The valuation of the management buy-out of an unlisted company : (a case study)

Abstract

This research is a 'case study' analysis on Flint Construction cc, which has undergone a management buy-out. Flint Construction cc specializes in the construction and restoration of surface and underground rail systems, the sale and purchase of perway materials (rails, sleepers, etc) and general civil engineering construction. The objective of the study is to determine the value of Flint Construction cc using the relevant valuation techniques discussed in the literature. Different valuation techniques are analyzed and utilized in order to ascertain the value of the business at the time of the buyout. These include using models such as Price-earnings (earnings valuation model), balance sheet valuations (assets valuation model), discounted free cash flows model (DFCF model), and the economic value-added model (EVA model). This study is a 'case study' and is limited to Flint Construction cc, and we therefore cannot generalize. Further, the study is conducted on an unlisted company, and it is difficult to obtain information, which is not publicly available. Other unlisted companies would probably be reluctant to disclose financial information. However, an interview was conducted to obtain data on strengths, weaknesses, opportunities, threats, subjective risk adjustments and perceptions of Flint Construction cc which were used in the valuation using PIE ratios, estimation of future cash flows and the EVA method. The Price-earnings (earnings valuation model), discounted free cash flows model (DFCF model), and the economic value-added model (EVA model) reveal that the business was sold at a 'fair' value of R3 million. The range for Flint Construction cc obtained from the different valuation methods excluding the net asset value method was from R2,450,403 to R3,I06,880. A further study can be undertaken to see what happens to company value after a buyout and whether shareholder value is created.