The document provides an overview of business valuation, including defining the valuation process, standards of value, approaches to valuation, and discounts and premiums. It discusses key aspects of valuation like determining fair market value, the income approach using discounted cash flows, and applying discounts for lack of control or marketability. The goal is to combine business wisdom, industry analysis, and technical financial expertise to determine a company's value. Valuations must meet professional standards from organizations like the IRS.

1. Business Valuation in Practice Michael F. Cannon, MA, MBA, AVA President, MCOM Corporation

2. Overview The valuation process Some Examples The concept of value Standards of value Approaches to value MCOM Corporation 2

3. Valuation vs. Appraisal Valuation “To establish a value for an entire or partial interest in a closely held businessor professional practice, taking into account both quantitative and qualitative tangible and intangible factors associated with the specific business being valued.” Appraisal “To establish a value of certain specific tangible assetsbased upon special market knowledge, education, and vocational training possessed by the appraiser.” NACVA Fundamentals, Techniques & Theory MCOM Corporation 3

4. Financial Value “The value of any financial asset is the net present value of all future cash flows discounted at the appropriate rate of return.” Brealey & Meyers—Principles of Corporate Finance MCOM Corporation 4

5. Types (Standards) of Value Fair market value Fair value (value before dissenting action) Intrinsic value Investment value Book value Replacement value Value in place Insured value Loan value Social value Moral value Ethical value Religious value Sentimental value MCOM Corporation 5

6. Fair Market Value “The price at which a property 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 and both parties have reasonable knowledge of the relevant facts.” Revenue Ruling 59-60 MCOM Corporation 6

7. Investment Value “The value to a particular investor based on individual investment requirements and expectations.” International Glossary of Business Valuation Terms May include synergies to a particular buyer Economies of scale Reduced competition MCOM Corporation 7

8. Levels of Value Investment or Synergistic Value $12 Marketable, control value Control Value $10 Marketable, control value Minority Value $8 Marketable, non-control value Non-Marketable, Minority Interest Value $6 Non-marketable, non-control value 8 MCOM Corporation

9. Premise of Value Going concern Assumes the business will continue into the future Liquidation value Forced liquidation Orderly liquidation MCOM Corporation 9

10. Common Approaches to Valuation Asset Approach – (Assets less Liabilities) Market Approach – (Comparable Transactions) Income Approach – (Future Benefit Stream) MCOM Corporation 10

11. Income Approach Discounted earnings method (inconsistent growth) Capitalization of earnings method (consistent growth) Dividend pay-out method (capitalize 5 yr avg.) Excess earnings method Treasury method Reasonable rate method MCOM Corporation 11

12. Discounts & Premiums Discount for lack of control Premium for control Discount for lack of marketability Key person discount They depend on the interest to be valued and the techniques used to establish the value conclusion MCOM Corporation 12

13. Value of Control Premium (20-50%) Control prerogatives Hire and fire Distribute earnings/declare dividends Buy and sell assets Enter into contracts Liquidate the business Set strategic objectives and other goals Set compensation and performance standards MCOM Corporation 13

14. Control Premium Case Media Buying Company: Miami Pros Strong underlying fundamentals Key Man, majority shareholder ready to share duties New ownership experienced and capable of needed changes Cons Poorly organized service company Excessive staff, low efficiency Dismal operating ratios Dissatisfied customers Valuation Impact: Ability to purchase majority shares added significant premium to otherwise lowered value due to poor results, operations and staffing. Potential of rapidly improving operations and solving operational problems. MCOM Corporation 14

15. Marketability Discounts Range <> 23-45% The ability to convert an ownership interest to cash The time required to do so affects the level of marketability Other factors that affect marketability Distributions of earnings Active market or industry roll-up Key person Number and profile of owners e.g., family owned Restrictions on transfer of stock Investors pay a premium for marketability and discount an investment for the lack of marketability MCOM Corporation 15

