Barry Goodman

Basic ESOP Valuation

Arlene Ashcraft

Pamela Steverango

The ESOP Association Las Vegas Annual ConferenceNovember 8, 2012

Income ApproachBarry Goodman – Advanced Valuation Analytics, Ltd.

Market ApproachArlene Ashcraft – Columbia Financial Advisors Inc.

Employee CommunicationPamela Steverango – Chartwell Capital Solutions

Agenda

Barry Goodman – Advanced Valuation Analytics, Ltd.

Income Approach

Capitalization Of Cash Flow MethodEstimate the capitalization rate.Estimate the cash flow capacity.Divide the cash flow capacity by the

capitalization rate.

Factor, expressed in %, used to convert anticipated benefits into a current value

Considers interest rates, rates of return expected by the market, and risk of the anticipated benefits

Capitalization Rate

The company’s ability to produce profitLooks at historical profit – not anticipated future

profitEstimation Methods

Most recent yearMean or weighted averageAnother way to estimate cash flow capacity-

Projected Year

Cash Flow Capacity

Net Sales and EBIDTA

2006 2007 2008 2009 2010 2011$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

-$2,000,000-$1,000,000$0$1,000,000$2,000,000$3,000,000$4,000,000$5,000,000$6,000,000$7,000,000

Net Sales EBITDA

Net

Sal

es EBITDA

Gradual Increase

2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,000,000$1,050,000$1,102,500

$1,157,625$1,215,506$1,276,281

$1,340,095$1,407,100

$1,477,455

CASH

FLO

W

Erratic History

2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000$2,500,000

$500,000

$25,000

$1,500,000

$2,000,000

$1,000,000

$2,400,000$2,520,000

$2,646,000

CASH

FLO

W

Hockey Stick

2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$1,000,000$1,050,000$1,102,500$1,157,625$1,215,506$1,276,281

$2,500,000

$3,125,000

$3,906,250

CASH

FLO

W

Revenue Projections: Last Year and This Year

2011 2012E 2013E 2014E 2015E 2016E$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$17,120,487 $17,360,317$18,401,936

$19,874,091$21,464,018

$23,181,140

$20,086,500$21,788,400

$23,466,107$25,132,200

$26,388,810

Revenue Revenue-Last

Rev

enue

EBITDA Projections: Last Year and This Year

2011 2012E 2013E 2014E 2015E 2016E$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$1,449,470

$557,420$432,701 $380,148

$568,053 $662,549

$1,856,114$2,141,260

$2,267,147$2,475,785 $2,461,763

EBITDA EBITDA-Last

EBIT

DA

EBITDA Margin Projections: Last Year and This Year

2011 2012E 2013E 2014E 2015E 2016E0%

2%

4%

6%

8%

10%

12%

8.5%

3.2%2.4%

1.9%2.6% 2.9%

9.2%9.8% 9.7% 9.9%

9.3%

EBITDA Margin EBITDA Margin-Last

EBIT

DA

Mar

gin

Historic Success At Forecasting Next Year’s EBITDA

2005 2006 2007 2008 2009 2010 2011$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

EBITDA EBITDA Forecasted for this Year

EBIT

DA

Discounts/PremiumsDoes the interest

holder have control over the

entity?

Is there a public market for the

interest?

Is there a public market for the

interest?

