40 to 45 pages project work but made separately
section 1
Using the Hitcher textbook as your primary reference, and supplemented by appropriate secondary
sources, write a research paper that compares and contrasts the three main approaches used to value a
private business. Your paper should have an Introduction, five “body” parts (approach 1, approach 2 and
approach 3, similarities between approaches, and differences between approaches) appropriately titled,
and a Conclusion. In each of the first three body parts, you must describe the approach, note the data
needed to apply the technique, and discuss limitations or challenges to properly executing the approach.
In the next two sections you need to clearly demonstrate what the approaches have in common and
how they differ.
BUSI 534
Page 1 of 7
SECTION 1
VALUATION APPROACH ASSIGNMENT INSTRUCTIONS
OVERVIEW
Business valuation is a set of steps used to estimate what a business is worth. The process,
however, is much less straightforward than the definition. Business valuation is the process of
placing a reasonable market value on a going concern business or the value of a planned start-up
company. There are different approaches to business valuation and each approach utilized
different processes to obtain a professional business valuation.
INSTRUCTIONS
Using the Hitcher textbook as your primary reference, and supplemented by appropriate
secondary sources, write a research paper that compares and contrasts the three main approaches
used to value a private business. Your paper should have an Introduction, five “body” parts
(approach 1, approach 2 and approach 3, similarities between approaches, and differences
between approaches) appropriately titled, and a Conclusion. In each of the first three body parts,
you must describe the approach, note the data needed to apply the technique, and discuss
limitations or challenges to properly executing the approach. In the next two sections you need to
clearly demonstrate what the approaches have in common and how they differ.
Assignment length: 6 – 10 pages, double-spaced (excluding title page and references) in
current APA format.
Number of citations: At least 4 (in addition to your textbook, which must be your primary
references). Remember: any article/source listed in your references must be cited at least
once in your paper.
Accepted sources: Books or other scholarly/professional sources. Remember,
Investopedia, Wikipedia, websites, periodicals (e.g., newspaper, magazine, newsletters),
and blogs are not scholarly/professional sources. You can use these in your paper (if
properly cited), but they do not count towards the required number of citations.
Note: Your assignment will be checked for originality via the Turnitin plagiarism tool.
Please Check documents for rubric.
BUSI 534
Page 2 of 7
SECTION 2
COMPANY REPORT: COMPANY, INDUSTRY AND ECONOMIC ANALYSIS
ASSIGNMENT INSTRUCTIONS
OVERVIEW
A business valuation report is a typical work product of a professional business appraisal done
for a small business client. The report documents the important elements of the business
valuation that meet the client’s objectives while providing consistent and accurate results. Over
the next few weeks, you will create a complete valuation report for your chosen company. This
process will be divided into three parts:
1. Company, Industry and Economic Analysis
2. Financial Statement and Company Risk Analysis
3. Valuation Estimates and Recommendations
NOTE WELL: FOR ALL PARTS OF THIS ASSIGNMENT IGNORE THE COMPANY’S
STOCK PRICE. YOU SHOULD ASSUME THAT YOUR COMPANY IS PRIVATE (I.E., STOCK
DOES NOT TRADE ON AN EXCHANGE) AND THUS YOU DO NOT KNOW THE PRICE OF
THE COMPANY’S STOCK OR THE MARKET VALUE OF THE COMPANY (THAT IS WHAT
YOU WILL ULTIMATELY ESTIMATE). THE REASON YOU ARE USING A “REAL”
COMPANY FOR THIS REPORT IS TO OBTAIN FINANCIAL DATA THAT IS FREE AND
MOST LIKELY FAIRLY RELIABLE/ACCURATE.
INSTRUCTIONS
For this assignment, you must write the first part of the complete valuation report. This section of
the report discusses the company, the industry in which the company operates, and the economic
outlook that may impact the company’s value. The following three major topics (i.e., Business
Description, Industry and Trends, and Economic Outlook) must be included in your paper (the
bullet point items under each topic are suggestions; you may discuss all, some of these items, or
completely different items):
Business Description
Description of the company, its industry, size and location
Brief history of the business from its inception to the current period
Nature of the Business
Products or Services
Key markets served
Key customers and/or suppliers
Marketing strategies
Key competitive strengths/weaknesses/protections/exposures
Business risks
Other
Industry and Trends
BUSI 534
Page 3 of 7
Major competitors
Growth prospects
Potential threats and benefits for the overall industry
Other
Economic Outlook
GDP, inflation, interest rate, unemployment, and other forecasts
Commodity prices and exchange rates
The political environment
Potential business tax rate changes
The overall state of business investment and capital spending
Other
The items you choose to discuss for each major topic depend on your company and what you
believe is important to the valuation of the business.
Assignment length: At least 10 pages, double-spaced (excluding title page and
references) in current APA format.
Number of citations: At least 6 (with a minimum of 2 articles per major topic).
Remember: any article/source listed in your references must be cited at least once in your
paper.
Accepted sources: Books or other scholarly/professional sources. Remember,
Investopedia, Wikipedia, websites, periodicals (e.g., newspaper, magazine, newsletters),
and blogs are not scholarly/professional sources. You can use these in your paper (if
properly cited), but they do not count towards the required number of citations.
Note: Your assignment will be checked for originality via the Turnitin plagiarism tool.
Check documents for rubric
SECTIN 3
COMPANY REPORT: FINANCIAL STATEMENT AND COMPANY RISK ANALYSIS
ASSIGNMENT INSTRUCTIONS
OVERVIEW
Financial Statement and Company Risk Analysis is the second part of the complete valuation
report for your chosen company. Past performance may provide valuable insight into future cash
flow. Value is impacted by how well (or how poorly) a company has performed in the past.
Sometimes the company’s financial statements require adjustment for discretionary or
nonrecurring items or even for unusual accounting practices to arrive at “normalized” cash flows.
Although a valuation estimate is a function of future value, the best way to forecast the future is
to thoroughly evaluate the past and to glean information from past operations to properly assess
the riskiness of any forecasted future cash flows.
BUSI 534
Page 4 of 7
INSTRUCTIONS
For this assignment, you need to have your chosen company’s most recent annual report and the
report two years prior to that (e.g., 2019 and 2017 or 2020 and 2018). With two years of annual
reports, you will have four years of income statements (e.g., 2016, 2017, 2018 and 2019 if you
have the 2017 and 2019 annual reports or 2017, 2018, 2019 and 2020 if you have the 2018 and
2020 annual reports).
Using the financial statement data in the company’s annual reports, create a comprehensive
written analysis of the company’s financial operations for the four most recent fiscal years. You
written report should be structured as follows:
Part I: Construct common size income statements for the four most recent fiscal years (that is
why you need the two most recent annual reports). Also, include a line listing the annual
growth rate in net revenue (or sales) for the four most recent years.
o See the next page for an example of what your table should look like.
Write an analysis of the table you created. For example: What trends do you observe? What
appears to be areas of strength or weaknesses? For what areas would you like additional
information? What are any potential areas of significant concern? Anything else?
Part II: Construct a table of ratios for the four most recent fiscal years (that is why you need
the two most recent annual reports).
o See the next page for an example of what you table should look like (note these are
the minimum ratios that you must include; if you believe others are interesting and/or
instructive, add those to this table).
Write an analysis of the ratio table you created. For example: What trends do you observe?
What appears to be areas of strength or weaknesses? What are any potential areas of
significant concern? Anything else?
Part III: Create a statement of cash flows table for for the four most recent fiscal years (that is
why you need the two most recent annual reports). For this statement, you only need to list
the three net accounts (i.e., Net Cash Flows from Operating Activities, Net Cash Flow from
Investing Activities, and Net Cash Flow from Financing Activities). Then, evaluate these
statements over this time period. What has been the major source of cash each year and what
has been the major use of cash? Has the company generated sufficient internal cash to
finance any capital spending? Anything else?
