What’s it Worth: Valuing a Business for SaleVALUATION 2016 SERIES

January 19, 2016

A Financial Poise Webinar

what’s it worth: valuing a business for sale

Premier Date: JANUARY 19, 2016

WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS

meet the facultyPANELISTS

Richard Claywell Biz - ValuationGary Frantzen Alvarez & MarsalGary Lotzer Compass Valuation Group

MODERATOR Kevin Lane Crowe Horwath

Practical and entertaining education for business owners and executives, accredited

investors, and their legal and financial advisors. For more information, visit

www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD

NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

about this webinarYou’re thinking about buying another business. Or you think it’s time to cash out and sell your business. Either way, you need to have or develop a view of what the business in question is worth. The Financial Poise webinar explores and explains, in plain English, the commonly accepted approaches used in valuing a business. It also covers recent trends in valuation multiples, approaches, value drivers, and how synergies are factored into transaction values.

about this series“What is it worth?” A valuation (or appraisal, if you prefer) can be performed on virtually any asset: the equity of a company or options to buy the equity of a company; intangible assets (such as patents and trademarks- or even contingent liabilities); real estate; and any sort of personal property. The concept of valuation permeates the business and legal world for reasons that include investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and litigation, among others. Join some of the leading experts in the country as they discuss- in plain English - the basics and the latest in valuation topics and why valuations of assets can vary so greatly from one professional to another.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.

episodes in this series

Dates above are premier dates; all webinars also available on demand

EPISODE #1 What’s it Worth: Valuing a Business for Sale1/19/2016

EPISODE #2 Valuing Lost Profits for Litigation Purposes2/26/2016

EPISODE #3 Selecting the Right Valuation Expert3/18/2016

EPISODE #4 Valuing Your Brand and Other “Soft” Assets4/29/2016

EPISODE #5 Bankruptcy Valuation Issues: 5/27/2016Valuation in the Context of a Fraudulent Transfer or Preference Attack

WHAT IS A BUSINESS VALUATION?

• Estimated cash equivalent price the market will bear at a specific date.• May refer to the entire company (the “enterprise” value) or a specific ownership

interest.• The result can be:

• An “Opinion of Value”• A “Calculation of Value”

• More abbreviated scope vs. an Opinion and/or with directed assumptions• An “Estimate” of a value or range of value

• Advisory in nature, less formal than an Opinion• The report can take several forms:

• Comprehensive or limited written narrative• Presentation slides and/or schedules• Oral

KEY TERMS• Assets• Liabilities• Equity

• Assets = Liabilities + Equity• Equity = Assets - Liabilities

• Invested Capital = All Classes of Equity + Interest-Bearing Debt (i.e. the capital that was provided by owners and creditors to fund the business)

• MVIC = Market Value of Invested Capital• Enterprise Value = MVIC less cash and equivalents• EPS: earnings (net income) per share of common equity• EBIT = Earnings before interest expense and taxes• EBITDA = Earnings before interest expense, taxes, depreciation and amortization• Free Cash Flow = Net operating profit less adjusted taxes less capital expenditures and net

working capital increases plus depreciation and amortization expenses

INVESTED CAPITAL AND EQUITY

Net Working Capital

Plant, Property & Equipment

Intangible & Goodwill

Debt

Equity

Current Assets Current Liabilities

Invested

Capital

DEFINITIONS

Net Revenue- Cost of Goods Sold= Gross Margin - Operating Expenses (SG&A)= Operating Profit- Estimated Income Taxes= Net Operating Profit less

Adjusted Taxes

EBIT

+ Depreciation & Amortization Expenses- Capital Expenditures- Increases in Net Working Capital EBITDA

= Free Cash Flow

WHAT IS BEING VALUED?

• May refer to the value of an entire company (the “invested capital”), the aggregate equity, or a specific class or block of equity.• If Equity:• Common or preferred (dividend preference)• Voting or non-voting• 100% or less than 100% of voting shares:• If less, controlling or non-controlling (minority) interest

• Marketable or non-marketable

Minority, Non-Marketable Value

Minority, Marketable Value

Control Value

Acquisition/Strategic Value

VARYING “LEVELS” OF VALUE

Strategic Premium

Control Premium Discount for Lack of Control

Discount for Lack of Marketability

WHY PERFORM A VALUATION?

