Business Valuation in Exit Planning
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The document is a seminar outline on business valuation in exit planning, detailing methods for valuing a business and their applications. It covers various valuation approaches including asset, income, and market methods, along with considerations for normalizing adjustments and planning strategies. Participants will learn to recognize valuation methods, assess value impacts, reconcile different valuations, and identify opportunities to enhance business value for clients.
Business Valuation in Exit Planning
- 1. Delivering on the Promise. Business Valuation in Exit Planning August 16, 2012 Michael Trabert, CPA, CVA, CMAP, CEPA Kenneth M. Haffey, CPA, CVA Sean R. Saari, CPA/ABV, CVA, MBA
- 2. Delivering on the Promise. Learning After completing the session, participants will be able to... Objectives 1. Recognize the methods typically utilized to value a business or ownership interest and understand their basic application 2. Identify normalizing adjustments and assess their impact on value 3. Reconcile values derived from multiple valuation approaches 4. Capitalize on planning opportunities to help clients maximize the value received for their business
- 3. Delivering on the Promise. Seminar • Valuation Basics Overview • Case Study / Valuation Analysis • Valuation Approaches • Control and Marketability Considerations • Planning Considerations
- 4. Delivering on the Promise. “There is no such thing as an absolute value in this world. You can only estimate what a thing is worth to you.” Charles Dudley Warner 1829-1900, American writer
- 5. Delivering on the Promise. Valuation • Standard of Value Fair Market Value Basics • • Strategic/Investment Value • Sales Price = Value? • Type of Value • Equity value • Market Value of Invested Capital (MVIC) • Equity Value + Interest-Bearing Debt • Enterprise value (EV) • MVIC - Cash
- 6. Delivering on the Promise. Valuation • Asset Approach Approaches • Income Approach • Market Approach • LBO Method • Rules of Thumb Practice Tip Remember that both fair market value and strategic value can be determined using these approaches depending upon the benefit stream used in the valuation analysis
- 7. Delivering on the Promise. Asset • Valuation Methodologies Adjusted net asset method Approach • • Basic Steps • Adjust assets to fair market/strategic value • Adjusted liabilities to fair market/strategic value • Pros • Provides “floor value” of the company • Relatively simple analysis • Cons • Typically provides a liquidation value, which is often not appropriate for healthy businesses • Rarely utilized in transactional valuation
- 8. Delivering on the Promise. Income • Valuation Methodologies Discounted cash flow method Approach • • Capitalization of cash flow method • Capitalization of earnings / Discounted future earnings • Basic Steps • Determine benefit stream and make normalizing adjustments as appropriate • Determine discount/capitalization rate • Determine cash flow adjustments • Discount/capitalize cash flows • Pros • Provides most “company-specific” value • Can appropriately incorporate projected growth of the business • Cons • Most involved of the valuation analyses • May be disagreements over likelihood of meeting projections
- 9. Delivering on the Promise. Income • Other Considerations Mid-Period Discounting Approach • • Non-Operating Assets • Direct to Equity vs. Debt-Free Valuation • Normalizing Adjustments
- 10. Delivering on the Promise. Normalizing • FMV vs. Strategic normalizing adjustments Adjustments • Compensation • Family members paid other than FMV • Officers paid other than FMV • Personal expenses • Related party transactions at other than FMV • Non-recurring income or expenses • Expense trends
- 11. Delivering on the Promise. Market • Valuation Methodologies Guideline transaction method Approach • • Guideline public company method • Basic Steps • Determine benefit stream and make normalizing adjustments as appropriate • Find comparable transactions/guideline public companies • Calculate valuation multiples and apply to subject company • Make adjustments as necessary to arrive at equity value (if necessary) • Pros • Incorporates market conditions and prices paid in recent relative transactions • Easy to explain and apply • Cons • Can be misleading if debt not appropriately considered • EBITDA multiples typically result in an Enterprise Value, not an Equity Value • In certain industries, there may be a lack comparable transactions or public companies
- 12. Delivering on the Promise. LBO • Valuation Methodologies LBO Method Method • • Basic Steps • Prepare discounted cash flow analysis • Estimate financing and capital structure • Determine implied rate of return at various exit points • Pros • Allows seller to determine maximum price that the buyer will be willing to pay based on the amount of debt financing available and rate of return required • Cons • Simply a derivation of the discounted cash flow method • Not as widely-utilized as basic income and market approaches • Buyer may not have reliable information available regarding the extent of financing that the seller can obtain
- 13. Delivering on the Promise. Rules of • Valuation Methodologies Rule of Thumb Thumb • • Basic Steps • Identify rule of thumb valuation metrics • Apply rule of thumb to the subject company • Pros • Simple application • Cons • Can result in misleading values • Often lacks support • Not permitted to be used as sole valuation method by most valuation standards
- 14. Delivering on the Promise. Other • Asset Deal vs. Stock Deal Valuation • Asset Deal Typically preferred by buyers Considerations • • Allows for step-up in basis of acquired assets, which may allow for higher purchase price • C Corporation sellers are subject to double taxation • Stock Deal • Typically preferred by sellers • No step-up in basis in acquired assets for buyer • Single level of seller taxation Asset Deal Stock Deal Deal Price $ 10,000,000 $ 10,000,000 Corporate Level Tax (35%) (3,500,000) - Cash Available to Distribute 6,500,000 - Dividend Tax (15%) (975,000) - Capital Gains Tax (15%) - (1,500,000) After-Tax Proceeds to Seller $ 5,525,000 $ 8,500,000
- 15. Delivering on the Promise. Planning • Button down financial reporting Get in compliance with GAAP Considerations • • Consider audited/reviewed F/S • Standardize processes • Make it easy for someone new to come in and run the business • Reduce reliance on key employees • Reverse engineer potential buyer preferences • Think about what characteristics would be desirable to potential acquirers in the industry and work to implement them • Implement confidentiality agreements with employees • Identify and reverse negative income/expense trends • Diversify the customer base • Right-size working capital
- 16. Delivering on the Promise. Learning After completing the session, participants will be able to... Objectives 1. Recognize the methods typically utilized to value a business or ownership interest and understand their basic application 2. Identify normalizing adjustments and assess their impact on value 3. Reconcile values derived from multiple valuation approaches 4. Capitalize on planning opportunities to help clients maximize the value received for their business
- 17. Delivering on the Promise. “Things only have the value that we give them.” Moliere 1622-1673, French Actor and Playwright Questions?