Business valuation for motherhealthcare prepared by connie dello buono 408 854-1883

345 views
290 views

Published on

Business valuation san jose california connie 408-854-1883

Published in: Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
345
On SlideShare
0
From Embeds
0
Number of Embeds
4
Actions
Shares
0
Downloads
6
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Business valuation for motherhealthcare prepared by connie dello buono 408 854-1883

  1. 1. Prepared for motherhealthcare On 04/04/2011 Prepared by CONNIE DELLO BUONO TA B LE OF C O N TEN TS Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Business Valuation Methods . . . . . . . . . . . . . . 3 Estimate Business Value . . . . . . . . . . . . . . . . . 5 Valuation Details . . . . . . . . . . . . . . . . . . . . . . . 6 Discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Expected Returns . . . . . . . . . . . . . . . . . . . . . . 8 Capitalization Rate . . . . . . . . . . . . . . . . . . . . . 9The information and conclusions contained herein are not offered or intended as legal or tax advice.Providing such information does not create a fiduciary relationship. This material should be used inconjunction with competent legal and tax advice in your financial and business planning. April 04, 2011 1 Version: 2.90.0.355
  2. 2. Prepared for motherhealthcare Prepared by CONNIE DELLO BUONOW hy do you need to know the value of your You Use Gifts as a Tax Strategy in Your Estate Plan business or assets? It m ight be to negotiate a Transferring potentially appreciating assets to reduce yoursale, secure credit, settle a legal dispute or determine your estate is a common estate planning strategy. An objectivetax liability. Or, as we’ll see below, it m ight be for one of valuation that adheres to IRS regulations can help your giftsm any other reasons - som e of which you may not have withstand IRS scrutiny.even considered. W hatever the reason, the task is the You Are Liquidating Your Businesssame: to use professionally accepted methods to arrive at If you are declaring bankruptcy or seeking protection toa well-reasoned and defensible estim ate of value. The reorganize, a valuation is necessary to determine creditoressential point to keep in mind is that value is determined settlements and the availability of assets for distribution.by a com plicated set of factors. For this reason, it isimportant to work with a valuation professional skilled in You Are Setting Up a Buy-Sell Agreementselecting and applying the appropriate m ethodology. Contractually determining what happens to business interestValuations can be helpful in many situations. after a triggering event can help you avoid disputes and solve estate planning problems.This is an initial estimate of business value, based onsimplified assumptions. It does not replace an expert You Are Seeking Business Financing.valuation, but is a valuable starting place. An independent valuation can provide objective evidence of the value of your business and assets that can help youYou Want to Buy or Sell a Business obtain financing from lenders and investors.If you own a business, you may need to establish areasonable estimate of what you can expect to receive. You Are Doing Strategic PlanningValuators often use several methods to reflect how A business valuation can give you a good picture of yourdifferent types of potential buyers may view the business. company’s progress, strengths and weaknesses. It can provide a foundation for your planning that will help youYou are Divorcing develop realistic strategic objectives.In a divorce, valuation helps determine the distribution ofassets between spouses. Divorces are often not amicable, You Require a Fairness Opinionand asset valuations can become the focus of the parties’ A fairness opinion usually addresses whether a proposedanimosity, so well-founded valuations that will withstand transaction is fair to owners or a group of noncontrollinglegal challenges are key. owners from a financial point of view.Not offered as legal advice. Consult competent counsel for legal and tax advice April 04, 2011 2 Version: 2.90.0.355