Merger or acquisition

Financial Reporting

Tax Compliance

Disputes & Litigation

Consulting & Advisory

WHO ASKS FOR A VALUATION?Who is the client? The user of the valuation?

Third party beneficiaries Benefits from a review copy (e.g. auditors) Third party reliance (e.g. bank financing) Government (tax or other regulatory)

Is independence required?

Disinterestedness?

Conflicts?

Who pays?

Confidentiality of information and results

DIFFERENT VALUATION EXPERTS1.Business Valuation

Invested Capital or Enterprise Value Class of Equity or Owner’s Interest (including

derivatives) Subject Interest Value

2.Real Property Appraisal3.Inventory Appraisal4.Machinery and Equipment Appraisal5.Personal Property6.Other Specialties (Gems, Jewelry, Art, etc.)7.Intangible Asset Valuation

ACCREDITATIONS FOR VALUATION AND APPRAISAL

1. Business and Intangible Valuation American Institute of CPA’s American Society of Appraisers CFA Institute - Chartered Financial Analyst National Association of Certified Valuation Analysts

2. Real Property, Inventory, Machinery and Equipment, Personal Property, Other Specialty

American Society of Appraisers Appraisal Institute – MAI designation National Association of Master Appraisers National Association of Auctioneers Certified Appraisers Guild of America

3. Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation

Most accreditations use the uniform standards set by USPAP

WHO PERFORMS A BUSINESS VALUATION?Governing Body

American Society of Appraiser (ASA)

American Society of Appraiser (AM)

Institute of Business Appraisers (IBA)

American Institute of Certified Public Accountants (AICPA)

National Association of Certified Valuation Analysts (NACVA)

National Association of Certified Valuation Analysts (NACVA)

CFA Institute

Prior Education

College Degree or equivalent

College Degree or equivalent

College Degree & 2 yr. post-graduate degrees or equivalent

College Degree or equivalent & CPA designation

College Degree or equivalent & CPA designation

College Degree or equivalent

College Degree or Equivalent

Coursework Four 24 society training courses

Four 24 society training courses

90 hours classroom or 5 years experience

None 40 hour society training course (Optional)

40 hour society training course (Optional)

Approx. 900-1200 hours of study over 3 years

Experience 5 yr. full time 2 yr. full time 90 classroom hours or 5 yr. full

Involvement in 10 business valuation

Licensed CPA 2 yrs. Or 10 business valuations

4 yr. full time

INDEPENDENCE VS. ADVOCACY

Lawyers and Bankers are advocates

Appraisers are independent

PROFESSIONAL STANDARDSUniform Standards of Professional Appraisal Practice (USPAP)

American Society of Appraisers – BVS

American Institute of Certified Public Accountants SSVS No. 1

National Association of Certified Valuation Analysts

Private Equity Group (PEG)

U.S. Internal Revenue Service Revenue Ruling 59-60

FASB ASC 820, Fair Value Measurements

Specified in contract?

Others?

STANDARDS OF VALUE

Fair Market Value – tax compliance, some litigation & disputes

Fair Value - financial reporting

Statutory Fair Value – some litigation & disputes

Investment Value – investment advice, decision making

Intrinsic Value

Fairness Opinions – Is a valuation a fairness opinion or vice versa?

What is a “Fairness Opinion?”

What is a “Solvency Opinion?”

The purpose of the valuation determines the standard of value:

HIGHEST & BEST USE

• The highest and best use is the reasonably probable and legal use of an asset that is physically possible, appropriately supported, financially feasible, and results in the highest value:• If the expected future benefits are maximized through the

continued operation of the group of assets in the business in which they are currently engaged, the appropriate premise is value-in-continued-use as a going-concern.• If the expected future benefits are maximized through the

piecemeal sale of the underlying assets independent of one another, the appropriate premise is value-in-exchange or liquidation.

PREMISE OF VALUE

Going-Concern

•Value of a firm as an operating, functioning business to a buyer. It results from advantages such as a good reputation, trained workforce, established and successful procedures, tested systems, and necessary licenses and permits. This value is almost always more than the sum of the market (liquidation) value of the firm's assets.

Liquidation •Orderly •Forced (Auction Value)•The cumulative value of the assets net of liabilities as if sold piecemeal and independently of one another, not as a group.

