 |
 |
|||||||
 |
|
 |
|
About Us |
|
Member's Page |
||
|
|
||||||||
|
|
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
|
|
Home > The Process > Evaluation |
|
Evaluation
"Sample Business Evaluation"
Prepared by: The Servian Group, L.L.C. 750 N Tamiami Trail Unit 807 Sarasota, Florida 34236 Telephone: 941 953-5601 Facsimile: 941 953-4006 Email: serviangroup@comcast.net CONFIDENTIAL The Servian Group 750 N Tamiami Trail Suite 807 Sarasota, Florida 34236
Seller Main Street Sarasota, Florida 34227
Dear Sir,
This report contains the documents and data we have used to evaluate Company. The suggested price is divided between tangible assets and business value, which is based on client information and an expected down payment. Asset Value The tangible asset price or asset value represents the current estimated value of the following: 1. Inventories for resale or consumption. 2. Equipment and vehicles. 3. Leasehold improvements. 4. Transferable rights and privileges uncontrolled by scarcity. The estimated current asset value of the company is: $364,000. Business Value The intangible asset price or business value represents the current estimated value of the following: 1. Establishing a customer base which will continue to trade with this company after being sold. 2. Securing a location, designing and constructing a floor plan and securing and installing equipment. 3. Management systems in place and producing cash flow. 4. Proprietary rights or limited issue permits. 5. Free training and available consulting time. The estimated current intangible value of the company is: $1,151,000. Estimated Current Market Value The enclosed report with supporting documents offers a range of suggested prices indicating the extremes of different prices; therefore, our single price conclusion is the average of the maximum and minimum suggested price ranges. The estimated current market value of the company is: $1,515,000. Respectfully submitted,
Robert Servian
I. Overview Client Data Seller Company Main Street Sarasota, Florida 34236 Authorization Seller has authorized this evaluation for Company and has provided the evaluator with both the general and financial information necessary to perform this evaluation. Nature of Assignment The purpose of this evaluation is to determine the estimated fair market value, based on an asset sale, of Company, hereinafter sometimes referred to as the company. This opinion will be in the form of a written report based on information collected regarding the company, analysis of that information, and the expertise of the evaluator. Assumptions and limiting conditions are stated in the exhibits to the evaluation report. Purpose of Evaluation This report provides the client with an opinion of the company’s fair market value for the purpose of the sale of the company. Definition of Fair Market Value Fair market value is the price, in cash or equivalent, that a buyer could reasonably be expected to pay, and a seller could reasonably be expected to accept, if the business were exposed for sale on the open market for a reasonable period of time, both buyer and seller being in possession of the pertinent facts and neither being under compulsion to act. Ownership Ownership or title to the business and equipment appraised was not a consideration of this assignment. This report assumes that the business appraised was the property of Company, free and clear. Additional Information Contact For additional information, contact Robert Servian from the Servian Group. Do not contact the client without written authorization from the Servian Group. All information contained in this report is confidential. Location of the Business At the time of the evaluation, the business was located at Main Street, Sarasota, Florida 34236. Documents Reviewed by Evaluator Documents listed as reviewed below have not been analyzed by the evaluator and any values derived from such documents or reports may be included in this report. We have relied on the expertise of the company’s financial advisors supplying this information for any values used. 1. Tax Returns 2. P & L’s 3. AR & AP analysis 4. Interviews with seller 5. Asset Lists Interviews Interviews were conducted by the evaluator using the evaluator’s forms and questionnaires. Environmental Concerns The evaluator expresses no opinions and has received no information that an environmental concern exists. Evaluation Effective Date Values stated are effective as of 5/15/2003. Any difference between the date this report is presented and the effective date could have a bearing on the value opinion stated. What is Valued in this Report The evaluator was asked to value the subject company, including all assets of the business, both tangible and intangible. 1. Company is the valued entity and owned by Seller. Please refer to the section entitled Clarification of Value for a detailed analysis of assets included in this evaluation report. 2. Automobiles have not been valued but are included in this evaluation report. 3. Liabilities have not been valued and are not included in this evaluation report. 4. Intangible assets are valued and included even though they may not be shown on the company’s balance sheet. 5. Accounts receivable are not included in this evaluation report. 6. Real estate and improvements have not been valued by the evaluator and are not included in this evaluation report.