  3. 3. Prepared for motherhealthcare Prepared by CONNIE DELLO BUONOIntroduction Determining the value of your business is a critical step in establishing a business continuation plan. There are four methods generally used in this process. In most cases the average of all four will be used; sometimes one or more of the methods is given added weight in the calculation.Direct Estimate Capitalization Capitalization of Earnings Direct Estimate The earnings of the business are divided by a fair interest Your best estimate of the fair market value of the rate (the capitalization rate), to estimate a value based on business; what an informed and willing buyer would the income produced by the business, which includes give for the business, and what you would consider a goodwill as well as assets. The information required is the fair price as the seller. The only information required is pretax earnings, excess compensation, nonrecurring your informed estimate of value. income, and a capitalization rate. Your Estimate Adjusted "Normalized"* of the Value: $80,000 Earnings: $50,000 Divide by Capitalization Rate(%): 10% Value $500,000Not offered as legal advice. Consult competent counsel for legal and tax advice April 04, 2011 3 Version: 2.90.0.355
  4. 4. Prepared for motherhealthcare Prepared by CONNIE DELLO BUONOExcess Earnings Multiple Excess Earnings Multiple of Revenue The value of goodwill is estimated by capitalizing the Current annual revenues are multiplied by a factor to earnings that are in excess of a fair return on actual estimate a value. The factor will be higher (100% to assets, and adding that amount to the value of the 125%) if the revenues are not dependent upon the assets (book value). The information required is personal contributions of the owners (stable business), adjusted "normalized"* earnings, total tangible assets, and lower (5% to 25%) if the business is a personal expected fair market return on the tangible assets, a service business with one or only a few owner/managers. capitalization rate, and book value. Information required is current annual revenue and a revenue multiplier. Adjusted "Normalized"* Current Annual Revenue: $40,000 Earnings: $50,000 Revenue Multiplier(%): 100% Market Value of Tangible Assets: $140,000 Value: $40,000 Expected Fair Market Return(%): 10% Less Expected Earning: $14,000 Earning Attributed Weighting to Goodwill: $36,000 Selected methods may be given greater emphasis Divide by through weighting, depending upon the nature of the Capitalization Rate(%): 10% business. Total Value of Goodwill: $360,000 Adjusted Book Value: $134,000 *"Normalized" earnings need to reflect adjustments for nonrecurring Value: $494,000 expenses, unusual items, and "excess" owner compensation.Not offered as legal advice. Consult competent counsel for legal and tax advice April 04, 2011 4 Version: 2.90.0.355
  5. 5. Prepared for motherhealthcare Prepared by CONNIE DELLO BUONO Summary motherhealthcareWeighted Average Business Value Direct What Next? Estimate At this point, you may wish to consult with a professional Value $80,000 skilled in applying the appropriate methodology in order to x Weight 1 obtain an accurate business valuation. Weighted Value $80,000 Some Tasks You May Wish to Consider Include: Capitalization Obtain balance sheet and cash flow information of Earnings Review methods of estimating value Value $500,000 Determine appropriate weighting for each method x Weight 1 Estimate the value of the business Weighted Value $500,000 Determine whether discounts may apply Determine whether expert valuation is necessary Excess Earnings Obtain expert valuation if necessary Value $494,000 Schedule regular reviews of the business value x Weight 1 Weighted Value $494,000 Multiple of Revenue Weighted-Average Business Value Value $40,000 $278,500 x Weight 1 Weighted Value $40,000Not offered as legal advice. Consult competent counsel for legal and tax advice April 04, 2011 5 Version: 2.90.0.355
  6. 6. Prepared for motherhealthcare Prepared by CONNIE DELLO BUONOmotherhealthcareBusiness Info Tax Bracket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24%Sunnyvale, California Type of Business . . . . . . . . . . . . . . . . . . . . . . . . . . BusinessAssumption Data Capitalization Rate Capitalization Rate for Adjusted Earnings Applied to Goodwill Fair Market Return Revenue Multiplier 10% 10% 10% 100%Balance SheetCash . . . . . . . . . . . . . . . . . $50,000 Land . . . . . . . . . . . . . . . . . . . . . . $0 Current Liabilities . . . . . . . $5,000Receivables . . . . . . . . . . . . $50,000 Plant & Equipment . . . . . . . $10,000 Long-term Liabilities . . . . $1,000Inventory . . . . . . . . . . . . . . $20,000 (Less Depreciation) . . . . . . . . . . $0Other . . . . . . . . . . . . . . . . . $10,000Total Current Assets . . . $130,000 Net Fixed Assets . . . . . . . $10,000 Total Liabilities . . . . . . . $6,000 Book Value . . . . . . . . . $134,000IncomeCash . . . . . . . . . . . . . . . . . $40,000 Operating Expenses . . . . . $10,000 Excess Compensation . . $10,000(Cost of GS) . . . . . . . . . . . . . . . . $0 Nonrecurring Expenses . $10,000Gross Margin . . . . . . . . . . $40,000 Pretax Earnings . . . . . . . . $30,000 Adjusted Earnings . . . . $50,000Not offered as legal advice. Consult competent counsel for legal and tax advice April 04, 2011 6 Version: 2.90.0.355
