1. Vine Valuations Inc.
Christine Minelli CA•CBV, CFI
chrism@vine.on.ca
(905) 549-8463 or (905)517-3741
www.vine.on.ca
Offices in Hamilton, Burlington and
Kitchener

2.  Transfer to Family  Sell to Third Party
Members  Refinance or
 Sell to Recapitalize
Shareholders  Go Public
 Sell to  Liquidate the
Management Business
 Sell to Employees
(Stock Ownership
Plan) Business needs to be valued
2

3.  Business valuation is a critical
component of a well planned exit
strategy:
For benchmarking/planning exit
strategy
For negotiating the sale
For maximizing wealth
Independent & objective
3

4. Business Valuation:
“the act or process of determining
the value of a business enterprise
or ownership interest therein”
Value: the desirability or worth of a thing; the rate
at which a commodity is potentially exchangeable
for others
Webster’s International Dictionary
4

5. Business Owner:
“What’s the value of my
business?”
Business Valuator:
“ It depends…”
5

6.  Price
and Value are not the same. “Price is what
you pay. Value is what you get”.. Warren Buffett
 Each business is unique and will command a
different price for different reasons.
 Buyer/Seller - different perspectives
 Toconclude a transaction, both parties must be
satisfied with Price and understand how it was
determined
 Valuation
is a starting point in exit planning, not
an end unto itself
6

7.  Price = Value + Terms
negotiated between buyer and
seller
 FMV = a notional or intrinsic
value estimate
 Business Valuation = an Art,
not a Science!
7

8. “The highest price, expressed in terms of cash
equivalents, at which property would change hands
between a hypothetical willing and able buyer and a
hypothetical willing and able seller, acting at arm’s
length in an open and unrestricted market, when
neither is under compulsion to buy or sell and when
both have a reasonable knowledge of the relevant
facts.”
Not the real world, but a starting point
8

9.  Recent profit history
 General condition of the company (facilities,
books & records, technology, processes,
employees, proprietary rights, contracts, etc.)
 Market demand for particular type of business
 Economic conditions (cost/availability of capital
and factors directly affecting the business)
 Ability to transfer goodwill or other intangibles
 Future profit/cash flow potential: Cash is KING!
But: Businesses rarely change hands at
fair market value
9

10. Transaction Value : Price + Deal Terms
 Negotiated between seller and a specific buyer
 Tradeoff between cash & terms
 May
not be the same as fair market value but
FMV a reasonable starting point
 Value unknown until business exposed for sale
10

11. Transaction Value is affected by:
 Timing of sale: Value is time-specific. Price today not
the same as Price next year.
 Economic outlook and outlook for specific industry: the
market dictates investor’s required rate of return.
 Earnings capacity. Value is prospective, present value
future benefits measured in cash flows. Owner selling
business but the buyer is buying a business opportunity.
Nature and history of business. S.W.O.T. assessment
part of buyer due diligence.
 Comparable market transactions/prices – a
benchmark. Pay no more than would pay for similar
investment.
11

12. Transaction Price is affected by:
 Liquidity of investment – size of market/existence of
more than one special purchaser
 Level of the business’ net tangible assets. The higher
the value of net tangible assets, the lower the buyer’s
risk, and the higher the price (usually).
 Intangibles: sometimes the only valuable assets
 Goodwill: Commercial or personal? Transferable?
 Size of interest being sold: controlling interest or
minority interest?
Exit planning tip: Find the right buyers, more than one.
12

13. Transaction Price is also affected by:
Negotiating strengths of buyer and seller
Personal reasons (distress or planned)
Available leverage (wait for proceeds/earn-out)
Who the owner is actually prepared to sell to:
 Sale to third parties
 Intergenerational sale to family
 Sale to management
 Sale to employees
Price & Terms may be different
13

