acme restaurant, inc. - chase group · restricted use appraisal report 2 ... (“bank”). the...

BUSINESS VALUATION

OF A 100% INTEREST IN:

ACME Restaurant, Inc.

1500 S. Mission Blvd Anytown, Ca 90000

Prepared for:

Lender Bank of California

Personal and Confidential

Financial Stmts. Through June 30, 2011

Presented by,

Mr. Aaron Wedeking, CPA

Chase Group Business Brokers, Inc. 41185 Golden Gate Circle, Suite 202

Murrieta, CA 92562

Restricted Use Appraisal Report The Chase Group – Business Valuations 41185 Golden Gate Circle, Suite 202 Murrieta, CA 92562

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Preface

This Company’s Business Valuation Report is provided for the sole and exclusive use of Lender Bank of California, herein (“Bank”). The business valuation pertains to ACME Restaurant, Inc., a California Corporation, (herein after referred to as the “Company”). The purpose of this Report is to provide the analyst’s opinion as to their conclusion of fair market value of the Company based on the financial operating information for the last two full fiscal years through December 31, 2010, an estimate of 2011 and other considerations. This business valuation is for the sole purpose of providing a conclusion of value for the sale of ACME Restaruant by Franklin Seller to William Buyer. The term “fair market value” is defined as the price at which a business would change hands between a willing and knowledgeable buyer and a willing and knowledgeable seller, neither being under a compulsion to buy or sell and both having reasonable knowledge of relevant facts. This Report:

• Assumes that the new owner(s) of the Company will have the necessary resources and commitment to acquire and also to grow the Company.

• Assumes that the buyer is fully knowledgeable about the Company and its operations

and will accomplish a rigorous due diligence process to verify all purported facts, estimates, calculations and suppositions and not rely solely on this document to support a purchase decision.

• Highlights the Company’s desirable qualities and projected improvements,

enhancements and future performance that may or may not be realizable. IRS 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.” The appraisal and subsequent valuation estimate of a closely-held business requires considerable judgment of many factors such as:

• The history and nature of the business the Company is engaged in. • The outlook for the overall economy and the industry the Company is in. • The latest financial condition of the Company. • The future earning capability of the Company and the associated related risks. • The capability of the Company to continue to generate the necessary cash flow to

support a purchase. • The worth and value of the goodwill/intangible assets of the Company.


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DOCUMENTS REVIEWED

The documents listed below have been reviewed and any assumptions made from such documents or reports may be included in this report. The Chase Group has relied on the expertise of the company’s financial advisors supplying this information for its accuracy. No attempt has been made to independently verify the accuracy of the information. • Form 1120S U.S. Income Tax Return for an S Corporation 2007, 2008, 2009, 2010 • Year-To-Date Profit and Loss Statement January 1 through June 30, 2011 • Asset List • http://www.ACMERestaurant.com • ACME Restaurant IP and Proprietary documentation • Agreement for Purchase of Business and Assets dated September 29, 2011

VALUATION DATE Values stated are effective as of 6/30/2011 (the most current date of provided financial information). Any difference between the date this report is presented and the effective date could have a bearing on the value opinion stated.

DISCLAIMER AND CONTINGENCIES

This is a Limited Appraisal Report. Such a report is also classified as a Restricted Use Appraisal Report, pursuant to Standards Rule 10-2 of the Uniform Standards of Appraisal Practice (USPAP). A limited appraisal report (or restricted use appraisal report) consists of valuation schedules and an abbreviated report narrative that summarizes key elements of the Company valued and describes the valuation methodologies utilized to determine our opinion of value conclusion. It is important to understand that our opinions and conclusions set forth in this report may not be understood properly without additional information. Communicating our opinion of value for the Company through a limited appraisal report allows us to more cost effectively provide you with our opinion of value without incurring the additional time and costs associated with preparation of a self-contained appraisal report. This report is only to be used in its entirety, and for the purpose for which it was prepared. No third parties should rely on the information contained in this report without the advice of their attorney or accountant, and without confirming for themselves the information contained herein. The Chase Group has no present or contemplated financial interest in the Company. Our fees for this valuation are based upon our normal valuation rates based on the product ordered, and in no way are contingent upon the results of our findings. The Chase Group has no responsibility to update this report for events and circumstances occurring after the date of this report. The analysts and appraisers, by reason of preparing this


