Business Valuation: Overview and Case Study Exit Planning Exchange – Connecticut Chapter January 22, 2016 Global Financial Advisory Services
Contact Information Business Valuation: Overview and Case Study For further information please contact us: T.J. Hope, CFA Mark S. Campbell, CPA/ABV/CFF Director Partner Stout Risius Ross BlumShapiro Valuation & Financial Opinions Litigation Services and Business Valuation New York, NY Shelton, CT +1.646.807.4223 +1.203.944.8673 thope@srr.com mcampbell@blumshapiro.com . 2 PRIVILEGED AND CONFIDENTIAL
Presentation Topics Need for valuation services Valuation Fundamentals Standards of Value Premise of Value Valuation Methods Case Study 3 PRIVILEGED AND CONFIDENTIAL
Potential Needs for Valuation Services Mergers, acquisitions, and divestitures Succession and business planning Shareholder buyouts Litigation (e.g., shareholder or post-M&A disputes) Corporate financial and tax reporting 4 PRIVILEGED AND CONFIDENTIAL
Standards of Value Fair Market Value Fair Value Investment Value / Intrinsic Value 5 PRIVILEGED AND CONFIDENTIAL
Standards of Value: Fair Market Value Tax standard Other contexts depending on the governing law Treasury Regulations, 26 CFR 20.2031-3: “[T]he net amount which a willing purchaser, whether an individual or a corporation, would pay for the interest to a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” 6 PRIVILEGED AND CONFIDENTIAL
Standards of Value: Key Fair Market Value Concepts Hypothetical buyer and seller, not specific No undue influence to buy or sell Knowledgeable buyer and seller Consider seller’s perspective, not just buyer’s Consideration of lack of control and lack of marketability discounts normally appropriate Strategic premiums typically ignored Example: Real property subsequently acquired by adjacent property owner 7 PRIVILEGED AND CONFIDENTIAL
Standards of Value: Fair Value Often relevant in litigation context Definition varies from state to state Valuation discounts may or may not apply Also relevant in a financial reporting context Accounting Standards Codification Topic 820, Fair Value Measurement (“FASB ASC 820”) 8 PRIVILEGED AND CONFIDENTIAL
Standards of Value: Investment Value Often relevant in merger Value to a specific buyer – therefore a strategic premium may be relevant Cost saving synergies Revenue enhancement synergies Tax synergies Cost of capital and capital allocation synergies 9 PRIVILEGED AND CONFIDENTIAL
Premises of Value “Value under what set of transactional conditions?” Premises of Value Going Concern Liquidation Forced Sale Assemblage Orderly 10 PRIVILEGED AND CONFIDENTIAL
Business Enterprise Value: Typical Balance Sheet ABC Company Assets Liabilities and Equity Current Assets Current Liabilities Cash $ 50 Accounts Payable $ 150 Accounts Receivable 250 Accrued Expenses 250 Inventory 200 400 500 Long-Term Liabilities Interest-Bearing Debt 450 600 Net Property and Equipment Shareholders' Equity 250 Total Assets $ 1,100 Total Liabilities and Equity $ 1,100 11 PRIVILEGED AND CONFIDENTIAL
Business Enterprise Value: Book Value Basis ABC Company Assets Liabilities and Equity Current Assets Current Liabilities Cash $ 50 Accounts Payable $ 150 Accounts Receivable 250 Accrued Expenses 250 Inventory 200 400 500 Long-Term Liabilities Interest-Bearing Debt 450 600 Net Property and Equipment Shareholders' Equity 250 ??? Intangible Assets $ 1,100 $ 1,100 Total Assets Total Liabilities and Equity 12 PRIVILEGED AND CONFIDENTIAL
Business Enterprise Value: Market Value Basis ABC Company Assets Liabilities and Equity Current Assets Current Liabilities Cash $ 50 Accounts Payable $ 150 Accounts Receivable 250 Accrued Expenses 250 Inventory 200 400 500 Long-Term Liabilities Interest-Bearing Debt 450 675 Net Property and Equipment 550 Shareholders' Equity Intangible Assets 225 $ 1,400 $ 1,400 Total Assets Total Liabilities and Equity 13 PRIVILEGED AND CONFIDENTIAL
