Under discussion: Arriving at an accurate valuation for a hyper-growth consulting business with $1Mln in Revenues. A full analysis of methodology. Financial statements and Modeling from Data Analysis. The case (and the Parties' names) has been anonymized to respect confidentiality. I presented this successfully in Superior Court as evidence.

1. T e r e s a D e n t I n o
CEO/Founder
Website: www.theFinancial411.com PO Box 620897 Woodside, California 94062
Tel 650.851.8959 I Fax 866.895.8878 I Email teresa@theFinancial411.com
BUSINESS VALUATION:
EJL Wireless Research
For Parties:
EARL J. LUM and GINA S. WONG
Prepared by
Teresa Dentino, CDFA
Founder/CEO
The Financial 411
Woodside, CA
Delivered in Superior Court as Expert Witness
Evidence and Testimony

2. Purpose
• The purpose of this business valuation is to assess the EJL Research consulting
and research practice, founded and operated by principal, Mr. Earl J Lum, for a
divorce marital settlement on behalf of the clients (parties): Gina S. Wong and
Earl J. Lum
The Company
• EJL Research is a privately held consulting and research consultancy practice that
is incorporated in the State of California. The focus of EJL services is a niche
segment of the wireless telecommunications industry, specifically related to the
networking aspect of wireless. The principal commodity of EJL wireless is
information that is used by global companies whose roles range from equipment
component manufacturers to wireless providers. The value to the client --
whether derived through purchase of research reports and/or direct consulting
services—assists these major players in their strategic planning, and maximizing
their respective business opportunities.
• Managed and founded in 2006 by Mr. Earl J. Lum, and the sole employee, the
business is not characterized by inventory of tangible assets and their production,
significant and ongoing capital equipment expenses, staffing and management,
geographic location, bricks and mortar office, obsolescence of equipment, and/or
heavy debt exposure. The business can be operated from any geographic location
with a minimal office set-up of phone fax and travel capabilities. However, the
cost of doing business that is unique to this company and, as differentiated from
the standard expenses associated with day-to-day operations of an office, is the
purchase of devices and/or equipment to be used for the owner’s research. From
the ‘tear-down’ of this equipment, Mr. Lum then generates his principal product
i.e. written papers and the resulting research and consulting that his clients
purchase.
Clients
• The clients of EJL are global companies – key names in the wireless networking
field, some examples of which are NOKIA, RFD MICRO DEVICES, and
ERICSSON, to name a few.
Market Penetration
• At this point, EJL has an estimated 25-30% penetration of the total wireless client
universe. In addition and since the publication of the P&L July figures, Mr. Lum

3. has booked new contracts that represent an entirely new source of revenues. Not
only will these contracts come from a different industry sector (and major players
therein), they will be structured for regular quarterly payments, and require little
or no additional operating expenses to service them. We view this as strong
leverage to future earnings growth and have factored this favorable development
into our projections and models.
Competition
• Per Mr. Lum there are 5 currently recognizable competitive experts who offer
similar services in this highly segmented and specialized area. While these
competitors’ services may be promoted as having the same value-to-client as
EJL’s, according to Mr. Lum they are characterized by a lower level of
penetration and insight into the industry’s complexities. N.B: To support his
premise, Mr. Lum points out that he has 99% retention and carry-over rate from
his subscribed clients year-over-year whereas his competition has to rely on
churning each year for new business sources. We have also noted this repetition
of client names within the Accounts Receivable entries from year to year that
supports his statements.
• Separately, and as explained in Market Penetration, we expect that competition
will not be significant factor and accordingly underweight its significance in our
determining a Risk/Price Multiple. Revenues along with bookings of new
business contracts that will contribute significantly to the resumption of this
successful market penetration rate under Mr. Lum’s guidance in the future and
post recession.
Knowledge Base
• Mr. Lum’s previous 15 + years as a market analyst of the wireless industry, Mr.
Lum’s considerable knowledge base, key contacts from his previous employment,
and copyrighted research papers comprise the significant intangible assets
(goodwill) of the business.
Cost Structure/Capital Equipment Requirements
• In performing his research it is necessary for Mr. Lum to purchase devices --
mainly -- and some costly trade subscriptions that are integral to the generation of
his research and consulting content. These expenses are defined in the financial
statements as Cost of Goods Sold (COGS). Outside of standard day-to-day office
expenses, telephone and travel, the COGS represents the unique and only
extraordinary capital investment necessary to conduct the business of EJL
Research. The number (as a percentage of revenues and noted separately in our