Part IV: Based on your comprehensive analysis of your chosen company, identify specific
risk factors that you should consider when doing your valuation estimate.
Your paper should include an Introduction, the four “parts” listed above, and a Conclusion.
Embed your tables into your paper where they flow with the discussion (that is, do not put tables
in an appendix). It is best create your tables in Excel and then to copy and paste special into your
word file using “Picture (Enhanced Metafile).”
Assignment length: At least 8 pages, double-spaced (excluding title page and references)
in current APA format.
BUSI 534
Page 5 of 7
Number of citations: At least 3 (with a minimum of 2 articles per major topic).
Remember: any article/source listed in your references must be cited at least once in your
paper.
Accepted sources: Books or other scholarly/professional sources. Remember,
Investopedia, Wikipedia, websites, periodicals (e.g., newspaper, magazine, newsletters),
and blogs are not scholarly/professional sources. You can use these in your paper (if
properly cited), but they do not count towards the required number of citations.
Note: Your assignment will be checked for originality via the Turnitin plagiarism tool.
2017 2018 2019 2020
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales (or whatever is on your company's statement) % % % %
Gross profit % % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
% % % %
Annual Sales growth rate % % % %
"Your Chosen Company's Complete Name"
Common Size Income Statements
For the years ending "Month",
The "Years" in your table will depend on your annual reporst (so, they
may not be 2017, 2018, 2019 and 2020 as here). On a common size
income statement, all accounts are divided by that year's sales and
recorded as a percent rounded to one decimal place. For
example,would be recorded as 300/2100 = 0.1429 = 14.3%. Note that
net revenue (or sales) will be divided by itself, so it will always be 100%.
Include all income statement accounts that are on the financial
statements for your chosen company in individual rows (note the first
three that I included above; your statement will include these plus all
other accounts on your company's income statements).
Be sure to list all profit measures (e.g., gross profit margin, operating
profit margin, earnings before taxes, and net income) - these should be
highlighted in bold font across all columns.
It is best to create your table in Excel and then copy and paste special
as a "Picture (Enhanced Metafile").
BUSI 534
Page 6 of 7
SECTION 4
COMPANY REPORT: VALUATION ESTIMATES AND RECOMMENDATIONS
ASSIGNMENT INSTRUCTIONS
OVERVIEW
As noted in Chapter 11 of the Hitchner textbook (page 496): “The detailed valuation report is
appropriate, as required or requested, when the analyst has been engaged to prepare a
comprehensive valuation of a business, an interest in a business, a security, or an intangible
asset. The report is the primary work product of the valuation process and should be prepared
with objectivity and integrity in accordance with business valuation standards and procedures. It
should describe valuation procedures in sufficient detail to enable the intended users to
understand the work performed and the conclusion reached. While there is no universal format
for reporting on a detailed valuation, there is general consensus on the elements that can be
included.”
Hitchner then provides a list that includes, for the most part, what you have completed in the past
two Company Report assignments (in particular, items 5, 6, 7 and 8 on page 496) and what you
will complete in this assignment (items 9, 10, 11, 12, and 13). Note that this assignment is
essentially an application of Chapters 5, 6, 7, 8, 9, and 10 to your chosen company (and possibly
something from chapters 13 to 31 if any of these special topics apply).
INSTRUCTIONS
Ratios 2017 2018 2019 2020
Current Ratio
Cash Ratio
Inventory Turnover in Days
A/R Turnover in Days
A/P Turnover in Days
Cash Conversion Cycle
Fixed Assets Turnover
Total Assets Turnover
Debt Ratio
Times Interest Earned
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Return on Assets
Return on Equity
"Your Chosen Company's Complete Name"
Financial Ratios
For the years ending "Month ",
BUSI 534
Page 7 of 7
For this assignment, you will conduct a valuation estimate for your chosen company. Your report
should include (at a minimum) the following sections:
1. Introduction
2. Description of the valuation approaches and methods considered (note, unless you have a
specific reason why one of the three valuation approaches discussed in Hitcher does not
apply to your chosen company, you should apply all of the Hitchner approaches to your
company valuation).
3. Identification and evaluation of any nonoperating and/or excess assets.
4. A risk analysis of your chosen company and an associated discussion of how applicable
discounts and premiums (if any – remember, you are “assuming” that your chosen
company is private) were computed.
5. Application of valuation approaches and methods used to your chosen company (in this,
the largest section of the paper, you must completely and clearly demonstrate how you
derived a specific value estimate for your company using each approach; thus, you will
end up with three values that will most likely not be the same).
6. Reconciliation of the three valuation approach estimates (which is most accurate and
why).
7. For the first time in this assignment, please look up the company’s stock price on the last
day of your financial data (for example, if your company’s fiscal year end is June 30 and
the last data that you used in your report was June 30, 2020, look up the stock price on
June 20, 2020, or the closest trading day to that date). Using that stock price, compute the
market value of your chosen company. Compare that value to your reconciliation
number. Which is higher? Why? What is your buy/sell recommendation based on this
comparison? Why?
For this specific assignment, all relevant data tables should be included Appendices. Your tables
must be clearly titled/labeled so it is easy to find the tables when they are discussed in the main
body of your paper.
Assignment length: At least 10 pages, double-spaced (excluding title page and
references) in current APA format.
Number of citations: At least 3 (with a minimum of 2 articles per major topic).
Remember: any article/source listed in your references must be cited at least once in your
paper.
Accepted sources: Books or other scholarly/professional sources. Remember,
Investopedia, Wikipedia, websites, periodicals (e.g., newspaper, magazine, newsletters),
and blogs are not scholarly/professional sources. You can use these in your paper (if
properly cited), but they do not count towards the required number of citations.
Note: Your assignment will be checked for originality via the Turnitin plagiarism tool.
C R P
Common
Size Income
Statements
and
Analysis
30 to >27.0 pts
Advanced
Statements properly
constructed/presented.
Analysis is
comprehensive and
complete.
27 to >24.0 pts
Proficient
Statements properly
constructed/presented.
Analysis is less than
comprehensive and/or slightly
complete.
24 to >0.0 pts
Developing
Statements are not
properly
constructed/presented.
Analysis is weak and/or
largely incomplete.
0 pts
Not
Present
30 pts
Table of
Ratios and
Analysis
20 to >17.0 pts
Advanced
Table is properly
constructed. Analysis is
comprehensive and
complete.
17 to >16.0 pts
Proficient
Table is properly constructed.
Analysis is less than
comprehensive and/or slightly
incomplete.
16 to >0.0 pts
Developing
Table is not properly
constructed/presented.
Analysis is weak and/or
largely incomplete.
0 pts
Not
Present
20 pts
Statement
of Cash
Flows and
Risk
Analysis
20 to >17.0 pts
Advanced
Statements adequately
presented. Analysis is
comprehensive and
complete.
17 to >16.0 pts
Proficient
Statements are adequately
presented. Analysis is less
than comprehensive and/or
incomplete.
16 to >0.0 pts
Developing
Statements are not
properly
constructed/presented.
Analysis is weak and/or
largely incomplete.
0 pts
Not
Present
20 pts
Word Limit
Met 10 to >9.0 pts
Advanced
The 8 page limit was
fully met.
9 to >7.0 pts
Proficient
Student wrote less than the
minimum, but more than 7
pages.
7 to >0.0 pts
Developing
Student wrote less than 7
pages.
0 pts
Not
Present
10 pts
Proper
Spelling,
Grammar,
APA
10 to >9.0 pts
Advanced
There were no more
than two spelling,
grammar, or APA
errors.
9 to >7.0 pts
Proficient
There were three spelling,
grammar, or APA errors.
7 to >0.0 pts
Developing
There were four spelling,
grammar, or APA errors.
0 pts
Not
Present
10 pts
Number of
Sources
Used
10 to >9.0 pts
Advanced
Student used at least 3
appropriate references.