Statistical Summary For summary purposes we have included a specific amount for asset value and business value and a conclusive selling price. We estimate the asset value of this company to be $364,000. We estimate the intangible value of this company to be $1,151,000. We estimate the market value of this company to be $1,515,000. Our analysis generates a price range representing the highest price a seller could expect and the lowest price a seller should accept. The suggested price is calculated based on the information generated by the various formulas, but will account for special situations and inconsistencies. Suggested Pricing Upper Range Value Lower Range Value Asset Method $400,400 $327,600 Basic Method $1,622,000 $734,800 Capitalization $2,908,571 $1,566,154 Critical Factor $1,601,504 $725,515 Debt Capacity $2,567,775 $1,597,085 Industry Method $1,501,000 $1,529,800 Comparable Sales $1,503,225 $1,532,255 National Method $534,308 $461,508 Weighted Method $989,589 $617,066 Multiple Average $1,703,958 $950,355 Suggested Range $1,703,958 $950,355 Suggested Price $1,515,557 $1,515,557
Special Conditions If a particular range value is extremely high or extremely low, do not be alarmed. Extreme deviations are the product of formulas, which consider only one or two business factors, and are not representative of the total business. This report reflects the adjustments and allowances for these extremes in the suggested range value. If potential buyers used only one method for evaluation and that formula produced one extreme value there would be reason for concern. However, very few buyers consider only one formula; rather, most buyers base their decision on the debt capacity and assets of a business and become generous or conservative based on their beliefs for all the other factors. Clarification of Value The value of the subject company has been stated on the opinion letter. This value does not include real estate or improvements, which are considered to be investment assets. The following should clarify how the final business value was calculated: Furniture, Fixtures and Equipment $329,000 Leasehold Improvements $5,000 Vehicles $25,000 Inventory $5,000 License/Patents $0 Total Asset Value $364,000 Intangible Value $1,151,000 Total Value $1,515,000 By Method Asset Method Equipment $359,000 Improvements $5,000 Vehicles $0 Stock/Supplies $0 Licenses/Patents $0 Asset High $400,400 Asset Low $327,600
Basic Value Factoring Net Cash $407,200 Asset Value $364,000 Basic High $1,622,000 Basic Low $734,800
Capitalization Rate High Return % 26% Low Return % 14% Capital Rate High $2,908,571 Capital Rate Low $1,566,154
Critical Factor Financing 55% Desirability 93% Lease 67% Economy 180% Critical High $1,601,504 Critical Low $725,515
Debt Method Discretionary Cash $530,000 Less Salary $50,000 Less Depreciation $72,800 Net Discretionary Cash $407,200 Interest Rate 10.00% Fast Pay Out Years 5 Slow Pay Out Years 10 Debt High $2,567,775 Debt Low $1,597,085
National Method Base Value $771,200 Competition $69,408 Management Type ($401,024) Turnover $123,392 Type of Business $131,104 Owner Finance Years $485,856 Owner Finance Rate $185,088 Owner Finance % $146,528 Bank Finance Years $485,856 Bank Finance Rate $0 Bank Finance % $316,192 Number of Employees $53,984 Age of Industry $208,224 Industry Market $185,088 Years of Operation $316,192 Consulting Time $123,392 Net Cash - Salary $339,328 Local Economy $208,224 Labor Market ($131,104) Skills Required ($69,408) Union Strength ($285,344) Location $362,464 National Economy $92,544 National High $534,308 National Low $461,508
Weighted Target $1,178,400 Labor 118% Predictability 93% Management 98% Competition 63% Revenue 100% Longevity 87% Location 103% Loan Ability 55% Clientele 73% Liability 50% Weighted High $989,589 Weighted Low $617,066
Evaluation Methods A business's value can actually be divided into five components: 1. Market value of assets. 2. Historical trends of revenues expense and cash flows. 3. The value of rights, privileges, and knowledge. 4. Estimated stability in the future. 5. Esthetic appeal. This evaluation report addresses all five components of a business's value through a series of questions, which define each of these aspects numerically. Software has been used to calculate the valuation methodologies, which were used to determine the suggested price. Not every method will necessarily be used in the evaluation report. The methods used in this report are described below. Asset Value The asset value method is used to determine a minimum value range for a business. That value represents the estimated worth of all tangible and intangible assets. Asset value must not be determined solely on the basis of book value or an assets worth in its current application but rather replacement value including all installation and testing costs. The upper and lower asset values are determined based on the accuracy of the asset data that was provided to the evaluator. Upper: $400,400. Lower: $327,600. Basic Method This method is based on two pricing formulas: 1. The first formula is a rule of thumb multiplier which is calculated by adding one year’s net cash flow to the business's assets, valued at current market value. 