I gave this presentation to an audience of Atlanta business owners in October, 2011. It provides a step-by-step explanation of how to arrive at the maximum value of a lower middle-market company - based strictly upon their financial performance for the prior 12 months.

1. HOW TO VALUE YOUR
BUSINESS
For Companies Worth between $1-10 Million
Presented by
Tom MacPherson
Summit Acquisitions Group
www.SummitAcquisitions.com

2. Summit Acquisitions Group, LLC
AREAS TO BE DISCUSSED
 What is Fair Market Value?
 Reasons for a Valuation
 Professional Appraisal vs. Valuation Opinion
 What is ODCF? (Owners’ Discretionary Cash Flow)
 Formula for Valuation
 Valuation Example/Worksheet
 Other Valuation Factors
 Questions

3. Summit Acquisitions Group, LLC
FAIR MARKET VALUE -
COMMON
Common Definition:
FMV of a business is commonly defined as “the
value that a willing seller and a willing buyer, both
being informed of the relevant facts about the
company, would complete an acquisition
transaction, with neither party under any
compulsion to do so.”

4. Summit Acquisitions Group, LLC
FAIR MARKET VALUE -
REAL
Real World Definition:
FMV of a business should really defined as “the
value that a willing seller and a willing buyer, both
being informed of the relevant facts about the
company, would complete an acquisition
transaction, with neither party under any
compulsion to do so –
and a willing banker would finance.”

5. Summit Acquisitions Group, LLC
REASONS FOR
VALUATION
 to buy or sell a business
 for bank financing
 for divorce
 for estate planning

6. Summit Acquisitions Group, LLC
PROFESSIONAL APPRAISAL
VS.
VALUATION OPINION
TYPES OF VALUATIONS

7. Summit Acquisitions Group, LLC
Income Approach: based on ability of the business to
generate desired economic benefit for the owners.
 Discounted cash flow method *
 Capitalization of earnings method
 Multiple of discretionary earnings method *
 Multiple of EBITDA method
Asset Approach: based on the value of business assets.
 Asset accumulation method
 Capitalized excess earnings method
Market Approach: establishes the business value in
comparison to historic sales involving similar businesses.
 Comparative transaction method *
 Guideline publicly traded company method
PROFESSIONAL
APPRAISAL

8. Summit Acquisitions Group, LLC
VALUATION OPINION
Valuation Method most used by Business Intermediaries:
Since experienced business intermediaries are “in the market” at
all times, they know what buyers are willing to pay for businesses
–
a Multiple of Owner’s Discretionary Cash Flow
(ODCF)

9. Summit Acquisitions Group, LLC
COST
Valuation Opinion takes much less time
to prepare than a Professional Appraisal,
costs 50-80% less than an Appraisal – and
Valuation is usually within 5-10% of the Appraisal.

10. Summit Acquisitions Group, LLC
Owner’s Discretionary Cash Flow
“Net Income before Income Taxes” plus ADDBACKS:
+ Interest
+ Owners’ Compensation (salaries, wages, bonus, car allowance, health and life insurance, etc.)
+ Depreciation and Amortization
+/- Non-Recurring one-time expenses/income
+ Compensation to family members not working in the business
+ Personal items paid for by the business
= Amount of cash over which the owner has discretion – to pay himself or re-invest.
WHAT IS ODCF?

11. Summit Acquisitions Group, LLC
FORMULA FOR
VALUATION
MAXIMUM VALUE OF A BUSINESS –
BASED UPON ACQUISITION FINANCING
There may be a simpler, more elegant valuation formula, but…
1) W = (Probable Cash Flow Available for Debt Service) ODCF less
(a) new owner’s (buyer’s) compensation to live on, and (b) Addbacks not “allowed” by
the bank. This number represents the bank’s opinion of “probable cash” available for
future debt service;
2) X = (Cushioned Cash) 75% of W. Cash Available for Debt Service after 25%
Cushion for unforeseen circumstances (aka DSCR);
3) Y = (Highest Amount to be Financed) X divided by $140,000 (annual debt
service per $1M at today’s SBA interest rate) times $1,000,000. This will give the
maximum amount (in millions of dollars) of debt that can be financed by the
probable available cash – with a 25% bank “cushion”; and
4) Z = (Highest Value of the Business) Y + .25Y. This represents the highest
value of the business – to be financed by an outside lender. This additional
25% represents a 20% cash down payment by the buyer.

12. Summit Acquisitions Group, LLC
VALUATION
EXAMPLE/WORKSHEET
Example Yours
500,000$ Net Income
250,000$ Total Addbacks
750,000$ Owner's Discretionary Cash Flow (ODCF)
(125,000)$ Compensation for New Owner to Live On
(150,000)$ Addbacks Not "Allowed" by Bank
W 475,000$ Probable Cash Available for Debt Service (PCADS)
X 356,250$ Cushioned Cash (Cash Available net of 25% Bank "Cushion") = 75% of PCADS
Y 2,544,643$ Highest Amount to be Financed = Cushioned Cash divided by $140,000 times $1,000,000
($140,000 = Annual Debt Dervice per $1M at SBA Interest Rate - 7.25%)
636,161$ 20% Down Payment
Z 3,180,804$ Highest Value of the Business
4.24 Multiple of ODCF

13. Summit Acquisitions Group, LLC
OTHER VALUATION
FACTORS
Qualitative Factors Reducing the
Highest Value of the Enterprise:
 Competition
 Regulations
 Concentration of Customers
 Products or Service Lines
 Supplier Relationships
 Market Position
 Management and Employees
 Adequacy of Physical Facility
 Operating Efficiencies and Inefficiencies
 Reasons for Sale

14. Summit Acquisitions Group, LLC
QUESTIONS
FAQ’S:
What about Rules of Thumb?
Aren’t there foreign buyers who are willing to pay a
premium for my business?
Can’t I get paid for the potential of my business?
Will I be able to replace my current income with the
proceeds of the sale?

15. Summit Acquisitions Group, LLC
CONCLUSION
Tom MacPherson | 770.367.4356 | TomM@SummitAcquisitions.com
4200 Settler Heights Drive, Suite 300 | Fort Mill, SC 29708 | www.SummitAcquisitions.com
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