9 to >7.0 pts
Proficient
Student used only 2
appropriate references.
7 to >0.0 pts
Developing
Student used less than 2
appropriate references.
0 pts
Not
Present
10 pts
Company Report: Financial Statement and Company Risk Analysis
Grading Rubric | BUSI534_D02_202130
C R P
Total Points: 100
Company Report: Financial Statement and Company Risk Analysis
Grading Rubric | BUSI534_D02_202130
C R P
Items 1, 2, 3 and
4 in the
assignment
instructions
30 to >27.0 pts
Advanced
Items 1-4 adequately
discussed. Analysis
is comprehensive
and complete.
27 to >24.0 pts
Proficient
Items 1-4 adequately
discussed. Analysis is
less comprehensive
and/or less than
complete.
24 to >0.0 pts
Developing
Items 1-4 are not adequately
discussed and/or analysis is
incomplete.
0 pts
Not
Present
30 pts
Application of
valuation
approaches and
specific value
estimates
90 to >82.0 pts
Advanced
All 3 valuation
approaches clearly
and properly
estimated with
specific verifiable
value estimates.
82 to >81.0 pts
Proficient
All 3 valuation
approaches clearly and
properly estimated but
there is some vagueness
in how values were
derived.
81 to >0.0 pts
Developing
One or more of the valuation
approaches are missing
and/or much of the estimation
process is not explained,
incomplete, or missing.
0 pts
Not
Present
90 pts
Reconciliation
and
recommendation
20 to >17.0 pts
Advanced
Reconciliation and
recommendations
are comprehensive
and complete.
17 to >16.0 pts
Proficient
Reconciliation and
recommendations are
less than comprehensive
and complete.
16 to >0.0 pts
Developing
Reconciliation and
recommendations are not
comprehensive and/or
incomplete.
0 pts
Not
Present
20 pts
Word Limit Met 20 to >17.0 pts
Advanced
The 10 page limit
was fully met.
17 to >16.0 pts
Proficient
Student wrote less than
the minimum, but more
than 8 pages.
16 to >0.0 pts
Developing
Student wrote less than 8
pages.
0 pts
Not
Present
20 pts
Proper Spelling,
Grammar, APA 20 to >17.0 pts
Advanced
There were no more
than two spelling,
grammar, or APA
errors.
17 to >16.0 pts
Proficient
There were three
spelling, grammar, or
APA errors.
16 to >0.0 pts
Developing
There were four spelling,
grammar, or APA errors.
0 pts
Not
Present
20 pts
Company Report: Valuation Estimates and Recommendations Grading
Rubric | BUSI534_D02_202130
C R P
Number of
Sources Used 20 to >17.0 pts
Advanced
Student used at
least 3 appropriate
references.
17 to >16.0 pts
Proficient
Student used only 2
appropriate references.
16 to >0.0 pts
Developing
Student used less than 2
appropriate references.
0 pts
Not
Present
20 pts
Total Points: 200
Company Report: Valuation Estimates and Recommendations Grading
Rubric | BUSI534_D02_202130
C R P
Business
Description 30 to >27.0 pts
Advanced
Major business
description aspects
important to the firm’s
valuation are thoroughly
and accurately
described.
27 to >24.0 pts
Proficient
Most of the major business
description aspects
important to the firm’s
valuation are discussed, but
some are missing or vague.
24 to >0.0 pts
Developing
Some or more of the
business description
aspects important to the
firm’s valuation are missing,
or inadequately discussed.
0 pts
Not
Present
30 pts
Industry
and Trends 20 to >17.0 pts
Advanced
Key industry
characteristics and
trends are adequately
discussed.
17 to >16.0 pts
Proficient
Key industry characteristics
and trends are discussed,
but some are less than
adequately discussed.
16 to >0.0 pts
Developing
Some or most key industry
characteristics and trends
are missing and/or
inadequately discussed.
0 pts
Not
Present
20 pts
Economic
Outlook 20 to >17.0 pts
Advanced
Key economic indicators
are discussed and
properly associated with
the firm’s outlook.
17 to >16.0 pts
Proficient
Key economic indicators are
discussed and but not
correctly associated with the
firm’s outlook.
16 to >0.0 pts
Developing
Key economic indicators
are missing and/or not
properly associated with the
firm’s outlook.
0 pts
Not
Present
20 pts
Word Limit
Met 10 to >9.0 pts
Advanced
The 10 page limit was
fully met.
9 to >7.0 pts
Proficient
Student wrote less than the
minimum, but more than 8
pages.
7 to >0.0 pts
Developing
Student wrote less than 8
pages.
0 pts
Not
Present
10 pts
Proper
Spelling,
Grammar,
APA
10 to >9.0 pts
Advanced
There were no more
than two spelling,
grammar, or APA errors.
9 to >7.0 pts
Proficient
There were three spelling,
grammar, or APA errors.
7 to >0.0 pts
Developing
There were four spelling,
grammar, or APA errors.
0 pts
Not
Present
10 pts
Number of
Sources
Used
10 to >9.0 pts
Advanced
Student used at least 6
appropriate references.
9 to >7.0 pts
Proficient
Student used only 4 or 5
appropriate references.
7 to >0.0 pts
Developing
Student used less than 3
appropriate references.
0 pts
Not
Present
10 pts
Total Points: 100
Company Report: Company, Industry and Economic Analysis Grading
Rubric | BUSI534_D02_202130
C R P
Valuation
Approaches
Identified
and
Explained
40 to >36.0 pts
Advanced
The three valuation
approaches are
correctly and
adequately identified
and explained.
36 to >33.0 pts
Proficient
The three valuation
approaches are correctly
identified but not fully
adequately explained.
33 to >0.0 pts
Developing
Some valuation approaches
are not correctly identified
and/or are not correctly
explained.
0 pts
Not
Present
40 pts
Approaches
Compared
and
Contrasted
30 to >27.0 pts
Advanced
The three valuation
approaches are
correctly and
adequately compared
and contrasted.
27 to >24.0 pts
Proficient
The three valuation
approaches are compared
and contrasted, but some
important elements are
missing or fuzzy.
24 to >0.0 pts
Developing
The valuation approaches
are either not
compared/contrasted or
they are inadequately
compared/contrasted.
0 pts
Not
Present
30 pts
Word Limit
Met 10 to >9.0 pts
Advanced
The 6-10 page limit
was fully met.
9 to >7.0 pts
Proficient
Student wrote less than the 6
page minimum, but more
than 5 pages
7 to >0.0 pts
Developing
Student wrote less than 5
pages.
0 pts
Not
Present
10 pts
Proper
Spelling,
Grammar,
APA
10 to >9.0 pts
Advanced
There were no more
than two spelling,
grammar, or APA
errors.
9 to >7.0 pts
Proficient
There were three spelling,
grammar, or APA errors.
7 to >0.0 pts
Developing
There were four spelling,
grammar, or APA errors.
0 pts
Not
Present
10 pts
Number of
Sources
Used
10 to >9.0 pts
Advanced
Student used four
appropriate references
(in addition to the
textbook).
9 to >7.0 pts
Proficient
Student used only three
appropriate references (in
addition to the textbook).
7 to >0.0 pts
Developing
Student used only two or
fewer appropriate
references and/or did not
cite the textbook.
0 pts
Not
Present
10 pts
Total Points: 100
Valuation Approach Grading Rubric | BUSI534_D02_202130
Running Title: Valuation Approach 2
Valuation Approach
Valuations serve the purpose of assigning economic value to an owner’s interest in an entity.
Some common reasons for valuations include; Mergers and acquisitions, financial reporting,
marital dissolutions, buy-sell agreements, tax purposes, and recapitalization (Hitchner, 2017).
Valuation analyst factor in company financials as well as other internal and external data to
properly assign a value that takes into consideration factors that may impact the firm.