2. The second formula begins with the current market value of the assets and adds a multiple of the monthly discretionary income based on the number of months required to start a similar business and bring it to a break even cash flow position. Upper: $1,622,000. Lower: $734,800. Capitalization Method (Return on Investment) This method is based on a simple mathematical model, which calculates a total investment based on discretionary cash flow divided by a rate of return associated with the cost of money and the level of risk associated with the valued business. Upper: $2,908,571. Lower: $1,566,154. Critical Factors Method This method takes into account the critical factors, which will encourage or discourage a potential buyer in investigating and/or purchasing this business. Each factor is explained below. Percent of Down Payment This factor is based on the common belief that lending institutions generally require 20% of the total purchase price as a down payment. This factor also considers how large the down payment is in relationship to the business's post-sale cash flows. Dollars of Down Payment This factor relates the absolute dollars required as a down payment to the potential number of qualified buyers with that amount of cash or other liquid assets. The larger the cash down payment, the fewer qualified buyers will be available, thereby limiting the demand and, consequently, reducing the suggested price. Interest Rate, Interest Type, and Term of Years This factor relates the various loan types, loan terms, and interest rates offered to a potential buyer by the owner and any other available lending institution to the propensity of a buyer to purchase this business. Industry This factor weighs the possibility of market saturation, currently predicted survival for an established business and the future stability of profits. Desire This factor quantifies the buyer’s motivation to buy based on status, visual appeal, profitability, risk and skills required. Lease This factor determines if sufficient time is available to repay loans and earn a reasonable return. A rate comparable to similar available spaces is used. Utility This factor examines the alternative use of the land and buildings for sale. Accounts This factor places value on the collect ability of accounts receivable and the security of the client base. Upper: $1,601,504. Lower: $725,515. Debt Capacity This method of evaluation is purely a financial model. Direct cash expenses are deducted from direct cash revenues to determine discretionary cash flow. Deductions are then made for an operator’s salary and the real depreciation cost of assets. The result is discretionary cash for debt service. The maximum debt service this business could handle, given the current level of discretionary cash, is calculated based on the number of years financed, and an interest rate. Most evaluators agree that any future increases in revenues while under the management of a new owner belong to the new owner. If the previous owner had generated more revenue the suggested price would reflect this. Upper: $2,567,775. Lower: $1,597,085. Industry Method This method is based on pricing formulas that have been developed for a specific industry. Most of these industry rules of thumb are based on a capacity or production volume times a dollar value. Other industries simply use a constant times gross or net revenues. Upper: $0. Lower: $0. Comparable Sales Method This method is based on comparing the business being valued with similar businesses that have been previously sold. Since revenue numbers are usually more accurate than net income numbers, we have calculated a weighted intangible price to revenue ratio, based on previous business sales, and then calculated an intangible value to which we added back this company’s assets to arrive at a total value. Upper: $0. Lower: $0. National Method This method is based on a series of factors, which resemble many of the factors previously used in the weighted and critical factor methods. However, in spite of oversimplification and the inability of these factors to shift with changing economic conditions, these formulas have been included because they are routinely used by a buyer in evaluating a purchase. The following factors have been taken into consideration: Finance Years This factor assumes the greater the loan period, the more a buyer will pay. Financing Rate This factor considers interest rates and types. It decreases the amount payable to a seller as the cost of financing increases. Years in Operation This factor assumes each year of past survival indicates a greater chance of future survival. Consulting Time This factor pays for education time from a seller. Employees This factor decreases value for a greater number of employees, as having a larger work force can create greater labor problems. Net Cash The greater a business's discretionary cash, the more a buyer should be willing to pay. Local Economy A better economy provides more certainty of future success, giving the business a higher value. Labor Market This factor assumes labor is a major business cost. If the labor market is soft for this business, labor cost will not rise; the converse is also true. The following have a direct effect on the labor market and therefore on the business value: union strength, age of industry, national economy, and industry market. This factor also assumes that if a business requires high level skills, it poses a higher risk and, therefore, is worth less to a potential buyer. Union Strength This factor analyzes how an outside organization can control your business. The less control a business has over its labor force, the less a potential buyer is willing to pay. Age of Industry This factor increases value for stability and longevity in proportion to an industry’s age. National Economy This factor assumes a growing economy increases a business's demand and price. Conversely, a declining economy decreases demand for a particular business and its price. Industry Market This factor looks at the future markets for the products or services of this company and industry. The security or risk assigned to the future will directly raise or lower any suggested price. Upper: $534,308. Lower: $461,508. Weighted Factors This method assumes that the business value is based on the highest potential value of assets plus the discretionary cash flow multiplied by a factor, which is based on the learning curve for this type of business. The current demand for this industry and business are also taken into account. The business value represents the maximum possible