Case Analysis

Statement of the Problem

The current problem Doug Cook is facing concerns the challenge of determining the actual value and opportunities of business before buying it. Cook wants to purchase a company, but he is unsure whether the owners have given an accurate reflection of the business values. The uncertainty was brought by the fact that he had heard previous stories where most of the business owners usually deceived potential buyers concerning the actual value and profitability of the businesses to sell their entities at higher prices. Purchasing a company without getting its real value may be problematic since it might lead to losses. The primary problem Cook is facing, therefore, is that he does not know how to determine the business he should purchase so that he can be sure of avoiding being deceived and ending up in losses. Currently, Cook has three options to choose from, but he does not know the process and steps he should follow to accomplish his objective of acquiring or purchasing a new business. The improper valuation of the identified companies may cause Cook to overpay for the company or even underpay lower prices not expected by the shareholders. Such cases might have negative impacts not only on a person purchasing a business but also on those selling their enterprises, their employees, customers, and shareholders. The fact that a company is different makes the entire process of evaluating a new business opportunity difficult. The valuation not only depends on the internal factors but also on various external issues, including geographical position, political stability, economic conditions, and legal requirements.

Analysis of the Problem

The problem Cook currently faces is tied to the theory of business evaluation and acquisition. The assessment of business before acquiring it is an essential part of ensuring that the right enterprise is identified and that there is a chance of getting the initial acquisition outlay costs. According to Mellen and Evans (2018), in an acquisition transaction, a party is required to pay the price to another party to make the entire process work. Whenever an individual or another business decides to acquire or purchase another company, there comes both the good and bad things, and as such, a person must be prepared to face both. Ben-David, Drake, and Roulstone (2015) state that the success of any acquired business depends on several issues: the most critical of which is accurate and proper valuation. In any acquisition transaction, the assessment is regarded as a primary issue alongside the financial capabilities, timing, tactics, and deal structuring.

Some of the valuation strategies assume that a business can be sold or disposed of at the bankruptcy prices, while other approaches stress the importance of considering the strength of an enterprise’s brand, which can lead to higher valuations. One of the methods that can be used to value an enterprise is its liquidation value, which, according to Ali et al. (2016), involves the price that Cook can pay for business after collecting all its liabilities and assets that are to be sold off. The book value is also one of the methods that Cook can use to determine which business among Coyote Consulting Company (CCC), Feldco Windows and Doors, Inc., and Luxury Tassels, Inc. he should purchase. The method, according to Mellen and Evans (2018), describes the amount proportional to the business’ preferred stock, assets, and liabilities, and one that an individual pays to attain or acquire the ownership of that enterprise.

Potential Solutions to the Problem

  1. Seeking the Help of a Professional Business Valuator

One of the methods Doug Cook can use to determine which businesses he should buy is to contact and seek the services of a professional business valuator. Such person can accurately determine the economic value of every business Doug Cook has identified to establish their fair price that can be used to create what should be paid towards the acquisition of such a company. The professionals not only create the current value of business but also help determine their historical and future value, so when a price is paid to purchase them, it is easier to establish whether they would yield returns on invested capital. Issues, such as market capitalization, times revenue analysis, discounted cash flow methods, and earnings multiplier, are essential tools that can be used to establish the value of the identified businesses (Ali et al., 2016). However, these methods require a professional, and so it is recommended that Doug Cook should look forward to hiring a professional business valuator.

  1. Conducting Both Internal and External Analysis for the Identified Business

One of the methods that Doug can use to establish the real value of the designated transactions is to conduct an internal and external analysis of the entities. An internal investigation can be achieved by using tools such as the VRIO (value, rarity, imitability, and organization) (Ben-David et al., 2015). None of the identified enterprises offers rare or unique products. The industry of an enterprise should be a significant factor in establishing which business Cook should purchase. Conducting Porter’s five force analysis is an important starting point, as it helps determine each of the company’s suppliers, customers, competitors, and even the substitute products. By identifying the competitors and level of competition, Doug Cook can establish whether it is worth investing in any particular industry. If one of the businesses has large competitors, influential purchasers, and strong supplier powers, Doug Cook should avoid investing in such markets, but if one of the companies operates in an industry where there is less competition but weak supplier powers, Doug Cook should consider investing his resources in such an enterprise (Ben-David et al., 2015). As someone who has extensive knowledge of managerial concepts, it should be easy to use Porter’s five force analysis.

  1. Conducting Financial Performance and Growth Opportunities Analysis

One of the primary steps that can be used to determine which business enterprise to invest in is through doing a financial performance and growth opportunity analysis on each of the identified businesses. Ratio analysis, for example, reveals which companies have had all-around positive financial performances and forecasts for the future. The tool helps ascertain the profitability, gearing ratio, and returns on invested capital of each of the enterprises. Furthermore, establishing the growth potential of each of the enterprise would provide an indication concerning which of the businesses Doug Cook should invest in.

The Recommended Solution to the Problem

To establish the real value of the identified businesses, Doug Cook should use a combination of different methods including:

  1. Hiring a professional business evaluator.
  2. Analyzing the financial performance and the growth opportunities of every identified business.
  3. Conducting the internal and external environments of every company to obtain the business enterprises that operate in favorable market conditions now and in the future.

Knowing the historical and forecasted financial performances of the businesses might help Doug Cook know how his capital invested in the firm would be returned. In the processes, Doug Cook should have established which of the identified businesses meets his requirements. For example, the analysis would reveal an enterprise that have no unions, located in Chicago, possess solid financial history, diverse customer base, profitable entity, low-to-no-tech enterprise, and an organization with the potential for growth.