in
sales and expenses to get the cash flows value from 2018 to 2022 and the valuation beyond that.
Please see more detail in Appendix A and the spreadsheet file, forecast sheet, for the projected
free cash flows of the firm while Appendix B and the spreadsheet file, valuation sheet, are the
explanation and detail of the enterprise value.
Selling the company
As getting nearly the retirement, planning for the future of this business ahead is always a good preparation. Therefore, exploring the choices and the value of the firm are crucial in
making the business decision. Selling the firm would be the beneficial idea for the owner with
the purpose of getting some money out of it, but unless it is worth to put the efforts in selling the
company. First of all, the firm have to find out how much will the company be earning after
2022. If there is the enough earning potential after 2022, it should be worth to put the efforts in
selling the firm. Therefore, determining the present value of the terminal value of the firm would
give the owner the information of how much the firm will generate in the future (after 2022). The
present value of the terminal value of the firm is $74,273.04, which is 62.2% of the total present
value of the company. As a result, more than half of value of this firm is coming from the cash
flows to be gained after 2022, hence, it would certainly be worth selling the company than to just
close out the business and cease operations.
After understanding of why selling this company would be the better option, next step is
to find the business brokers or the people/companies that would be interested in buying this
business from the owner. If there are other companies/people that the owner has been networking
with and has a strong relationship with them, this should be the great opportunity to sell the firm
by utilizing the connections, in which the firm may not have to deal or pay for that many
additional services charged from the business brokers and other factors. Others than the
connection, the recommendation would be trying to sell this firm through the business brokers
and/or the online marketplaces. These are two best methods for the company that have the
enterprise value or selling the firm for under $2 million (Lavinsky, n.d.).
For the business brokers, the firm should find the business brokers that are located in the
area of Midwestern, such as Ohio, Kentucky, and Indiana, and compare their service charges
together with their service quality as well. The business brokers are truly knowledgeable and
professional in supporting the company in selling the business to others. To get a better result,
the firm can also employ additional advertising efforts as well as the service from business
brokers (Lavinsky, n.d.). See Appendix C for the list of business brokers around the Midwestern
area and their contacts. The firm can contact as much as business brokers in order to compare the
cost they would charge for the services, in which each business broker would charge differently
according to their rates and the other factors involved with the owner’s business. For the online
marketplaces, they are the business-for-sale marketplaces, such as BizBuySell.com and
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BizSale.com, that have been searched by many of buyers (Lavinsky, n.d.). The owner can
advertise this firm on many online business-for-sale marketplaces, in which it is easy and use not
much time to post from one to another website. The recommendation is to choose the websites
that have higher traffics or more visitors than the others.
Maximize the 5-year future value of the business
As mentioned earlier about the current value of the company or the enterprise value, the projection of future cash flows from 2018 and after is the cash flows that the company needs to
focus. Please see Appendix A and Forecast sheet again for the projected cash flows from 2018 to
2022. However, the enterprise value as of current is $119,405, so what will the business do to
increase the cash flows and maximize the value of the firm is indeed the valuable efforts to be
considered.
If the owner decides to open the business for another five years, the recommendation is to
increase the current enterprise value by increasing and focusing more on company’s capability in
online sales. In the digital world, where Internet makes no boundaries to the online market, the
consumers can purchase the products anywhere anytime by just clicking purchasing button on
the websites or the mobile applications. The high number of users who owned the smartphone
(see Appendix D) also make the e-Commerce businesses grow even more. According to Zaroban
(2018), “E-commerce represented 13% of total retail sales” and “U.S. e-commerce sales grow
16.0% in 2017.” Therefore, it is possible for the firm to increase the online sales from 2018
onwards.
However, to be able to compete with the competitors and has more capability in selling
the products online, the firm should redesign the website and use the e-commerce specialist
service. There will be the costs charged, which is eCommerce Website Pricing Package. This
service also includes design, programming, integrations, data imports, hosting, and SEO. The
whole package price will be depending on the size of the business or the sales volume the firm
expects to get from online sales. Hence, the package should cost this firm approximately 10% of
expected online sales (Smith, 2018). In this case, it would cost the firm $52,049.75 to expect
$520,497.47 online sales (40% of total revenue) from the expected total revenue of
$1,301,243.67 from 2018 to 2022. Referring to Household Appliances market, “40% of total
revenue will be generated through online sales by 2021” (The Statistics Portal, 2018).
