Business Valuation Issues

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Business Valuation Issues
Step by Step Process for Selling Your Business to
Your Employees

• 20th Annual OEOC Conference - April 21, 2006
• Rosanne J. Aumiller, CPA/ABV, ASA
• rja_at_barneswendling.com
• 216.566.9000

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Introduction

• Barnes Wendling has served Northern Ohios
  closely-held businesses since 1946.
• Our core clients are privately owned middle
  market companies.
• We consider confidentiality, independence, senior
  level involvement, integrity, relationship
  building to be critical success factors.

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Where to Find Us
Akron 1799 Akron-Peninsula Rd. 222 Akron, OH
44313 [phone]
Cleveland 1215 Superior Avenue, Suite
400 Cleveland, OH 44114 [phone]
Sheffield Village 5050 Waterford Drive Sheffield
Village, OH 44035 [phone]
Sandusky 1616 Sycamore Line Sandusky, OH
44870 [phone]
Norwalk 48 Executive Drive Norwalk, OH
44857 [phone] www.barneswendling.com
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Business Valuation Litigation
Support Forensic Accounting Corporate
Finance

• Appraisal Review
• Appraisal Consulting
• Raising Capital / Re-Capitalization
• Acquisitions
• Divestitures
• Business Strategic Planning/Budgeting/Forecastin
  g
• Capital Budgeting
• Debt Restructuring
• Obtaining Financing

• Estate and Gift Tax Planning
• Buy Sell Agreements
• Succession Planning
• Family Limited Partnerships
• ESOPS
• Mergers and Acquisitions
• Intangible Asset Valuation
• Financial Modeling
• Buyer/Seller Due Diligence
• ESOP Feasibility Study

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Some Questions Raised...

• What should an ESOP Trustee look for in an
  appraiser?
• What is a business valuation?
• What creates value in the ESOP sponsoring company?

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Organizations Credentials

• American Society of Appraisers
• ASA Accredited Senior Appraiser
• American Institute of CPAs
• ABV Accredited in Business Valuations
• National Association of Certified Valuation
  Analysts
• CVA Certified Valuation Analyst
• Institute of Business Appraisers
• CBA Certified Business Appraiser

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Number of Professionals
American Society of Appraisers - 2,313 Accredited
Members American Institute of CPAs - 1,701 ABV
Holders Natl Assoc. Cert. Val. Analysts 4,800
CVA Designees Institute of Business Appraisers
465 CBAs
It Boils Down to A Relatively Small Number
Source Borrowman Baker
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What Is a Business Valuation?

• Product
• comprehensive written report
• gives the reader a logical, supportable value
  conclusion
• company history, products/services, personnel,
  markets, economy, analysis, conclusion
• Service
• key is client should understand content

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Valuations Have Multiple Uses

• XYZ Company may have different values depending
  on the level of value and the standard of
  value

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The Valuation Process

• Identify
• Purpose ESOP transaction or annual update
• Level of Value - control or minority
• Standard of Value - fair market value
• Date of Valuation
• Key Issues adjust owners' comp leverage

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Minority vs. Control InterestImpact on Value

• Control
• Ohio 2/3 ownership or
• Greater than 50 voting or
• As defined in a shareholder agreement
• Large enough block to control mgmt. decisions
• Minority
• Discounted value
• No individual ability to affect mgmt. decisions

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Levels of Value
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Standards of Value

• ALL ASSUME CASH EQUIVALVENT VALUE
• Fair Market Value - hypothetical willing
  buyer/seller, refer to Rev Ruling 59-60
• Investment Value
• Strategic Value
• Fair Value

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IRS Revenue Ruling 59-60 Set the guidelines for
valuing private interests

• Fair Market Value
• The amount at which 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, both parties having reasonable knowledge of
  relevant facts.

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IRS Revenue Ruling 59-60

• Eight factors to consider
• Nature of the business history
• Economic industry outlook
• Book value of stock co. financial condition
• Earning capacity
• Dividend paying capacity
• Intangible value - goodwill or other
• Sales of stock and size of block
• Market price of similar public stocks

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DOL Requirements

• ESOP cannot over pay for stock adequate
  consideration
• FMV as of transaction date
• Utilize qualified valuator as professional
  advisor to the trustee
• Valuator independent of ESOP, Company selling
  shareholder(s)
• Similar to IRS Revenue Ruling 59-60

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Two Key Drivers

• Future Cash Flow Available to Shareholders
• Volatility or Risk Associated with Future Cash
  Flow

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Factors that Drive Value

• Internal Factors
• Quantitative
• Qualitative
• External Factors
• Economic climate

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Factors that Drive Value Total Invested Capital

• After initial valuation stock price may decline
  if leveraged
• As debt is repaid, stock price increases

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How is a Business Valued?
Approach
Method
Value is based upon.
Estimated future profitability (cash flow)
Discounted Cash Flow or Capitalized Earnings
INCOME
Historical profitability/ (cash flow)
Private company transactions involving similar
businesses
Comparable Sale or Guideline Company
MARKET
Public company stock prices
ASSET
Adjusted Net Assets
Appraisal of hard assets
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Discounts and Premiums

• Minority discount
• Control premium
• Lack of marketability
• Key person discount
• Blockage discount

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Marketability Discount Model Liquidity Hierarchy
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What goes into our work?
THE KNOWLEDGE AND EXPERIENCE OF BWs CONSULTING
PROFESSIONALS
Industry Data Research Insight (Standard Poor's
Public Company Data) Partnership Profiles
(Database of limited partnership
transactions) Pratt's Stats Database (Private
company transactions) FactSet Mergerstat
Transaction Data Various trade and industry
publications
Unique Resources BWs Proprietary Internal
Database (Given the number of engagements we have
completed, we have a huge body of valuation
data) ScanUS (Mapping software used to
graphically display relevant data can be a
powerful analysis tool)
WELL-RESEARCHED, DEFENDABLE RESULTS OPINIONS
External Resources Financial Consulting Group
(Access to the knowledge of hundreds of valuation
professionals) CPA Associates International Associ
ation of Certified Fraud Examiners
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What Information Do We Need?
Financial Operational Data

1. Capital expenditures over the last 5 years and
   plans for the future
2. Distributions/dividends paid
3. Industry data the company may receive as part of
   a trade group
4. Sales by product line
5. Summary of employees by function, organizational
   chart, terms of labor contracts if applicable
6. Owners compensation for last 5 years
7. Complete document request will be provided

1. Five years of financials and tax returns
2. Business plan or budget for next 1 to 5 years
3. Shareholder agreements
4. Fixed asset/depreciation schedules
5. Terms of debt
6. Terms of capital and operating leases
7. Identify competitors
8. Management structure

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Valuation Process Timeline
Data Request List to Client
Analyze Financials/ Operational Data
Site Visit and Interview
Apply Valuation Methods
Client gathers data
Present Final Report to Client
Final MSDP
Week 1
Week 2
Week 3
Week 4
Draft Report
Identify Key Issues
Research Comparable Transaction Data
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Conclusion

• Challenge - to balance objectivity with providing
  a reasonable value range to meet clients needs
• Questions?
• Thank you