4. statements) has varied throughout previous years and current 2009 actuals,
however, Mr. Lum anticipates that an average yearly amount assumption going
forward is reasonably in the range of $20,000.00. We have incorporated that
figure into our projections and models.
Methodology
• The first step in our valuation process involves a reconstruction of the earnings
statements of the business.
• In this instance we used the following source documents in order to create the
attached summaries of earnings per years 2006 through 2009:
Tax returns for years of the business from start-up in mid 2006 through
2008
P & L’s for the same period but also including the 2009 P&L through July
end of month
Copies of checks written on the business account.
• The purpose of the reconstruction of earnings is to assure that excessive,
immaterial and/or personal costs are not being charged as expenses to the
business. Starting with a thorough inspection of P&L and comparing the results
to the business tax returns, we found no discrepancies. In valuing companies,
however, we do not rely solely on the statements of expenses shown in tax
returns, as these are not always vetted with precision to exclude some personal
expenditure that can appear within these statements. Later we show some minor
downward revisions to expenses in our model to account for this factor.
• After the ERCON (earnings reconstruction) is completed and has been tested
across all source documents for consistency, we begin to develop the appropriate
key ratios and screens from which to complete the analysis.
• Similarly we made adjustments to both years 2006 and 2009 where a full years
business was not represented. Since there is seasonality to both Revenue
bookings and the COGS purchases, we applied average weighting formulas in
order to adjust those quarters accordingly.
Prevailing Valuation Methods
• Capitalized Earning Approach
• Excess Earnings Method
• Discounted Cash Flow Method

5. • Tangible Assets (Balance Sheet) Method
Synergies
EBITDA Method
nal valuation methods stated above, we worked from a
ing EBITDA (Earnings Before Interest Taxes and
er an
amalgam
the
• to
along with all
d
es in
acro Economic Outlook
• While EJL’s results for 2009 reflect the affect of the recession in the
dramatically reduced growth rate for year-over-year comparison to the ’07 v.
’08 increase – some 60%, we see the current turn in the macro economic
indicators as a positive sign for growth to occur at a more normalized rate by
Q’s 3 & 4 of 2010.
• Cost To Create Approach
• Rule of Thumb Methods
• EBITDA Method
• Valuation based on
• From the conventio
premise of establish
Amortization) in order to establish the Free Cash Flow of the business. Aft
analysis of Key ratios to solve for significant patterns, we then used an
of the Capitalized Earnings Approach and Cash Flow Method to cross check our
values and lastly a Discounted Cash Flow model was applied. Due to the nature
of the business as defined previously -- one where there is no product
manufacturing, significant capital expenditures and the financing of such, nor
inventory requirement of tangibles that significantly affect valuation –
EBITDA is the conventionally accepted measure for valuation.
While there was no amortization reported for the business, we did add back
net income the depreciation expenses allowed in the tax returns,
federal and state income taxes paid, auto & gasoline expenses, utilities and
office rent expenses to arrive at our EBITDA. While we do not question the
accuracy or verity of these expenses, they are not viewed as intrinsically
fundamental to the operation of the business. For example, an individual coul
conduct the business without owning a car - relying instead on taxi servic
certain metro areas – and which expense would vary materially from the
depreciation and other expense reimbursements that an auto receives under IRS
code. Similar rationale is applied to the intrinsic nature and vagaries by
geographic area of office rent, utilities and the like, and therefore they are
removed from the discussion entirely.
M