price a buyer would pay given a business at this scale of operations and profit level. Each factor adds or deducts from the target value to arrive at a suggested price. Each of the following factors has an affect on the final suggested price. Labor This factor weighs the stability of a company’s labor force and the changes, which may reduce profits under a new owner. Predictability This factor reviews the company’s historical and current trends compared to the local and national economic trends. Management This factor estimates the integrity of the current management system and how changes of ownership will impact the business. Competition This factor weighs the possibility of a new owner going out of business because of a saturated market. Revenues The past and present problems of collecting revenues will probably remain unchanged under new ownership. Longevity The number of years a business entity has survived and grown is usually proportional to the confidence level for future survival. This factor balances lease rates, years at this location, and the utility of this location for this business against current and potential competitive locations. Loan Ability This factor weighs this company’s ability, based on its own assets, to acquire funding from lenders. Clientele This factor weighs the stability of clients and future expectations for revenue from those clients after a management change. Liability This factor weighs the hazard level of this business and how easily a bankruptcy situation could occur. Upper: $989,589. Lower: $617,066. Multiple or Average Value Method This method is the average of all of the previously described formulas based on theory that a reasonable buyer will use more than one of the previous formulas. An average value derived from all of the formulas should represent the actions of a reasonable buyer. Upper: $1,703,958. Lower: $950,355. Conclusions All of the formulas described above are calculated and displayed in price ranges with a maximum and minimum level because the data used to calculate these values are based on estimates. Upper Range Pricing The upper range pricing represents the seller’s optimistic view of his business given current market constraints. Upper: $1,703,958. Lower Range Pricing The lower range pricing represents the buyer who is primarily concerned with financial rewards including return on investment and return on equity, and will buy a business based on conservative financial estimates. Lower: $950,355. Suggested Price Range The suggested price range is based on all of the evaluation methods. It is strongly based on the multiple averages but occasionally differs for a variety of reasons. The first thing that will cause a variation between the multiple averages and the suggested price comes from inconsistent data that was used to calculate the various valuation methodologies contained in this report. If there is too much inconsistency, bizarre results may be produced. If this occurs, the suggested price will be discounted based on the degree of inconsistency that was encountered.
The methods used to sell the business can affect the suggested price. The accuracy of data used in this report will have a substantial affect on the suggested price. If the data is not accurate, the methodologies this report relies upon will generate a suggested total price range, which is wide and often unrepresentative. Suggested Price: $1,515,557.
Justification for Purchase The justification for purchase test provides a means to test the reasonableness of the proposed selling price of the business. It is not a method for estimating the value of a business or other property, as are the other valuation methods included in this report. The estimated purchase price is $1,515,000. A down payment percentage of 33.0%. The balance paid in equal monthly installment over a period of 10 years with a 10.0% annual interest rate. The derived cash flow will be available for capital additions and buyers compensation. The following table describes all of the assumptions used for a hypothetical purchase of this business. Total Price $1,515,000 Down Payment 33.0% Balance Financed $1,015,050 Number of year 10 Interest Rate 7.0% Discretionary Cash $530,000 First Year Growth 0.0% Annual Cash Growth Thereafter 0.0%
Post Sale Cash Flow In the following post sale cash flow, the derived cash flow was developed from the last year’s actual cash flow less the principle and interest payments from the debt to purchase the business. This cash flow will be the new buyer’s discretionary cash flow, before taking a salary. The evaluator makes no representations or warranties, nor gives any assurance, that a prospective buyer will do as well as indicated in this report. If a buyer relies upon this information, the buyer shall accept all the inherent risks of doing so. YR Beginning Principle Interest Derived Loan Cash Payment Payment Cash Flow Balance 1 $530,000 $62,265 $98,702 $369,032 $1,015,050 2 $530,000 $68,785 $92,183 $369,032 $952,785 3 $530,000 $75,988 $84,980 $369,032 $884,000 4 $530,000 $83,945 $77,023 $369,032 $808,012 5 $530,000 $92,735 $68,233 $369,032 $724,068 6 $530,000 $102,445 $58,522 $369,032 $631,333 7 $530,000 $113,173 $47,795 $369,032 $528,888 8 $530,000 $125,023 $35,944 $369,032 $415,715 9 $530,000 $138,115 $22,853 $369,032 $290,692 10 $530,000 $152,577 $8,390 $369,032 $152,577 Reasonability Analysis The following analysis is based on the purchase terms described above. All of the calculations are based on after debt cash flows. If the purchase and growth assumptions are correct, the following analysis will provide a guideline to determine the reasonableness of the purchase price and terms. Post Purchase Details First Year Return on Down 74% Months to Repay Down Payment 16 Annual Return on Purchase Price 24.36% Years to Pay Total Purchase 4 Post Purchase Details After Compensation for Management First Year Return on