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report, are 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. The Chase Group assumes no responsibility for matters of a legal nature affecting the property valued or the title thereto, nor do we 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. The Chase Group assumes no responsibility for any environmental problems and has not inspected the property. This valuation 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. Readers of this business valuation report should be aware that business valuations are based in part on future earnings potential that may or may not materialize. Any financial projections presented in this report are included solely to assist in the development of the value conclusion presented in this report. The actual results may vary from the projections, and the variations may be material. Chase Group makes no warranties or representations with regard to any variations. The Chase Group 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 analysts and appraisers disclaim any ability of any potential purchaser to generate any future income, cost and expense potential, or expectations as may be stated in this report. All information in this report has been provided by our client and is assumed to be reliable. No verification of the information has been done by The Chase Group, nor have we made an inspection or on-site visits of the business premises or facilities. 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 valuation was prepared without the prior written consent of The Chase Group. 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.


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BUSINESS DESCRIPTION

ORIGIN, OWNERSHIP AND CONTROL

The Company was formed as a Corporation in the State of California and was created by Franklin Seller. As of the date of this valuation the owners and officers are:

Franklin Seller, (Owner) The Company’s primary place of business is located at:

1500 S. Mission Blvd., Anytown, CA 90000 The Company’s Federal Employer Identification Number is: 20-0505050 The Owner’s Social Security Number is: The Company’s accounting firm/statutory agent is:

Name: Lever &Pully CPAs, LLP Address: PO Box 400 Anytown, CA 90000 Phone: 760-607-0760

NATURE OF THE BUSINESS The Company’s primary business is providing a fine dining Mexican Restaurant in Anytown, CA. The company has been family owned and operated for 35 years. They specialize in authentic regional food, with a large dining area to provide room for parties. The business possesses the requisite licensing and permits to carry on the operations described herein.

PRIMARY CUSTOMERS AND PRODUCTS

The Company’s primary customers are local families, retirees and military personnel. Dinner is the most popular time in the restaurant. Being in Anytown for 35 years they have maintained several long term customers. There are no single customers that account for more then 10% of their revenue. New clients are developed through word of mouth and local advertisements.


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COMPETITION

There are a few “Fast Casual” type regional food restaurants however there is only one other sit down fine dining regional food restaurant in Anytown that competes with ACME. Anytown is a community that is separated by 10-15 miles of small two lane roads from other cities. Typically restaurants in communities like this do not draw customers from other cities but do have a captive audience among the approximately 30,000 residents of Anytown, CA. They also draw customers from a local military base, Camp Anywhere.

EMPLOYEES The Company has several long term employees that have been with the company for 20-25 years. The employees enjoy the work hours and good pay.

FACILITIES, PROPERTY AND LOCATION The Company operates out of a 2400 square foot restaurant on one of the main streets that run thru Anytown, CA. The building is currently owed by the owners of the restaurant and they are renting to themselves at $5,000 per month. The current market rate for a building of that size and location is approximately $5,000 per month. The new owner is planning on purchasing the building and will have full control over the lease and its expiration. The Company’s primary physical assets include walk in refrigerator, 2 door freezer, 10 burner stove, steam table, pot sink, dishwashing sink, plates & silverware for 200, 25 tables, 12 booths and 50 chairs. The total value of the business assets are estimated by the Owners and Buyer to be $75,000 for equipment, tools, place settings and dinning furniture.

REASON FOR SALE After 35 years of running the business the owners are looking to retire. Frank is 70 years old .

LITIGATION

The Company reports that it is not a defendant in any other litigation matters nor is it aware of any material claims pending or which may be asserted against the Company.