Controlling, as if freely

traded value

Controlling, non freely

traded value

Non-controlling, as

if freely traded value

Non-controlling, non freely

traded value

Yes No

Yes YesNo No

Appendix A: Balance Sheet

2006 2007 2008 2009 2010 2011Current Assets- Cash and Equivalents $500,000 $550,000 $600,000 $450,000 $300,000 $125,000Trade Receivables 4,000,000 4,500,000 5,000,000 5,500,000 4,200,000 3,100,000Inventory 2,400,000 2,600,000 2,750,000 2,850,000 3,000,000 2,600,000Other Current Assets 200,000 200,000 200,000 200,000 200,000 200,000Total Current Assets 7,100,000 7,850,000 8,550,000 9,000,000 7,700,000 6,025,000Property & Equipment 8,085,885 8,085,885 8,085,885 8,085,885 8,085,885 8,085,885Other Assets 933,346 933,346 933,346 933,346 933,346 933,346Total Assets $16,119,231 $16,869,231 $17,569,231 $18,019,231 $16,719,231 $15,044,231Current Liabilities $3,000,000 $3,500,000 $4,500,000 $6,000,000 $7,000,000 $6,500,000Long-Term Liabilities 5,000,000 4,500,000 4,000,000 3,500,000 3,500,000 3,500,000Other Liabilities 0 0 0 0 0 0Total Liabilities $8,000,000 $8,000,000 $8,500,000 $9,500,000 $10,500,000 $10,000,000Equity $8,119,231 $8,869,231 $9,069,231 $8,519,231 $6,219,231 $5,044,231Total Liabilities & Equity $16,119,231 $16,869,231 $17,569,231 $18,019,231 $16,719,231 $15,044,231Unadjusted Equity $8,119,231 $8,869,231 $9,069,231 $8,519,231 $6,219,231 $5,044,231Total Adjustments to Equity $0 $0 $0 $0 $0 $0

Appendix B: Income Statement2006 2007 2008 2009 2010 2011

Net Sales $30,000,000 $33,000,000 $32,000,000 $30,000,000 $26,500,000 $23,000,000Cost of Sales 21,500,000 24,500,000 24,000,000 20,000,000 20,000,000 20,000,000Gross Margin 8,500,000 8,500,000 8,000,000 10,000,000 6,500,000 3,000,000Operating Expenses 4,900,000 4,950,000 3,600,000 4,000,000 4,500,000 4,300,000Depreciation 1,100,000 1,350,000 1,900,000 1,900,000 2,000,000 1,900,000Other- 0 0 0 0 0 0Operating Profit 2,500,000 2,200,000 2,500,000 4,100,000 0 (3,200,000)Interest Expense 770,000 930,000 1,050,000 1,030,000 600,000 450,000Other Income (Loss) 25,000 25,000 25,000 25,000 25,000 25,000Income Before Taxes 1,755,000 1,295,000 1,475,000 3,095,000 (575,000) (3,625,000)Income Taxes 737,100 543,900 619,500 1,299,900 (241,500) (1,522,500)Net Income $1,017,900 $751,100 $855,500 $1,795,100 ($333,500) ($2,102,500)EBI $1,450,000 $1,276,000 $1,450,000 $2,378,000 $0 ($1,856,000)EBIT $2,500,000 $2,200,000 $2,500,000 $4,100,000 $0 ($3,200,000)EBITDA $3,600,000 $3,550,000 $4,400,000 $6,000,000 $2,000,000 ($1,300,000)Net Income (Unadj) $959,306 $775,000 $865,000 $4,021,100 $926,500 ($3,625,000) Depreciation/Amort. 1,100,000 1,350,000 1,900,000 1,900,000 2,000,000 1,900,000 Changes Work Cap 908,330 181,816 (293,408) (3,972,523) (807,008) 4,027,840 Investing Act (1,604,564) (7,918,481) (801,652) (785,937) (1,098,795) (1,767,503) Financing Act (1,967,445) 6,331,404 (2,005,511) (764,264) (1,020,697) (535,337) Dividends 0 0 0 0 0 0Cash Flow ($604,373) $719,739 ($335,571) $398,376 $0 $0

Arlene Ashcraft– Columbia Financial Advisors, Inc.

Market Approach

Also called the “Sales Comparison Approach”Based on the theory of substitution

In real estate, appraisers look at data on sales of comparable properties. In business valuation, the theory is the same.

A business appraiser interprets transaction data to help guide the determination of appropriate multiples of various measures (cash flow, earnings, book value, etc.) to derive indications of value for the subject company

Market Approach

The market approach consists of any/all of the following:

An analysis of previous sales or offers for the subject company’s stock

Sales of entire public or privately held companies similar to the subject company

And/or sales of stock of publicly traded companies similar to the subject company

Market Approach

These are the same as in the income approach:Cash FlowRiskGrowth

All of the above influence the price paid for a whole company or a single share in a company

Market Approach-Value Drivers

What drives value?Macroeconomic factors Industry factorsCompany specific factors

Prices can change rapidly for publicly traded companies, as perceived changes in the above drivers become incorporated quickly into the share price

Market Approach-Value Drivers

The chart below shows the variation in the S&P 500 Index over time. The horizontal line is the starting value for the S&P 500 in January 2002.

