Affiliate Spotlight - Ahuja & Clark, PLLC

Taylor Herzog, CFA, CAIA

What Booze Can Teach You About the Importance of Unique Perspectives in Valuation

Sometimes having a divergent and unique perspective in valuation can be the difference between a firm's life or death.

Anheuser Busch was founded in 1852 and was a well-established business by the early 1900s. Then in 1920, the Eighteenth Amendment to the US Constitution was passed which established the prohibition of alcoholic beverages. At first glance, a sovereign government passing a law that outlaws a firm’s product should have massive negative consequences for the firm’s valuation. After all, it appears future sales and profits are about to go dry (pun intended).

Virtually all analysts would conclude that the current value of a firm should be massively reduced to reflect the unquestionable loss in future revenue and thus profits.

However, any enterprising analyst could make the following unique observation: The amendment made it illegal to manufacture, sell and transport alcoholic beverages, but it did not make it illegal to produce, sell and transport the raw materials needed to make them.
The analyst making this unique observation could then value the firm not on the easily observable historical basis of sales from alcoholic beverages but on the different go forward basis of the material to make alcoholic beverages.

It is likely that with this unique observation, the executive management of the firm could have taken this strategic insight and concluded that the firm could specifically sell the unfermented malt extract.

In effect, the consensus would have quickly assumed the value of this boring, well established, old product firm would massively fall given the outlawing of its product. The divergent analyst with his or her unique insight would have concluded the firm could massively increase its value due to the same outlawing act by shifting the product down a few steps in the manufacturing chain.

In Daniel Okrent’s book “The Rise and Fall of Prohibition,” the then Chairman of the firm said:

“We ended up as the biggest bootlegging supply house in the United States of America.” Amazingly, it was all legal.

This is a great example of how a simple valuation exercise could have effectively saved the life of a previously considered dying business (not only saved it but helped it thrive) by leveraging the strategic value embedded in the divergent valuation opinion.

Overall, the value in a valuation can extend well beyond the immediate need for a simple number. It can become the strategic pivot point that the valuation analyst and the client firm use to materially increase a firm's value.

More importantly, this highlights the importance of being a business/strategic analyst first and a valuation analyst second. After all, as a wise man once said:
“Not everything that can be counted counts, and not everything that counts can be counted”.
 

About the Author
Taylor Herzog, CFA, CAIA
Manager of Advisory Services
Ahuja & Clark, PLLC | Certified Public Accountants
He has been working in the financial industry for over 10 years and his areas of expertise include multi asset class valuations, wealth management, investment research, model risk management, bank management, startups, private business valuations, and strategic technology management.

About the Firm
Ahuja & Clark, PLLC | Certified Public Accountants
Ahuja and Clark, PLLC (A&C) is a full-service accounting firm that offers an integrated approach to business valuations, tax and assurance services. A&C brings to its clients more than 20 years of experience. A&C’s mission is to provide services of unparalleled quality with exceptional consistency.

A&C provides valuation services to a wide variety of clients, including but not limited to estate planning purposes, partner/shareholder purposes, section 409 and SBA lending purposes. A&C provides financial due diligence to private equity firms and forensic accounting to insurance and legal clients.

A&C’s clients include high net worth individuals and small to mid-size businesses within diversified industries, including but not limited to law firms, physicians and IT businesses. A&C has also provided similar services for manufacturers, distributors, high tech companies, municipalities, staffing companies and leasing companies. 

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TABB Newsletter - TABB Newsletter 2017 Q1

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