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DEAL STRUCTURE This valuation includes the following Company tangible and intangible assets:

• Furniture/Fixtures/Equipment customary to the normal operation of the business. • All proprietary Company information and methods of doing business. • All rights for the Company’s proprietary services. • All rights to the Company trade name. • All Goodwill and other intangible assets not specifically listed.

This valuation also includes the following tangible assets and liabilities:

• Prepaid expenses • Inventory (at cost at the time of sale)

This valuation does not include:

• Cash and cash equivalents • Accounts Receivable • Notes payable • Accounts payable

Additionally: If applicable and desired,

• All personal property and equipment normally used in the conduct of the business will be included in the valuation and possible sale.

• The seller will provide the buyer with a Covenant-Not-To-Compete Agreement for the period of 3 years in a 50 mile radius of Anytown, California.

• The seller will provide a personally guaranteed, Hold Harmless Agreement which indemnifies the buyer against any and all currently known and unknown liabilities which may arise based on past operations of the Company.

• At the Buyer’s option, the seller may remain with the Company in a consulting or contract capacity after the sale with compensation terms to be determined following the sale. Once any subsequent employment is completed, however, it is the understanding of all parties that the Seller will then immediately sever his relationship with the Buyer(s) and any of the Company’s contacts, vendors, suppliers or customers.


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COMPANY FINANCIAL HISTORY

The Company has a long business history of strong sales. There was a slight decrease in 2010 compared to 2009 however 2011 appears to be back in line with previous years. The following pages contain extracts of the Company’s U.S Tax Returns for the latest fiscal years (last fiscal period ending 12/31/2010) and interim accounting statements for the current year. In summary, sales have been:

• Fiscal Year ending December 31, 2011: $ 950,210 (projected) • Fiscal Year ending December 31, 2010: $ 935,342 • Fiscal Year ending December 31, 2009: $ 954,099

Unreconstructed net taxable income / (loss) has been:

• Fiscal Year ending December 31, 2011: $ 23,960 (projected) • Fiscal Year ending December 31, 2010: $ 14,712 • Fiscal Year ending December 31, 2009: $ 36,516

Ending inventory levels have been:

• Fiscal Year ending December 31, 2011: $ 7,114 • Fiscal Year ending December 31, 2010: $ 7,114 • Fiscal Year ending December 31, 2009: $ 7,114

Asset value levels have been:

• Fiscal Year ending December 31, 2011: $ 62,112 • Fiscal Year ending December 31, 2010: $ 62,112 • Fiscal Year ending December 31, 2009: $ 62,112


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RECONSTRUCTED INCOME AND EXPENSES

The Company’s Income and Expense Statement has been reconstructed (recast, normalized) to determine the potentially available cash flow for a new owner. This has been done to show the “free cash flow” or “current net earnings” in the business to allow a potential buyer to determine the true investment value of the business. The following pages contain the reconstructed income and expenses (with explanatory notes) and the resultant adjusted earnings. The reconstructed earnings before interest, taxes, depreciation and amortization (EBITDA), before the owner’s discretionary expenses, and appropriately adjusted for extraordinary and/or non-recurring income items are:

• Fiscal Year ending December 31, 2011: $ 181,220 reconstructed/projected • Fiscal Year ending December 31, 2010: $ 171,386 reconstructed • Fiscal Year ending December 31, 2009: $ 192,773 reconstructed

Weighted, reconstructed annual adjusted earnings will be a factor in calculating an estimated overall value for the business under the premise that the most recent results are the most predictive of future earnings and therefore should carry greater weight in a three year span of consideration. The calculated three-year weighted average adjusted reconstructed earnings (free cash flow) is $179,868.


