Valuation is critical in a business acquisition. The acquisition agreement needs to support valuation assumptions and appropriately allocate risks between the parties with respect to these calculations. Professionals framing these agreements need to communicate or the risk allocation for key valuation assumptions may not comply with the parties’ expectations. This presentation will be a guide for fostering that collaboration.

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5. Lawyer Appraiser
Accountant

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10. Price
Earnings
Known Company
(Comparable)
Unknown Company
(Target)
$20,000,000
$1,000,000
?
$500,000
= =

11. Comparable Transactions (numbers in millions)
Company Date EBITDA Sale Price Multiple
ABC 1/1/2013 10 99 9.9
DEF 2/1/2013 6 45 7.5
GHI 3/1/2013 5 35 7
JKL 4/1/2013 15 150 10
Average Multiple: 8.6

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15. Free Cash Flow Growth
-
2.00
4.00
6.00
8.00
10.00
12.00
2010 2011 2012 2013 2014 2015 2016
Year
CashFlow(inmillions)
CapEX
Cash Flow

16. Year Discount
Rate
2010 2011 2012 2013 2014 2015 2016 NPV
Free Cash
Flow
0% 6.0 6.3 6.7 7.1 7.5 8.0 8.5 50.3
12% 6.0 5.6 5.3 5.0 4.8 4.5 4.3 35.8
14% 6.0 5.5 5.1 4.8 4.4 4.1 3.8 34.1
16% 6.0 5.4 5.0 4.5 4.1 3.8 3.4 32.5

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23. TARGET COMPANY: Motorcycle Sales
METRIC: 3x Sales
COMPARABLE: Harley Davidson
Reported Revenue
Actual Revenue
Overstatement
Reported Valuation
Actual Valuation
Overstatement
$10,000
$9,000
$1,000
$30,000
$27,000
$3,000

24. Effect of Revenue Overstatement on P/Sales Valuation
$10,000 $9,000
$1,000
$30,000
$27,000
$3,000
Reported
Revenue
Actual
Revenue
Overstatement Reported
Valuation
Actual
Valuation
Overstatement
DollarValue(in1,000s)

25. TARGET COMPANY: Motorcycle Seller
METRIC: 20x Earnings
COMPARABLE: Harley Davidson
Reported Revenue
Actual Revenue
Reported Earnings
Actual Earnings
Revenue Overstatement
Reported Valuation
Actual Valuation
Overstatement
$10,000
$9,000
$1,500
$500
$1,000
$30,000
$10,000
$20,000

26. Revenue Overstatement in P/E Valuation
$10,000
$9,000
$1,000
$30,000
$10,000
$20,000
Reported
Revenue
Actual
Revenue
Revenue
Overstatement
Reported
Valuation
Actual
Valuation
Overstatement
DollarValues(1,000s)

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35. Revenue
Cost of Goods Sold
Gross Profit
Administrative Expenses
Net Income
Automobile Leases
Aircraft Costs
Lease for Shared Office
Net Savings to Buyer
20x Earnings Value Increase
Value without Add-Backs
Value with Add-Backs
$30,000,000
25,000,000
5,000,000
3,500,000
$1,500,000
$50,000
400,000
50,000
$500,000
$10,000,000
$30,000,000
$40,000,000
( )
( )

36. Showing Value of Add-backs
$30,000,000
$40,000,000
Value without Add-Backs Value with Add-Backs

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