By adding more costs involved with e-commerce matter, the firm can expect to gain more
4.2% of terminal growth rate, which will result in 6.64% terminal growth rate. This would
increase the present value of free cash flows of 2018-2022 to $45,131.96 and the present value of
terminal value of $128,749.76, which will result in increasing the enterprise value to
$173,881.72. Then, Net Present Value (NPV) analysis would give the firm an answer of would it
be worth to invest some costs and put the efforts in order for the company to generate higher
cash flows. Ammerman & Associates would recommend to invest in eCommerce Website
Pricing Package because the NPV result is positive, which mean that the cash inflows are higher
than the cash outflows. For more detail, please see Version B on the Valuation sheet from the
excel file.
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Other recommendations
Partnership with other household and furniture online retailers would be the valuable
opportunity for the firm to spread out more visibility of those high-end products on-hands in
order to reach more target market. Furthermore, by developing the firm’s website and invest
more costs involved with e-commerce, the firm would have more competence and capability to
sell more products/services online through its own website. According to The Statistics Portal
(2018), it shows that there is higher sales growth rate in Furniture & Appliances (10.5%) than the
Vacuum Cleaner annual growth rate (1.33%).
Therefore, the firm should consider of offering more products/services categories online,
such as households, furniture & appliances products/services. By expanding the business in this
way, the company can still hold on the same company’s positioning of selling the premium
products/services while offering more choices of products/services categories to the customers.
This change would support the company in registering as the premium household retail website,
which is unique and certainly outstanding among the company’s prospective target market.
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References
Amadeo, K. (2018, July 06). How Bad Is Inflation? Past, Present, Future. Retrieved November
15, 2018, from https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-
forecast-3306093
Damodaran, A. (2018, January). Betas by Sector (US). Retrieved November 19, 2018, from
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html
Lavinsky, D. (n.d.). How & Where to Find Someone to Buy Your Business. Retrieved November
19, 2018, from https://www.growthink.com/content/how-where-find-someone-buy-your-
business
Pew Research Center, N. (2018, February 05). Demographics of Mobile Device Ownership and
Adoption in the United States. Retrieved November 19, 2018, from
http://www.pewinternet.org/fact-sheet/mobile/
Smith, J. (2018, November 05). How Much Does It Cost to Build an eCommerce Website?
Retrieved November 19, 2018, from https://www.outerboxdesign.com/web-design-
articles/ecommerce_website_pricing
The Statistics Portal. (2018). Furniture & Appliances - United States | Statista Market Forecast.
Retrieved November 15, 2018, from https://www.statista.com/outlook/247/109/furniture-
appliances/united-states
The Statistics Portal. (2018). Vacuum Cleaner - United States | Statista Market Forecast.
Retrieved November 15, 2018, from
https://www.statista.com/outlook/16020100/109/vacuum cleaner/united-states#market-
onlineRevenueShare
U.S. Bank. (2018). Enjoy more buying power with the U.S. Bank Visa® Platinum Credit Card.
Retrieved November 20, 2018, from https://www.usbank.com/splash/credit-
cards/platinum/16592.html?fbclid=IwAR023dApUBcF8H0d0omAo0zoDAVhyhoc7pbh5
zozJdSc5eHiVz1FkfX9iA4
Vanguard. (2018). How the right asset mix can lower your risk. Retrieved November 19, 2018,
from https://investor.vanguard.com/college-savings-plans/what-is-asset-mix
Zaroban, S. (2018, February 16). U.S. e-commerce sales grow 16.0% in 2017. Retrieved
November 19, 2018, from https://www.digitalcommerce360.com/article/us-ecommerce-
sale
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Appendix A
Analysis report (Excel file): Forecast sheet
A.1. Sales growth rate: it can be used to calculate the revenues by averaging the company’s
previous sales growth rates and the vacuum cleaner’s market annual growth rate, which is 1.3%
(The Statistics Portal, 2018), thus, 2.44% is the sales growth rate each year from 2018 to 2022.