S&P 500 Index from January 2002 through September 2012

Jan-02May

-02Au

g-02Dec-

02Ap

r-03Au

g-03Dec-

03Ap

r-04Au

g-04Dec-

04Ap

r-05Au

g-05Dec-

05Mar-

06Jul-

06Nov

-06Mar-

07Jul-

07Nov

-07Mar-

08Jul-

08Nov

-08Mar-

09Jul-

09Oct-

09Feb

-10Jun

-10Oct-

10Feb

-11Jun

-11Oct-

11Feb

-12Jun

-120

200

400

600

800

1000

1200

1400

1600

1800

Snapshot: S&P 500 Index from Sept. 26, 2008 to Oct. 15, 2008

9/26/0

89/2

7/089/2

8/089/2

9/089/3

0/0810/

1/0810/

2/0810/

3/0810/

4/0810/

5/0810/

6/0810/

7/0810/

8/0810/

9/08

10/10

/08

10/11

/08

10/12

/08

10/13

/08

10/14

/08

10/15

/08800

850

900

950

1000

1050

1100

1150

1200

S&P 500 Index

S&P 500 Index

S&P

500

Valu

e

Issues with the market approach Comparability – determination and availability of data

Each subject company is different and unique, but companies that have similar growth and risk drivers can still be appropriate to use as comparables

Volatility-Public Companies Timely Data & Completeness of Data-Merged and Acquired

Companies

Positive features of the market approach Timely data

Incorporates up-to-date perceptions of risks/benefits of investment “Real world” transactions

Market Data

Assessment of relative risk and returnSelection and application of multiplesWeighting of indications of value derived

May change from year to year Usefulness of underlying data

Indicated Value Minority Marketable

Market Approach – Public Companies

Relatively similar approach as in the public company market method

Assessment of relative risk and return Selection and application of multiples Weighting of indications of value derived

May change from year to year Usefulness of underlying data

Indicated Value Control Marketable or Control non-Marketable

Market Approach – M & A

Historical M&A Transaction Volume

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201210.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

0

2000

4000

6000

8000

10000

12000

14000

Transactions

Avg. EBITDA Multiple, Excl. Multiples over 100

EBIT

DA

Mul

tiple

Tran

sact

ions

Reasonable given value basisStrengths and weaknesses of eachFinal weighting of concluded valuesImplied multiples

Concluded Value

Pamela Steverango – Chartwell Capital Solutions

Employee Communication

ESOP companies must share certain information with participants

Annual participant statementSummary Plan Description (SPD)Summary annual report on the activity in the planAdditional disclosure for public companies

Why?

Some ESOP companies choose to share more financial information and communicate more with participants

Value is determined on an annual basis by an independent appraiser and is not arbitrarily set by management

There are a number of ways of looking at valueThere are external factors and internal factors that

affect value, some of which are beyond your Company’s control

Each Employee can impact value

What?

Influencing Factors

External General & Regional

Economic Condition Regulatory

Considerations Specific Industry

Condition Capital Markets

Condition

Internal Operational Factors Financial Performance

and Outlook Vendor Relationships Customer Relationships Management Capabilities Personnel

Company Operational FactorsOther• Technology• Administration• Business Development • Activity

Risk• Relative Size• Industry Position• Quality of Earnings• Customer

Concentration• Product Diversity• Geographic Diversity• Leverage• Off B/S Liabilities

Personnel• Depth and strength of

management team• Longevity and

expertise of key personnel

• Ability to attract key personnel

• Strong HR department

Profitability• Margins• Fixed Cost Leverage• Volatility

Growth• Diversification of end

markets• Breadth and depth of

service specialties• Geographic

diversification• Corporate growth

strategy and vision• Reputation in

marketplace

Clarify expectationsWhat does it mean to think and act like an owner

in your company?How does this differ from perceptions people have

about ownership?Initial Communication

Start from the participant point of viewMake it understandableSeemingly “ungrateful” or probing questions could

be a good signNo questions could be a bad sign

How?