6. ctors Affecting Business Valuation – Determining Risk/PriceFa
Multiple
• One measure of a company’s value is to assign a risk/premium value to
various factors that affect a business prospects for success. While subjective,
we can use this to compare and contrast and test for consistency the results
from our various valuation methods.
Finance 3.25
Industry Growth 3
Business Growth 3.75
Customer Concentration 3.5
Product/Service Concentration 3.5
Intellectual Capital 4
Ease of Operation 3.5
Capital Requirements 3.75
Managem 2.75ent and Control
Total 31
Business Risk/Price Multiple (RPM) 3.44
• A rating scale of between 1and 4 is used to weight each factor’s impact on the
business risk, w
• The RPM is then used in conjunction with capitalizing earnings for one measure
of the company’s value.
• Later in our analysis we will refer back to this number.
ith 4 being the highest.

7. Value Calculations
• ew business and therefore doesn’t present a significant
period of trailing EBITDA, we have also considered the future cash flow
unique trends,
outpacing mature companies in earnings growth within the first 5- 7 years as
market penetration expands. While we cannot assign certainty to future
earnings, we have made some assumptions -- based on updated information
from Mr. Lum.
Having determined the Key Ratios of the business and evaluated for trends, we
ot over-
•
plete year, -- while we have made projections about its’
outcome --, there was a significant variance in the expenses for COGS (vs.
•
Since this is a relatively n
prospects in our determination. Growth companies have
•
did not find correlations that were meaningful to support the argument for
relying entirely on historical patterns. With two incomplete yearly P & L
results, two complete years, as well as a recession in the mix, we could n
emphasize these numbers, to the exclusion of other factors.
Hence we established the 2008 EBITDA as a baseline instead of 2009, since
2009 is not a com
previous years), and Mr. Lum does not expect the COGS/Net Income Ratio to
be the norm going forward.
Accordingly we applied an adjustment in Adjusted Pro Forma ’08 to COGS, per
the average of $20,000.00 annual that Mr. Lum expects going forward. Hence,
there are 2 EBITDA figures now represented.
• The first indicates the actual 2008 number (adjusted), while the 2nd
includes a
updated (from that recorded in P & L) amount regarding new contracts that
booked but not paid. We included only those that Mr. Lum has already
confirmed, some $15,000.00 per quarter going forward. We did not include in
our numbers the projected 50K per quarter that Mr. Lum
n
are
is expecting to
•
•
• the report you will find the Annual EBITDA projected figures – now working
with 2 different scenarios based on 1) actuals and 2) new booked contracts -
materialize overall.
From this Adjust Pro Forma baseline, we applied a growth rate of 25% annually
or 5 years forward; again an amount Mr. Lum feels confident he will reach andf
is more typical of a growth concern vs. a mature company.
Given the high growth possibilities for the business, it’s early stage cycle,
introduction of additional revenue channels, and our appraisal of all financials;
we think this average over the next 5 years is an accurate and moderate
assumption.
In

