InKnowVision June 2012 HNW Technical Webinar 2 - Valuation Planning

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InKnowVision June 2012 HNW Technical Webinar 2 - Valuation Planning

  1. 1. InKnowVision’s Monthly HNW Webinar Series Technical Webinar ©2012. InKnowVision LLC. All rights reserved. www.inknowvision.com
  2. 2. Going Bananas Case StudyA presentation by Mary Warmus, CPA, MBA, ASA
  3. 3. The Life Cycle of the Business Dictates what Valuation Methodologies to use. Impacts model assumptions in the DCF and the selection of multiples in the Market Approach. Exposes the risk posture of the client. Emphasizes the need for long-range strategic planning. Impacts the clients need for a valuation and other services. Dictates a client’s timeline for Exit. Highlights the need for a team of trusted business advisors.Next slide provided by attorney, Felix Gonzalez of the Archer Law Group KENSINGTON FINANCIAL CONSULTANTS, INC Copyright 2012
  4. 4. Going Bananas nd Produce Company Balance Sheet As of December 31, 2010ASSETS LIABILITIES AND CAPITALCURRENT ASSETS CURRENT LIABILITIES Cash $ 1,000,000 Accounts Payable $ 2,950,000 Accounts Receivable 13,500,000 Other Accrued Liabilities 75,300 Inventory 2,200,000 Current Portion of Long Term Debt 85,000 Prepaid Expenses 125,600 Line of Credit 1,250,000 Shareholder Loans 25,000 TOTAL CURRENT LIABILITIES 4,200,000 Other Receivables 10,000 Misc Other Assets 5,000TOTAL CURRENT ASSETS 16,865,600 LONG TERM LIABILITIES Mortgages Payable 2,500,000PROPERTY AND EQUIPMENT TOTAL LONG TERM LIABILITIES 2,500,000 Property & Equipment 7,500,000 Accum Depr (5,625,000) Total Property & Equip (net) 1,875,000 TOTAL LIABILITIES 6,700,000OTHER ASSETS - Land 350,000 TOTAL CAPITAL 12,390,600TOTAL ASSETS 19,090,600 TOTAL LIABILITIES AND CAPITAL 19,090,600
  5. 5. Discounted Cash Flow Analysis -Base Case TerminalDescription 2010A 2011 2012 2013 2014 YearRevenue 125,000,000 135,000,000 143,100,000 150,300,000 154,900,000 158,772,500Less: Cost of Goods Sold: Cost of Sales 102,500,000 110,700,000 117,342,000 123,246,000 127,018,000 130,193,450 Depreciation 250,000 225,000 202,500 182,250 164,025 147,623 Freight Out 5,000,000 5,400,000 5,724,000 6,012,000 6,196,000 6,350,900 Total Cost of Sales 107,750,000 116,325,000 123,268,500 129,440,250 133,378,025 136,691,973Gross Profit 17,250,000 18,675,000 19,831,500 20,859,750 21,521,975 22,080,528Selling General & Administrative Expenses:Depreciation & Amortization (b) 93,750 84,375 75,938 68,344 61,509 55,358Operating Expense 9,750,000 10,042,500 10,343,775 10,654,088 10,973,711 11,302,922Operating Income 7,406,250 8,548,125 9,411,788 10,137,318 10,486,755 10,722,247Other Income - - - - - -EBIT 7,406,250 8,548,125 9,411,788 10,137,318 10,486,755 10,722,247Income Tax @ 39% (3,333,800) (3,670,600) (3,953,600) (4,089,800) (4,181,700)Net Income 5,214,325 5,741,188 6,183,718 6,396,955 6,540,547Plus: Depreciation and Amortization 309,375 278,438 250,594 225,534 202,981Less: Working Capital Additions - (6% of Change inSales) (600,000) (486,000) (432,000) (276,000) (232,400)Operating Cash Flow 4,923,700 5,533,625 6,002,312 6,346,489 6,511,128Less: Capital Expenditures (300,000) (275,000) (250,000) (225,000) (200,000)Free Cash Flow 4,623,700 5,258,625 5,752,312 6,121,489 6,311,128Capitalized Residual Cash Flow 60,105,979Discount Factor - (WACC - 13%) 0.9407 0.8325 0.7367 0.6520 0.6520Discounted Cash Flow 4,349,600 4,377,800 4,237,900 3,991,000 39,187,100
  6. 6. DCF Value Conclusion – Base CaseFair Market Value - Business Enterprise(C Corp) ControlBasis 56,143,400Plus: Non-operating Assets - Excess Working Capital 5,165,600Less: Debt (3,835,000)Fair Market Value - Equity (Control, Marketable Basis) 57,474,000Plus: S Coproration Premium - 15% 8,621,100FMV - S Corporation Basis (Control, Marketable) 66,095,100Less: Minority Discount - 24% (13,793,760)FMV - Minority Non-Marketable Basis of Going Bananas 43,680,240Less: Marketability Discount - 35% (15,288,084)FMV - Minority Non-Marketable Basis of Going Bananas 28,392,156Rounded to… 28,392,000Notes:a) Forecast based on Client Analysis - Assumes new growth areas in prepared fruits/salad kits & enhanced market shareb) Operating expenses and depreciation charges based on historical performance.c) Discount Factor assumes Mid-Year Conventiond) Excess working capital defined as (Current Assets-Current Liabiliites) determined with reference to historical average.e) This analysis was prepared for purposes of this valuation calculation and should not be used for any other purpose.f) Long run inflation rate assumed to be 2.5%.
