The document provides an overview and agenda for a business valuation boot camp. It discusses introducing business valuation and reasons valuations are needed. Key topics include defining value, valuation principles and methodologies, and selecting valuation advisors. The presentation covers standard of value, enterprise value versus equity value, asset, income and market approaches. Specific valuation methods like discounted cash flow and guideline public company are demonstrated. The summary emphasizes valuations consider future performance and cash flow, and utilize multiple appropriate methodologies for a defensible conclusion.

1. Business Valuation Boot Camp
Curtis A. Farrow, CPA, MBA
Senior Financial Analyst, Valuation Services
(720) 839-6130
cfarrow@gbq.com

2. Agenda 2
• Introduction & Reasons for a Valuation
•What is Value?
• Valuation Principles & Methodologies

3. Business Valuation Boot Camp
Introduction & Reasons for a Valuation

4. What is Business Valuation?
• Business Valuation involves estimating/appraising the
value of a business or business interest
• Business valuation analysis is a surrogate for public market
• Business valuation is most prevalent in hard-to-value
assets such as stock in privately held businesses
• BV is analogous to real estate appraisal
4

5. When are Valuations Needed? 5

6. “Magnificent Seven” Questions to Ask when
Selecting a Valuation Advisor
1. What % of your career is dedicated to BV (100% is the correct answer)
and how many BV professionals are on your staff?
2. How many BVs have you/your firm completed?
3. How many BVs for this purpose have you/your firm completed?
4. Professional certifications related to BV (e.g., CFA, ASA, ABV)?
5. Have you given presentations/written articles on BV?
6. Can I have references from former clients, advisors, etc.?
7. Fee structure and expected turnaround time
6

7. Typical Valuation Process
1. Scoping Out the Engagement
• Confirm Purpose/Standard of Value/Valuation Date
• Fee Quote/Timing
• Complexity/Intended Audience
2. Review & Analyze Requested Information
• Business and Industry
• Historical/Projected Financial Performance
3. Due Diligence Meetings/Management Interviews
4. Select & Apply Appropriate Valuation Methodologies
5. Present Conclusions
7

8. Business Valuation Boot Camp
What is Value?

9. What Standard of Value?
Liquidation Value
• “Fire sale” of assets; lowest type of value
Fair Market Value
• The price at which an asset would change hands between a willing
buyer and a willing seller, when the former is not under any
compulsion to buy and the latter is not under any compulsion to
sell, both parties being able, as well as willing, to trade and well-
informed about the asset and the market for the asset.
• Assumes a financial buyer…no acquirer synergies are considered
• This is the typical definition for regulatory purposes (e.g., IRS, DOL,
etc.)
Strategic Value
• Value to strategic buyer, considering add-backs, synergies, etc.
• Value is buyer-specific (i.e., different buyers will have different
perceived values)
9

10. Enterprise Value vs. Equity Value
Enterprise Value the value of the business
as a whole; may be viewed as:
• Total invested capital (equity + debt – cash)
Equity Value = Enterprise Value – Debt +
Cash
• Represents shareholder value (i.e., stock value)
• Zero-sum game: $1 more of debt = $1 less of equity
• Analogous to home value less mortgage
10

11. Business Valuation Boot Camp
Valuation Principles & Methodologies

12. Valuation Methodologies
Asset Approach
• Going Concern
• Liquidation
Income Approach
• Multiple-Period Discounting Method (e.g., discounted cash
flow)
• Single-Period Capitalization Method (e.g., capitalized cash
flow)
Market Approach
• Guideline Public Company Method
• Guideline Transaction (M&A) Method
12

13. Overview of Valuation Principles
Valuation Must be Forward-Looking
•Must consider anticipated future performance
•Historical performance may help predict the future
Future Cash Flow is Key Driver of Value
•Future cash flow is king
•Must consider risk in realizing projected cash flow
Factors Considered in Valuations
•Historical and expected future performance & trends
•Market multiples of comparable companies and transactions
•Economic, industry, and company-specific factors
13

14. Asset Approach Overview
Premise: The value of a business can be estimated based
on the value of its underlying assets and liabilities
Adjust ALL assets and liabilities to FMV
• Must include booked and un-booked assets and liabilities
• Must include tangible and intangible assets and liabilities
When is the Asset Approach Most Appropriate?
• Generally appropriate for holding companies or asset-
intensive companies with modest profitability
• Generally less appropriate for profitable operating entities
14

15. Income Approach Overview
Premise: The value of a business can be estimated based on
the present value of the future economic benefits it generates
Steps in performing the income approach:
• Select & Determine Earnings Stream
• Develop Appropriate Required Rate of Return
• Select & Apply Multi-Period or Single-Period Model
15

16. Preferred Earnings Stream: Distributable Cash Flow
Normalized After-Tax Net Income
+ Depreciation and Amortization
- Capital Expenditures
+/- Additional Net Working Capital Requirements
= Distributable (Debt-Free) Cash Flow
16