8. have also been then given a weighted average. In this way we weighted the 1st
year’s outcome with greater certainty with continual reduction of weighting
consecutively over the next 4 years. This addresses the unknown aspects of
ture earnings growth and their inherent risk.
•
w.
comparative business multiples. When dealing with more
andardized business classifications (e.g. a furniture manufacturer or a
ss
• lts in the following steps. These
teps are illustrated in detail on pgs 5, 6, 7, and 8 of this report.
•
out
likely
•
blending
f both higher and lower results that is likely to occur within that business cycle.
•
e
•
•
•
d
fu
Many valuations rely upon a thumbnail or standard multiple times trailing
earnings method, which can be 2, 3 or even 5 times trailing free cash flo
Some rely on
st
gardening service) this can provide one measure of evaluation. However, for
our purposes, and for lack of a lengthy earnings history, a standardized busine
category, and the growth stage of the company, we deemed the future earnings
to be as significant to the evaluation as trailing and current earnings.
After weighting the EBITDA, we looked at resu
s
Using a baseline Pro Forma earnings statement, we calculated two different
values for EBITDA. The 1st
value represents the cash accrual basis, with
adjusting for new business that Mr. Lum has recently booked and that is
to be ongoing. The 2nd
measure then includes the new business in our values.
Next we projected earnings growth over a 5 yr. Period based on a 25% annual
growth rate, which is likely given the earl stage of the company and a
o
In order to equalize the uncertainty about future earnings prospects, we then
performed a weighted average calculation that gives more bias to the 1st year’s
numbers and decreasing yr-by-yr thereafter. Thereafter we worked with thes
weighted average figures in the remaining calculations.
Using the Discounted Cash Flow method (the convention, given the above
stated factors about the business length, etc.), the next step was to determine the
Present Value of the future income (Free Cash Flow or FCF) stream.
The (2) Totals of the 5 yrs free cash flow were then tested against the present
value figures (both EBITDA Scenarios I & II) to weigh them as reasonable
valuations from the perspective of opportunity costs and fairness.
Lastly as a final crosscheck, we used the Excess Earnings Multiple method -
typically used for the standardized situations mentioned previously - and applie
the Risk Price Multiple to complete that evaluation.

9. • We concluded this valuation with a range of values for this company based
again on our two EBITDA benchmarks. We are confident that the EJL Wire
Research company presents a valuation in the range of:
less
00 to$750,000.
$950,000.00.

10. 2006 Tax Return Projected Annualized 2007 Tax Return
Total Income 129,320.00$ 221,691.43$ Total Income 194,454.00$
(15,000.00)$
Advertising 655.00$ 206,691.43$ Advertising 2,227.00$
Commission and Fees 6,250.00$ Commission and Fees 11,248.00$
Interest: Other Interest: Other 470.00$
Legal and Professional 4,046.00$ Legal and Professional 2,624.00$
Rent/Lease Machinery/Equipment 40.00$
Repairs and Maintenance 929.00$ Repairs and Maintenance 238.00$
Supplies 2,533.00$ Supplies 2,613.00$
Travel, Meals and Entertainment 33,642.00$ Travel, Meals and Entertainment 11,804.00$
Other Expenses 34,314.00$ Other Expenses 52,737.00$
Total Expense 82,369.00$ 110,845.71$ Total Expense 84,001.00$
(5,336.00)$
105,509.71$
EBITDA 46,951.00$ 116,181.71$ EBITDA 110,453.00$
*Add Backs
DMV 200.00$
Personal Pchse 464.00$
Adjusted Net Income 46,951.00$ 95,845.71$ Adjusted Net Income 111,117.00$
Net Inc/Revs 36.31% 46.37% Net Inc/Revs 57.14%
Exps/Revs 63.69% 53.63% Exps/Revs 43.20%
COGS/Rev's 6.20% COGS/Rev's 4.01%
Revenues Yr-ov-Yr N/A N/A Revenues Yr-ov-Yr -5.92%
COGS 12,807.00$ COGS 7,805.00$
Notes:
Total Income indicates Revenues after client discounts and equal to total business income figures reported in tax returns
Per the parties' tax returns and Schedule C's, COGS figures are included here within the "Other Expenses" total, and not as a separate line item.
Adjustments made to '06 and '07 represent seasonal adjustments to either income and expenses.
June - December

