Multiple Lines of Business—Let Me Count the Ways

Recently, I read an article from McKinsey titled “How CEOs Are Turning Corporate Venture Building Into Outsize Growth.”¹ While the article and survey are about what the title indicates, it reminded me of a broader valuation issue: What do I do when a business I am valuing has multiple lines of business? The answer, of course, is that the facts and circumstances and your professional judgment will determine the approach you use to value the business.

An example will help to make the point. A divorce case I was involved with some years ago dealt with the valuation of a business that had multiple lines of business—if you were paying attention. The husband’s business made tungsten products. Tungsten is one of the heaviest metals on earth. A lot of their products were related to using tungsten for ballast, for example, in aircraft. This primary line of business was sold to customers from the public. The business also had a second business, which made a specific product for the United States military. It was a secret product, and, even as a valuator, I was not allowed to know what the product was. This was a tungsten product also. It was the subject of a contract with the U.S. government for a defined period. The company had been notified that the government would discontinue the product at the end of the contract period, which was six years from the valuation date.

The opposing valuator valued both business lines as though they were a single product. However, I valued the government contract product as a separate line with a separate forecast of revenues and profits for a six-year period and used a terminal value equal to the liquidation value of the manufacturing equipment for the line discounted to a present value.

Just because multiple business lines are within a single legal entity does not mean that the operations should be valued as a single combined result. Multiple business lines should be valued separately where appropriate.