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Thus, a business valuation will usually benchmark a profitable private firm against other investments.
This process involves an analysis of the risk of those other investments as well as of the risk of the
business being valued.
Industry Analysis
Acme operates in the adhesive and sealant industry. The U.S. government‟s Standard Industrial
Classification (SIC) for this industry is number 2891. Victoria researches this industry and finds that
the segment consists of approximately 1,100 U.S. establishments primarily engaged in manufacturing
industrial and household adhesives, glues, caulking compounds, sealants, linoleum, tile, and rubber
cements. The annual sales in this industry segment are $16.9 billion, and the industry employs roughly
36,000 people. The industry has grown at an average annual compound rate of 6.7% over the past 10
years. Victoria finds that this industry segment is a large growing global segment. However, the U.S.
portion is highly fragmented, and a significant majority of the industry participants are small and
regional companies. It is expected that the industry will consolidate as companies seek to enhance
operating efficiencies in new product development, sales and marketing, distribution, production, and
administrative overhead.
From her analysis, Victoria concludes that the industry outlook is positive in revenues and earnings,
but it is moderated by the high degree of competition from numerous smaller firms selling similar
products.
The Fundamental Position of the Firm
During Victoria‟s interviews with the firm‟s managers, she discovers that Bob founded Acme 20 years
ago, and its history has been one of relative success. It started in a small garage and grew by
expanding the number of products and its customer base. Over the years, Acme acquired new
facilities, not only in its hometown but in other cities as well. The firm‟s growth was primarily funded
by reinvesting its profits and with long-term financing when purchasing real estate. During the past
five years, Acme‟s sales increased from $33 million to $50 million. Acme expects to expand its
manufacturing capacity by adding equipment to the existing locations.
Victoria‟s analysis reveals that Acme has competition from many firms, and many of them are
small, private companies. She also finds that Acme‟s customers are retail distributors of its products,
and the firm does not have any significant customer concentration. In general, customer relationships
have historically been long-term.
Acme has several trademarks and products that are widely known to the public, as is Acme‟s name.
Victoria also finds that the risk of product obsolescence or replacements by new products is a minimal
risk to Acme.