VALUATION FOR M

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VALUATION FOR MA TRANSACTIONS
CPA Leadership Webinar Presented by Chris
Mellen
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Agenda

• Seminar Overview
• Current Environment
• Approaches to Value
• Components of Value Creation
• Valuation Metrics
• Operating Options to Enhance ROI
• Questions Concerns in Maximizing ROI
• Risk and Value Drivers
• Sources of Synergy
• The Virtuous Valuation Circle
• Closing Thoughts
• Valuation for MA Building Value in Private
  Companies
• Speaker Bio Contact Information

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Seminar Overview

• Most owners and managers operate their businesses
  without ever knowing
• What their company is worth
• How much more a strategic buyer would pay to
  acquire it
• What factors affect the companys stock value
• Practical ways to increase value and improve
  returns

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Seminar Overview

• The objective of this seminar is to discuss
• What are some of the key metrics of the income
  approach to value?
• What are the components of value creation?
• How do you determine owners return on investment
  (ROI) in their company as part of their overall
  investment strategy?

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Current Environment

• Continued strength in middle market transaction
  activity valuations holding steady
• 29 transactions were completed in Q1 2011 (based
  on data from 159 private equity firms for
  transactions between 10 million and 250
  million).
• This compares to 19 deals in Q1 2010 and 60 in Q4
  2010 (driven by uncertainty in impending tax law
  changes).
• The average EBITDA multiple on these deals was
  6.1x TTM for the 3rd quarter in a row . . . up
  from the low to mid 5s in Q1/Q2 2010.
• Message MA is very much back in the picture as
  a viable owner exit option.
• SOURCE GF Data (Conference Exhibitor)
• Source GF Data.

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Approaches to Value

• Value is a prophesy of the future . . . It is
  based on expected future performance.

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Approaches to Value
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Approaches to Value
Income Approach Market Approach Asset Approach
The company derives significant value from its operations. There is an adequate number of companies that are reasonably similar to the subject company. The company owns a significant amount of tangible assets.
The company generates a positive income or cash flow. There are merger and acquisition transactions that involve targets that are reasonably similar. The company creates little value from its operations.
The company possesses significant intangible value. There is adequate data available about the companies used for comparative purposes. The companys balance sheet includes most of its tangible assets.
The companys risk can be accurately quantified through a rate of return. The companies generate multiples that provide a reasonable indication of market conditions and prices as of the appraisal date. It is possible to obtain accurate appraisals of the value of the companys assets.
The companys future performance can be accurately estimated through a forecast. The subject company is large enough to be compared to the companies used in the market approach. The ownership interest being appraised possesses control or access.
This discussion of the market approach only refers to applications of the guideline public company and merger and acquisition methods. This discussion of the market approach only refers to applications of the guideline public company and merger and acquisition methods. This discussion of the market approach only refers to applications of the guideline public company and merger and acquisition methods.
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Approaches to Value Income Approach

• Future benefits to a business
• Gross revenues
• Gross profits
• Net operating profits
• Net income
• Operating cash flow
• Free cash flow
• Need to discount future benefits by cost of
  capital to find firm value

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Approaches to Value What is the Discount Rate?

• Factors affecting the discount rate
• Components of a discount rate
• Calculating the discount rate
• Characteristics of the Company Specific Risk
  Premium
• The Capitalization Rate
• The Cost of Debt
• Weighted Average Cost of Capital (WACC)
• Possible distortions in the rates
• Growth Rates

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Approaches to Value Cash Flow

• Measuring economic income for financial
  decision-making
• When to use net cash flow
• Net Income vs. Net Cash Flow
• Matching rates and returns
• Deriving discount rates from the market
• Manipulating returns
• Sources of forecast assumptions

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Components of Value Creation
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Valuation Metrics

• For value creation and ROI in private companies
• Investment
• Initial investment
• Reinvested profits
• Market value of tangible assets
• Return
• EBIT EBITDA
• Net cash flow to invested capital
• Rate of Return
• Required vs. Actual
• Value
• Fair Market Value
• Investment Value
• Strategic Value

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Valuation Metrics

• Continuum of Value

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Operating Options to Enhance ROI

• Option 1 Investment (current value)
• Option 2 Return (net cash flow)
• Option 3 Rate of Return (risk)
• ROI Enhanced Through a Combination of Reduced
  Investment, Improved Returns, or Lower Risk

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Questions Concerns in Maximizing ROI

• Public company focus
• Companys actual performance
• Competitive position
• Strategic (Investment) Value vs. Fair Market
  Value
• Growth
• Change in risk profile
• Differing rates of return
• Is it bad to borrow?

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Risk and Value Drivers

• Considerations Driving Value
• Macro
• Financial
• Operations
• Management
• Sales and Marketing
• Higher vs. Lower Multiples
• i.e., Perceived vs. Real Risk

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Sources of Synergies

• Revenue enhancements
• Cost reductions
• Process improvements
• Financial economies
• Risk reduction
• Intangible Capital
• Negative Synergies

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The Virtuous Valuation Circle

• Think about this . . . The Virtuous Valuation
  Circle
• C
• 
  
• g V
• k

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The Virtuous Valuation Circle

• The Virtuous Circle
• At the beginning . . . 2 axioms
• 1. A virtuous circle is a complex set of events
  that reinforces itself through a continuous
  feedback loop.
• 2. A virtuous circle can transform into a
  vicious circle if eventual negative feedback is
  ignored.

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The Virtuous Valuation Circle

• Components of Value are Inseparable
• C g k

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The Virtuous Valuation Circle

• In summary . . .
• Value ?(Cash Flow, Risk)
• Lets take a practical look

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Closing Thoughts

• Educate peers and clients about value creation.
• Be aware that not all value is created equal.
• Understand value as a conflict of reason and
  passion.
• Preciseness does not beget accuracy/appropriatenes
  s.
• There are no shortcuts to the true understanding
  of value creation so lets be careful out there .
  . .

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Valuation for MA
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Valuation for MA
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Speaker Bios

• Chris M. Mellen is the President of Delphi
  Valuation Advisors, and the Managing Director of
  American Business Appraisers. His experience
  includes completion of over 2,000 business and
  intangible asset valuations over the past 22
  years. Chris holds the Certified Merger
  Acquisition Advisor (CMAA), Accredited Senior
  Appraiser (ASA), Master Certified Business
  Appraiser (MCBA), and Accredited in Business
  Appraisal Review (ABAR), and designations. He
  has served on several valuation committees,
  published several articles, led numerous
  seminars, and provided expert testimony in court.
  Chris is co-author of VALUATION FOR MA
  BUILDING VALUE IN PRIVATE COMPANIES. Prior to
  founding Delphi in 2000, he held senior level
  positions in the valuation practices of a large
  regional accounting firm in Boston (CBIZ Tofias)
  and KPMG.

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Speakers Contact Information

• Chris Mellen
• Delphi Valuation Advisors, Inc.
• 100 River Ridge Drive, Suite 201
• Norwood, MA 02062
• Phone [phone]
• Fax [phone]
• cm_at_delphivaluation.com
• www.delphivaluation.com