Cermco produces and sells specialty customer relationship management (CRM) solutions to small and medium-size businesses in the United States and Canada. The company is more than 20 years old and has a steady, loyal customer base.
A major reason for Cermco’s success lies in the ability of its product to easily integrate with various accounting and ERP systems. As a result, even when clients upgrade their entire accounting systems to expensive ERP solutions, they continue to use Cermco’s CRM because of its superior features.
Annual revenues for Cermco’s three most recent years are about $11 million (20X3), $7 million (20X4), and $3 million (20X5), respectively. Overall interest expenses and operating margins have remained a relatively constant percentage of revenues.
Cermco attributes the decline in revenues to declines in market share as a result of natural client turnover and the entrance of many other small competing software companies into the market. Nevertheless, Cermco’s CRM product continues to enjoy the highest industry ratings and a loyal customer base.
Cermco’s balance sheets for the most recent three years follow:
CERMCO
Balance Sheet December 31
Thousands 20X5 20X4 20X3
Assets
Current assets
Cash and cash equivalents $390 $1,386 $2,603
Short-term investments — — —
Net receivables 720 664 1,225
Inventory — — —
Other current assets 412 469 892
Total current assets $1,522 $2,519 $4,720
Long-term investments 1,215 — —
Property, plant, and equipment 76 258 454
Goodwill 545 1,757 2,194
Intangible assets 999 1,844 3,644
Accumulated amortization — — —
Other assets — — —
Deferred long-term asset charges — — —
Total assets $4,357 $6,378 $11,012
Liabilities
Current liabilities
Accounts payable $469 $1,174 $1,436
Short/Current long-term debt — — 600
Other current liabilities 1,227 1,358 1,496
Total current liabilities $1,696 $2,532 $3,532
Long-term debt — — —
Other liabilities — — —
Deferred long-term liability charges — — —
Minority Interest — — —
Negative goodwill — — —
Total liabilities 1,696 2,532 3,532
Stockholders' equity
Misc. stock option warrants — — —
Redeemable preferred stock — — —
Preferred stock 3,014 3,211 2,333
Common stock 16 16 13
Retained earnings –25,513 –23,814 –19,165
Treasury stock — — —
Capital surplus 25,168 25,564 25,862
Other stockholders’ equity –24 –1,131 –1,563
Total stockholders’ equity $2,661 $3,846 $7,480
Produce a valuation estimate for Cermco for December 31, 20X5. Use whatever valuation method you think best but justify your choice. Note that you can estimate the annual income from year-to-year changes in the balance sheet.
Cermco produces and sells specialty customer relationship management (CRM) solutions to small and medium-size businesses in the United States and Canada. The company is more than 20 years old and has a steady, loyal customer base.
A major reason for Cermco's success lies in the ability of its product to easily integrate with various accounting and ERP systems. As a result, even when clients upgrade their entire accounting systems to expensive ERP solutions, they continue to use Cermco's CRM because of its superior features.
Annual revenues for Cermco's three most recent years are about $11 million (20X3), $7 million (20X4), and $3 million (20X5), respectively. Overall interest expenses and operating margins have remained a relatively constant percentage of revenues.
Cermco attributes the decline in revenues to declines in market share as a result of natural client turnover and the entrance of many other small competing software companies into the market. Nevertheless, Cermco's CRM product continues to enjoy the highest industry ratings and a loyal customer base.
Cermco's balance sheets for the most recent three years follow:
CERMCO
Balance Sheet December 31
Thousands 20X5 20X4 20X3
Assets
Current assets
Cash and cash equivalents $390 $1,386 $2,603
Short-term investments - - -
Net receivables 720 664 1,225
Inventory - - -
Other current assets 412 469 892
Total current assets $1,522 $2,519 $4,720
Long-term investments 1,215 - -
Property, plant, and equipment 76 258 454
Goodwill 545 1,757 2,194
Intangible assets 999 1,844 3,644
Accumulated amortization - - -
Other assets - - -
Deferred long-term asset charges - - -
Total assets $4,357 $6,378 $11,012
Liabilities
Current liabilities
Accounts payable $469 $1,174 $1,436
Short/Current long-term debt - - 600
Other current liabilities 1,227 1,358 1,496
Total current liabilities $1,696 $2,532 $3,532
Long-term debt - - -
Other liabilities - - -
Deferred long-term liability charges - - -
Minority Interest - - -
Negative goodwill - - -
Total liabilities 1,696 2,532 3,532
Stockholders' equity
Misc. stock option warrants - - -
Redeemable preferred stock - - -
Preferred stock 3,014 3,211 2,333
Common stock 16 16 13
Retained earnings -25,513 23,814 -19,165
Treasury stock - - -
Capital surplus 25,168 25,564 25,862
Other stockholders' equity -24 -1,131 -1,563
Total stockholders' equity $2,661 $3,846 $7,480
Produce a valuation estimate for Cermco for December 31, 20X5. Use whatever valuation method you think best but justify your choice. Note that you can estimate the annual income from year-to-year changes in the balance sheet.