  7. 7. Prepared for motherhealthcare Prepared by CONNIE DELLO BUONOThe value of a business may be discounted from its fair Two primary considerations are how quickly themarket value under certain circumstances. Discounts are business interest could be sold, and how easily it couldusually considered in estate tax or gift tax situations, be sold. If the current owner would have to offerwhere a lower value is desired. Any guarantees or do thediscount should only be applied financing to sell theafter expert appraisal, including company, it will not becomplete documentation, since considered easy to sell. If itdiscounts are subject to challenge is likely to take a long timeby the Internal Revenue Service. to find a qualified buyer, it will not be sold quickly.The discounts below are related,and often both apply. They are not Minority Discountadded together; they are taken in A minority interest in asequence, with the marketability closely held business isdiscount applied to the result of the often valued at less than itsminority discount. For example, if proportionate share of theboth discounts were 20%, the net value of the business as avalue would be 64% of the initial whole.value after both discounts. There are two elements to this discount. One is lack ofLack of Marketability control; a minority interest can not control either day-to-A discount on the value of the business may apply if there day or long-range management decisions. This makesis not a ready market for the business. This usually applies the minority interest less attractive to a buyer. There isto small, closely held businesses (often specialty or "niche also lack of liquidity; often it is impossible for a minoritymarket") where the business interest will be more difficult to owner to "cash-out" their interest at full value.sell than publicly traded stock. Remember, an expert appraisal is critical to establishing and defending a discount.Not offered as legal advice. Consult competent counsel for legal and tax advice April 04, 2011 7 Version: 2.90.0.355
  8. 8. Prepared for motherhealthcare Prepared by CONNIE DELLO BUONODefinitionThe return that an informed buyer would expect from a business reflecting size, management and industry competitiveness. Investment Returns Business Description Rate Established businesses, good trade position, good management, 6% - 10% + RFR stable past earnings, predictable future. Same as above except in more competitive industries 11% - 15% + RFR Companies in Highly competitive industries, with little capital 16% - 20% + RFR investment and no management depth, although with a good historical earnings record. Small businesses that depend on the skill of one or two people, 21% - 25% + RFR or large companies in highly cyclical industries with very low predictability. Small personal service businesses with a single owner/manager 26% - 30% + RFR RFR = Risk Free Rate (Treasury Bills 6% - 7%) Source: Schilt, James H., "A Rational Approach to Capitalization Rates for Discounting the Future Income Stream of Closely Held Companies", The Financial Planner, Jan. 1982Not offered as legal advice. Consult competent counsel for legal and tax advice April 04, 2011 8 Version: 2.90.0.355
  9. 9. Prepared for motherhealthcare Prepared by CONNIE DELLO BUONODefinitionA divisor used to convert cash flow into value by applying it to a single years "normalized" net income. One-Year Earnings Capitalization Rate Business Description Rate Old established businesses, with significant hard assets and excellent goodwill 10% Well-established businesses requiring "considerable managerial care." 12.5% Strong, well-developed businesses making products whose sales/earnings are susceptible to general economic swings and requiring considerable managerial care but little specific knowledge by management. 15% Highly competitive businesses with low levels of hard assets and requiring little managerial care. 20% Small, highly competitive businesses requiring little capital investment. 25% Large or small companies requiring special managerial skills of one or more people, with little capital investment and in highly competitive fields where failure is a strong possibility. 50% Personal service businesses whose success reflects the skill of the manager. 100% Source: Dewing, Arthur Stone, Financial Policy of Corporations (5th Ed. 1953), Vol. 1, p. 390.*"Normalized" earnings need to reflect adjustments for nonrecurring expenses, unusual items, and "excess" owner compensation.Not offered as legal advice. Consult competent counsel for legal and tax advice April 04, 2011 9 Version: 2.90.0.355

×