  7. 7. Going BananasWeighted Average Cost ofCapitalCost of Equity Capital (BuildupMethod): 20-year US Treasury bond yield as ofRisk-free rate of return 4.13% 12/31/10Long-term equity risk SBBI Valuation Edition 2011premium 6.70% Yearbook SBBI Valuation Edition 2011 Yearbook -Size premium 6.28% 10th decileUnsystematic risk premium SBBI Valuation Edition 2011 Industry risk premium -1.55% Yearbook Company risk premium 2.00% EstimateTotal equity rate 17.56%Cost of Debt Capital Prime rate at 12/31/10 was 3.25% per Federal ReserveAverage cost of debt 3.25% Bank of St. LouisTax rate 39.00% Estimated Federal and State After-tax debt rate 1.98%Capital StructureEquity/invested capital 70.00%Debt/invested capital 30.00% Total invested capitalWACC (Rounded) 13.00%Sourcehttp://www.federalreserve.gov/releases/H15/data.htm KENSINGTON FINANCIAL CONSULTANTS, INC Copyright 2012
  8. 8. Some Factors Considered for Risk AssessmentIntense competition can adversely affect market participant’s financialperformance.Food distribution businesses are highly competitive and are characterized byhigh inventory turnover, narrow profit margins and increasing consolidation.The Company Produce competes not only with local, regional and national fooddistributors, but also with vertically integrated national and regional chains thatemploy a variety of formats, including supercenters, supermarkets and warehouseclubs.Many of The Company’s food distribution competitors are substantially largerand may have greater financial resources and geographic scope, lowermerchandise acquisition costs and lower operating expenses, intensifyingprice competition at the wholesale and retail levels. Industry consolidationand the expansion of alternative store formats, which have gained andcontinue to gain market share at the expense of traditional grocery stores,tend to produce even stronger competition for both retail and fooddistribution segments. Failure to implement strategies to respond to thesecompetitive pressures, can negatively impact operating results through adverseaffects on pricing (reductions), decreased sales or margins, or loss of market share.Wholesale bypass is threatening food wholesaler’s existence. The main factorthat has undermined industry revenue growth is the increasing trend of wholesalebypass. Retailers aim to source produce as cheaply as possible, which in some casesleads them to undertake their own sourcing activities.
  9. 9. DCF Assumptions – Case Changes BASE Case 2 Case 3 WACC 13% 14% 13% Risk Average More Average Revenue Growth 8% to 2.5% 8% to 2.5% 5% to 2.5% Gross Margin 82% 82% to 80% 82% Fair Market Value (1) $ 28,392,000 $ 33,104,000 $ 25,021,000 (1) S Corp Basis, Minority, Non-Marketable Basis KENSINGTON FINANCIAL CONSULTANTS, INC Copyright 2012
  10. 10. Publicly Traded Guideline Companies•Nash-Finch Foods Nash-Finch Company operates as a wholesale food distributor in the United States. The companys Military segment distributes grocery products to the United States military commissaries and exchanges in the United States and the District of Columbia, Europe, Puerto Rico, Cuba, the Azores, and Egypt.•United Natural Foods United Natural Foods, Inc. is a national distributor of natural, organic and specialty foods and non-food products in the United States and Canada. The company operates through three operating divisions: Wholesale, Retail and Manufacturing.•Spartan Stores Spartan Stores, Inc. operates as a grocery distributor and retailer principally in Michigan and Indiana. The company operates in two segments, Distribution and Retail.•Core-Mark Holding Company Smokes and snacks are at the center of Core-Mark Holdings cosmos. The company distributes packaged consumables (including cigarettes and other tobacco products, candy, snacks, grocery items, perishables, nonalcoholic beverages, and health and beauty aids) to about 26,000 convenience stores; mass merchandisers; supermarkets; and drug, liquor, and specialty retailers.
