business valuation
TRANSCRIPT
SUCCESSION PLANNING JESSICA MAN CPA, CA, CBV, CDFA
OVERVIEW
Succession Planning
Value of a Business
Valuation Example
Building Value
Tax Planning
Questions
WHAT IS SUCCESSION PLANNING
A planning process to:
1. Transfer management responsibilities
2. Transfer legal ownership
SUCCESSION PLANNING TIMELINE
Succession Planning Timeline
Get Ready Get Set Go
Ownership Transition
Ensure Corporate
Sale Readiness
Establish Value/Price
TaxPlanning
Develop Successors
Contingency Plans
Prepare Will & Estate Plan
Choose Sale Option
Execute Terms of
Sale
Financing for Buyer
Corporate Goal Planning
Personal Goal Planning
WHY IS IT IMPORTANT
Effective plans maximize value!
WHAT IS A VALUE?
“An Asset is worth what it can earn and reflects a future income
stream”
PRINCIPLES OF VALUATION
Value is at a point of time
Value is related to future expectations
Value relates to earning power
More than one special purchaser will make a special purchaser market
PURPOSE
Succession planning
Buy or sell a business
Tax planning
Shareholders agreement
Matrimonial settlement
VALUATION APPROACH
Going Concern
Liquidation
VALUATION METHODS
Capitalization cash flow/earnings method
Discounted cash flow method
Asset valuation method
Comparable transaction method
RISK FACTORS
Nature of business
Clientele
Credit and collection policies
Geographic location
Growth prospects of clients
Owner-Client relationships: Transferable?
RISK FACTORS (CTD)
Operating productivity
Size
Financial position
Staff compensation
Industry
Economic, social and political environment
VALUATION EXAMPLE
VALUATION EXAMPLE
Small Business
Service Industry
Assumptions: Going Concern
Capitalization Earnings Method
EARNINGS CAPITALIZATION METHOD
Formula
Maintainable Earnings Before Taxesmultiplied by (x)
Capitalization earnings multipleplus (+)
Redundant assetsequals (=)
Fair Market Value
INCOME STATEMENT
Ref. 2014 2015$ $
Revenue (A) 950,000 1,000,000
Operating ExpensesRemuneration 550,000 625,000 Office and general 142,500 150,000 Professional fees 10,000 25,000 Rent 50,000 50,000 Selling expenses 80,000 100,000 Total operating expenses (B) 832,500 950,000
Income before taxes (C=A-B) 117,500 50,000
BUSINESS VALUATION TEMPLATECAPITALIZED EARNINGS METHOD
ABC COMPANYINCOME STATEMENT
YEARS ENDED JUNE 30, 2014 AND 2015
BALANCE SHEET
2014 2015$ $
ASSETSCurrent
Cash 30,000 45,000 Accounts receivable 45,000 50,000
75,000 95,000 Non-current
Property, plant and equipment (net) 50,000 55,000 125,000 150,000
CAPITALIZED EARNINGS METHODABC COMPANY
BALANCE SHEETAS AT JUNE 30, 2014 AND 2015
BALANCE SHEET
2014 2015$ $
LIABILITIESCurrent Accounts payable 20,000 25,000 Long-term Long-term debt 100,000 90,000
120,000 115,000
SHAREHOLDERS' EQUITY Capital stock 100 100 Retained earnings 4,900 34,900
5,000 35,000
125,000 150,000
Net Working Capital 55,000 70,000
CAPITALIZED EARNINGS METHODABC COMPANY
BALANCE SHEETAS AT JUNE 30, 2014 AND 2015
CALCULATION OF MAINTAINABLE EARNINGS
Notes in Financial Statements Professional fees of $15,000 related to litigation in 2015 Severance Package of $50,000 for a retired employee in
2015 Management Bonus of $75,000 for tax planning in 2014
and 2015 Family travel to Italy in 2015 Interest on long-term loan of $8,000 and $6,000 in
2014 and 2015 respectively
BUSINESS VALUATION TEMPLATECAPITALIZED EARNINGS METHOD
ABC COMPANYMAINTAINABLE EARNINGS BEFORE INTEREST AND TAXES
YEARS ENDED JUNE 30, 2014 AND 2015
Ref. 2014 2015$ $
Income before taxes
Adjustments to incomeProfessional feesEmployee termination/settlementManagement bonusesTravelInterest on long-term debt
Total Adjustments
Maintainable earnings before interest and taxes (Maintainable earnings)
Average maintainable earnings
117,500 50,000
15,00050,000
75,000 75,000
8,00010,000
6,00083,000 156,000
200,500 206,000203,250
(C=A+B)
(A)
(B)
BUSINESS VALUATION TEMPLATECAPITALIZED EARNINGS METHOD
ABC COMPANYCALCULATION OF FAIR MARKET VALUE
Ref. Low High
Maintainable Earnings
Capitalization Multiples
Capitalized Earnings
Add: Net Realizable Value of Redundant Assets Excess Working Capital
Enterprise Value
Less: Fair Market Value of Long-term debt
Fair Market Value of Shares
203,250 203,250
3 5
609,750 1,016,250
70,000 70,000
679,750 1,086,250(90,000) (90,000)
589,750 996,250
(A)
(B)
(C=AxB)
(D)
(E=A+D)(F)
(G=E+F)
BUILDING VALUE
Plan and set goals
Maintain profitability at benchmark levels
Improve organic growth rate
Establish a stable financial position
Put employment contracts in place
MARKET TRANSACTIONS
Accountant - 0.75 to 1x revenue
Insurance Brokers - 3x commission income
Dentists – (General) - 1x revenue
Service Business (General) - 0.5 to 1x revenue
E-commerce - 3 to 6x EBITDA
Manufacturing - 5 to 7x EBITDA
TAX PLANNING
Lifetime Capital Gain Exemption