A.2. Cost of Goods Sold: we recommended to use the percentage of sale by averaging the
previous 3 years, which it is around 46% of sales each year.
A.3. The U.S. annual inflation rate: it is projected to be 2% (Amadeo, 2018), therefore, this will
be added up each year to the fixed and salary expenses to get more realistic expenses.
A.4. The employment expenses will be calculated as the percentage of salary expenses, which it
is around 8.6% per year.
A.5. Other expenses, current assets, and current liabilities will use the percentage of sales to
forecast the value from 2018 to 2022.
A.6. Change in working capital: use the difference of net working capital year-on-year, in which
those can be calculated from current assets minus current liabilities each year.
A.7. Free cash flows: use the operating cash flows minus the change in working capital
A.8. Then, transferring the free cash flow in ‘forecast’ sheet to the ‘valuation’ sheet in order to
find the enterprise value in the next process.
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Appendix B
Analysis report (Excel file): Valuation sheet
B.1. Calculate WACC%, which is 12.95%: In order to find the present value of company’s free
cash flows, WACC will be required to find to use as the discount rate. From company 2017
balance sheet, debt ratio is 27.43% and equity ratio is 72.57%. Cost of debt is 11.99%, which is
the U.S. Bank credit card interest rate (U.S. Bank, 2018) while cost of equity is 13.31%, in which
CAPM is used to calculate cost of equity. To explain more, risk free rate is 2.25% from the US
Treasury Bill, beta is 1.39 by using unlevered beta corrected for cash from ‘Business &
Consumer Services’ segment (1.01) to calculate the β (Damodaran, 2018), and Rm is 10.2%,
which is the approximate annual return on Vanguard total market mutual fund (Vanguard, 2018).
B.2. Present Value of FCFs 2018-2022: used 12.95% WACC to calculate and got the value of
$45,131.96.
B.3. Find terminal growth rate, which is 2.44%: used average of company's sales growth rate and
the Vacuum Cleaner market annually growth rate.
B.4. Present Value of Terminal Value: used terminal growth rate in calculating the firm’s
terminal value ($136,548.75). Then, used WACC to discount it to get the PV of terminal value of
$74,273.04.
B.5. Enterprise Value: combined the PV FCFs 2018-2022 and PV Terminal value to get the
enterprise value of $119,405.
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Appendix C
Table 1: The lists and contacts of business brokers
Business Broker Contact
Midwest Business Brokers, Inc. [email protected]
1.800.636.7046
Midwest Business Brokers and Intermediaries
(MBBI)
Illinois: 847.847.7703
Wisconsin: 262.893.8691
Midwest Group 630.325.8080
SUNBELT BUSINESS ADVISORS Minneapolis, MN 55413
P: 612-455-0880 | F: 612-455-0887
Saint Paul, MN 55126
P: 651-484-2677 | F: 651-484-9658
Chicago, IL 60631
P: 773-243-1603 | F: 773-243-1618
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Appendix D
Table 2: Percentage of US adults who own any cellphone and/or smartphone, 2018. [Retrieved from
http://www.pewinternet.org/fact-sheet/mobile/]
% of U.S. adults who own the following devices
Any cellphone Smartphone Cellphone, but not smartphone
Total 95% 77% 17%
Men 95% 80% 16%
Women 94% 75% 19%
Ages 18-29 100% 94% 6%
30-49 98% 89% 9%
50-64 94% 73% 21%
65+ 85% 46% 40%
White 94% 77% 17%
Black 98% 75% 23%
Hispanic 97% 77% 20%
Less than high school graduate 90% 57% 33%
High school graduate 92% 69% 24%
Some college 96% 80% 16%
College graduate 97% 91% 6%
Less than $30,000 92% 67% 25%
$30,000-$49,999 98% 82% 15%
$50,000-$74,999 98% 83% 15%
$75,000+ 98% 93% 5%
Urban 96% 83% 13%
Suburban 94% 78% 16%
Rural 91% 65% 26%
Source: Survey conducted Jan. 3-10, 2018. PEW RESEARCH CENTER