  11. 11. Mergerstat: Size Premiums Small vs. Large Companies: Median P/Es Offered Size Total # Median Year P/E > $100MM P/E < 25MM Discount Transactions P/E All 2006 22.8 17.6 22.8% 464 26.1 2007 23.9 21.2 11.3% 498 28.8 2008 23 8.9 61.3% 289 21.7 2009 18.4 8.5 53.8% 210 20.7 2010 21.8 9.2 57.8% 301 24.4 Average - 5 Years 41.4% 24.3 Source: Mergerstat 2011 for transactions 2010 and prior. Pages 20-21 KENSINGTON FINANCIAL CONSULTANTS, INC Copyright 2012
  12. 12. Guideline Publicly Traded Company Method Multiples of Revenues and EBITDA LTM Most Revenues Ending Recent MVIC MVIC/REV MVIC/EBITDA Company $000 (FYE 0) $000 LTM LTMNASH-FINCH $4,991,979 2010/12 2010/12 $ 810,136 0.2 6.1UNITED NATURAL FOODS 3,925,338 2010/10 2010/07 1,965,413 0.5 13.4SPARTAN STORES 2,520,370 2010/12 2010/03 558,659 0.2 5.5CORE-MARK HOLDING COMPANY 7,266,800 2010/12 2010/12 402,995 0.1 7.5LOW LOW 0.1 5.5HIGH HIGH 0.5 13.4MEAN MEAN 0.2 8.1MEDIAN MEDIAN 0.2 6.8 Selected Multiple (1) 0.4 8.1 Size Adj - 41.4% (2) (0.2) (3.4) Adjusted Multiple (Min/Mkt) 0.2 4.7 Control Premium - 42.5% (3) 0.1 2.0 Adjusted Multiple (Control/Mkt) 0.3 6.8NOTES:(1) Multiple as if freely traded - minoirty, marketable value indication(2) Mergerstat discount for size - 5 year Average(3) Mergerstat control premium - 5 year Average KENSINGTON FINANCIAL CONSULTANTS, INC Copyright 2012
  13. 13. Guideline Company MethodGOING BANANAS GUIDELINE COMPANY APPROACH Sales EBITDAGoing Bananas 12/31/10 Cash Flows: 125,000,000 7,750,000Selected Multiple 0.20 6.80Indicated BEV- Control, Marketable 25,000,000 52,700,000Plus: Excess WC 5,165,600 5,165,600Less: Debt (3,835,000) (3,835,000)Total Equity Value - Control, Marketable 26,330,600 54,030,600Adjustment: S Corp. Premium - 15% 3,949,590 8,104,590FMV Equity - Control, Marketable 30,280,190 62,135,190Less: Minority Discount - 24% (7,267,246) (14,912,446)FMV Equity - Minority, Marketable (1) 23,012,944 47,222,744Less: Marketability Discount - 35% (8,054,531) (16,527,961)FMV Equity - Minority, Non-Marketable (2) 14,958,414 30,694,784Source: Guideline Public Companies KENSINGTON FINANCIAL CONSULTANTS, INC Copyright 2012
  14. 14. Market Transaction Method using Pratt StatsTransactions: Food Distributors for SIC 5141N Market Value ofo Business Description Invested Capital Sale Date Net Sales MVIC / Sales MVIC / EBITDA1Food Distributor to Philadelphia Suburbs $325,000 7/16/2007 $2,486,930 0.13 3.422Distributor of Food Products $1,500,000 5/11/2007 $6,662,285 0.23 N/A4Wholesale of Produce $240,000 1/31/2007 $1,485,722 0.16 2.445Wholesale Produce $65,000 7/19/2009 $1,328,991 0.05 1.106Food distributor $510,000 10/1/2009 $1,265,000 0.40 N/A7Food Wholesaler $60,000 3/29/2010 $2,883,801 0.02 4.678Fresh Produce Wholesaler: Selling to Restaurants $2,000,000 10/1/2009 $10,138,000 0.20 3.179Food Distributor to Foodservice and Retail Customers $89,299,000 4/28/2008 $158,461,414 0.56 9.76 AVG 0.22 4.09 MED 0.18 3.29 HIGH 0.56 9.76 LOW 0.02 1.10Source: PrattStats Copyright © 2011 Business Valuation Resources, LLC. All rights reserved. www.BVResources.comSM
  15. 15. Market Transaction MethodGOING BANANAS PRIVATE TRANSACTIONS METHOD Stats Sales EBITDAGoing Bananas 12/31/10 Cash Flows: 125,000,000 7,750,000Selected Multiple 0.23 3.62Indicated BEV- Control, Marketable 28,430,556 28,070,500Plus: Excess WC 5,165,600 5,165,600Less: Debt (3,835,000) (3,835,000)Total Equity Value - Control, Marketable 29,761,156 29,401,100Adjustment: S Corp. Premium - 15% 34,225,329 33,811,265FMV Equity - Control, Marketable 63,986,484 63,212,365Less: Minority Discount - 24% (15,356,756) (15,170,968)FMV Equity - Minority, Marketable (1) 48,629,728 48,041,397Less: Marketability Discount - 35% (17,020,405) (16,814,489)FMV Equity - Minority, Non-Marketable (2) 31,609,323 31,226,908Source: Pratt Stats
  16. 16. Going BananasValue Summary Income Approach - Discounted Cash Flow Method Market Approach Public Guideline BASE Case 2 Case 3 Co. TransactionsWACC 13% 14% 13%Risk Average More AverageRevenue Growth 8% to 2.5% 8% to 2.5% 5% to 2.5%Gross Margin 82% 82% to 80% 82% $Fair Market Value (1) 28,392,000 $ 33,104,000 $ 25,021,000 $ 30,695,000 $ 31,500,000(1) S Corp Basis, Minority, Non-Marketable Basis KENSINGTON FINANCIAL CONSULTANTS, INC Copyright 2012

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