Down 64% Months to Repay Down Payment 19 Annual Return on Purchase Price 21.06% Years to Pay Total Purchase 5 Ratios Price to Earnings 2.86 Price to Earnings (After Management Comp.) 3.16 Price to Revenue 0.45 Price to Assets 4.16 Comments Evaluation A business evaluation is an investigation into the law of probabilities with respect to business value. Through the evaluators experience, training, and integrity, we are able to project the activities of buyers and sellers in the marketplace into an estimation of value. In reaching a conclusion, comparison of businesses usually involves adjustments due to the individuality and uniqueness of each business. Transactions are often influenced by sentiment, personal bias, individual needs, politics, state of mind, and other conditions not considered by the impartial evaluator. A business evaluation cannot be guaranteed, nor can it be proven. The opinion of value can, however, be substantiated and the final opinion is the result of a thorough professional analysis of a large amount of data. An evaluation must not be considered absolute but should be used as a basis of negotiations between concerned parties, whatever their interests. The evaluation process as followed in the preparation of this report is an orderly procedure for arriving at an estimate of value. By following this procedure, the evaluator begins with a preliminary study of the issues and defines the basis from which the opinion of value is to be made. Once the data has been collected, a systematic approach is taken to analyzing the data and selecting appropriate valuation methodologies. In assignments to estimate fair market value, the ultimate goal of the valuation process is a supported conclusion that reflects the evaluator’s study of all influences on the value of the company being appraised. Therefore, the evaluator studies the business from various perspectives. Various questions are raised and answered through research of the industry and the financial capabilities of the subject business. Some of the questions researched may be found in the supporting data section of this report. The various valuation approaches are interrelated, and each involves gathering and analyzing specific pieces of data relating to the company being analyzed. From the analysis, the evaluator derives separate indications of value, of which one or more may be used in determining the final value. To complete the evaluation process, the evaluator integrates the information drawn from market research, analysis of data, and from numerous valuation techniques to form a conclusion. This conclusion may be an estimate of value or a range in which the value may fall. An effective integration depends on an evaluator’s skill, experience, and judgment. Principles of Evaluation Every evaluation method and technique must comply with and is limited to the following principles if the final results are to be considered significant. Principle 1 What a reasonable buyer will pay a reasonable seller.
The term reasonable in this context is used in the economic sense. The buyer and seller are each assumed to be comparing alternative investments and when the economic incentive to purchase is equal to the economic incentive to sell, a deal is made. Principle 2 For evaluation purposes, a business is defined as an organized method of producing revenues routinely over a period of time. The value of a business is divided into two (2) components: 1. The asset value represents the value of machinery, equipment, buildings and land, usable stock and other legal rights. 2. The business value or goodwill value of a business represents the premium value a buyer will pay the seller for organization and historically recorded cash flows. Additionally, when comparing alternative investments, there is no economic incentive to invest capital in a business which has not or is realistically not capable of producing a net income in excess of the operator’s salary plus a reasonable return on investment. Principle 3 Accuracy depends upon the standard use of terms, methods, and disclosure of information. This report is only as good as the data it is based upon. This report makes adjustments for minor mistakes in judgment or interpretation of questions; however, accounting or financial data is taken at face value. The report includes documents and source notes when possible. The inclusion of source materials with any evaluation will have many effects:
Principle 4 All estimated values are limited by time. Any sales price is subject to change as the market conditions change. Therefore, the suggested price is valid only for a short time relative to the size and scale of a given business, in a given industry, and in a given market. Documentation of the data used in this report will provide the basis for analyzing how this data will change over time. Fair Market Value The single most important market factor to impact the value of a business is the supply and demand of an equally desirable substitute that is available in the marketplace. According to the principle of substitution, the value of a thing (business) tends to be determined by the cost of acquiring an equally desirable substitute. A buyer will pay no more for a business than the cost of purchasing a similar business. This concept is the basis of fair market value and is the overriding methodology in this evaluation report. There are three approaches to determining the value of any asset: 1. The cost approach, which considers the cost of purchasing or producing the business. 2. The market data approach, which values the business based on current sales in the marketplace for the same or similar business. 