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VALUATION OPINION AND ANALYSIS

The Chase Group estimates that the collective fair market value for all tangible and intangible business assets in the designated company is approximately $655,000 based on the methodology described below and other considerations, as of June 30, 2011. The Chase Group estimates that the fair market value for all of the furniture, fixtures & equipment (FF&E) in the designated company is approximately $75,000 based on the Company’s balance sheet, management input and other considerations, as of June 30, 2011. In considering the potential fair market value of a business it’s assumed that the most likely type of buyer will be:

• A financially motivated/investment oriented buyer (generally a private party) • A competitive firm or an industry player looking to expand vertically

Although there are many variations of ways to estimate the value of a business, they tend to group within three possible approaches:

• Asset Based Valuation • Market Comparison Valuation • Income Based Valuation

For small privately held business the Market Comparison Valuation and Asset Based Valuation are rarely used. The Market Comparison method is rarely used do to the lack of market data available for a proper comparison of other privately held businesses. The Asset Based Valuation does not take into account the earning potential and intangible assets that have accrued while the business has been in existence and is not considered an accurate way to value the “going concern” of a small business. The Chase Group generally uses the most commonly used (and most appropriate valuation) approach for the company; an Income Based Valuation. The Income Based Valuation approach is further broken down into four generally accepted methods:

• Present Value of Future Earnings Valuation • Capitalization of Excess Earnings Valuation • Multiple of Discretionary Earnings Valuation • Gross Revenue Multiples

The valuation method used in this valuation is the widely used and professionally accepted Multiple of Discretionary Earnings method. This combined approach will assign a financial value to the Company’s reconstructed earnings (vs. assets less liabilities) resulting in available discretionary earnings that is reflective of the risk associated with the continued operation of the business with recent proven financial results that can reasonably be expected to continue after the business sale for an indefinite but substantial duration.


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This valuation method will include the following Company tangible and intangible assets: • Furniture/Fixtures/Equipment (F/F/E) customary to normal operation. • All proprietary Company information regarding methods of doing business. • All rights to the Company’s proprietary products and/or intellectual property. • All Goodwill and other intangible assets (including intellectual property, trade names,

trademarks and service marks). This valuation method will also include the following tangible assets or liabilities:

• Cash and cash equivalents • Accounts receivable • Prepaid expenses • Inventory (at cost, adjusted at the time of sale) • Liabilities of any type • Real Estate

In applying this valuation approach the Company’s latest two (2) full fiscal year’s pre-tax actual and current projected discretionary earnings have been reconstructed using the aforementioned methodology. Additionally, the multiplier to be used in the valuation calculation has been determined using a 15-point risk assessment model. This multiplier calculation method combines the pertinent elements of most published capitalization rate estimation processes and results in an earnings multiplier (actually, an inverse of a capitalization rate). The multiplier has been calculated to be 3.60X for this Company. Documentation supporting this multiplier is contained in the following section titled; Supporting Data and Documentation. In instances where there are greater liabilities than assets, however, the multiplier value will be deemed to be Not Applicable where the value would produce a negative preliminary valuation figure. Applying the valuation formula results in the Preliminary Value of the designated Company. The Preliminary Value is not the final value, and must further incorporate separate assets before deriving the Final Business Value: Preliminary Value = Reconstructed Weighted Cash Flow times the (Capitalization Rate)

Multiplier Preliminary Value = $179,868 x 3.60 = $648,000 (rounded to nearest thousand dollar) It’s important to note that this valuation is based in part on the average weighted reconstructed cash flow, also referred to as the “earnings before interest, taxes, depreciation, amortization (EBITDA), and discretionary expenses. In addition to paying for the business and providing operating capital, a new owner will also be responsible for interest expenses, income taxes, and equipment replacement costs.


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This preliminary valuation opinion assumes the following:

• The business will be sold as an asset sale. • All property and equipment normally used in the conduct of the business will be

included in the sale. • The seller will provide the buyer with a Covenant-Not-To-Compete Agreement for

the period of 3 years in the following geographic area: Southern California • The seller will provide a personally guaranteed, Hold Harmless Agreement which

indemnifies the buyer against any and all currently known and unknown liabilities which may arise based on past operations of the Company.

