2 valuation
TRANSCRIPT
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PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
VALUATION
Presented by:Kevin W. Smith, CPA, CIC
Mystic Capital Advisors Group, LLCwww.mysticcapital.com
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
VALUATION
What is a Firm Really Worth?
IRS Revenue Ruling 59‐60
The price a willing buyer might pay a willing seller for a property, when neither is under compulsion to carry out the transaction and when both parties are able to trade and are reasonably informed about both the property in question and the business in which it operates.
Rules of Thumb are Worthless!!!
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COMPONENTS OF VALUE
Earnings Value (Book of Business Value)
Balance Sheet / Tangible Net Worth (Liquidation Value)
Working Capital
Earnings Value + Balance Sheet –Working Capital = Fair Market Value
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METHODOLOGIES OR MYSTERIES?
Asset Approach (Tangible Basis)
Income Approach (Net Present Value of Discounted Future Cash Flows)
Market Approach (Comparable Transactions)
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KEY FACTORS AFFECTING VALUE EBITDA, EBITDA, EBITDA
Business Structure
Employment Agreements
Concentration Risks
Key Personnel
Market, Competitors & Trends
Tangible Balance Sheet
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EBITDA, EBITDA, EBITDA PRIMARY DRIVER of Valuation
Earnings Before Interest, Taxes, Depreciation & Amortization
Gross or Net (i.e. Revenues or Earnings?)
Normalization of Pro Forma EBITDA (i.e. elimination of non‐recurring items & extraordinary items, as well as adjustment to reflect operations under a third party’s business model)
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Annual % of Pro Forma Pro Forma % of Results Rev Adjustments Statement Rev Explanation
REVENUESCommission & Consulting Income 2,000,000 87.0% 30,000 2,030,000 88.1% New Account Total Commissions 2,000,000 87.0% 30,000 2,030,000 88.1%Contingency Income 250,000 10.9% (25,000) 225,000 9.8% Known ReductionMiscellaneous & Other Income 10,000 0.4% - 10,000 0.4% Total Revenues 2,260,000 98.3% 5,000 2,265,000 98.3%External Broker Commission Expense (40,000) -1.7% - (40,000) -1.7% Net Retained Revenues 2,300,000 100.0% 5,000 2,305,000 100.0%
EXPENSES Personnel Expense
Compensation 1,200,000 52.2% (100,000) 1,100,000 47.7% Reduction & Comp. ChangeBenefits & Taxes 144,000 6.3% 43,000 187,000 8.1% Buyers' Benefits Total Personnel 1,344,000 58.4% (57,000) 1,287,000 55.8%
Non-Personnel ExpenseOther Operating Expenses 550,000 23.9% (75,000) 475,000 20.6% Non-recurringDepreciation & Amortization 100,000 4.3% (100,000) - 0.0% By definitionInterest Expense 25,000 1.1% (25,000) - 0.0% By definition Total Other Operating 675,000 29.3% (200,000) 475,000 20.6%
Total Expenses 2,019,000 87.8% (257,000) 1,762,000 76.4%0.0%
Net Pre-Tax Profit (Loss) 281,000 12.2% 262,000 543,000 23.6%
EBITDA Margin 23.6%
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IMPACT OF EBITDA vs. REVENUES
Comm. Rev’s $400,000 $400,000Profit Margin 30% 20%
EBITDA $120,000 $80,000Multiple 6 6
Value $720,000 $480,000
Value/Revenues 1.8 1.2
Revenue Multiple = Value ExpressionEBITDA Multiple = Value Calculation
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BUSINESS STRUCTURE “C” Corporation vs. “S” Corporation
Are Capital Gains “Passing” you by?
Tax Benefits Equate to REAL dollars for BOTHparties
Structure can not only impeded Valuation, but can also impede the ability to get a “deal done”
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EMPLOYMENT AGREEMENTS
Can NOT sell what is not YOURS
Non‐solicitation & non‐piracy provisions
Non‐Competition
Vesting &/or other Deferred Compensation
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CONCENTRATION RISKS
Lines of Business or Products
Customer Base
Markets
Geographic Region
Production Staff
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KEY PERSONNEL
Who “runs” the Agency? Sales? Operations?
How deep is the “bench”?
Should I stay or should I go?
Method of Compensation
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MARKET, COMPETITORS & TRENDS
Trend Analysis‐Market‐ Products‐ Historical Performance
Competitor Analysis
Niche / Strategic Benefits
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TANGIBLE BALANCE SHEET
Net Tangible Worth (Deficit)
Stock deals assume the Balance Sheet – both Stated & Unstated Obligations
Work Capital – Pay attention to the language!!!!
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SUMMATION & QUESTIONS
Earnings Value + Tangible Balance – Working Capital = Fair Market Value
Intangible nature of the Industry makes EBITDA the Key Driver of Valuation
Final Questions?