Imaginary Case: Business Valuation Approaches for Garuda Indonesia (ESOP Case)

As an analyst I wonder if I were doing a business valuation for GIA. A foreign business consultant asked me to do a valuation case for GIA, as an internship requirement. Here is my "imaginary case" based on my daily job as a business analyst, L.O.L. #ngawurmode

Business valuation reports can be made for several purposes: estate (property) and gift taxes, Employee Stock Ownership Plans (ESOPs), stock options, marital dissolution (according to a certain country/state regulation), intangible assets and goodwill, partnership and shareholder buyouts, bankruptcy, and reorganization of a company. When involved in a legal case, clients can also ask a business valuation company for litigation support and expert witness testimony. Basically, there are three approaches to determine the value of a business: income approach, market approach, and asset approach.

The business valuation approach depends on the purpose and the client’s case. For example, if Garuda Indonesia (or “the Company”) wants to share ESOPs. An ESOP is a defined contribution employee benefit plan that allows a business owner(s) to sell all or part of their closely held company to employees. ESOPs are usually given to employee(s) who is/are close to retirement. Garuda Indonesia sets up a trust fund to establish an ESOP and contributes new shares of its own stock or cash to buy existing shares. The trust is governed by a trustee(s) selected by Garuda Indonesia’s Board of Directors. When issuing ESOPs, Garuda Indonesia has to consider Indonesian ESOP’s regulation. In American case, according to Employee Retirement Income Security Act (ERISA) of 1974 and amendments, the ESOP trust cannot pay more than fair market value for the company stock that is purchases from the selling shareholder. If Indonesia has a specific ESOP regulation, then the company has to obey the rules. Business valuation is important to determine the fair market value of Garuda Indonesia.

A business appraiser or an analyst must consider the stockholders’ control and also the marketability to adjust the interest that is being sold to ESOP. A control premium will be used depending on how soon control will pass to the ESOP and how market conditions affecting Garuda Indonesia’s stock.

A business valuation is based on a certain valuation date. To do the business valuation, appraisers need some information from Garuda Indonesia, such as company profile, ownership (outstanding stocks, ESOPs, etc.), and financial statements. Company profile is important, because by knowing Garuda Indonesia’s business, appraisers can see the Standard Industrial Classification (SIC) which is used to determine the risks (beta) applied, competition environment, markets, and to obtain several subscribed data (merger and acquisition transactions and public company guidelines). Appraisers have to calculate the Company’s taxes and risks (discount rates), and also make some financial projections of the Company. Garuda Indonesia’s risks consist of risks taken from database (market/industrial risk) and the Company’s specific risks, like from financial statements, commercial aviation market/industry trends, customers, competitors, key management, etc. Then appraisers use the tax and discount rates to calculate weighted average cost of capital (WACC), a method to obtain the Company’s value. The other methods are merger and acquisition (M&A) and public company (PC) guidelines. Appraisers (analysts) will collect other companies’ M&A transactions and PC data which are similar to Garuda Indonesia’s. Then, analysts give weight or score the data based on the similarity to Garuda Indonesia. The selected average or median can be used to determine the value of the Company. In an ESOP case, analysts give weight to WACC, M&A method, and PC method, and then calculate the fair market value (FMV) of Garuda Indonesia.

Garuda Indonesia’s business valuation report will consists of:

1. Garuda Indonesia’s history
2. Business overview
3. Products and services
4. Customers
5. Competition
6. Current status
7. Management profile
8. Ownership (stockholders) and taxation status
9. Economic outlook of Indonesia
10. Commercial aviation industry analysis and forecast, also other related industries.
11. Financial statement analysis
12. Business valuation methods
13. Fair market value conclusion
14. Exhibits to show the calculations

A draft for factual content review will be sent to Garuda Indonesia, and the Company has to review the report, before the business valuation company fixed the report into final.