3. The income approach, which is a financial analysis consisting of capitalizing an income stream based on the cost of money and a risk rate that reflects current market conditions. In this report you will find as many methods, under each approach, as is reasonably applicable to valuing the subject business. In order to arrive at a supportable value, we have chosen those methods that would best apply to the purchase of the subject business as reflected by the marketplace. The Internal Revenue service established Revenue Ruling 59-60 as the standard for the valuation of closely held companies. The following summarizes the key factors to consider: 1. History and Nature of the Business. 2. Economic Outlook. 3. Book Value. 4. Earning Capacity of the Enterprise. 5. Dividend Paying Capacity of the Enterprise. 6. Goodwill and Intangible Assets. 7. Recent Sales of Stocks. 8. Market Value of Comparable Companies. Cost Approach In considering the cost approach, we must remember that the cost of something does not necessarily determine its selling price. This is true in a rapidly changing market, which is highly affected by technological changes or variances in supply and demand. This is especially true if a company is very young and has not yet established enough of a track record to make a confident analysis of the future performance. Also, in the case of a business, all serious practitioners of business valuation agree that book value is not necessarily an adequate proxy for representing the underlying net asset value of a business for valuation purposes, much less for representing the value of the business itself. However, book value is a figure that is available for almost all businesses. Furthermore, it is a value that different businesses have arrived at by some more or less common set of rules, usually some variation within the scope of generally accepted accounting principles (GAAP). Also, each asset or liability number that is a component of book value as shown in the financial statements represents a specific set of obligations that can be identified in detail by referring to the company’s records, assuming that the bookkeeping is complete and accurate. Therefore, book value usually provides the most convenient starting point for an asset value approach to the valuation of a business interest. The nature and extent of adjustments that should be made to book value for the business valuation depend on many factors. One, of course, is the purpose for the evaluation. Another, which is frequently a limiting factor, is the availability of reliable data on which to base the adjustments both for the subject company and for other companies which might be compared in the course of the valuation. One concept for fixed assets is value in use, the value of the operating assets to the owner/user, or buyer who will use it in a similar manner. Value in use is the value that includes consideration for the unique relationship of the item to a particular business such as the subject. There is a value for an item, which is already in place and is ready to use. The value might be the items retail price, plus applicable taxes, freight, and installation charges. The summation of these costs, after proper deductions for depreciation and obsolescence, is the value in use of that item. This value may be different from its fair market value to a buyer who will not use the equipment at its present location. A definition for value in use is as follows: The value of an economic good to its owner/user is based on the production (privacies in income; utility or amenity form) of the economic good to a specific individual. This is a subjective value, however, and may not necessarily represent the market value. We, therefore, have to subjectively estimate the value in use of the subjects assets based on past experience with assets of a similar nature. Income Approach The income approach is especially meaningful if assets are used to produce income, such as in the valuation of a business. However, it still takes root from the market data approach because it is an analysis of what the current market is paying by determining a comparable return that can be capitalized into a comparable purchase price. Market Data Approach In other types of valuations, mainly real estate, the market data approach indisputably will always yield the most accurate results. It is a true representation of the current marketplace because it is what the market is paying for the same or similar asset. However, in the case of a business, using public or private comparable sales price-to-earnings or income-to-sales ratios may be the least reliable for several reasons, among which are: 1. No two businesses are alike. 2. Business sales are not recorded and, therefore, information gathered is usually sketchy. 3. Accounting records are not necessarily standardized between the comparable companies. There is no standard definition of net profit or income, revenue, cost of sales, and many other financial statement items. 4. Some comparable sales include assets that the subject business does not have and these assets are not valued separately, so the evaluator cannot make proper adjustments. The market data approach can be very useful when analyzing data drawn from the market as to what types of ROI (return on investment) ratios are customary, or data based on Price-to-Earning ratios that buyers are willing to pay in order to purchase a certain type of business. Stock Price Data from Publicly Traded Companies It can be argued that the use of stock prices of publicly-owned companies to estimate the market value of privately held companies is a source of comparable data. However, many business evaluators realize that to estimate the market value of a privately held business by using this data is seriously flawed in several respects: 1. Publicly held companies, whose stock is listed on the major exchanges, are usually much larger than the closely-held businesses that are being appraised. This difference in size raises serious questions as to whether the two are, in fact, comparable. 