Valuation professional approach business valuations from three valuation approaches; income
approach, market approach, and the asset base approach. While all three approaches assess a
value to a firm, they apply different methods and methodologies to derive value. This value is
important for buyers looking to acquire the targeted business, shareholders and management, as
well as sellers exploring potential sale of the business or parts of the business. The focus of this
paper is to look at these three different valuations approaches how they derive, assign value to a
business, and identify similarities and differences that exist within these methods.
Income Approach
Hitchner (2017) identifies the Income approach as “the most widely used and recognized
approach to valuing an entity”; the basics of the income approach consisting of future payments
divided by associated risk and future payment uncertainty. According to Hall (2004) the income
approach to valuation is “the determination of value involves estimating a benefit stream,
determining a capitalization or discount rate, and applying that rate to the benefit stream to
derive an estimate of value”. The income approach looks to evaluate the equity interest in a firm
it also looks at value as forward-looking (Hitchner, 2017). The income approach can be looked at
as a fraction with the numerator representing the future payments and the denominator as the rate
Running Title: Valuation Approach 3
of return or risk associated with the business (Hitchner, 2017). Valuation analyst can use three
different methods to derive value in the income approach which include; discount cash flow
(DCF), capitalization cash flow (CCF), and excess cash flow (ECF).
The discount cash flow method for valuation forecast expected free cash flow from a business
discounted future cash flow by the discount rate also know as the cost of capital. The underline
premisis of the discounted cash flow is it derives value of the operating asset divided by the
investment this should equal the present value of future income streams (Hitchner, 2017). Gajek
and Kucinski (2017) identify the DCF method makes the going concern assumption a firm exist
into perpetually causing the valuation of the firm to be overstated; this is often compensated in
adjustments to increasing the discount rate or lowering forecasted cash flows. Another method in
the income approach is the capitalized cash flow method also known as the dividend discount
model or Gordon growth model assumes the growth and discount rate remain constant (Hitchner,
2017). This takes into the consideration the valuation analyst assumes all factors in the valuation
will remain unchanged. The CCF method is similar to the DCF method as it discounts the current
cash flow by the discount rate but differs because it does not seek to have a terminal value
factored into the valuation. The excess cash flow or excess earnings method discounts a
company’s earnings by the appropriate rate of return on its tangible assets and the rate of return
on intangible assets to the relative risk factors (Hitchner, 2017).
When choosing between the different methods it is important to consider the nature of the
business; the capitalized cash flow method is best to use when valuating a firm with stable
growth in revenues and earnings. Discount cash flow is best used with business expected to
experience some time of unsustainable growth rates (Hall, 2004). Halls (2004) approach to the
excess cash flow method is “mechanical, it should be used only in very small businesses”. The
Running Title: Valuation Approach 4
ECF method is the preferable for valuating businesses in divorce proceeding a factoring in
goodwill in jurisdictions where goodwill is considered a nonmarital asset (Hitchner, 2017).
Market Approach
The market approach to valuation focuses on determining the value of a business by using
comparable guideline companies and the transaction data associated with the sales of private and
public companies (Hitchner, 2017). A big component of the market approach is the valuators
discretion; the ability to adequately find a comparable firm or similar business plan to base the
valuation. From the comparable company the valuation analyst determines a valuation multiple
that is applied to the measured metric to determine a valuation price. Market approach is a
forward looking; while the parameters determined are based on historical operating data the
transaction price and market multiple reflect future growth expectations (Hitchner, 2017). The
accuracy of this approach is reliant on the valuation analyst ability to determine a comparable
company to use in valuation of the subject company.
The Market approach has is advantages and disadvantages to other valuation approaches. The
market approach is simple to understand and apply to derive a valuation price. The valuation
analyst model is based on actual data and does not rely on forecasting and assumptions used in
other methods of valuation. Disadvantages also exist in the market approach to valuation which
revolve around comparative data points. Difficulties exist when determining a comparative
company to determine a multiple. If the company being valued is to unique or diversified
problems present themselves finding a market comparable with a similar business or similar
business interest. Another difficulty includes the potential lack of data to determine a transaction
Running Title: Valuation Approach 5
price; private company transactions are not required to be reported which can make valuing a
company with a private firm as a comp difficult. Although as mention earlier not having to
forecast is an advantage of the market approach the disadvantage comes from the lack of
assumption; it does not factor in a growth rate when determining a price for a business.
Asset Approach
The asset approach to valuation takes into the consideration the value of a business assets to
determine a valuation price. It takes the book value on the balance sheet adjusting assets and
liabilities to a fair value or fair market value (Hitchner, 2017). The asset approach takes into
consideration all a company’s assets both tangible and intangible to derive a price value. The
book value-based approach valuation in asset-based valuation eliminates forecasting and
assumptions to be made by the valuator analyst (Jenkins & Kane, 2006). Hitchner (2017) states
“the asset approach is more commonly used in valuations for financial and tax reporting for
asset-intensive business”. It can be applied to valuation of individual assets to effectively isolate
and valuate individual parts of an entity.
The Asset approach to valuation is not without its disadvantages when seeking to assert a value
on a business. Hitchner (2017) finds the asset approach to operating companies on a going
concern often results in undervaluation because goodwill and other intangible assets are not
accounted for on a company’s balance sheet. Often goodwill or intangible assets that were
recorded on a company balance sheet does not reflect current fair marketed value. The asset
approach is often used to value small businesses with no goodwill or business on a liquidation
value.
Running Title: Valuation Approach 6
Valuation methods comparison
As mentioned throughout the paper a huge premises of valuation approaches are the assumptions
made by the valuation analyst. The income approach difference from the market and asset
approach as it requires valuation analyst to forecasting future revenue stream. These growth rate
and discount rate assumptions are essential to assigning a price to business value. Unlike the
other two valuation approaches the asset-based valuation is not forward looking it is based on
historical cost of assets adjusted to the fair market value. The market approach to valuation
serves ineffective if a reliable secondary market does not exist this puts it at a disadvantage to
other valuation methods that can be performed in the absence of an adequate and reliable
secondary market. These approaches also differ in with what they can valuate. The income
approach struggles with valuing machinery and equipment it is difficult to isolate income
streams to account for a specific machine; the market approach and asset approach can value
machinery (Hitchner, 2017). These two approaches can separate and assign specific value to
independent parts of a business.
Conclusion
These three approaches to valuations of firms are all respected methods of determining a value or
price of the subject company by factoring in internal and external data used to determine price
value. Understanding the differences in how value is derived to assign a price to a valuation is
essential to understanding each approach. The income approach in its simplest form factors in
the cash stream of a business or entity discounting it by systematic risk to derive a value. The
market approach compares a subject company and multiplies the parameters of the valuation by
the multiple of the comparable company. The asset approach uses the value of the underling
company assets to value the company. There is not one valuation method that is preferred over
Running Title: Valuation Approach 7
the other it the underlying business being valuated that makes one method favorable over the
others. It is the nature of the business that makes an approach favorable then others and the
discretion of the valuation analyst to determine the correct approach to take.
Running Title: Valuation Approach 8
Reference Page
Gajek, L., & Kucinski, L. (2017). Complete discounted cash flow valuation. Insurance:
Mathematics and Economics, Vol. 73, pages 1-19. Retrieved from https://www-
sciencedirect-com.ezproxy.liberty.edu/science/article/pii/S0167668715303279
Hall, S. (2004). Applying Income-Approach Business Valuation Methods to Professional
Practices. Journal of Financial Service Professionals. Vol. 58, Iss. 3, pages 91-99.
Retrieved from https://search-proquest-com.ezproxy.liberty.edu/docview/209615564?pq-
origsite=summon
Hitchner, J. (2017). Financial Valuation: Application and Models 4th edition. Hoboken, NJ.
Wiley.