14. Buyer to owner: “You tell me your price, I’ll tell you the terms”
Possible Deal Terms -
 Hold-back of sale proceeds, buyer has recourse if info
wrong
 Seller financing helps close deal, risk on the seller
 Performance payouts/earn-outs can bridge the “price
gap”, but risk transfers to seller. Timing of cash flow to
consider.
 Non-competition agreements, protect the buyer.
Exit Planning : What terms will owner consider? What
terms can owner afford?
14

15. Buyer to owner: “You tell me your price, I’ll tell you the
terms”
Possible Deal Terms –
 Employment contracts. Normally favour buyer. 100% tax
deductible and buyer gets extended terms. Retiring? Can
be a deal-breaker.
 Price adjustments made post-closing: contingent and
unknown liabilities, i.e. estimates, provisions, bad debts,
warranty claims, similar. Need to consider.
15

16.  Income Approach:
- Focus on profits/cash flow produced by assets
- Capitalized earnings/cash flow method (single period)
- Discounted cash flow method (multiple period)
 Market Approach:
- Guideline Company method
- Transactional method
- Industry method: “rules of thumb”
 Asset Approach:
- Adjusted book value (assumes going concern)
- Liquidation value (forced/orderly)
16

17.  Assumes the business is a going concern, expected
to generate adequate return on investment
 FMV equal to present value of expected future
earnings/cash flow (earnings, EBIT, EBITDA)
Requires:
 Assessing future maintainable cash flows
 Determining appropriate (buyer) tax rate
 Determining capitalization rate (& multiple)
 Assessing discounts for control & illiquidity
Exit Planning Tip: Consider ways to increase business
cash flow to exit date in order to increase exit price
17

18. Business net profit or loss +/-
◦ Non-operating/non-recurring revenue & expense
◦ Interest & non-cash expenses (depends)
◦ Equipment replacements/additions (depends)
◦ Discretionary items, adjust to market:
•Owner's compensation & benefits
•Meals & entertainment expenses
•Automobile expenses & allowances
•Compensation of non-working family members
•Rent and other non-arm’s length expenses
Exit Planning Tip: Should ‘clean-up’ discretionary items before sale
18

19.  Adjust assets/liabilities to fair market value
(real estate, receivables, inventory, F&E …)
 Identify redundant assets (non-operating
assets: excess cash, ATV, house, trailer, boat,
etc.)
 Related party amounts: buyer does not want to
buy
 Remove purchased goodwill – valuing goodwill
 Identify liabilities buyer does not want to
assume
Exit Planning Tip: Consider removing redundant assets before
 Unusual May affect QSBC status seller’s tax planning,
sale. items related to and CGE.
bonuses/advances, etc.
19

20. Adjusted earnings** $
1,000,000
Forecasted growth** x
1.05
Estimated future earnings $ 1,050,000
Capitalization rate** 25.0 %
P/E multiple (1 ÷ capitalization rate)
4.0
Indicated Value from Operations $ 4,200,000
Add: Net redundant assets **
357,350
Total Enterprise Value of equity only, interest cost$in
Cost
4,557,350 earnings 20

21.  Investor’s risk adjusted
rate of return on equity
 Reasonable capital
structure (debt/equity)
 Expected growth
21

22. Cost of Equity
 Risk free rate of return (GOC long-term bond)
 Equity risk premium (range 4% to 6%)
 Small company (size) premium (up to 10%)
 Industry risk premium ( +/-)
 Company specific risk premium ( +/-)
 Long-term growth in excess of inflation reduces
risk The higher the capitalization rate, the lower the
Price. Multiple of earnings/cash flow = 1 ÷
capitalization rate
22

23.  Economic risk
 Business risk
 Operating risks
 Financial risks
 Asset risks
 Product risks
 Market risks
 Technological risks
 Regulatory risks
 Legal risks
23

24. High Risk/Lower Multiple Low Risk/Higher Multiple
= Lower Price =Higher Price
 New business, no  Established earnings
history base
 Weak balance sheet  Strong balance sheet
 Weak growth trend  Strong growth trend
 Weak industry/position  Strong industry/position
 Significant barriers
 Few entry barriers  Not price dependent
 Competes on price  Not tied to personal
 Customer loyalty is to goodwill
the business owner  Asset purchase
 Share purchase 24

