Transcript Goals for 2001 - Kent State University

Step by Step Process for Selling Your
Business to Your Employees
20th Annual OEOC Conference - April 21, 2006
Rosanne J. Aumiller, CPA/ABV, ASA
[email protected]
216.566.9000
Business Valuation Issues
Introduction
• Barnes Wendling has served Northern Ohio’s
closely-held businesses since 1946.
• Our core clients are privately owned middle
market companies.
• We consider confidentiality, independence,
senior level involvement, integrity, & relationship
building to be critical success factors.
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Where to Find Us
Akron
1799 Akron-Peninsula Rd. #222
Akron, OH 44313
(330) 701-0128
Cleveland
1215 Superior Avenue, Suite 400
Cleveland, OH 44114
(216) 566-9000
Sheffield Village
5050 Waterford Drive
Sheffield Village, OH 44035
(440) 934-3850
Sandusky
1616 Sycamore Line
Sandusky, OH 44870
(419) 627-2770
Norwalk
48 Executive Drive
Norwalk, OH 44857
(419) 668-8296
www.barneswendling.com
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Business Valuation
Litigation Support
Forensic Accounting
Corporate Finance
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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 / ReCapitalization
 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
It Boils Down to A
Relatively Small Number
Source: Borrowman Baker
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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
• Identify
Purpose – ESOP transaction or
annual update
Level of Value - control or minority
Standard of Value - fair market value
Date of Valuation
Key Issues – adjust owners' comp;
leverage
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Minority vs. Control Interest
Impact 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
{
Marketable Minority Interest Value as if freely traded on an active public
market
Discount for Lack of
Marketability
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 & history
Economic & industry outlook
Book value of stock & co. financial
condition
Earning capacity
Dividend paying capacity
Intangible value - goodwill or other
Sales of stock and size of block
Market 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:
Quantitative
Qualitative
• 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?
Approach
Method
Discounted Cash Flow
INCOME
ASSET
Estimated future profitability (cash flow)
or
Capitalized Earnings
Comparable Sale
MARKET
Value is based upon….
or
Historical profitability/ (cash flow)
Private company transactions involving
similar businesses
Guideline Company
Public company stock prices
Adjusted Net Assets
Appraisal of hard assets
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Discounts and Premiums
•
•
•
•
•
Minority discount
Control premium
Lack of marketability
Key person discount
Blockage discount
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Marketability Discount Model: Liquidity Hierarchy
What goes into our work?
THE KNOWLEDGE AND EXPERIENCE OF BW’s
CONSULTING PROFESSIONALS
Unique Resources
Industry Data
Research Insight (Standard
&Poor's Public Company Data)
Partnership Profiles (Database of
limited partnership transactions)
Pratt's Stats Database (Private
company transactions)
WELL-RESEARCHED,
DEFENDABLE RESULTS
& OPINIONS
FactSet Mergerstat Transaction
Data
Various trade and industry
publications
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)
External Resources
Financial Consulting Group
(Access to the knowledge of
hundreds of valuation
professionals)
CPA Associates International
Association of Certified Fraud
Examiners
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What Information Do We Need?
Financial & Operational Data
1.
Five years of financials and tax returns
9.
Capital expenditures over the last 5
years and plans for the future
2.
Business plan or budget for next 1 to 5
years
10.
Distributions/dividends paid
3.
Shareholder agreements
11.
Industry data the company may
receive as part of a trade group
4.
Fixed asset/depreciation schedules
12.
Sales by product line
5.
Terms of debt
13.
6.
Terms of capital and operating leases
Summary of employees by function,
organizational chart, terms of labor
contracts if applicable
7.
Identify competitors
14.
Owners compensation for last 5 years
8.
Management structure
15.
Complete document request will be
provided
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Valuation Process Timeline
Data Request –
List to Client
Analyze
Financials/
Operational
Data
Site Visit
and
Interview
Apply
Valuation
Methods
Client gathers data
Week 1
Week 2
Week 3
Week 4
Present
FinalFinal
Report
to Client
MSDP
Draft
Report
Identify Key Issues
Research
Comparable
Transaction
Data
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Conclusion
• Challenge - to balance objectivity with
providing a reasonable value range to
meet client’s needs
• Questions?
• Thank you
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