1. Business Valuation in Exit Planning
Sean Saari, CPA/ABV, CVA, MBA
Robert A. Ranallo, CPA/ABV, JD, CVA, CFF
May 23, 2013

2. After completing the session, participants will be
able to…
• Recognize the methods typically utilized to value a
business or ownership interest and understand their
basic application
• Identify normalizing adjustments and assess their
impact on value
• Reconcile values derived from multiple valuation
approaches
• Capitalize on planning opportunities that help
maximize the value received for the sale of a
business
“In the long run, men hit only what they aim at.” – Henry David Thoreau
LEARNING OBJECTIVES

3. • Valuation Basics
• Case Study / Valuation Analysis
 Valuation Approaches
 Control and Marketability Considerations
 Planning Considerations
AGENDA

4. “There is no such thing as an absolute
value in this world. You can only estimate
what a thing is worth to you.”
Charles Dudley Warner 1829-1900, American Writer
QUOTE OF THE DAY

5. • Standard of Value
 Fair Market Value
 Strategic / Investment Value
• Sales Price = Value?
• Type of Value
 Equity Value
 Market Value of Invested Capital (MVIC)
 Equity Value + Interest-Bearing Debt
 Enterprise Value (EV)
 MVIC - Cash
VALUATION BASICS

6. Reconciling Equity Value vs. Enterprise Value
VALUATION BASICS
Cash
Total
Enterprise
Value
Equity
Value
Debt
Value Net Debt

7. • Asset Approach
• Income Approach
• Market Approach
• LBO Method
• Rules of Thumb
VALUATION APPROACHES

8. ASSET APPROACH
Valuation Methodologies
• Adjusted net asset method
Basic Steps
• Adjust assets to fair market / strategic value
• Adjust liabilities to fair market / strategic value
Pros
• Provides “floor value” of the company
• Relatively simple analysis
Cons
• Typically provides a liquidation value which is
often not appropriate for healthy businesses
• Rarely utilized in transactional value

9. Valuation Methodologies
• Discounted cash flow method
• Capitalization of cash flow method
• Capitalization of earnings / Discounted future earnings
Basic Steps
• Determine benefit stream and make normalizing adjustments
as appropriate
• Determine discount/capitalization rate
• Determine cash flow adjustments
• Discount / capitalize cash flows
Pros
• Provides most “company-specific” value
• Can appropriately incorporate projected growth of the
business
Cons
• Most involved of the valuation analyses
• May be disagreements over likelihood of meeting projections
INCOME APPROACH

10. Other Considerations
• Mid-Period Discounting
• Non-Operating Assets
• Direct to Equity vs. Debt-Free Valuation
• Normalizing Adjustments
“It’s the little details that are vital.
Little things make big things happen.”
– John Wooden
INCOME APPROACH

11. • FMV vs. Strategic normalizing adjustments
• Compensation
 Family members paid other than FMV
 Officers paid other than FMV
• Personal expenses
• Related party transactions other than FMV
• Non-recurring income or expenses
• Expense trends
ADJUSTMENTS
NORMALIZING

12. Valuation Methodologies
• Guideline transaction method
• Guideline public company method
Basic Steps
• Determine benefit stream and make
normalizing adjustments as appropriate
• Find comparable transactions/guideline
public companies
• Calculate valuation multiples and apply
to subject company
• Make adjustments as necessary to
arrive at equity value (if necessary)
MARKET APPROACH

13. Pros
• Incorporates market conditions and prices
paid in recent relative transactions
• Easy to explain and apply
Cons
• Can be misleading if debt not appropriately
considered
 EBITDA multiples typically result in an
Enterprise Value, not an Equity Value
• In certain industries, there may be a lack of
comparable transactions or public
companies
MARKET APPROACH

14. Valuation Methodologies
• LBO Method
Basic Steps
• Prepare discounted cash flow analysis
• Estimate financing and capital structure
• Determine implied rate of return at
various exit points
LBO METHOD

15. Pros
• Allows seller to determine maximum price that
the byer will be willing to pay based on the
amount of debt financing available and rate of
return required
Cons
• Simply a derivation of the discounted cash flow
method
• Not as widely-utilized as basic income and
market approaches
• Buyer may not have reliable information
available regarding the extent of financing that
the seller can obtain
LBO METHOD

16. Valuation Methodologies
• Rule of Thumb
Basic Steps
• Identify rule of thumb valuation metrics
• Apply rule of thumb to the subject company
Pros
• Simple application
Cons
• Can result in misleading values
• Often lacks support
• Not permitted to be used as a sole valuation
method by most valuation standards
RULES OF THUMB

17. Asset Deal vs. Stock Deal
• Asset Deal
 Typically preferred by buyers
 Allows for step-up in basis of acquired assets, which may allow for
higher purchase price
 C Corporation sellers are subject to double taxation
• Stock Deal
 Typically preferred by sellers
 No step-up in basis in acquired assets for buyer
 Single level of seller taxation
OTHER VALUATION
CONSIDERATIONS

18. OTHER VALUATION
CONSIDERATIONS
Asset Deal vs. Stock Deal

19. Control Discounts / Premiums
• Two options
 Model in cash flows
 Discreet discount / premium
Marketability Discounts
• Controlling ownership interest
 Typically 0%-15%
• Non-controlling ownership interest
 Typically 25%-40%
 Would apply if trying to sell a non-controlling interest
when the business as a whole is not being sold
CONTROL & MARKETABILITY
CONSIDERATIONS

20. Button Down Financial Reporting
• Get in compliance with GAAP
• Consider audited/reviewed F/S
Standardize Processes
• Make it easy for someone new to come in and run the
business
• Reduce reliance on key employees
Reverse Engineer Potential Buyer Preferences
• Think about what characteristics would be desirable to
potential acquirers in the industry and work to
implement them
PLANNING
CONSIDERATIONS

21. • Implement confidentiality
agreements with employees
• Identify and reverse negative
income/expense trends
• Diversify the customer base
• Right-size working capital
PLANNING
CONSIDERATIONS

22. After completing the session, participants will
be able to…
• Recognize the methods typically utilized to value
a business or ownership interest and understand
their basic application
• Identify normalizing adjustments and assess their
impact on value
• Reconcile values derived from multiple valuation
approaches
• Capitalize on planning opportunities that help
maximize the value received for the sale of a
business
SUMMING UP

23. “Things only have the value that we
give them.”
Moliere 1622-1673, French Actor/Playwright
CLOSING QUOTE

24. QUESTIONS?
Bob Ranallo, CPA/ABV, JD, CVA, CFF
Partner
Phone - (440) 449-6800 x7131
Email - branallo@skodaminotti.com
Sean Saari, CPA/ABV, CVA, MBA
Senior Manager
Phone - (440) 449-6800 x7221
Email - ssaari@skodaminotti.com