11. 2008 Tax Return 2009 Tax Return 2009
Projected Total Annual
Total Income 325,081.00$ Total Income 179,479.00$ 307,678.29$
30,000.00$
Advertising 2,969.00$ Advertising 2,100.00$ 337,678.29$
Commission and Fees 40,091.00$ Commission and Fees 12,893.00$
Interest: Other 208.00$ Interest: Other 187.00$
Legal and Professional 4,619.00$ Legal and Professional 5,119.63$
Rent/Lease Machinery/Equipment Rent/Lease Machinery/Equipment
Repairs and Maintenance 1,159.00$ Repairs and Maintenance 300.00$
Supplies 2,126.00$ Supplies 2,535.00$
Travel, Meals and Entertainment 20,048.00$ Travel, Meals and Entertainment 12,214.00$
Other Expenses 27,666.00$ Other Expenses 73,436.00$
Total Expense 98,886.00$ Total Expense 108,784.63$ 186,487.94$
(43,571.00)$
Adjusted Total Exps.>>> 142,916.94$
EBITDA 226,195.00$ EBITDA 70,694.37$ 194,761.35$
Net Inc/Revs 69.58% Net Inc/Revs 39.39% 57.68%
Exps/Revs 30.42% Exps/Revs 60.61% 57.68%
COGS/Rev's 2.90% COGS/Rev's 18.08%
Revenues Yr-ov-Yr 67.18% Revenues Yr-ov-Yr 3.88% 3.88%
COGS 9,423.00$ COGS 61,068.00$
Actuals Jan - July

12. Total Income 325,081.00$
Advertising 2,969.00$
Commission and Fees 40,091.00$
Interest: Other 208.00$
Legal and Professional 4,619.00$
Rent/Lease Machinery/Equipment
Repairs and Maintenance 1,159.00$
Supplies 2,126.00$
Travel, Meals and Entertainment 20,048.00$
Other Expenses 27,666.00$
Total Expense 98,886.00$
EBITDA 226,195.00$
New Booked Contract 60,000.00$
New Net Income 286,195.00$
Net Inc/Revs 69.58%
Exps/Revs 30.42%
COGS/Rev's 6.15%
COGS 20,000.00$
Pro Forma Baseline Based on 2008

13. KEY RATIOS
Year
N
etInc/R
evs
W
/A
djustm
ents
M
ean
N
etInc/R
evs
C
O
G
S/R
ev's
Expenses/R
evs
G
row
th
R
ate
06 36.31% 46.37 45.00% 6.20%
07 57.14% 57.14% 4.01% -5.92%
08 69.58% 69.58% 2.90% 67.18%
09 39.39% 57.68% 50.00% 18.08% 3.88%
Pro Forma 68.00% 6.15% 30.42%
Teresa Dentino, CDFA
Tel: 650.851.8959
The Financial 411
teresa@thefinancial411.com
Page 1 EJL Wireless

14. 5% G. Rate Total 5 Yrs.
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Total Income 325,081.00$
Advertising 2,969.00$
Commission and Fees 40,091.00$
Interest: Other 208.00$
Legal and Professional 4,619.00$
Rent/Lease Machinery/Equipment
Repairs and Maintenance 1,159.00$
Supplies 2,126.00$
Travel, Meals and Entertainm 20,048.00$
Other Expenses 27,666.00$
10,400.00$
(1,000.00)$
Total Expense 108,286.00$
EBITDA 216,795.00$ 270,993.75$ 338,742.19$ 423,427.73$ 529,284.67$ 555,748.90$ 2,118,197.$
New Booked Contract 60,000.00$
New Net Income 276,795.00$ 345,993.75$ 432,492.19$ 540,615.23$ 675,769.04$ 709,557.50$ 2,704,427.$
Yr EBITDA Weighting EBITDA w/ New contracts
1 270,993.75$ 5 345,993.75$ 5
2 338,742.19$ 4 432,492.19$ 4
Net Inc/Revs 66.69% 3 423,427.73$ 3 540,615.23$ 3
Exps/Revs 33.31% 4 529,284.67$ 2 675,769.04$ 2
COGS/Rev's 6.15% 5 555,748.90$ 1 709,557.50$ 1
Weighted Avg. 372,969.26$ Weighted Avg. 476,191.92$
COGS 20,000.00$ 5 yrs Total 1,864,846.31$ 5 yrs Total 2,380,959.59$
Projected GrowthPro Forma Baseline Based on 2008
Weighted Average Calculation on Pro Forma
25% Growth Rate
Teresa Dentino, CDFA
Tel: 650.851.8959
The Financial 411
teresa@thefinancial411.com
EJL Wireless Research
9.2.09

