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Business Valuation in Exit Planning
1. Delivering on the Promise.
Business Valuation in
Exit Planning
August 16, 2012
Michael Trabert, CPA, CVA, CMAP, CEPA
Kenneth M. Haffey, CPA, CVA
Sean R. Saari, CPA/ABV, CVA, MBA
2. Delivering on the Promise.
Learning After completing the session, participants will be able to...
Objectives
1. Recognize the methods typically utilized to value a
business or ownership interest and understand their
basic application
2. Identify normalizing adjustments and assess their
impact on value
3. Reconcile values derived from multiple valuation
approaches
4. Capitalize on planning opportunities to help clients
maximize the value received for their business
3. Delivering on the Promise.
Seminar • Valuation Basics
Overview
• Case Study / Valuation Analysis
• Valuation Approaches
• Control and Marketability Considerations
• Planning Considerations
4. Delivering on the Promise.
“There is no such thing as an absolute value in this world.
You can only estimate what a thing is worth to you.”
Charles Dudley Warner 1829-1900, American writer
5. Delivering on the Promise.
Valuation • Standard of Value
Fair Market Value
Basics
•
• 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 - Cash
6. Delivering on the Promise.
Valuation • Asset Approach
Approaches
• Income Approach
• Market Approach
• LBO Method
• Rules of Thumb
Practice Tip
Remember that both fair market value and strategic value
can be determined using these approaches depending upon
the benefit stream used in the valuation analysis
7. Delivering on the Promise.
Asset • Valuation Methodologies
Adjusted net asset method
Approach
•
• Basic Steps
• Adjust assets to fair market/strategic value
• Adjusted liabilities to fair market/strategic value
• Pros
• Provides “floor value” of the company
• Relatively simple analysis
• Cons
• Typically provides a liquidation value, which is often not
appropriate for healthy businesses
• Rarely utilized in transactional valuation
8. Delivering on the Promise.
Income • Valuation Methodologies
Discounted cash flow method
Approach
•
• Capitalization of cash flow method
• Capitalization of earnings / Discounted future earnings
• Basic Steps
• Determine benefit stream and make normalizing adjustments as
appropriate
• Determine discount/capitalization rate
• Determine cash flow adjustments
• Discount/capitalize cash flows
• Pros
• Provides most “company-specific” value
• Can appropriately incorporate projected growth of the business
• Cons
• Most involved of the valuation analyses
• May be disagreements over likelihood of meeting projections
9. Delivering on the Promise.
Income • Other Considerations
Mid-Period Discounting
Approach
•
• Non-Operating Assets
• Direct to Equity vs. Debt-Free Valuation
• Normalizing Adjustments
10. Delivering on the Promise.
Normalizing • FMV vs. Strategic normalizing adjustments
Adjustments
• Compensation
• Family members paid other than FMV
• Officers paid other than FMV
• Personal expenses
• Related party transactions at other than FMV
• Non-recurring income or expenses
• Expense trends
11. Delivering on the Promise.
Market • Valuation Methodologies
Guideline transaction method
Approach
•
• Guideline public company method
• Basic Steps
• Determine benefit stream and make normalizing adjustments as
appropriate
• Find comparable transactions/guideline public companies
• Calculate valuation multiples and apply to subject company
• Make adjustments as necessary to arrive at equity value (if
necessary)
• Pros
• Incorporates market conditions and prices paid in recent relative
transactions
• Easy to explain and apply
• Cons
• Can be misleading if debt not appropriately considered
• EBITDA multiples typically result in an Enterprise Value, not an Equity Value
• In certain industries, there may be a lack comparable
transactions or public companies
12. Delivering on the Promise.
LBO • Valuation Methodologies
LBO Method
Method
•
• Basic Steps
• Prepare discounted cash flow analysis
• Estimate financing and capital structure
• Determine implied rate of return at various exit points
• Pros
• Allows seller to determine maximum price that the buyer will be
willing to pay based on the amount of debt financing available
and rate of return required
• Cons
• Simply a derivation of the discounted cash flow method
• Not as widely-utilized as basic income and market approaches
• Buyer may not have reliable information available regarding the
extent of financing that the seller can obtain
13. Delivering on the Promise.
Rules of • Valuation Methodologies
Rule of Thumb
Thumb
•
• Basic Steps
• Identify rule of thumb valuation metrics
• Apply rule of thumb to the subject company
• Pros
• Simple application
• Cons
• Can result in misleading values
• Often lacks support
• Not permitted to be used as sole valuation method by most
valuation standards
14. Delivering on the Promise.
Other • Asset Deal vs. Stock Deal
Valuation • Asset Deal
Typically preferred by buyers
Considerations •
• Allows for step-up in basis of acquired assets, which may allow for higher 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 taxation
Asset Deal Stock Deal
Deal Price $ 10,000,000 $ 10,000,000
Corporate Level Tax (35%) (3,500,000) -
Cash Available to Distribute 6,500,000 -
Dividend Tax (15%) (975,000) -
Capital Gains Tax (15%) - (1,500,000)
After-Tax Proceeds to Seller $ 5,525,000 $ 8,500,000
15. Delivering on the Promise.
Planning • Button down financial reporting
Get in compliance with GAAP
Considerations
•
• Consider audited/reviewed F/S
• Standardize processes
• Make it easy for someone new to come in and run the business
• Reduce reliance on key employees
• Reverse engineer potential buyer preferences
• Think about what characteristics would be desirable to potential
acquirers in the industry and work to implement them
• Implement confidentiality agreements with
employees
• Identify and reverse negative income/expense
trends
• Diversify the customer base
• Right-size working capital
16. Delivering on the Promise.
Learning After completing the session, participants will be able to...
Objectives
1. Recognize the methods typically utilized to value a
business or ownership interest and understand their
basic application
2. Identify normalizing adjustments and assess their
impact on value
3. Reconcile values derived from multiple valuation
approaches
4. Capitalize on planning opportunities to help clients
maximize the value received for their business
17. Delivering on the Promise.
“Things only have the value that we give them.”
Moliere 1622-1673, French Actor and Playwright
Questions?