• When do you need a business valuation?

You need a Valuation When you . . .

• Sell your business
• Buy a business
• contemplate a public offering
• Analyze the collateral value of a loan portfolio
• Make a gift of stock
• Complete estate planning
• Litigate
• Buy-out or redeem shareholders
• Contemplate, enter or emerge from Bankruptcy
• Negotiate a Divorce settlement
• Appeal Property taxes

Valuation of Business Enterprises

• Definition of Fair Market Value

"The amount at which property would change hands between a willing buyer and a willing seller when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts"

• Different parties have different perpsectives of value
  - Minority, passive investor
  - Majority owner/operator
  - Financial investor
  - Strategic investor

• The Value of a Business is Usually Greater as a Going Concern
• Value is the Present Worth of Future Benefits of Ownership
• Revenue Ruling 59-60 Factors to Consider
• The nature of the business and the history of the enterprise from its inception.
• The economic outlook in general and the condition and outlook of the specific industry in particular
• The book value of the stock and the financial condition of the business.
• The earnings capacity of the company.
• The dividend-paying capacity.
• Whether or not the enterprise has goodwill or other intangible value.
• Sales of the stock and the size of the block of stock to be valued.
• The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market either on an exchange or over-the-counter.

 
What is Being Valued & When

• 100% controlling interest
• 75% controlling interest
• 25% minority interest
• Swing vote
• What is the valuation date?

 
Discounts & Premiums

• Discounts
  • Marketability
  • Minority interest
  • Key man discount
  • Lack of voting rights
  • Small stock
• Premiums
  • Control
  • Synergies

Prerogatives of Control

• What are some of the Prerogatives of Control?
  • Elect directors and appoint management.
  • Determine management compensation and prerequisites.
  • Set policy and change the course of business
  • Acquire or liquidate assets
  • Select people with whom to do business and award contracts
  • Make acquisitions
  • Liquidate, dissolve, sell out, or recapitalize the company
  • Sell or acquire Treasury shares
  • Register the company's stock for a public offering
  • Declare and pay dividends
  • Change the articles of incorporation or bylaws.

Terms
 

Gross Cash Flow =

net income + depreciation & amortization

Earnings Before Interest & Taxes (EBIT) =
Pretax income + interest expense
Earnings Before Depreciation Interest & Taxes (EBDIT)=EBIT + Depreciation & Amortization
Debt Free Net Income (DFNI) = EBIT - Taxes (based on EBIT)

Debt-Free Net Cash Flow Calculation

EBIT

• Taxes

= Debt-Free Net Income

+ Depreciation and Amortization

= Debt-Free Cash Flow

• Additions to Working Capital
• Additions to Fixed Assets

= Debt-Free Net Cash Flow

Invested Capital Value

Debt Value

+

Equity Value = Invested Capital Value

Total Invested Capital

Table
 

• Cost Approach
• Restated Balanced Sheet Analysis
• Market Approach

• Comparable Acquisition/Transaction Analysis
• Income Approach
• Discounted Cash Flow Analysis

Cost Approach to Valuation

Applicable to Companies Where

• Business defined by nature of assets (i.e., real estate holding companies, investment companies)
• need to value specific underlying assets
• Significant non-operating assets or unrelated business interests present
• Liquidation value (highest realizable value)

Cost Approach

• Definition

• Historical Cost
• Reproduction Cost
• Replacement Cost

Sum of Assets

• Net Working Capital
• Fixed Assets
• Intangible Assets

Market Approach

• Definition

• Stock market transactions of similar publiclv-held companies
• Acquisition data for similar public or closely-held companies

Generally applicable to companies where:

• Other similar companies are actively traded in public markets

• Similar publicly-disclosed acquisitions

• Established company - mature industry
• Stable. predictable sales and earnings

Market Approach Example

• Advantages

Market Approach Example

• Drawbacks

• Applying market multiples of publicly traded companies to closely-held companies

Typical Market Multiples

• Price/Earnings
• Price/Earnings + Depreciation
• Total Capital*/EBIT
• Total Capital*/EBIT + Depreciation
• Total Capital*/EBITD +R&D
• Total Capital*/Sales

*Debt plus equity

Market Approach Example

Comparable Company financial data
 

Market Approach Example

Comparable Company Multiples
 

Market Approach Example

Subject Company Financial Data
 

Income Approach

• Defined

Income or DCF Approach

Applicable to companies where:

• Future performance is more indicative of value than past/present results
• Specialized business with few (if any) publicly-traded competitors
• Startup or turnaround operation

Income Approach Example

Components of Value

• Present value of cash flows over the projection period.
• Present value of cash flows beyond the projection period.

Continuing Value

The Gordon Growth Model

Where. . .

DFNCF Debt Free Net Cash Flow

g = compound growth rate