25. High Risk/Lower Multiple Low Risk/Higher Multiple
= Lower Price =Higher Price
 Seller not staying on  Seller stays long period
 No vendor take back  Vendor financing &
financing good terms
 Price not tied to post-  Vendor earn-out,
closing, no ‘earn-out’ shares in post-closing
 No proprietary assets risks
or competitive  Valuable intellectual
advantage property/other rights
 Minimal synergy for  Significant synergies
buyer This is not an all-inclusive list of risk
identified
factors 25

26.  Uses multiples derived from market prices of public
companies engaged in same or similar lines of business
 Market prices of public companies reflect minority interest
positions and high liquidity
 Selected companies should share characteristics such as
markets, products, growth and cyclical variability to the
business
 Valuator analyzes financial and operating performance,
compares to the business being valued
 Adjustments are made to multiples for differences
identified and for private co illiquidity of investment
26

27. GUIDELINE CO. DATE P/E P/Sales
P/Book
Apple Company, Inc. 12/31/07 8.70 55.30%
2.85
Bananas R Us, Inc. 10/31/07 9.30 47.43%
4.65
Fruits, Inc. 12/31/07 8.50 35.25%
3.65
Cherry Corp. 10/31/07 6.60 54.80%
3.90
Grapes Corp. 11/30/07 7.80 48.20%
4.25
**Adjusted to normalize to business being valued
Median Multiple 8.50 48.20% 27
3.90

28. Market Approach: Guideline Company Example
PRICE TO EARNINGS
After-tax earnings $ 959,446
Selected Multiple x 6.20
Operating Entity Value $ 5,948,565
Net Non-operating assets + 250,000
Total Entity Value $ 6,198,565
Rounded $ 6,200,000
28

29. A rule of thumb is a mathematical formula developed
from the relationship between price and certain
variables based on experience, observation,
hearsay, or a combination of these; usually industry
specific.
Rules of thumb arise from observation of market
transactions
Expressed as multiples of revenue, cash flow, etc. A
multiple of revenues implicitly assumes there is a
reasonably constant relationship between gross
revenues, maintainable earnings (or cash flow) and
Value. Rules of thumb assumes “one size fits all”. But each business is unique.
Good as a secondary check, not as primary valuation method
29

30. Multiples of:
 Price/net earnings
 Price/pre-tax earnings
 Price/cash flow
 Price/revenues
 Price/gross profit
 Price/book value
 Price/EBIT
 Price/EBITDA
 Price/SDE
30

31. Restate assets & liabilities to FMV:
 Adjusted Book Value Method
• Going concern basis
• FMV is in net assets owned, not in cash
flow (i.e. real estate or other investment
holding co.)
 Liquidation Value Method
• Worth more dead than alive
• Forced vs. orderly
31

32. Business Owner:
“What’s the value of my
business?”
Business valuator:
“ It depends…”
32

33.  Successful deal takes time and planning.
Usually need 3 to 5 years track record of
profits & good FS.
 Takes between 6 – 18 months to sell
 Business Valuator can:
◦ Find ‘hidden assets’
◦ Provide a baseline value now
◦ Identify weaknesses & areas of
improvement
33

34.  Business Valuator can:
◦ Identify value drivers to maximize sale
value
◦ Assess business risks and opportunities
◦ Help target buyers / best sale process
◦ Evaluate offers/assist in negotiations and
give the owner an edge!
 Integrating a business valuator into exit
planning team can translate into a higher
value when the owner ultimately retires.
34

35. Vine Valuations Inc.
Christine Minelli CA•CBV, CFI
chrism@vine.on.ca
(905) 549-8463 or (905)517-3741
www.vine.on.ca
Offices in Hamilton, Burlington and
Kitchener