VALUATION APPROACHES

Appr

oach

es to

Va

lue

Income Approach Cost ApproachMarket Approach

Capitalization of Earnings

Valu

atio

n M

etho

ds

Discounted Cash Flow

Guideline PublicCompanies

Guideline Transactions

Liquidation

Adjusted Balance Sheet

Forced Orderly

VALUATION PROCESS

• The purpose of the valuation determines the standard of value• The highest and best use of the assets of the business as a group must be

assessed:• Current use as a going-concern• Alternative use, assets separate and independent of one another

• The highest & best use and the purpose of the valuation determine the premise of value:• Fair value (financial reporting): Value in-use or Value in-exchange• Fair Market Value: Going-Concern or Liquidation (orderly or forced)

• Based on the premise, the appraiser must consider all three valuation approaches and choose the most appropriate.

• The best methods are determined based upon the approaches that are most appropriate, the availability of data and the purpose of the valuation

Seller Perspectiv

e

Buyer Perspectiv

e

ACQUISITION ECONOMICS

Purchase Price

Value of Synergies

Purchase Price

Seller Added ValueStand Alone

ValueCost

Buyer Added Value

SYNERGY DECOMPOSITION

Eliminate Redundanci

es

Potential Synergies to Buyers

Purchase Price

SG&A Reduction

Working Capital

Efficiency

Operating Margin

Sales Growth

Stand-Alone Value

FINANCIAL STATEMENT ADJUSTMENTSAccounting Adjustments/Methods

Inventory (i.e. LIFO/FIFO)Depreciation expense Leases (i.e. capital or operating)Prior period adjustmentsExtraordinary non-recurring revenue and expensesIncome tax considerations (e.g. NOL carry-forwards)Discontinued operations

Discretionary ExpensesOwner/executive compensationManagement perksContributions & giftsRelated party transactions (e.g. leases, financing, royalties, etc.)

Non-Operating Assets/LiabilitiesNon-operating revenue and expensesExcess/deficient net working capitalGoodwill

KEY ISSUES

Revenue• demand for product/service• capacity constraints• nature of competition

Costs of production• productivity norms• expected inflation - productive inputs vs. output

pricing• technology advances - products and production

processes• asset efficiency• owner/executive compensation & perquisites• general & administrative overhead

Capital marketsGovernment & other external

• taxes• structural constraints• quality standards• environmental standards

Structure• merger• asset purchase• stock purchase

Assumption of liabilitiesRelated Agreements

• non-compete• assumption of leases• employment agreements• intellectual property

Post-closing settlement• working capital accounts• environmental liabilities• product warranties

Market Value Issues Transaction Value Issues

INCOME APPROACH – TWO METHODS

Capitalization of

Earnings

Discounted Cash Flow

Two Methods

Discussion Topics

How do you choose?

What is the difference?

What is the impact?

INCOME APPROACH – TWO METHODS

Two Methods

Capitalization of a single

period earnings / cash flow

Discounted multi-period

future earnings/cash

flowTwo Key Variables

Income Stream

Capitalization / Discount

Rate• Capitalization rate – rate used to convert a single period’s income stream into value

• Discount rate – rate used to discount a future series of earnings or cash flows back to present value

• Different measures of earnings – EBITDA, EBIT, EBT, cash flow

• Typical

adjustments to earnings – owner’s compensation, related party transactions, non-recurring charges, non-operating expenses

CAPITALIZATION METHOD

Capitalization Model: $(t+1); (r-g)

$ = amount of earnings or cash flow for periodt = time periodr = required rate of returng = expected constant growth of earnings/cash flow

DISCOUNTED CASH FLOW METHOD

Discounting Model: $(t) + $(t+1) + $(t+2) + …. $(n) + Residual Value

(1+r)^t (1+r)^t+1 (1+r)^t+2 (1+r)^n (1+r)^n

t = time period

$ = amount of earnings or cash flow for period

r = required rate of return

g = expected constant growth of earnings/cash flow

n = number of discrete time periods of projected earnings

Residual Value can be estimated by:• Capitalization model• Exit multiples• Liquidation value of assets

MARKET APPROACH – TWO METHODS

Guideline Public

Companies

Guideline Transactions

Two Methods

Discussion Topics

How do you choose?

What is the difference?

What is the impact?

