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Valuation   Concepts And Overview
 

Valuation Concepts And Overview

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    Valuation   Concepts And Overview Valuation Concepts And Overview Presentation Transcript

    • V ALUATION of C LOSELY H ELD B USINESSES Richard A. Warner Principal Great Lakes Valuations 224-764-2280 [email_address]
    • Agenda Introductory Comments Business Appraisal Concepts Approaches to Valuation Wrap-Up
    • Selected Business Demographics Source: 1997 US Census material Business Size by Employees Average Annual Revenues Average Number of Employees 1 to 4 $321,000 2.1 5 to 9 $792,000 6.6 10 to 19 $1,600,000 13.4 20 to 99 $5,701,000 39.2 100 to 499 $27,056,000 192.2 500 to 999 $540,467,000 688.6
    • Why Do We Need Valuations? Mergers & Acquisitions Estate Planning and Wealth Management Family Law – Marital Dissolution Shareholder Disputes & Oppression Succession Planning/Buy-Sell Agreements ESOPs
    • Other “Stuff” Attorney – Appraiser Roles & Relationships Objectivity & Bias Appraiser Skills, Knowledge, Certification
    • Business Valuation Concepts
      • Standards of Value
        • Fair Market Value
        • Investment Value
        • Fair Value
        • Intrinsic Value
      • Premise of Value
      • Valuation Date
    • Present Value Would you rather have $10,000 now, or $14,025 five years from now? Future Value Present Value Investment Yield 5% 7% 10% ? $10,000 2011 $14,025 2016
    • Balance Sheet Basics = Current Assets $41,500,000 Tangible Assets $41,000,000 Intangible Assets and Goodwill $126,500,000 + + Current Liabilities $25,000,000 Long Term Debt (including current portion) $34,000,000 Equity $150,000,000 $209,000,000 $209,000,000 = + + Box analysis diagram ©Financial Valuation Group International
    • Income Statement Basics Revenue: $6,000,000 Less Cost of Goods Sold $4,500,000 Equals: Gross Margin $1,500,000 Less Operating Expenses Selling Expenses $450,000 General Expenses $450,000 Administrative Expenses $450,000 Equals: Operating Profit $150,000 Plus/minus Other Income/Expenses $0 Earnings Before Taxes $150,000 Income Taxes (40%) $60,000 Net Income After Taxes $90,000
    • D EFINING the E NGAGEMENT Who is the client? Who is the appraiser? What is the specific interest being appraised? What is the valuation date? What is the purpose of the appraisal? What is the standard of value? What type of report is needed? Schedules? Fees?
    • G ATHERING C OMPANY I NFORMATION
      • Key focus –
        • Estimate the stream of future benefits from the business
        • Estimate the risk associated with achieving those benefits
        • Value = Benefits/Risk
    • A NALYZING THE I NFORMATION
      • Financial Analysis:
        • Common-size analysis
        • Comparative analysis
        • Trends
      • Non-financial analysis
        • Management
        • Competition
        • Products & Quality
        • Customer/supplier concentration
    • E STIMATING THE V ALUE
      • Valuation Approaches
        • Asset Approaches
        • Market Approaches
        • Income Approaches
    • A SSET A PPROACH – W HEN TO U SE
      • Appropriate when valuing:
        • Marginally profitable companies (better dead than alive?)
        • Asset-heavy companies
        • Holding companies and non-profits
        • Controlling interests
      • Generally not useful:
        • When significant intangible value exists
        • For valuing service companies
        • For valuing professional practices
        • When considering minority interests
    • M ARKET A PPROACHES - GPTCM
      • Guideline Publicly Traded Company Method
      • Using information from publicly traded, similar companies, determine “multiples” to apply to the subject company’s operating results to obtain a value
      • Completed Transactions Method
      • Similar to GPTCM – based on sales of business interests in the market (M&A)
      • Data Sources
          • Institute of Business Appraisers
          • Bizcomps©
          • Pratt’s Stats©
          • Mergerstat©
    • C APITALIZATION OF I NCOME Basic capitalization formula: PV = E 1 /c Where: E 1 = expected economic income at the end of next year c = capitalization rate Example: If E 1 = $100,000 and c = 20% then PV = $500,000
    • D ISCOUNTED C ASH F LOW The value of a business is the present value of the “income” it can reasonably be expected to generate in the future… Basic DCF formula: What about after the forecast period? Where “ d ” is the discount rate…
    • D ISCOUNTED C ASH F LOW – T ERMINAL V ALUE One method is to calculate the terminal value using a capitalization of income method… Where: PV = Terminal Value E n = “Earnings” during last period of forecast k = discount rate (required rate of return) g = growth rate of E n in perpetuity n = number of periods in the projection period
    • D ISCOUNT AND C APITALIZATION R ATES
      • A discount rate is a rate of return used to convert a monetary sum into a present value; also known as
        • opportunity cost of capital
        • weighted average cost of capital
        • required rate of return
      • How to determine for a closely held company?
        • Build-up models
        • CAPM
    • D ISCOUNT AND C APITALIZATION R ATES – B UILD-UP E XAMPLE Risk free rate = 5.1% General equity risk premium = 7.2% Size Premium = 9.3 Specific risk premium = 4.0% Discount rate = 25.6%
    • D ISCOUNTED C ASH F LOW E XAMPLE
    • C ONTROL AND M ARKETABILITY Controlling Interest Value Marketable Minority Interest Value (“WSJ Listed Price”) Nonmarketable Minority Interest Value Control Premium Minority Interest Discount Discount for Lack of Marketability
    • Application of Discounts and Premiums Value on a control, marketable basis $100.00 Less discount for lack of control (25%) 25.00 Value on a minority, marketable basis $75.00 Less marketability discount (35%) 26.25 Value of minority, non-marketable interest (51.25% discount) $48.75
    • A C ONCLUSION OF V ALUE – W HEW!
      • Check the math…
      • Review the facts…
        • Review company strengths and weaknesses
        • Review economic conditions
        • Review comparative financial analysis
      • Subjectively weight results obtained by different valuation approaches?
      • Did we value the right property correctly?
    • Q UESTIONS…….