• The seller will not remain with the Company after the sale. To arrive at an overall appraised value for 100% of the corporate stock (or to include other assets not included in the preliminary value calculation) of the Company, it is necessary to adjust the preliminary value as follows: Preliminary Value: $648,000 Cash and Equivalents $0 Accounts Receivable $0 Pre-paid Expenses $0 Inventory $7,000 Real Estate Value $0 Liabilities $0 Business Valuation $655,000 The Goodwill value in the Company is calculated as follows: Goodwill = Preliminary Valuation less the Liquidation Value of F/F/E Goodwill = 572,523. *** *It should be noted that the actual amount for the accounts receivable at the time of sale should be adjusted not only for the current “on the books” amount but also by using an “aging” factor to account for possible uncollectible receivables.

**It should be noted that the actual amount for the inventory at the time of sale should be

adjusted not only for the current amount but also by negotiating a fair market amount for possible old/outdated (non-salable) inventory.

***See The Chase Group Consolidated Valuation Report Sheet in the next section.


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The Chase Group estimates that the fair market value for all of the assets and assumable liabilities in the designated company, ACME Restaurant, Inc., is approximately $655,000 (rounded to nearest thousand) based on the Company’s sales, earnings, balance sheet, and other considerations, as of June 30, 2011. FAIR MARKET BUSINESS VALUATION PREPARED FOR: ACME Restaurant 1500 S. Mission Blvd, Anytown, Ca 90000 PREPARED BY: The Chase Group 41185 Golden Gate Cir., Suite 202, Murrieta, Ca 92562 PREPARER'S RELATIONSHIP TO THE BUSINESS: Independent Business Valuation Analyst 3-YEAR WEIGHTED AVERAGE CASH FLOW: $179,868 CAPITALIZATION MULTIPLIER: 3.60 CAPITALIZATION RATE 27.78% PRELIMINARY BUSINESS VALUE $647,523 LIQUIDATION VALUE OF F/F/E (all tangible assets integral to the operation of the business) $75,000 GOODWILL VALUE: $572,523 CURRENT ASSETS TO BE CONVEYED IN THE SALE: Cash and Equivalents $0 Accounts Receivable $0 Pre-paid Expenses $0 Inventory $7,000 Real Estate Value $0 LIABILITIES TO BE ASSUMED: $0 BUSINESS VALUATION: $654,523 As of: 06/30/2011


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Multiplier Calculation and Seller Survey Results


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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 $650,000 An Assumed purchaser down payment of $5,000. The balance is paid through a seller carryback loan and an SBA loan. The SBA loan will be paid back in equal monthly installments over a period of 10 years with an estimated 6% annual interest rate. The derived cash flow will be available for capital additions and buyer’s compensation. The following table describes all of the assumptions used for a hypothetical purchase of this business.


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Post Sale Cash Flow Analysis

In the following post sale cash flow analysis, the derived cash flow was developed from the three year weighted average cash flows calculated earlier less the principal 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. If the new owner does not hire a manager to fill in for the prior owners he/she will have an additional $40,000 of cash flow.


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Certification

In regards to the business valuation appraisal of ACME Restaurant, Inc.:

1. To the best of the undersigned appraiser’s knowledge, the statements of fact contained in this

Report are true and correct. 2. The reported analyses, opinions, and conclusions are limited only by the written assumptions

and limiting conditions, and are the appraiser’s personal, unbiased professional analyses, opinions and conclusions.

3. This appraisal has been performed on the basis of non-advocacy. The appraiser has no

present or contemplated interest in the business appraised and has no personal bias with respect to the parties involved.

4. The appraiser’s compensation is not contingent on any action or event resulting from the

analyses, opinions, or conclusions in, or the use of, this Report. 5. The appraiser’s analyses, opinions, and conclusions, as well as the development of this

Report, have been in reasonable accordance and conformity with the business appraisal standards of The Institute of Business Appraisers.

6. No person related to the subject business or its owners or advisors provided significant

professional assistance to the undersigned in the development of this appraisal. Certified by: October 4, 2011 Aaron Wedeking, CPA Date The Chase Group

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