MARKET APPROACH – TWO METHODSTwo Methods

Multiples derived from

guideline public company

stock prices

Multiples derived from

guideline change of

control transactions

Two Key Variables

MVIC Price per Share

Related to measures of earnings AFTER deducting interest expense - net income, net book value

Related to measures of earnings BEFORE deducting interest expense – Net Revenue, EBITDA, EBIT, Debt-Free Cash Flow

MULTIPLE COMPUTATION

MVIC = (price/share X shares) + debtEBITDA EBITDA

Price = price/shareEarnings net income/share

MULTIPLE DECOMPOSITIONCapitalization Model: $(t+1) = earnings (t) X (1+g) (r-g) (r – g)

Market Multiples:Value = factor X earnings (e.g. multiple of actual earnings)Value = earnings X (1 + g)

(k - g)Multiple = (1 + g)

(k - g)g = expected growth for earningsk = risk adjusted discount rate

CHARACTERISTICS FOR GUIDELINE COMPANY COMPARABILITY

Quantitative• size of assets/sales• profitability• growth rates: earnings, assets, sales• leverage

• financial• operating

• productivity/asset utilization

Qualitative• Porter’s framework

• threats of new entrants• nature of competition• threat of substitute products• bargaining power of suppliers• bargaining power of customers

• distribution channels• customers• end-users• products/services• value-chain positioning

COST APPROACH• Restates accounting value of net assets to economic/market value assuming highest and best use

[adjusted book value].• Most applicable in valuing companies with underutilized assets and/or little intangible value:

• Real estate investment companies• Investment holding companies• Contract manufacturers• Commodity processors• Companies facing potential liquidation

• Given less weight when valuing:• Service businesses• Business with substantial intangible value• Asset-light businesses

• Liquidation Value – determine if sale of assets will be:• Orderly – reasonable time• Forced – “fire sale” – lower value than orderly sale due to decreased time in finding potential

buyers and increase in selling costs

COST APPROACH (con’t)• Typical balance sheet adjustments include:

• Marketable securities• Accounts receivables• Inventory• Land• Fixed assets (building & equipment)• Related party transactions• Intangibles• Contingent Liabilities

VALUATION – COMMON MISTAKES• Failure to make adjustments• Failure to adequately consider risks• Inappropriate adjustments• Failure to recognize the impact of legal structure on investment returns• Failure to comply with valuation standards• Lack of support for assumptions• Inconsistency (e.g. inflation in discount rate and growth, revenue growth and

capex)• Failure to recognize key business attributes• Oversimplified and inappropriate methodology• Averages vs. trends or cycles• Reliance on rules of thumb• Over reliance on court cases

More About The Faculty:KEVIN LANE

D

kevin.lane@crowehorwath.com

Kevin is an accomplished financial professional with over 15 years of experience in private equity and consulting leadership positions. He has led and performed dozens of valuation assignments, including the valuation of small and medium size businesses, intellectual properties, joint ventures, and emerging technologies for a variety of purposes including litigation, technology commercialization, mergers and acquisitions, and tax planning. He currently leads Crowe Horwath’s outsourced corporate development practice.

Kevin has provided expert accounting and valuation testimony, prepared expert reports and analyses, and scrutinized the work of opposing experts related to economic damages in complex commercial litigation matters - testimony venues have included Federal District Court, American Arbitration Association, and formal mediation

Having spent almost three years in the private equity industry, Kevin is also experienced in all aspects of the investment process, including financial modeling, evaluating investment opportunities, performing due diligence, negotiating transactions, and obtaining financing. Kevin has been a guest lecturer at The John Marshall Law School and Loyola University Chicago School of Law on topics including accounting for business combinations, intellectual property valuation and taxation, and economic damages.

Kevin is a Certified Public Accountant (CPA) Accredited in Business Valuation (ABV). He holds a Bachelor of Business Administration, Accountancy and Computer Applications from the University of Notre Dame and a Masters in Business Administration, concentrations in Finance and Economics, from the University of Chicago Booth School of Business.

More About The Faculty: D

RICHARD CLAYWELLDrichard@biz-valuation.com

Richard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in Business Valuation, Accredited Senior Appraiser, Certified Business Appraiser, International Certified Valuation Specialist, Certified Valuation Analyst, Certified in Merger & Acquisition Advisor, Master Analyst in Financial Forensics, Certified in Fraud Deterrence, Accredited in Business Appraisal Review. Richard has been valuing closely held companies since 1985. Richard’s practice is restricted to business valuation, economic damages, profit enhancement and exit planning.