2. Prices of publicly traded stock reflect the sale of very fractional ownership interests. On the other hand, the evaluator’s objective is usually to estimate the market value of a major ownership interest, frequently, one hundred percent ownership of the closely held business. 3. Selecting appropriate publicly traded companies is tantamount to guess work, and, thus, cannot be relied upon. 4. The price to earnings ratio represents the ratio of a current stock to an earnings-per-share figure that can be from a few weeks to several months old. 5. Probably the greatest fallacy of attempting to use publicly traded stock prices to estimate the value of a closely held business lies in the psychology of the investor. The potential buyer for a closely held business is almost always concerned with the anticipated performance of the business itself. Of course, it is sometimes argued that the trend of stock prices of a publicly held company is strongly influenced by the company’s performance. However, it is demonstrable that, whereas this does tend to be true in the long run, there are many influences on stock that tend to be of short term nature, and that strongly influence stock prices while bearing relatively little long term relationship to the company’s performance. Therefore, using the prices of publicly traded stocks is not recommended as a means of estimating the value of closely held businesses. Comparable Transactions Still another source of market data is, of course, information on actual sales of companies, such as the subject, in the evaluator’s local community. It is unlikely, however, that there will be enough information available on sales similar to the subject to provide a statistically sound basis for estimating the business's market value. However, as mentioned above, when analysis based on research on potential buyers for this kind of investment is made, important insight into what a buyer is willing to pay for a particular business can assist the evaluator in determining an accurate opinion of value. This analysis must include such factors as industry risk, the local and national economy, competition, barriers to entry, and the future potential of Company. In this report we may include information or make comments on similar business sales that might have a bearing on our opinion of value. However, it is very important to remember that it is a difficult task to quantify how similar or dissimilar are two businesses, and, therefore, using price to earnings ratios and price to revenue ratios from comparable sales has a built in uncertainty. It is possible that if no comparable sales information is available, or if it’s too unreliable, the evaluator may elect not to use the market data approach in this valuation. Correlation of Methods It is important to note that under guidelines set by the Uniform Standards of Professional Evaluation Practice (Standards Rule 9-5), the Internal Revenue Service (Revenue Ruling 59-60), as well as most evaluation societies, the evaluator is required to use all approaches for which reliable data is available and applicable. The use of as many approaches and methods within these approaches is useful to the extent that it will establish a range of values for the entity being appraised. Revenue Ruling 59-60 (in Section 3, Approach to Valuation) recognizes the fact that appraising is not an exact science: [a] sound valuation will be based upon all the relevant facts, but the element of common sense, informed judgment and reasonableness must enter into the process of weighing those facts and determining their aggregate significance. Sometimes it will be obvious that the analyst should rely on a single approach, such as methods under the cost approach whereby earnings are insignificant to the value of the assets. An example of this would be a new enterprise with little or no longevity or profits, where projections would be meaningless. Another example would be a company that has longevity, but insignificant profits, and would be a candidate for liquidation. In other cases, it may be apparent that several methods would be appropriate for the final value conclusion. When this is the case, the evaluator must look to the real world to determine which method or methods should receive the most weighting. Service companies can represent a significant problem to the evaluator in that there are few assets that would give a buyer confidence should the business someday fail. In any case, risk is the most important factor to consider in an evaluation. As stated earlier and acknowledged in Revenue Ruling 59-60, value is based on anticipated expectations of the buyer as to future performance. In other words, what a company did in the past has no significance to its value if that trend is not anticipated in the future. Although assets play an important role in risk calculations, one must remember that earnings and the anticipation of an increasing income stream are the overriding factor in the purchase of a business. The process of elimination and an analysis of methods both suggest that the income approach methods are clearly the most representative of current market value. Limitations, Contingencies, and Disclaimer Please read the following very carefully! Tax and Legal Advice for Sale or Transfer of Stock This report represents the opinions of business professionals experienced in the sale and transfer of business assets and values. The evaluation of business assets for a suggested value is extremely complex but can be accomplished with a certain degree of accuracy because asset values can be defined in the marketplace. However, the sale or transfer of stock as a method for disposing of a corporation is considerably more complex because the buyer is assuming liabilities and is subject to a complex set of tax laws. If you are planning a sale or transfer of stock, we strongly encourage you to consult with your tax attorney and accountant. Tax and legal advice must be given by