Jenkins, D., & Kane, G. (2006). A contextual Analysis of Income- and Asset- Based Approaches
to Private Equity Valuation. Accounting Horizons. Vol. 20, Iss. 1, pages 19-35. Retrieved
From https://search-proquest-com.ezproxy.liberty.edu/docview/208907899?pq-
origsite=summon
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Valuation Approach and Company Report- Outline
Name
Institutional affiliation
Course
Instructor
Date
SECTION 1
Private company valuation approaches
Introduction
● The overall economic rationality is that companies must strive towards optimal returns
and profitability.
Research objectives
● To indicate the three valuation approaches and their operation.
● To reveal the benefits and limitations of using each valuation approach
● To identify the similarities between the valuation approaches.
● To investigate the differences between the valuation approaches.
Asset-Based Approach
● The asset-based approach to valuation is one of the primary modes of valuation in private
companies.
Income-Based Approach
● The income approach is another prominent approach to the valuation of private
companies.
Market-Based Approach
● The market approach is a valuation method of valuation that emphasizes the market
forces related to the prices.
Results and Findings
● The paper shows the different approaches to valuation. The income-based, market-based,
and asset-based approaches are the main approaches to valuation in a private company.
Conclusion
● The three approaches to valuation give different perspectives of value in the context of
private companies.
References
Hitchner, J. (2017). Financial Evaluation: Applications and models (4th ed.). Hoboken, NJ:
Wiley. ISBN 978-1-119-28660-8.
Jenkins, D. S., & Kane, G. D. (2006). A Contextual Analysis of Income and Asset‐Based
Approaches to Private Equity Valuation. Accounting Horizons, 20(1), 19-35.
Miciuła, I., Kadłubek, M., & Stępień, P. (2020). Modern Methods of Business Valuation Case
Study and New Concepts. Sustainability, 12(7), 2699.
Tham, J., & Vélez-Pareja, I. (2004). Principles of cash flow valuation: An integrated market-
based approach. Elsevier.
SECTION 2
Company Report
Company Analysis
● A widely known retailer of specialty coffee, Starbucks Corporation is operating through
several segments.
● Starbucks Corporation started its operation in 1971 in the United States with Zev Siegl,
Gordon Bowker, and Jerry Baldwin.
● To understand the reason for Starbucks' success, which has spanned over the years, it is
imperative first to understand the nature of the company's business.
● The essential products and services offered by Starbucks are easily noticeable thanks to
the company's effective strategies of marketing its products.
● The organization's marketing strategies have enabled it to serve critical markets
worldwide.
● Starbucks participates in several corporate social responsibility activities in current times.
● The various multinational companies worldwide that have partnered with Starbucks are
the driving force to the company's successful implementation of its marketing plan.
● The strengths, weaknesses, opportunities, and threats (SWOT) analysis reveals Starbucks
' position in the snacks and coffee retail industry.
● Porter's five forces of analysis give a depiction of Starbucks' competition within the
industry.
● The second force in Porter’s analysis is the bargaining power of Starbucks’ buyers.
● The third force in Porter's analysis is the bargaining power of Starbucks' suppliers.
● The fourth force of Porter's analysis is the threat of substitutes.
● The fifth force under Porter's analysis is the threat of new entrants. This is a moderate
force.
Industry Analysis
● As earlier mentioned, the retail coffee and beverage industry in which Starbucks operates
has a significant number of competitors.
Economic Analysis
● The economic outlook of Starbucks cooperation can be analyzed using the political,
economic, socio-cultural, environmental, and legal (PESTEL) framework.
Asset-Based Approach
● The asset-based approach in the case of Starbucks is based on the depictions of the
balance statement.
Income-Based Approach
● The Income-based approach used in the case of Starbucks takes the trajectory of the
Discounted Cash Flow method.
Recommendations
● Based on the data and the information posited about Starbucks Corporation, a few
recommendations can be cited.
● The first recommendation is that the company be engrossed in launching new products to
increase its product portfolio and edge the competitors for a more significant market
share.
References
Boulton, R. E., Libert, B. D., & Samek, S. M. (2000). A business model for the new economy.
Journal of business strategy, 21(4), 29-29.
Clements, M. (2019). Strategic Audit: Starbucks.
Geereddy, N. (2020). Strategic Analysis of Starbucks Corporation. Retrieved Apr 5, 2021, from.
https://scholar.harvard.edu/files/nithingeereddy/files/starbucks_case_analysis.pdf.
Hitchner, J. (2017). Financial Evaluation: Applications and models (4th ed.). Hoboken, NJ:
Wiley. ISBN 978-1-119-28660-8.
Mahmutllari, J. (2014). Developing a new product development and launch process: Case:
Company X.
NASDAQ. (2021). Starbucks Corporation (NASDAQ: SBUX). AlphaSpread.com. Retrieved Jul
7, 2021, from https://www.alphaspread.com/security/nasdaq/sbux/dcf-valuation.
Sakal, D. V. (2018). COMPANY ANALYSIS OF STARBUCKS CORPORATION.
1
Valuation Approach and Company Report
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Institutional affiliation
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Instructor
Date
VALUATION APPROACH AND COMPANY REPORT 2
Section 1: Private Company Valuation Approaches
Introduction
The overall economic rationality is that companies must strive towards optimal
returns and profitability. Even though private companies differ from public companies in
nature and legal expectations, the profit objective suffices in both. Therefore, there is a need
to keep efficient records when dealing with private companies through valuation. Valuation is
the consolidation of relevant data and information that gives direction on the company's
progress and potential success or failure. Because private companies are directed by an
inherent need to achieve efficiency and optimal profitability, the asset, market, and income
approaches offer a broad framework for the proper valuation of private firms to the benefit of
the stakeholders.
The stakeholders in a private company are the primary consumers of valuation
information. Even though private companies do not list their share for a public offering, its
ordinary course of operations leads to several stakeholders. Some investors, for example, are
interested in the asset valuation approach before conducting business with private companies.
Additionally, valuation information solves the information asymmetry between other external
stakeholders like suppliers and creditors. Even though private firms are not subjected to
stringent accounting and reporting standards stipulated by the Securities and Exchange
Commission (SEC), investors and other stakeholders appreciate proper valuation done within
the constricts of formal reporting procedures. Therefore, valuation is as essential a procedure
for private firms as it is for publicly traded companies.
Research Objectives
VALUATION APPROACH AND COMPANY REPORT 3
Several approaches can be incorporated into the valuation of private companies. Each
valuation approach incorporates a specific set of data and information. The main approaches
in the valuation of private companies are the Asset Approach, Market Approach, and Income
approach (Hitchner, 2017). This paper intends to peruse how each method operates in private
companies. Additionally, the paper will reveal the efficiencies and inefficiencies of each
approach in the private company context. Finally, the paper will reduce the introspection into
the different approaches into their inherent similarities and differences. Therefore, the
research objectives can be listed as:
❖ To indicate the three valuation approaches and their operation.
❖ To reveal the benefits and limitations of using each valuation approach
❖ To identify the similarities between the valuation approaches.
❖ To investigate the differences between the valuation approaches.
To study each of the research, objectives will be compiled to come up with a cogent
conclusion. The similarities and differences of the valuation methods give necessary
directions to the stakeholders in private companies on the trajectory of their financial
reporting. This paper does not imply that all private firms have a similar view of valuation.
Still, it takes on the various valuation approaches primarily adopted in line with formal and
common reporting standards.
The valuation approaches can be identified as:
Asset-Based Approach
The asset-based approach to valuation is one of the primary modes of valuation in
private companies. In the most rudimentary of this method, the asset-based approach reflects
the book value of the company because it is a calculation generated from subtracting
liabilities from the total assets in the company (Hitchner, 2017). Jenkins and Kane (2006)
VALUATION APPROACH AND COMPANY REPORT 4
posit that the asset-based approach can be used in the context of liquidity valuation,
accounting valuation, and a sum of the parts valuation. Liquidity valuation in the context of
asset valuation is when assets are valued with the prospects of sale (Jenkins and Kane, 2006).