Richard received his Bachelor of Science in Accounting in 1979 from the University of Houston – Clear Lake. He then received certification as a Public Accountant in 1983. Over the years, Richard has earned additional accreditations that relate to business valuations, economic damages and fraud. Richard has been an instructor for the National Association of Certified Valuation Analysts for many years, has been an instructor for the Internal Revenue Service and the International Association of Consultants Valuators and Analysts (IACVA). Richard is currently the Director of Education for the IACVA and is responsible for the business valuations materials being taught in 55 countries. Richard has taught business valuation or economic damage courses in China, Korea, Taiwan.

Richard has performed over 1,000 business valuations since 1985. Richard has testified in Texas County Court, Texas State Court, Bankruptcy Court and Texas State Courts. Richard has given testimony in economic damages (lost profits), shareholder disputes, personal injury, wrongful termination and divorce.

More About The Faculty:D

GARY FRANTZEND

gfrantzen@alvarezandmarsal.comGary Frantzen leads Alvarez & Marsal's Valuation Services practice in Chicago. He specializes in the valuation of businesses and business interests including equity, liabilities and debt securities, options and other derivative securities / instruments, intellectual property and other tangible and intangible assets.

Mr. Frantzen has provided opinions of value, fairness and solvency for a wide variety of purposes including financial reporting, tax planning and reporting, dispute resolution, mergers and acquisitions and other business purposes.He has advised clients regarding the value impact of potential strategic alternatives, business plans and enterprise transactions; valued assets for business combinations, fresh start accounting and impairment measurement; valued business interests for tax planning and reporting, and has provided independent fairness and solvency opinions regarding contemplated transactions.With more than 25 years of experience, Mr. Frantzen has provided valuation advice in a wide variety of situations and industries to management, board members and special committees, attorneys, individuals and the courts. Notable assignments include: the valuation of tangible and intangible assets of a multi-billion dollar, multinational corporation for fresh start accounting; the valuation of the assets of a regional health system with respect to its acquisition by a major university medical center; the valuation of large water and transportation infrastructure projects for financing-related purposes and financial reporting; the valuation of the tangible and intangible assets of a large, multinational chemical producer acquired by a large private equity sponsor; and the valuation of the shares of a publicly-traded hospital management company related to a dissenting shareholder dispute when their shares were acquired in a private transaction.

More About The Faculty:D

GARY LOTZERDglotzer@vanterapartners.com

Gary is the Principal Valuator for Business Valuations & Advisory, LLC, dba Compass Valuations Group www.CompassValuations.com. His professional affiliations include the American Institute of CPA’s, AICPA Forensic and Valuation Services section and Arizona Society of CPA’s. Mr. Lotzer has over thirty years of diverse, business experience across a broad spectrum of industries.  He has served in C-level roles of lower mid-market companies located in the US, Mexico, Europe and Asia.  His specialized combination of corporate finance, marketing and operations skills have been successfully applied in venture-backed startup, turnaround and high growth business stages.  Particular professional expertise includes strategic planning, business plan development, financial modeling, business valuations and due diligence.  Mr Lotzer has founded and co-founded multiple successful companies, and has personally negotiated and structured numerous debt and equity capital transactions.  He has also participated in OTCBB and AMEX public capital listings.  Previously, he was engaged in M&A as an independent intermediary.  He was a Managing Director of Hunter Wise Financial Group LLC, a middle-market investment bank, formerly headquartered in Irvine, CA. His office is located in Tucson, AZ. Mr. Lotzer holds Series 82 and 63 securities licenses, as well as an Arizona real estate broker's license.

He began his career in Chicago in public accounting, but migrated to Milwaukee where he eventually merged Lotzer & Co CPA’s into Seidman & Seidman/BDO, an international CPA/Consulting firm.

He is a Certified Public Accountant (WI License No. 5757), and long-term member of the American Institute of Certified Public Accountants and holds the Accredited Business Valuation (ABV) credential issues by the AICPA exclusively to licensed CPA’s that complete their rigorous accreditation requirements. He is also a member  of the AICPA Forensic and Valuation Services section, and the Arizona Society of CPA’s.

He is a graduate of the University of Wisconsin – Madison School of Business, and has attended the Thunderbird American Graduate School of International Management Executive Program in Phoenix.

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Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.