Business Valuation Issues20th Annual OEOC Conference - April 21, 2006

Rosanne J. Aumiller, CPA/ABV, ASA

rja@barneswendling.com

216.566.9000

Step by Step Process for Selling Your Business to Your Employees

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Introduction

• BBarnes Wendling has served Northern Ohio’s closely-held businesses since 1946.

• OOur core clients are privately owned middle market companies.

• WWe consider confidentiality, independence, senior level involvement, integrity, & relationship building to be critical success factors.

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Where to Find UsWhere to Find UsAkron1799 Akron-Peninsula Rd. #222Akron, OH 44313(330) 701-0128

Sheffield Village5050 Waterford DriveSheffield Village, OH 44035(440) 934-3850

Norwalk48 Executive DriveNorwalk, OH 44857(419) 668-8296

www.barneswendling.com

Sandusky1616 Sycamore LineSandusky, OH 44870(419) 627-2770

Cleveland1215 Superior Avenue, Suite 400Cleveland, OH 44114(216) 566-9000

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Business ValuationLitigation Support

Forensic Accounting Corporate

Finance

Estate and Gift Tax Planning Buy Sell Agreements Succession Planning Family Limited Partnerships ESOPS Mergers and Acquisitions Intangible Asset Valuation Financial Modeling Buyer/Seller Due Diligence ESOP Feasibility Study

Appraisal Review Appraisal Consulting Raising Capital / Re-

Capitalization Acquisitions Divestitures Business & Strategic

Planning/Budgeting/Forecasting

Capital Budgeting Debt Restructuring Obtaining Financing

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Some Questions Raised...

• What should an ESOP Trustee look for in an appraiser?

• What is a business valuation?

• What creates value in the ESOP sponsoring company?

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Organizations & Credentials

American Society of Appraisers

ASA Accredited Senior Appraiser

American Institute of CPAs

ABV Accredited in Business Valuations

National Association of Certified Valuation Analysts

CVA Certified Valuation Analyst

Institute of Business Appraisers

CBA Certified Business Appraiser

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Number of Professionals

American Society of Appraisers - 2,313 Accredited Members

American Institute of CPAs - 1,701 ABV Holders

Nat’l Assoc. Cert. Val. Analysts – 4,800 CVA Designees

Institute of Business Appraisers – 465 CBAs

Source: Borrowman Baker

It Boils Down to A Relatively Small Number

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What Is a Business Valuation?

• Product – comprehensive written report– gives the reader a logical, supportable value

conclusion– company history, products/services,

personnel, markets, economy, analysis, conclusion

• Service – key is client should understand content

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Valuations Have Multiple Uses

XYZ Company may have different “values” depending on the “level of value” and the “standard of value”

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The Valuation Process

• IdentifyPurpose – ESOP transaction or

annual updateLevel of Value - control or minorityStandard of Value - fair market

valueDate of ValuationKey Issues – adjust owners' comp;

leverage

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Minority vs. Control InterestImpact on Value

Control– Ohio 2/3 ownership or– Greater than 50% voting or– As defined in a shareholder agreement– Large enough block to control mgmt. decisions

Minority– Discounted value– No individual ability to affect mgmt. decisions

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Levels of Value

Synergistic (Strategic) Value

Controlling Interest Value

Control Premium

Minority Discount

Discount for Lack of Marketability

Marketable Minority Interest Value - as if freely traded on an active public

market{

Non-marketable Minority Interest

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Standards of Value

ALL ASSUME CASH EQUIVALVENT VALUE

• Fair Market Value - hypothetical willing buyer/seller, refer to Rev Ruling 59-60

• Investment Value

• Strategic Value

• Fair Value

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IRS Revenue Ruling 59-60 Set the guidelines for valuing private interests

Fair Market Value

“The amount at which property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

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IRS Revenue Ruling 59-60

Eight factors to consider:Nature of the business & historyEconomic & industry outlookBook value of stock & co. financial conditionEarning capacityDividend paying capacity Intangible value - goodwill or otherSales of stock and size of blockMarket price of similar public stocks

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DOL Requirements

• ESOP cannot over pay for stock – adequate consideration

• FMV as of transaction date• Utilize qualified valuator as professional

advisor to the trustee• Valuator – independent of ESOP,

Company & selling shareholder(s)• Similar to IRS Revenue Ruling 59-60

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Two Key Drivers

• Future Cash Flow Available to Shareholders

• Volatility or Risk Associated with Future Cash Flow

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Factors that Drive Value

• Internal Factors:QuantitativeQualitative

• External Factors:Economic climate

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Factors that Drive Value Total Invested Capital

• After initial valuation stock price may decline if leveraged

• As debt is repaid, stock price increases

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How is a Business Valued?How is a Business Valued?

Approach Method Value is based upon….

INCOME

MARKET

ASSET

Discounted Cash Flow

or

Capitalized Earnings

Comparable Sale

or

Guideline Company

Adjusted Net Assets

Estimated future profitability (cash flow)

Historical profitability/ (cash flow)

Private company transactions involving similar businesses

Public company stock prices

Appraisal of hard assets

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Discounts and Premiums

• Minority discount

• Control premium

• Lack of marketability

• Key person discount

• Blockage discount

Marketability Discount Model: Liquidity HierarchyMarketability Discount Model: Liquidity Hierarchy

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What goes into our work?What goes into our work?

Industry Data

Research Insight (Standard &Poor's Public Company Data)

Partnership Profiles (Database of limited partnership transactions)

Pratt's Stats Database (Private company transactions)

FactSet Mergerstat Transaction Data

Various trade and industry publications

Unique Resources

BW’s Proprietary Internal Database (Given the number of engagements we have completed, we have a huge body of valuation data)

ScanUS (Mapping software used to graphically display relevant data can be a powerful analysis tool)

WELL-RESEARCHED, DEFENDABLE RESULTS & OPINIONS

External Resources

Financial Consulting Group (Access to the knowledge of hundreds of valuation professionals)

CPA Associates International

Association of Certified Fraud Examiners

THE KNOWLEDGE AND EXPERIENCE OF BW’s CONSULTING PROFESSIONALS

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What Information Do We Need?What Information Do We Need?

1. Five years of financials and tax returns

2. Business plan or budget for next 1 to 5 years

3. Shareholder agreements

4. Fixed asset/depreciation schedules

5. Terms of debt

6. Terms of capital and operating leases

7. Identify competitors

8. Management structure

Financial & Operational Data

9. Capital expenditures over the last 5 years and plans for the future

10. Distributions/dividends paid

11. Industry data the company may receive as part of a trade group

12. Sales by product line

13. Summary of employees by function, organizational chart, terms of labor contracts if applicable

14. Owners compensation for last 5 years

15. Complete document request will be provided

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Valuation Process TimelineValuation Process Timeline

Data Request – List to Client

Identify Key Issues

Analyze Financials/ Operationa

l Data

Site Visit and

Interview

Draft Repor

t

Final MSDP

Present Final Report to Client

Week 1

Week 2

Week 3

Week 4

Research Comparab

le Transactio

n Data

Apply Valuatio

n Methods

Client gathers data

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Conclusion

• Challenge - to balance objectivity with providing a reasonable value range to meet client’s needs

• Questions?

• Thank you