Accounting valuation is where a private company is valued following internal controls or
accounting guidelines (Jenkins and Kane, 2006). Lastly, a sum of the parts is asset valuation
with investment prospect through acquisition or restructuring (Jenkins and Kane, 2006).
Hitchner (2017) posits that the asset-based approach to valuation attempts to find the firm's
underlying assets and uses the value of the tangible and intangible assets. Therefore, an asset-
based approach for a private company can be termed as more than just the company's book
value.
The necessary data and information involved in the asset approach are the value of
assets (both tangible and intangible) and the value of liabilities. However, this value can be
challenging to derive at actual value. Therefore, Jenkins and Kane (2006) posit that the value
of the individual assets can be derived using the expected cash flows from an asset (intrinsic
valuation) or through the pricing of similar assets (relative valuation). Most financial
statement adjustments already account for either or both of the valuation mentioned above
methods for tangible assets. However, intangible assets like goodwill can present a challenge
in the asset-based approach, with the income or market approach better suited for such
valuations (Hitchner, 2017). Therefore, the asset-based approach presents an advantage with
financial statement adjustments for straightforward valuation but presents a challenge for
private firms with a significant bulk of intangible assets.
Income-Based Approach
VALUATION APPROACH AND COMPANY REPORT 5
The income approach is another prominent approach to the valuation of private
companies. Private companies that choose to use this method are often split between the
capitalization of the cash flow method and the discounted cash flow method (Miciuła et al.,
2020). The data that is required when using the income approach for private companies
includes:
⮚ Net cash flows
⮚ Pre-tax earnings
⮚ Depreciation
⮚ After-tax earnings
⮚ Weighted Average Cost of Capital
Therefore, by deriving the present values of the data depicted above, the income-based
approach generally reflects the amount of income that a company is likely to generate in the
future.
The Capitalization of Cash Flows method is one of the standard methods under the
income-based approach. The method primarily utilizes the earnings before interest and taxes
and the company's cash flows (Miciuła et al., 2020). This method assumes that there are
negligible differences between tangible and intangible assets and that the value of assets need
not be separated (Miciuła et al., 2020). The defining mark of the capitalization of earnings
method is that it gives a reliable relationship between the following aspects in a private firm:
● Estimated Future benefits (Earnings or cash flow)
● Yield(Required rate of return)
● The estimated value of the business.
On the other hand, another standard method under the income-based approach to valuation is
the Discounted Cash Flow Method. This method is pegged on the theory that a private firm’s
value is equivalent to the present value of the projected future benefits (including the present
VALUATION APPROACH AND COMPANY REPORT 6
value of its terminal value (Hitchner, 2017). In this method, the valuation starts by
determining the applicable revenue growth rate for the private firm. Projections are then
made based on the firm's revenues, operating expenses, and taxes with the view of generating
the Free Cash Flows (FCF) (Miciuła et al., 2020). In this method, the weighted average cost
of capital (WACC) is utilized as the discount rate (Hitchner, 2017). Therefore, both the
Discounted Cash Flows method and the Capitalization of Cash Flows method are effective
methods under the income-based business valuation approach.
Several pros and cons emerge from the Income-based approach of valuation. The pros
include the inherent nature of the income-based approach inclines towards the future and not
historical data; thus, it provides investors with valuable information. Additionally, the
income-based approach emphasizes the cost of debt and equity, which is relevant for future
projections. The cons of the income-based approach are that it is slightly complicated and
that valuation is based on financial forecast and WACC, which are not rigid estimates, but
subject to manipulation and constant changes. Because most of these cons can be solved
through proper valuation practices, the income-based approach to valuation is still reliable.
Market-Based Approach
The market approach is a valuation method of valuation that emphasizes the market
forces related to the prices. Hitchner (2017) posits that the following variables are relevant
for a private firm that uses the market-based approach:
✔ Earnings before Interest and Taxes (EBIT)
✔ Revenues
✔ Assets
✔ Equity
VALUATION APPROACH AND COMPANY REPORT 7
The main methods used under the market-based approaches are the public company
comparables method and the precedent transactions (Tham and Vélez-Pareja, 2004). Because
private companies are limited in using public company comparables, the precedent
transactions method is the commonly used method. The precedent transactions method
involves using pricing data based on observed transactions (Tham and Vélez-Pareja, 2004).
This method emphasizes the value of transactional value without coherent financial
adjustments (Tham and Vélez-Pareja, 2004). Therefore, the market-based approach is
concerned with price-related indicators.
Several pros and cons emerge from the use of market-based approaches in the valuation
of private businesses. One of the primary advantages is that this approach is relatively
straightforward. Additionally, unlike other approaches, the approach does not rely on
subjective forecasts or calculations. On the other hand, this method is inherently limited
because it is challenging to access comparable data with private companies. In addition, the
viability and reliability of data can affect the valuation process.
Results and Findings
The paper shows the different approaches to valuation. The income-based, market-
based, and asset-based approaches are the main approaches to valuation in a private
company. Each approach is unique and requires a different set of data to complete.
Several similarities emerge between the three approaches to valuation. The first
similarity is that all the approaches have an inherent inclination towards the future. Hitchner
(2017) disputes that the market-based approach has no interest in future earnings and data.
An additional similarity is that all the marketing approaches appreciate financial statements
and accounting adjustments because most of the ratios and data are derived from such
records. Lastly, all the marketing approaches are concerned with the notion of risk and
VALUATION APPROACH AND COMPANY REPORT 8
propose different methods of dealing with different risks. Therefore, even though the three
approaches to valuation differ in nature and operation, they can have several similarities.
Several notable differences emerge between the three approaches to valuation. The
first difference is that only the asset-based approach appreciates the difference between
tangible and intangible assets. The market-based and income-based approaches view this
dichotomy as trivial or negligible. Another difference is that all the approaches utilize some
unique data sources to posit the final valuation; for example, the asset-based approach uses
the value of tangible and intangible assets, the income-based approach uses the net cash
flows, and the market-based approach uses equity. This data is different and does not exist in
the other approaches. Therefore, the approaches to valuation are substantively different.
Conclusion
The three approaches to valuation give different perspectives of value in the context
of private companies. Because private companies are directed by an inherent need to achieve
efficiency and optimal profitability, the asset, market, and income approaches offer a broad
framework for the proper valuation of private firms to the benefit of the stakeholders. The
approaches mentioned several inherent similarities and differences. Additionally, every
valuation approach has several advantages and limitations. Therefore, every private company
should contemplate which valuation approach or combination of approaches best suits their
firm.
References
Hitchner, J. (2017). Financial Evaluation: Applications and models (4th ed.). Hoboken, NJ:
Wiley. ISBN 978-1-119-28660-8.
Jenkins, D. S., & Kane, G. D. (2006). A Contextual Analysis of Income and Asset‐Based
Approaches to Private Equity Valuation. Accounting Horizons, 20(1), 19-35.
VALUATION APPROACH AND COMPANY REPORT 9
Miciuła, I., Kadłubek, M., & Stępień, P. (2020). Modern Methods of Business Valuation
Case Study and New Concepts. Sustainability, 12(7), 2699.
Tham, J., & Vélez-Pareja, I. (2004). Principles of cash flow valuation: An integrated
market-based approach. Elsevier.
Section Two: Company Report
1. Company, Industry, and Economic Analysis
Company Analysis
A widely known retailer of specialty coffee, Starbucks Corporation is operating
through several segments. The organization is presently operating in 62 countries with an
employee workforce nearing 183000 workers. These segments are channel development,
America's and international development. The organization deals with tea and coffee
products, operating more than 32,000 corporation-operated stores worldwide. Currently, the
company has 82 markets. The company usually buys and roasts coffee along with other
beverages. Also, the organization deals with other food kinds of stuff through its
organization-operated stores. Apart from its flagship coffee brand, the firm also sells other
goods under different brands like Ethos, Princi, Teavana, and Seattle's Best Coffee.