qualified professionals and based on individual cases. What is Valued in this Report This business evaluation report and analysis of value assumes an asset sale and does not reflect the stock value of the company. The evaluator has not valued the hard assets or the real estate of the company and has relied on sources deemed reliable to determine the value of all assets listed in this report. Excluded Assets and Liabilities This report excludes current assets such as cash, accounts receivable, prepaid expenses, and other liquid assets that would normally show up on the company’s balance sheet. It also excludes the company’s liabilities. This report assumes that the seller would keep the company’s current assets and pay off any debts at the time of sale. Treatment of Real Estate This report does not take into consideration any real estate that the company owns. However, comparative market rent is deducted from the cash flow to reflect the true earning power of the company, since the ownership of real property is discretionary to a business. If the company being valued owns the real estate, it should be considered an investment asset that would be added to the value opinion in this report. Disclaimer This is a business evaluation report and not an appraisal. There are a number of significant differences between evaluations and appraisals. An evaluation is not nearly as rigorous as a formal appraisal, and is designed to give a guideline or benchmark value rather than a formal determination of value. Specifically, and at a minimum, a valuation analysis should include the following conditions for an opinion of value to be considered an appraisal rather than an evaluation: 1. Strict adherence to USPAP (Uniform Standard Professional Appraisal Practices) standards. 2. A full financial statement's analysis, including Income Statement, Balance Sheets and Cash Flows. 3. An in-depth understanding of the financial statements and the company to justify making appropriate adjustments to the Income Statements and Balance Sheets. 4. An assurance that all data is accurate and included in the final report. 5. A comparison of the valued company’s financial statements to industry norms (RMA, trade, or other ratios/percentages) and using this data in building discount and capitalization rates. 6. A certifying cover letter with the evaluator’s signature. The formulas used in the various valuation methodologies in this evaluation are based on thousands of evaluations performed over the past fifteen years by business brokers, business buyers, and business sellers in real world buy/sell situations. The business values that result from these methods, although not considered a formal appraisal, have been time tested and have been shown to provide a solid basis for determining business value. Contingencies and Limiting Conditions 1. The evaluator, by reason of performing this business evaluation and preparing this report, is not required to give testimony nor be in attendance in court or any other governmental hearing with reference to matters herein, unless prior arrangements have been made with the evaluator relative to such additional employment. 2. The evaluator assumes no responsibility for matters of a legal nature affecting the property valued or the title thereto, nor does the evaluator render any opinion as to the title, which is assumed to be good and marketable. The property is valued as though under responsible legal ownership. 3. The evaluator assumes no responsibility for any environmental problems and has not inspected the property. 4. This evaluation was based on a specific period of time. Data for this period of time has been collected from several sources. The particular business environment and market may not continue in the future, therefore, the evaluator is not making any claims regarding future performance of this business. The evaluator assumes no responsibility for errors in data available from external sources. 5. The selection of the use of fair market value was made by the client. The evaluator assumes no responsibility for the type of value selected as opposed to other types of value. 6. The evaluator was retained by its client, who is thoroughly familiar with the business, and all past and future performance information used in this report has been based on information provided by the client and other sources deemed to be reliable. The evaluator disclaims any ability of any potential purchaser to generate any future income, cost and expense potential, or expectations as may be stated in this report. 7. All information in this report has been provided by our client, most of which is contained in the questionnaire section of this report, and is assumed to be reliable. No verification of the information has been done by the evaluator, nor has the evaluator made an inspection or on-site visits of the business premises or facilities. 8. Any sketch that may be presented in this report may show approximate dimensions and is included to assist the reader in visualizing the property. The evaluator has made no survey of the property. 9. Information, estimates, and opinions furnished to the evaluator and contained in this report were obtained from sources considered reliable and believed to be true and correct. However, no responsibility for the accuracy of such items furnished to the evaluator can be assumed by the evaluator. 10. Possession of this report or a copy thereof does not carry with it the right of publication. It may not be used for any other purpose, in whole or in part, by anyone except the client for whom the evaluation was prepared without the prior written consent of the evaluator. 11. It is assumed that the reader of this report has at least a basic understanding of the subject business's industry, terminology, and operations. Other assumptions and limiting conditions are as may be stated in various other sections of this report.
|