Business Valuation 101 Valuation Market Approaches Income Asset Valuation Guideline Precedent Past Adjusted Excess Discounted Capitalized Methods Public M&A Company Book Value Earnings Cash Flow Cash Flow Transactions Companies Transactions 14 PRIVILEGED AND CONFIDENTIAL
Income Approach Methods: Discounted Cash Flow (DCF) Capitalized Cash Flow (CCF) Different methods to arrive at present value of future income Fundamental concept: Value is the present worth of future benefits 15 PRIVILEGED AND CONFIDENTIAL
Discounted Cash Flow Method Year 1 Year 2 Year 3 Residual Distributable Cash Flow $ 50 $ 55 $ 61 $ 64 Present Value (15% WACC) $ 47 $ 45 $ 43 Total PV of Cash Flows (Years 1-3) 134 Capitalization Rate 10% Residual Cash Flow Value 448 Residual Value 635 Business Enterprise Value $ 582 PV of Residual 448 16 PRIVILEGED AND CONFIDENTIAL
What is Distributable Cash Flow? = Available Cash Flow Adjust for Non- Arm’s Length Transactions - Owners’ Compensation - Real Estate Leases - Transactions with Related Entities - Loans from Owners Adjust for Nonrecurring Events 17 PRIVILEGED AND CONFIDENTIAL
What is Capitalization Rate? = Rate of Return – Growth Rate = 15% - 5% 50 * (1+5%) 1 50 * (1+5%) 2 50 + ……… . + + (1+15%) 1 (1+15%) 2 (1+15%) 3 18 PRIVILEGED AND CONFIDENTIAL
The Inverse of a Capitalization Rate is a Multiple $ 50 = $ 500 & $50*10x = $ 500 10% $ 50 = $50 * 10x 10% 19 PRIVILEGED AND CONFIDENTIAL
Obvious Problems with Rules of Thumb “Private companies trade at 4x to 6x earnings.” translates to “All private companies have the same risk and the same growth prospects.” 20 PRIVILEGED AND CONFIDENTIAL
Common Valuation Pitfalls: Company Growth vs. Industry Growth Valuation Date $350 $300 $250 $200 $150 $100 $50 $0 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 Industry Company 21 PRIVILEGED AND CONFIDENTIAL
Common Valuation Pitfalls: Cash Flow vs. Rate of Return After-Tax vs. Pre-Tax Debt-Free vs. Equity Nominal vs. Real 22 PRIVILEGED AND CONFIDENTIAL
Reviewing Valuation Report – Other Income Approach Issues Are the discount or capitalization rates adequately supported both theoretically and by market data? Is the near-term projected growth of earnings and cash flow reasonable? Are projected margins reasonable relative to actual historical performance and relative to the market? Has long-term growth been assessed properly? 23 PRIVILEGED AND CONFIDENTIAL
Reviewing Valuation Report – Other Income Approach Issues How sensitive is the analysis to changes in certain of the assumptions? Sales growth Margins Cost of capital Long-term growth rate Is the dilutive impact of stock options incorporated in the analysis? 24 PRIVILEGED AND CONFIDENTIAL
Guideline Public Company Analysis Enterprise Value / EBITDA Public Company Multiples High 9.0x Average 6.0x Median 5.5x Low 3.5x Selected Multiple 5.0x Subject Company EBITDA $ 100 Business Enterprise Value $ 500 25 PRIVILEGED AND CONFIDENTIAL
Market Comparable Pitfalls: Appropriate Multiple for the Industry Multiples Industry Service Value / Sales »»»»»»»»»» High Tech Manufacturing Value / Earnings »»»»»»»»»» Retail Banking Value / Assets »»»»»»»»»» Insurance 26 PRIVILEGED AND CONFIDENTIAL
Market Comparable Pitfalls: Differences Between Comparable Companies Market capitalization (size) Future growth prospects in cash flow Risk factors 27 PRIVILEGED AND CONFIDENTIAL
Reviewing Valuation Report: Basic Market Approach Considerations Is the criteria used to select peer group publicly traded or merged and acquired companies clearly explained? Is the population from which companies or transactions are drawn clearly explained? Does the report explain why certain pricing multiples are relied upon over others? Enterprise Value/EBITDA Price/Earnings Price/Sales 28 PRIVILEGED AND CONFIDENTIAL
Case Study – PeopleCo Manufacturing Income Approach Market Approach Guideline Public Companies Precedent M&A Transactions Reconciliation Planning Opportunities - Discounts 29 PRIVILEGED AND CONFIDENTIAL
Recommend
More recommend