Starbucks Corporation started its operation in 1971 in the United States with Zev
Siegl, Gordon Bowker, and Jerry Baldwin. The company opened its first store in Seattle next
to a historic pike place field market. The founders based the firm's business model on selling
high-quality roasted coffee. With its change of ownership in the late 1980s, the organization
expanded a great deal. Further expansion occurred upon the firm going public in 1992. Four
years later, the company's president started opening more stores outside North America. Until
VALUATION APPROACH AND COMPANY REPORT 10
recently, the company has encountered some excellent levels of success in the food and
beverage industry. With its specialization in premium tea and high-quality coffee as its
primary brand, the corporation has seen a significant transformation to preserve market
dominance and competitiveness.
To understand the reason for Starbucks' success, which has spanned over the years, it
is imperative first to understand the nature of the company's business. Firstly, Starbucks buys
whole bean coffees, Italian-style espresso drinks, and other coffee-related accessories and
accessories, mainly its retail stores. Besides, the company uses other channels; for instance,
some of its equity investors create and sell a line of special premium ice creams and bottled
drinks sold through non-retail channels, which aligns with the companies' goals and
objectives. These channels are referred to as special operations geared towards Starbucks'
plan of a continued expansion of retail operations and recognition as the world's most
respected brand. In this regard, Starbucks is growing its specialty operations by selectively
pursuing a wide range of opportunities to leverage its name.
The essential products and services offered by Starbucks are easily noticeable thanks
to the company's effective strategies of marketing its products. In response to the high
demand for coffee, the company's stores had devised several ways of marketing their
products. For instance, they have adopted customization and the selling of seasonal products
such as hot beverages. Additionally, the stores also offer tea as a complementary food item
like tea and non-food products such as coffee mugs to expand their market share. However,
the company stores have a unique way of differentiating these products from competitors
through a customer-driven marketing strategy of segmenting the market.
The organization's marketing strategies have enabled it to serve critical markets
worldwide. Starbucks mainly dominates in the U.S market, although it is increasingly facing
a lot of competition from other known brands from China. The U.K. America's segment
VALUATION APPROACH AND COMPANY REPORT 11
comprises company-owned and licensed stores in the U.S., Latin America, and Canada. The
segments from these countries account for the most significant percentage of Starbucks'
market. However, 64% of the entire segment income is generated from America's stores
(Geereddy, 2020). Internationally, the company runs store segments that are company-owned,
mainly in Japan, China, Europe, Asia Pacific, and some African countries. The international
segments account for almost a quarter of the corporation's operating income.
Starbucks participates in several corporate social responsibility activities in current
times. Additionally, the new brand would attract a whole new range of customers hence
expanding revenue. Apart from finding ways to deal with competition while expanding the
market share effectively, its success can also be attributed to its highly effective suppliers.
For example, the First Capital Realty Company leases property to the organization to
generate a sustainable cash flow. Another one is a Chinese-based Tingyi Cayman holding
corporation which manufactures and advertises ready-to-drink products from Starbucks.
The various multinational companies worldwide that have partnered with Starbucks
are the driving force to the company's successful implementation of its marketing plan.
According to Geereddy (2020), the snacks and coffee retail industry has shown steady growth
over the recent past. However, it suffered some losses from the 2008/9 economic crisis,
which saw the industry revenue decrease by 6.6% to $25.9 billion. Since then, the industry
has experienced a positive trajectory by recording growth in sales with a projected rate of
3.9% per annum (Geereddy, 2020). Starbucks does not take part in online sales, but through
its distribution review, one can find Starbuck branded roasted coffee beans in several retail
stores worldwide, such as Costco and Walmart.
The strengths, weaknesses, opportunities, and threats (SWOT) analysis reveals
Starbucks ' position in the snacks and coffee retail industry. A formidable strength of the
corporation is its global brand recognition and its market position. The exemplary quality of
VALUATION APPROACH AND COMPANY REPORT 12
the firm's products like coffee and premium tea is the other strength. Also, the company's
utilization of technology marketing by having attractive coffee stores aesthetic has lured
customers to consumption of its products globally. These strengths continue to solidify the
firm's profitability and market share.
Below is a chart that highlights Starbucks’ SWOT analysis:
The significant threats for Starbucks are the volatile coffee prices and the stiff
competition from the new entrants. Since there are no significant barriers to entry into the
industry, new companies offering similar products can freely enter the market, leading to
competition against Starbucks. Also, volatile coffee prices, which cause supply chain
turbulence, affect the company's profitability. The volatility of products' prices may also lead
to volatility of GDP as the tax revenue is also reduced. . Thus, the supply chain and market
are the main threats to the company's profitability.
Porter's five forces of analysis give a depiction of Starbucks' competition within the
industry. The firm operates in a business environment with intense competition from other
notable firms like McDonald's, Wendy’s, Burger King, and Subway. Assessing the
STRENGTHS
1. Global Market recognizition and Position
2. High quality products in terms of premium
coffee and tea
3. Attractive stores aesthetic
4. Technology usage in marketing
WEAKNESSES
1. Fairly expensive products
2. Excess focus on the United states markets
THREATS
1. Increased competition from new entrants
2. volatile prices of coffee
OPPORTUNITIES
1. New products
2. New distribution channels
3. Technological advancements
SWOT ANALYSIS
VALUATION APPROACH AND COMPANY REPORT 13
competitiveness of Starbucks is necessary because it emphasizes the trajectory of
recommendations in future decisions and projects for Starbucks.
The first force in Porter's analysis is the competitive rivalry or competition between
firms within the industry. This force can be defined as strong because of the large number of
competitors within the industry. Additionally, firms within the industry have a moderate
variety which ensures that the force of competition is sustained at reasonably high standards.
Lastly, because consumers incur minor to no costs in switching, the competition force is
exemplified. Therefore, there is a strong competitive force in Starbucks' industry.
The second force in Porter’s analysis is the bargaining power of Starbucks’ buyers.
This bargaining force is strong because of three variables: availability of various substitutes,
low switching costs, and a relatively stretched buyer size. Because of the substitute in firms
and products (beverages), Starbucks' industry consumers have the upper hand. Additionally,
the relatively strained stretch of buyers for every seller in the industry makes this force
strong.
The third force in Porter's analysis is the bargaining power of Starbucks' suppliers.
This force is relatively weak. One of the reasons for this weak force is the oversupply of
agricultural products like coffee berries. Additionally, most individual suppliers are small to
moderate-sized, and the wide variety of supplier products leads to rivalries between the
suppliers. Therefore, Starbucks enjoys a state of reasonable imposition as suppliers have
strained power.
The fourth force of Porter's analysis is the threat of substitutes. This is a strong force
because of the incredible variety of beverages that can compete against the products offered
by Starbucks. Additionally, even though Starbucks has created a niche for itself through
iconic coffee tastes, there are negligible costs for customers that decide to switch to other
VALUATION APPROACH AND COMPANY REPORT 14
brands. Therefore, there is a strong possibility for Starbucks' profitability being affected by
substitutes.
The fifth force under Porter's analysis is the threat of new entrants. This is a moderate
force. There are limited barriers to entry in the market and beverages industry. Therefore,
more firms can provide competition for Starbucks. Additionally, there are moderate costs
associated with the supply chain associated with Starbucks. Therefore, Starbucks suffers a
moderate likelihood of being displaced by new entrants in its industry position and market
share.
Industry Analysis
As earlier mentioned, the retail coffee and beverage industry in which Starbucks
operates has a significant number of competitors. Although the company is currently
dominating the industry with an estimated 36.7% market share, several other brands like
Dunkin also have an outstanding share in the same market. According to Geereddy (2020), it
has proven quite challenging to impose barriers to entry to this industry due to the nature of
the products provided. In this regard, new entrants will always get into the market, and thus
competition is likely to increase. However, Mahmutllari (2014) posits that competition can be
termed as positive in the process of creating new products since the unexplored market gaps
are filled in that process.