15. 0 1 2 3 4 5
20.00% 20.00% 20.00% 20.00% 20.00% 20.00%
1,864,846.31$
Discounted C/F ($749,439.91)
0 1 2 3 4 5
20.00% 20.00% 20.00% 20.00% 20.00% 20.00%
2,380,959.59$
Discounted C/F ($956,854.26)
EBITDA I EBITDA II (w/New Contract)
Total 5 Yrs. 1,864,846.00$ 2,380,959.00$
Valuation I Opportunity Cost + Risk
1 2 3
749,439.91$ 798,153.50$ 850,033.48$ 905,285.65$
Total 5 Yrs. 1,864,846.00$
Total Cost (905,285.65)$
Investment Gain 959,560.35$
ROI 106.00%
Valuation II Opportunity Cost + Risk
1 2 3
956,854.26$ 1,019,049.79$ 1,085,288.02$ 1,155,831.74$
Total 5 Yrs. 2,380,959.00$
Total Cost (1,155,831.74)$
Investment Gain 1,225,127.26$
ROI 106.00%
"Opportunity Cost" is considered to include: financing, risk, etc.
We further tested the final two valuations by applying a second method as demonstrated on the following page.
Opportunity
Costs
Opportunity
Costs
Analysis of DISCOUNTED CASH FLOW = VALUATION
After determining the discounted cash flow of the weighted average of projected 5 Years earnings (Previous Pg., "H & K 35"), we tested for those values
against: The Total 5 yrs CF, and then Minus the "Opportunity Costs" (Risk) of receiving that cash flow. The high ROI (another filter that helps us test the
valuation) is in keeping with the higher risk nature of future cash flow and its prediction.
PART1PART2PART3
Present Value of Future Earnings Stream - EBITDA II (After Weighted Average)
Present Value of Future Earnings Stream - EBITDA I (After Weighted Average)
5 - Yrs Total Cash Flow
Teresa Dentino, CDFA
Tel: 650.851.8959 The Financial 411 EJL Wireless Research 9.2.09

16. EBITDA Value w/RPM
2009 Cash Flow 194,761.00$ 669,977.84$
Pro Forma Cash Flow I 216,795.00$ 745,774.80$
Pro Forma Cash Flow II 276,795.00$ 984,510.80$
Multiple of Excess Earnings Method
RISK PRICE MULTIPLE (3.44) x Adjusted Pro Forma Cash Flow
The multiple we used here (3.44) is derived from the RPM that is contained within our brief i.e. 9
categories of evaluation are assigned a value from 1 - 4 (with 4 being the highest) to arrive at the
multiplier.

17. Factors Affecting Business Valuation – Determining Risk/Price
Multiple
One measure of a company’s value is to assign a risk/premium value to various factos
that affect a business prospects for success. While subjective, we can use this to compare
and contrast and test for consistency the other results from our various valuation
methods.
Finance 3.25
Industry Growth 3
Business Growth 3.75
Customer Concentration 3.5
Product/Service Concentration 3.5
Intellectual Capital 4
Ease of Operation 3.5
Capital Requirements 3.75
Management and Control 2.75
Total 31
Business Risk/Price Multiple (RPM) 3.44
• A rating scale of between 1and 4 is used to weight each factor’s impact on the
business risk, with 4 being the highest.
• The RPM is then used in conjunction with capitalizing earnings for one measure
of the company’s value