Download Valuing the Cooperative Firm Phil Kenkel Bill Fitzwater Cooperative

Valuing the Cooperative Firm
Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University
[email protected]
The stock in a cooperative firm is not publically traded but is instead redeemed by the
cooperative at book value at some future point in time. This structure eliminates an observable
stock price than can be used to infer the value of the firm. Firm value is not generally an
important issue for cooperative members but valuation can become critical when members are
faced with an outside offer to buy the firm or the cooperative is considering merger with another
cooperative. Currently, most cooperative firms are evaluated based on their business assets, with
the valuation often based on the historical value on the balance sheet. This may understate the
true value of the firm as a going concern. The balance sheet valuations may also not be a fair
method of determining the relative equity value of two cooperatives involved in a merger.
This paper proposed a method of valuing values cooperatives based on the discounted projected
future cash flows. The main purpose of this research is to determine how this method, which is
used extensively in the valuation of privately held firms, can be applied to the cooperative firm.
Historical financial data was obtained for 10 Oklahoma grain and farm supply cooperatives, A
cooperative financial simulation program developed at Oklahoma State University was used to
develop 10 year projections for the case study cooperatives. The simulations modeled the sales,
expenses, profits and profit distributions of the firm and considered the cash flow required for
infrastructure reinvestment and equity retirement. The financial projections were used to project
the free cash flows of the cooperatives which were then discounted to provide a valuation in
according to the standard methods.
Two separate valuations were calculated for each case study cooperative. One valuation
considered all of the cash flows generated by the cooperative that potentially could be distributed
to the equity owners. The other valuation reflected the cooperatives’ historic profit distribution
strategy. Both of the valuations were substantially above the value of the member’s equity.
Those results could be useful for cooperative leaders who are striving to communicate the value
of the cooperative to members. The relative value of the case study cooperatives when
calculated by either of the cash flow based valuations was also markedly different from balance
sheet comparisons. That suggests a more equitable approach to determining the relative value of
cooperatives that are involved in merger negotiations.