Economic Analysis
The economic outlook of Starbucks cooperation can be analyzed using the political,
economic, socio-cultural, environmental, and legal (PESTEL) framework. PESTEL is an
effective tool for analyzing the effects of external issues and attributes of the company's
macro-environment. To maintain its position in the coffee and beverages industry, the
VALUATION APPROACH AND COMPANY REPORT 15
company should continue monitoring its external environment. Through an effective address
of the factors identified by the PESTEL analysis of the remote business, Starbucks can attain
long-term successes regardless of the hostile external forces that may impact the business.
The success of Starbucks can be linked to its effectiveness in dealing with the factors
identified in the PESTEL analysis.
Some of the economic factors critical to the global coffeehouse stores are the
increasing labor costs in the countries supplying coffee, declining unemployment rates, and
economic growth of developing nations. A decrease in the unemployment levels brings
opportunities for the company to attain an extra income from different markets worldwide.
However, the increasing labor cost in developing nations poses an external threat to the
company as it hikes the firm's spending on ingredients. It is imperative to note that Starbucks
sources almost all of the coffee beans from these third-world countries. Although the supply
of coffee beans could be an issue, this analysis of the PESTEL model presents opportunities
for the company's products primarily.
Socio-cultural factors are another PESTLE analysis framework that shows trends
affecting consumption and the coffeehouse business. The company must deal with some
opportunities like growing the middle class and building the coffee culture to expand its
revenues by growing demand for specialty coffee. Starbucks can further widen the demand
for its products by widening its range of healthful items which would be attractive to health-
conscious consumers. Starbucks, however, faces some threats that are connected to
independent coffeehouses, which are socio-cultural. These threats tend to side with the
independent coffee houses instead of the big multinational chains like Starbucks. The
Starbucks SWOT analysis had also pointed out the threat of the independent coffeehouse
movement. From the analysis, the external social factors provide significant opportunities and
a vital threat that could influence Starbucks ' chain revenues.
VALUATION APPROACH AND COMPANY REPORT 16
The technological factors in this industry influence the coffeehouse chain. Starbucks
is experiencing several external factors related to technology, like rapid adoption of mobile in
online purchases and an increase in the availability of coffee machines for creating specialty
coffee. The company has opportunities of expanding its mobile apps and linked services and
therefore present extra avenues for income gains via mobile purchases. Also, Starbucks has
improved its efficiency in the supply chain, judging from the coffee farmers' use of recent
technologies. However, the increased home use and availability of specialty coffee machines
pose a threat to Starbucks since it is the leading cause of an influx of substitutes for its
products.
Sustainable business processes which are on the rise are trends that present Starbucks
the opportunity to improve on its sustainability standards. The Improvement can build the
organization's brand while also attracting customers to consume its products. The PESTLE
analysis model identifies this issue as an ecological factor. Other environmental factors in the
company's macro-economic business environment include the rising push for ecologically
friendly products. For instance, the company can innovate to create products that are more
ecologically friendly. According to the PESTLE analysis, the environmental factors present
opportunities for enhancing the company's corporate image.
2. Financial statement & company risk analysis
(US$ in thousands)
Description
Sep 27, 2020
Sep 29, 2019
Cash provided by
changes in operating assets
and liability
2,676,400
1,648.700
Adjustments to
reconcile net earnings to net
673, 100
1,452,400
VALUATION APPROACH AND COMPANY REPORT 17
cash provided by operating
activities
Net cash from
operating activities
1,597,800
5,047,000
Net cash used in
investing activities
1, 711,500
1,010,800
Net cash used in
financing activities.
1,713,300
10,056,900
Net Increase/decrease
in cash and equivalents
1, 664, 300
6,069,700
Cash and cash
equivalents end of a period
4,350,900
2,686,600
Cash flow statement
item
Description
The company
Cash from operating
activities
This section refers to
the total amount of outflow
or inflow obtained from
operating activities while
excluding the discontinued
operations (Sakal, 2018).
These activities' cash flows
are adjustments and value
changes that are not termed
The net cash that
Starbucks corporation
obtained from the operating
activities was reduced from
2019-2020 (Clements, 2019).
VALUATION APPROACH AND COMPANY REPORT 18
financing or investing
activities.
Cash utilized in
investing activities.
This is the amount of
cash outflow or inflow of the
investing activities with the
exclusion of discontinued
operations (Sakal, 2018).
This cash flow material
includes collecting loans,
acquisition, and disposition
of debts or/and equity
instruments, equipment, plant
and property, and other
productive assets.
The net cash used by
Starbucks in investing
activities rose from 2019-
2020 (Clements, 2019).
Cash from financing
activities
This is the amount of
outflow or the cash inflow of
any financing activities with
the exclusion of the
discontinued operations
(Sakal, 2018). The financing
activity cash flows entail
obtaining resources from the
owners and providing the
resources with a return on
their investment. This issue
Starbucks’ net cash
provided in the financing
activities increased from
2019-2020(Clements, 2019).
VALUATION APPROACH AND COMPANY REPORT 19
translates to borrowing an
amount of money and
repaying the same amount
borrowed-settling the
obligation. The process
involves acquiring and
repaying for the resources
from the creditors that were
obtained on long-term credit.
3. Valuation Estimates & Recommendation
Asset-Based Approach
The asset-based approach in the case of Starbucks is based on the depictions of the
balance statement. NASDAQ (2021) posits that the year ended September 2020 showed that
the company had $29,374,500,000 in assets, which primarily includes tangible assets and
includes the value of intangible assets like goodwill. Boulton et al. (2000) posit that the asset-
based approach may be incapacitated for the modern view of companies. However, the asset-
based approach can be used by investors to get a reflection of the liquidation value.
Income-Based Approach
The Income-based approach used in the case of Starbucks takes the trajectory of the
Discounted Cash Flow method. Hitchner (2017) posits that this method is pegged on the
theory that a private firm’s value is equivalent to the present value of the projected future
benefits (including the present value of its terminal value. The Income-based approach using
VALUATION APPROACH AND COMPANY REPORT 20
the DCF method is reflected by NASDAQ (2021) as 50.54 USD in intrinsic value. Therefore,
Starbucks has a good potential for the future based on the income-based view.
Recommendations
Based on the data and the information posited about Starbucks Corporation, a few
recommendations can be cited. The first recommendation is that the company be engrossed in
launching new products to increase its product portfolio and edge the competitors for a more
significant market share. Additionally, because one of the primary threats is that the firm
relies heavily on the USA market, there is a need to expand the geographical markets. Lastly,
the company should consider more cause marketing approaches and corporate social
responsibility ventures to improve the brand.
VALUATION APPROACH AND COMPANY REPORT 21
References
Boulton, R. E., Libert, B. D., & Samek, S. M. (2000). A business model for the new
economy. Journal of business strategy, 21(4), 29-29.
Clements, M. (2019). Strategic Audit: Starbucks.
Geereddy, N. (2020). Strategic Analysis of Starbucks Corporation. Retrieved Apr 5, 2021,
from.
https://scholar.harvard.edu/files/nithingeereddy/files/starbucks_case_analysis.pdf.
Hitchner, J. (2017). Financial Evaluation: Applications and models (4th ed.). Hoboken, NJ:
Wiley. ISBN 978-1-119-28660-8.
Mahmutllari, J. (2014). Developing a new product development and launch process: Case:
Company X.
NASDAQ. (2021). Starbucks Corporation (NASDAQ: SBUX). AlphaSpread.com. Retrieved
Jul 7, 2021, from https://www.alphaspread.com/security/nasdaq/sbux/dcf-valuation.
Sakal, D. V. (2018). COMPANY ANALYSIS OF STARBUCKS CORPORATION.