Benefits of an ESOP How an ESOP WorksHow the ESOP Buys StockRequired Players and RolesBenefits and Risks of OwnershipSub S Corporation Status

Initial Communication Sample Outline

Who is Eligible to Participate in the ESOP?Who gets Allocations of Contributions?When Will I Receive my Benefit and How is it

Paid?Value of Company Stock and My AccountVestingSummary Plan Description

Initial Communication Sample Outline

Questions?

?

Barry GoodmanAdvanced Valuation Analytics, Ltd.

1901 L Street NW | Suite 605Washington, DC 20036

202-296-2777bgoodman@advancedval.com

Arlene Ashcraft, CFA, ASAColumbia Financial Advisors, Inc.

720 SW Washington Street | Suite 650Portland, OR 97205

503-222-0562aashcraft@cfai.com

Pamela Steverango, CFAChartwell Capital Solutions

One Market | Spear Tower | 36th FloorSan Francisco, CA 94105

415-293-8200pamela.steverango@chartwellcapitalsolutions.com

Speaker Information

Barry R. Goodman, CFA, ASA, CPA/ABV, CBA, CFPBarry has the following professional designations that require an examination: Chartered Financial Analyst Certified Business Appraiser Certified Public Accountant Accredited in Business Valuation Accredited Senior Appraiser - American Society of Appraisers Fellow - Financial Analysts Federation Certified Financial Planner

In addition, he is active in the following organizations: American Society of Appraisers (Business Valuation Specialty) American Institute of Certified Public Accountants Greater Washington Institute of Certified Public Accountants (Valuation Committee) Employee Stock Ownership Association (Business Valuation Advisory Committee/Chairman of Leverage Buyout Sub-

Committee) National Economists Club Washington Society of Investment Analysts

Barry R. GoodmanAdvanced Valuation Analytics, Inc.

1901 L Street, NWSuite 605

Washington DC 20036202-296-2777

bgoodman@advancedval.com

Arlene L. Ashcraft, CFA, ASA

Principal and ShareholderArlene Ashcraft has been engaged in business appraisals since 2005. She specializes in ESOP valuation and financial advisory services and appraisal assignments for litigation support purposes.

Ms. Ashcraft is an Accredited Senior Appraiser of the American Society of Appraisers designated in Business Valuation, and a Chartered Financial Analyst. She is the current Treasurer of the American Society of Appraisers Portland, Oregon Chapter and Editor of the American Society of Appraisers Business Valuation E-Letter. Ms. Ashcraft earned her Masters of Business Administration from Portland State University in 2004. She is a member of the ESOP Association and an associate member of the ESOP Association’s Valuation Advisory Committee. Ms. Ashcraft has been a speaker on ESOP valuation issues at conferences and webinars sponsored by the National Center for Employee Ownership.

Arlene L. AshcraftColumbia Financial Advisors, Inc.

720 SW WashingtonSuite 650

Portland OR 97205503-222-0562

aashcraft@cfai.com

Managing DirectorPamela has provided financial advisory services to privately held companies since 1986. She is recognized as a leading authority on business valuation, particularly with respect to Employee Stock Ownership Plans and other qualified ERISA plans.

Pamela is a nationally recognized speaker on ESOP business valuations. She has been a featured speaker for The ESOP Association, the National Center for Employee Ownership, The ESOP Association - California/Western States Chapter, the AICPA, and for individual organizations on ESOP valuations and fiduciary issues as they relate to ESOP valuations.

Pamela is an active member of The ESOP Association’s Ownership Culture Committee, the National Center for Employee Ownership, The ESOP Association - California/Western States Chapter, the CFA Institute and Security Analysts of San Francisco.

Pamela is a Chartered Financial Analyst charter holder. She earned a Bachelor of Science degree in psychology from Oregon State University. Pamela also holds a Master of Business Administration degree, with an emphasis in finance, from Golden Gate University.

Pamela D. Steverango, CFA

Pamela SteverangoChartwell Capital Solutions

One Market Street, Spear TowerSuite 3600

San Francisco CA 94105415-293-8200

pamela.steverango@chartwellcapitalsolutions.com