Operational analysis

Operational and funding analysis

The first part of a valuation engagement is to understand the business. How the business operates and is funded. This is the story behind the numbers.

• What are the key drivers of revenue and revenue growth?
• What cost structure does the business have and how is this likely to impact future margins?
• What are the key risk factors impacting future earnings?

An operational analysis includes understanding the products and or services, customers and suppliers and the competitive advantage.

The analysis often falls into three key categories: business operations, legal and corporate and funding information.

Business operations

• How long has the business been in operation and where is it in the business life cycle?
• Who are the key management, what are their roles and experience and if they were to leave how would this impact earnings?
• What are the plans for the expansion of the business, both geographically and in new service lines and products?What is the potential market size for the industry and the businesses market share?
• Who are the key customers and how long have they been with the business? Does the business generate a large percentage of income from one client and what is the risk of losing that client? How much income is generated from repeat client sales?
• Who are the key competitors and what are the barriers to entry? How might this impact future revenue growth and future expected operating margins?
• What key operating assets does the business own?How old are the assets? How does this impact expected future capital expenditure?
• Is the business involved in any related party transactions, such as rental payments to a related trust? Are these payments at market rates?
• Are any shareholders involved in the business? If so, do they get paid a market rate?

Legal

• Does the business have any licenses, agreements, or contracts in place with customers or suppliers? What are the key terms of the agreements, such as exclusivity, expiry and the ability to transfer the agreements?
• Does the business own any trademarks, patents, or other intellectual property?How does the intellectual property impact revenue growth and margins? How is the intellectual property protected?
• Is there a shareholders’ agreement in place? Are there any restrictions on the transfer of shares or how shares are to be priced?

Corporate and funding

• Who are the shareholders or trustees? Do they operate in the business? What control and influence do they have over the operations of the business?
• Has the entity made any business acquisitions or been approached by a buyer or have there been any share transfers? If so, what are the details and what value do they infer?
• What debt to the business and the interest and payment terms for the debt? Is the business funded in other ways, for example, through shareholder loans?
• Does the company have preference shares, convertible notes and or options? If so, what are the details of these financial instruments?