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How much is your foundry worth.

To survive in today's dynamic business environment, it is essential that management be aware of the worth of its business. Foundry mergers and acquisitions have been much publicized of late. That fact and the progressive complexity of business operations make determining a foundry's value an important concern. This article will focus on some of the

Generally, a fair market value should be based on a thorough investigation of the business and the proper application of current valuation methodology. An accurate valuation is important in establishing a fair price, protecting those with fiduciary responsibilities e.g., the board of directors), protecting the rights of stockholders, stockholder value and identifying tax attributes that may affect that price.

For example, a comprehensive valuation often involves a determination of the utility of each tangible and intangible asset in the production of future income. Key intangibles can include customer relationships, production contracts and proprietary processes. A detailed investigation and valuation of the foundry's strengths and weaknesses will help project accurately future economic returns as the basis of any price determination. Why a Valuation

There are many important reasons why it makes good business sense to conduct a valuation of your foundry. You may need to: * identify amortizable assets and fair market values in a purchase agreement to provide the proper tax treatment for individual assets; * buy or sell shares in the foundry to establish the value of a minority interest; * obtain financing or recapitalize business; stock valuation helps set collateral value for obtaining financing; * establish or update an employee stock ownership plan; (ESOP). Care must be taken in negotiating a price for sale of a business because lawsuits can be brought by minority shareholders or creditors where there is evidence of an unfair selling price., * estimate inheritance taxes or prepare an estate plan, since the value of the family business is an important factor; * establish a bid price for an acquisition; * consider effects of business expansion or divestiture on share value*allocate a purchase or sale price to individual assets for tax reporting reasons; * establish an asking price when selling the foundry; * provide support in litigation for purposes such as bankruptcy, marital dissolution or breach of contract; * structure buy/sell agreements with other shareholders or partners. Fair Market Value

The internal Revenue Service defines fair market value as "the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relative facts."

The term, fair market value (FMV) assumes the business to be on-going and offered for sale in the marketplace for a reasonable period of time. This standard is therefore a value in exchange" for cash, taking into account current market conditions and the marketability problems of most private businesses.

FMV must be distinguished from other types of value such as insurable value, investment value, property tax value and liquidation value. These different standards of value are appropriate for various purposes, but business valuations use FMV as the most common premise. Determining FMV

FMV, typically, is determined using all or parts of three general approaches: market comparable, income and underlying assets. * The market comparable approach is the prevalent method of business valuation. in it, a foundry's value is developed by comparing the business to publicly held companies. For example, the market price of the stock of these comparable firms sells at a multiple of its earnings (e.g., price/earnings, or P/E ratio). A P/E ratio of 10 means that the current selling price is 10 times the last 12 months of reported after-tax company earnings. If the public company is comparable, the P/E ratio can be applied to the private foundry business to help establish value. * In the income approach, a discounted cash flow analysis is often prepared which equates future cash flows to a present value equivalent by applying a required rate of return on capital employed. The rate of return selected should reflect current capital market rates and the risk of the investment. Alternatively, a recent level of earnings or cash flows is often capitalized" by dividing by the required rate of return into the earnings base to estimate capital value. This is often a shortcut method of estimation which does not require detailed estimates and projections. For example, a business enterprise with $500,000 in expected after-tax annual earnings would be worth $2.5 million if a 20% rate of return were required by the buyer($500,000/.20=$2,500,000).Liabilities would be subtracted to arrive at the value of equity using this capitalization approach. a The underlying assets approach considers the various assets, both tangible (machinery and equipment, land, buildings) and intangible (patents, trademarks, goodwill) comprising a foundry's total assets. Before the valuation begins, however, it is important to decide on the premise for the valuations that will have the greatest impact on the value determined. Each asset would be individually valued. Equity value equals the sum of all asset values, minus liabilities.

Two principal premises are value-in-exchange" (the highest price at which property would sell in the open market if sold independent of the business), and value-in-use" (the value of an asset as part of an assembled group of assets employed in a profit-making business). The underlying assets approach considers all related costs to put any asset into service, including such elements as engineering, installation and testing. A valuation's specific characteristics and purpose will determine which premise of value to use. Summary

Today's successful businessman must have a good idea of the value of his company. Valuations are necessary for various reasons, but, most importantly, a comprehensive estimate of fair market value is a measure of foresight, business expectations and future economic returns to the owner.

Small Foundry Directions is a new series for modern casting. It is intended for small foundries and will focus on their unique circumstances in a small business environment.

The purpose of Small Foundry Directions is to examine some of the issues facing the smaller foundries in the decade of the 90s, and allow experts to address those issues and suggest approaches that would benefit the foundryman.

Comments from our readers over the last 12 months have expressed a need to carefully look at ways to improve small foundry operations and stimulate ideas and planning. We hope the subjects covered in Small Foundry Directions will answer that need.

Some of the issues we intend to cover include:

* calculating your foundry's worth

* improving your marketing skills

* solving environmental problems

* protecting your equity

* accounting and money management

* learning and applying new technology

* employee relations.

Direct your suggestions to Tom Bex, senior editor.
COPYRIGHT 1990 American Foundry Society, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:Small Foundry Directions; estimating the fair market value of foundries
Author:Grabowski, Roger J.
Publication:Modern Casting
Date:Oct 1, 1990
Previous Article:New roads for automotive castings.
Next Article:Avoiding high bottoms in brick-lined arc furnaces.

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