16. Key Person Discounts Hotly Contested One man operations can suffer large discounts without succession planning Earn out schemes developed to circumvent this problem IRS scrutinizes these carefully, often will not allow them to be “stacked” on control and marketability discounts MCOM Corporation 16

17. Management Analysis CaseDiesel Engine Service & Repair: Florida Keys Pros Solid, 200+ loyal clients Fast, efficient, fair prices Extremely low overhead No payment problems Cons Excessive officer compensation, loans Customer loyalty to owner Next generation family members, incompetent, arrogant, not service oriented Valuation Impact: Bring in succession management, train and allow buy in over time, make 5 year exit plan, clean up financials. MCOM Corporation 17

18. It Is Best To Do a Valuation Before You Need One The best way to see if management is adding value to the firm Tool “par excellence” for business planning Takes subjectivity out of the equation Considers all asset values, tangible and intangible Includes market, competitive and industry analyses Cleans up financial statements for the long term Allows normalization of unrelated expenses and assets Provides parameters for accurate forecasting Takes litigation and other material factors into consideration Values key man, succession and growth plans correctly MCOM Corporation 18

19. Helps owners identify the next step for the business… and how to get there Divestiture Maintain Growth Reorganization Acquisition Merger Pre-Preparation for tax needs or triggering events It Is Best To Do a Valuation Before You Need One MCOM Corporation 19

20. The Valuation Process Define the engagement Gather all necessary information Analyze all information and make adjustments to “normalize” financials Apply valuation approaches/methods to estimate the value of the enterprise Communicate the results Prepare and issue the valuation report MCOM Corporation 20

21. Industry Analysis Case Advertising Agency: Mexico Pros Work System reduced headcount Profitability very high Principals primary skilled employees Proprietary Techniques Cons Declining Industry Lifecycle Reduced Margins Industry Consolidation Becoming Commodity Service Low ball offer from multi-national Valuation Impact: Gave owner choices; either negotiate better sale price or move operation to local acquisition mode. MCOM Corporation 21

22. Market Analysis CaseElectrical SubContractor: Las Vegas Pros Excellent structure, staff, profitability 3 generations of service, great reputation Best efficiency Cons Industry downturn Low cost illegal alien labor Declining margins Loss of customer loyalty Valuation Impact: Re-orient business to custom higher margin market and RFP business for government projects. MCOM Corporation 22

23. Company Analysis CaseCustom Closet Designer/Manufacturer: New York Pros Excellent in all operational areas Higher than industry average profit margins Strong, motivated management and staff Cons Dependence on two major developers Unable to penetrate aftermarket Low margins Cut throat competition Valuation Result: Reduction in Overall Value, higher Discount for lack of marketability MCOM Corporation 23

24. Business Wisdom and Technical Expertise Combined Business Wisdom Market Analysis Company Analysis Management Analysis Control Adjustments Normalizing adjustments Technical/Research Expertise Fundamental analysis Economic Analysis Financial Analysis Industry Analysis MCOM Corporation 24

25. Subjective Issues Size of discounts and premiums Discount or capitalization rate Projected growth rates Normalizing adjustments Assumptions and limiting conditions How to analyze all the existing conditions (ex. Market, competition, management, economic factors, etc.) MCOM Corporation 25

26. Professional Valuation Standards Meet Standards from; Department of Labor (ESOPs) Internal Revenue Service Federal and state laws Rules of applicable courts Case law Valuation organizations Require Confidentiality Analysis of all relevant data Independence and objectivity Declaration of assumptions and limiting conditions Provide guidelines for developing and communicating valuation results and conclusions Results in a combination of technical expertise and business wisdom MCOM Corporation 26

27. Materials for your review Valuation Process Database Comparable Transactions Further research into the industry Sample Business Valuations List of Valuation Questions Database of Valuation uses, experiences and case law verdicts MCOM Corporation 27

28. Thank You! MCOM Corporation