Business Valuation in Exit Planning


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Business Valuation in Exit Planning

  1. 1. Business Valuation in Exit PlanningSean Saari, CPA/ABV, CVA, MBARobert A. Ranallo, CPA/ABV, JD, CVA, CFFMay 23, 2013
  2. 2. After completing the session, participants will beable to…• Recognize the methods typically utilized to value abusiness or ownership interest and understand theirbasic application• Identify normalizing adjustments and assess theirimpact on value• Reconcile values derived from multiple valuationapproaches• Capitalize on planning opportunities that helpmaximize the value received for the sale of abusiness“In the long run, men hit only what they aim at.” – Henry David ThoreauLEARNING OBJECTIVES
  3. 3. • Valuation Basics• Case Study / Valuation Analysis Valuation Approaches Control and Marketability Considerations Planning ConsiderationsAGENDA
  4. 4. “There is no such thing as an absolutevalue in this world. You can only estimatewhat a thing is worth to you.”Charles Dudley Warner 1829-1900, American WriterQUOTE OF THE DAY
  5. 5. • Standard of Value Fair Market Value Strategic / Investment Value• Sales Price = Value?• Type of Value Equity Value Market Value of Invested Capital (MVIC) Equity Value + Interest-Bearing Debt Enterprise Value (EV) MVIC - CashVALUATION BASICS
  6. 6. Reconciling Equity Value vs. Enterprise ValueVALUATION BASICSCashTotalEnterpriseValueEquityValueDebtValue Net Debt
  7. 7. • Asset Approach• Income Approach• Market Approach• LBO Method• Rules of ThumbVALUATION APPROACHES
  8. 8. ASSET APPROACHValuation Methodologies• Adjusted net asset methodBasic Steps• Adjust assets to fair market / strategic value• Adjust liabilities to fair market / strategic valuePros• Provides “floor value” of the company• Relatively simple analysisCons• Typically provides a liquidation value which isoften not appropriate for healthy businesses• Rarely utilized in transactional value
  9. 9. Valuation Methodologies• Discounted cash flow method• Capitalization of cash flow method• Capitalization of earnings / Discounted future earningsBasic Steps• Determine benefit stream and make normalizing adjustmentsas appropriate• Determine discount/capitalization rate• Determine cash flow adjustments• Discount / capitalize cash flowsPros• Provides most “company-specific” value• Can appropriately incorporate projected growth of thebusinessCons• Most involved of the valuation analyses• May be disagreements over likelihood of meeting projectionsINCOME APPROACH
  10. 10. Other Considerations• Mid-Period Discounting• Non-Operating Assets• Direct to Equity vs. Debt-Free Valuation• Normalizing Adjustments“It’s the little details that are vital.Little things make big things happen.”– John WoodenINCOME APPROACH
  11. 11. • FMV vs. Strategic normalizing adjustments• Compensation Family members paid other than FMV Officers paid other than FMV• Personal expenses• Related party transactions other than FMV• Non-recurring income or expenses• Expense trendsADJUSTMENTSNORMALIZING
  12. 12. Valuation Methodologies• Guideline transaction method• Guideline public company methodBasic Steps• Determine benefit stream and makenormalizing adjustments as appropriate• Find comparable transactions/guidelinepublic companies• Calculate valuation multiples and applyto subject company• Make adjustments as necessary toarrive at equity value (if necessary)MARKET APPROACH
  13. 13. Pros• Incorporates market conditions and pricespaid in recent relative transactions• Easy to explain and applyCons• Can be misleading if debt not appropriatelyconsidered EBITDA multiples typically result in anEnterprise Value, not an Equity Value• In certain industries, there may be a lack ofcomparable transactions or publiccompaniesMARKET APPROACH
  14. 14. Valuation Methodologies• LBO MethodBasic Steps• Prepare discounted cash flow analysis• Estimate financing and capital structure• Determine implied rate of return atvarious exit pointsLBO METHOD
  15. 15. Pros• Allows seller to determine maximum price thatthe byer will be willing to pay based on theamount of debt financing available and rate ofreturn requiredCons• Simply a derivation of the discounted cash flowmethod• Not as widely-utilized as basic income andmarket approaches• Buyer may not have reliable informationavailable regarding the extent of financing thatthe seller can obtainLBO METHOD
  16. 16. Valuation Methodologies• Rule of ThumbBasic Steps• Identify rule of thumb valuation metrics• Apply rule of thumb to the subject companyPros• Simple applicationCons• Can result in misleading values• Often lacks support• Not permitted to be used as a sole valuationmethod by most valuation standardsRULES OF THUMB
  17. 17. Asset Deal vs. Stock Deal• Asset Deal Typically preferred by buyers Allows for step-up in basis of acquired assets, which may allow forhigher purchase price C Corporation sellers are subject to double taxation• Stock Deal Typically preferred by sellers No step-up in basis in acquired assets for buyer Single level of seller taxationOTHER VALUATIONCONSIDERATIONS
  18. 18. OTHER VALUATIONCONSIDERATIONSAsset Deal vs. Stock Deal
  19. 19. Control Discounts / Premiums• Two options Model in cash flows Discreet discount / premiumMarketability Discounts• Controlling ownership interest Typically 0%-15%• Non-controlling ownership interest Typically 25%-40% Would apply if trying to sell a non-controlling interestwhen the business as a whole is not being soldCONTROL & MARKETABILITYCONSIDERATIONS
  20. 20. Button Down Financial Reporting• Get in compliance with GAAP• Consider audited/reviewed F/SStandardize Processes• Make it easy for someone new to come in and run thebusiness• Reduce reliance on key employeesReverse Engineer Potential Buyer Preferences• Think about what characteristics would be desirable topotential acquirers in the industry and work toimplement themPLANNINGCONSIDERATIONS
  21. 21. • Implement confidentialityagreements with employees• Identify and reverse negativeincome/expense trends• Diversify the customer base• Right-size working capitalPLANNINGCONSIDERATIONS
  22. 22. After completing the session, participants willbe able to…• Recognize the methods typically utilized to valuea business or ownership interest and understandtheir basic application• Identify normalizing adjustments and assess theirimpact on value• Reconcile values derived from multiple valuationapproaches• Capitalize on planning opportunities that helpmaximize the value received for the sale of abusinessSUMMING UP
  23. 23. “Things only have the value that wegive them.”Moliere 1622-1673, French Actor/PlaywrightCLOSING QUOTE
  24. 24. QUESTIONS?Bob Ranallo, CPA/ABV, JD, CVA, CFFPartnerPhone - (440) 449-6800 x7131Email - branallo@skodaminotti.comSean Saari, CPA/ABV, CVA, MBASenior ManagerPhone - (440) 449-6800 x7221Email -