17. Required Rate of Return
An investor’s required ROR is a function of the
perceived risk & potential of the investment
Cost of Equity (ke) = Rf + (ERP x β) +/- Company-
specific risk factors
WACC = ke*%e + kd*%d
Match Cash Flow with Rate of Return:
• Cash Flow Available to Debt & Equity – Use WACC
• Cash Flow Available to Equity Only – Use Cost of Equity
17

18. Selecting a Model: Discounted Cash Flow vs.
Capitalized Cash Flow
Multiple-Period Models (e.g., discounted future cash flow)
are often far more appropriate because:
• Can account for anticipated changes in the business such as
growth rates, margins, upcoming investments, business strategies,
etc.
Single Period Models:
• Only appropriate if growth in future cash flows is projected to be
constant
• Difficult to rely on single-period models during times of turbulent
economic conditions and/or volatile company performance
18

19. Year 1 Year 2 Year 3 Year 4 Year 5
Distributable Net Cash Flow 5,000,000$ 5,500,000$ 5,940,000$ 6,296,400$ 6,611,220$
Present Value Factor @ 18.0% 0.9206 0.7801 0.6611 0.5603 0.4748
Present Value of Distributable Cash Flow 4,602,873$ 4,290,814$ 3,927,186$ 3,527,811$ 3,139,154$
Present Value of Cash Flows (Years 1 to 5) 19,487,838$ Year 5 Cash Flow 6,611,220$
Present Value of Residual Cash Flow 25,354,703 Multiplied by: 1 + Growth Rate 1.05
Residual Cash Flow 6,941,781
Enterprise Value 44,842,541
Discount Rate 18.0%
Rounded 44,800,000$ Less: Residual Growth Rate -5.0%
Capitalization Rate 13.0%
Residual Cash Flow Value 53,398,315
Present Value Factor 0.4748
PV of Residual Cash Flow 25,354,703$
Discounted Cash Flow Example
19

20. Market Approach Overview
Premise: The value of a business can be estimated based on
comparisons to similar businesses
Guideline Public Company Method
• Stock market is the best and most accurate source of valuation
data; it is the source of rate of return data in income approach
• Compare fundamentals of subject company and peer group of
publicly traded companies
• Apply pricing multiples (e.g., price-to-earnings, enterprise value-
to-EBITDA, etc.) of publicly traded comparable companies
Guideline Transaction Method
• Identical to public company approach, except use transaction
multiples from M&A deals as basis for valuation
• Information about each transaction is typically limited since deals
often involve private companies
20

21. Guideline Public Company Method Example 21
Closing
Stock Price
(12/31/07)
ABC 5.00$ x 45.52 = 227.6$ + 221.8$ - 108.4$ = 341.0$ 8.5 9.3 0.42
DEF 25.50 x 22.18 = 565.6 + 305.8 - 78.4 = 793.0 7.4 8.6 0.34
GHI 38.75 x 31.54 = 1,222.2 + 751.8 - 45.0 = 1,929.0 10.7 13.1 0.75
JKL 8.00 x 18.95 = 151.6 + 0.0 - 3.6 = 148.0 6.2 7.8 0.33
MNO 9.50 x 24.64 = 234.1 + 18.5 - 8.4 = 244.2 5.4 6.4 0.55
PQR 18.25 x 41.84 = 763.6 + 106.9 - 24.7 = 845.8 6.8 8.5 0.68
STU 14.00 x 35.72 = 500.1 + 247.9 - 7.4 = 740.6 5.7 7.4 0.42
VWX 11.50 x 65.90 = 757.9 + 1,085.2 - 222.1 = 1,621.0 9.5 13.8 0.81
YZ 22.75 x 45.52 = 1,035.6 + 333.6 - 26.9 = 1,342.3 7.1 8.9 0.59
Low 25% 6.2 7.8 0.42
Median 7.1 8.6 0.55
High 25% 8.5 9.3 0.68
Variation 23.8% 26.9% 32.7%
Selected Multiple 6.5 8.1 0.45
Subject Company Results 6.7 5.1 89.6
Suggested Value 43.55 41.31 40.32
Concluded Enterprise Value: $42,000,000
EV /
EBITDA
EV /
EBIT
EV /
Sales
Pricing Multiples
Debt &
Preferred
Stock
Cash and
Equivalents
Enterprise
Value (EV)Co.
Derivation of Enterprise Value
Shares
Outstanding
(millions)
Market Value
of Equity (mil)

22. • Valuations should consider all methodologies and utilize the
appropriate ones; income and market approaches are most
common with strong, profitable companies
• Valuation opinions supported by multiple valuation methods
are preferable, more defensible, and often lead to more
stable, accurate, and sustainable valuation levels
Valuation Methodologies
Guideline Public
Company Method
Discounted Cash
Flow Method
Net Asset Value
Method
Guideline
Transaction
Method
Valuation
Conclusion
22

23. Key Valuation Concept: Valuation is Forward-
Looking
23
“It’s tough to
make
predictions,
especially
about the
future.”
-Yogi Berra