Business Valuation Blog | Understanding Buying / Selling a Company

How Does an Electric Utility Company Appraisal Take Place?

Posted by Business Valuation Specialists LLC on Jul 20, 2020 8:00:00 AM

high voltage substation

When your business is keeping the power on for your customers, the value of your electric utility company may not seem important. However, that value can make a huge difference in how easily you can grow your business, whether it's through a merger or simple expansion as your region becomes more populated. But how do you determine the overall value of your utility? An electric utility company appraisal can go a long way to giving you a solid grasp of your business' value. Here's what happens in the process.

How Does an Electric Utility Company Appraisal Take Place?

Let's start by taking a look at the kind of factors that can impact your electric utility's value. How many of your customers pay on time with their payments versus those who are behind? This can have a strong impact on your cash flow. What's the size of your customer base and is it growing or shrinking? If the population in your area is growing, you may end up seeing more apartment and commercial customers, which can grow your business. What condition are your utility's assets in? If you replaced all of your transformers in the past few years following a major disaster, they'll have a higher value than those that will need to be replaced soon.

This information is among the data that a certified business appraiser will consider when they're calculating the estimated value of your electric utility company. They'll take this kind of information into account, as well as looking at your company's financial state, competition and similar factors that can impact your ability to compete in the market.

To start, the appraiser will gather information about why you need the appraisal performed and your finances. This allows them to determine the best methodology to use in your circumstances. In many situations, there are legal precedents that require the appraiser to follow a specific method when calculating your company's business. As they look at your finances, they'll look for unusual transactions, such as the huge expenses you had the year that the hurricane wiped out 90% of your infrastructure or the year you gained several large box stores as customers who paid for their own infrastructure upgrades.

Once the finances have been sorted, the appraiser will look at the competition, local market and expected future changes to your business to help estimate the value. They may also look at information from publicly-traded electric utility companies that have similar revenue, receipts or transactions to yours to determine value. Income can be projected out into the future to calculate value as well. In almost all situations, the value of an electric utility company is more than the simple value of its assets.

By having an electric utility company appraisal performed on your business, you can use the information and insights you gain to improve your company's overall operation, making it work more efficiently and grow responsibly. However, it's very important that you use a certified business appraiser for the valuation process. The certification process teaches specific methodologies to use in a range of circumstances, allowing the appraiser to provide you with the most accurate estimate of your company's value.

Topics: utility company business appraisal