BUSINESS ANALYSIS/VALUATION

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1

BUSINESS ANALYSIS/VALUATION

For

Gift Gallery LTDNorth Towne Mall

Madison WI, 53710

Valuation as of: December 31 2005

PREPARED BY

Robert Smith CVABusiness Valuations Services LLC

636 Maple Rd.Suite 100

Middleton, WI 53562608 555-1234

[email protected]

Report Date: September 27 2006

2

September 27 2006

Mr. Steven Wilson, PresidentGift Gallery LTD1258 Collectibles PlaceWaunakee, WI 53597

Dear: Mr. Wilson:

Thank you for contacting us. The following is the information that you requested on Gift GalleryLTD located at North Towne Mall, Madison, WI. Enclosed herein you will find our completemarket valuation for this business.

Our evaluation is based on the premise that any going business MUST meet the following threecriteria: 1) A business is worth that price at which it will support its structured debt service atcurrent market rates, terms and conditions. 2) It must pay a fair market salary to the owner(s),commensurate with other similar size and type of businesses located in the same market area asthe subject business. 3) It must also pay a fair market rate of return, commensurate with risk, onthe owner’s total investment. As you will see in the following analysis, by using the inputtedmarket variables listed herein, there is only ONE price at which this business can accomplishthese three criteria! This evaluation is a study that has determined that price.

Because of this fact, this analysis can be used by you as a powerful business tool and a completebusiness plan to help guarantee that the calculated profits can be maintained and possibly evenenhanced. This can be accomplished by regularly scheduled comparisons (and if necessary, themaking of adjustments) of the business’ expense to the sales ratios contained herein to those ofindustry standards. Your guiding point to this comparison will be the percentage columnscontained on each expense line-item of the proforma 1st year financial statement. Each of thesecritical percentages should be looked at by management as the specific performance goalobjective for each expense item to help assure a minimum performance level that is show here.This is a critical component of one element of your short term financial planning. By properlymanaging the specific policies, procedures and systems that control each expense line-item to aperformance standard better than the standard shown here, you could expect that it would result inan even better financial performance than is represented here.

We have determined the market value of this business on the basis of a personal inspection of thesubject business and the use of good, commonly accepted business and accounting practices. We

Gift Gallery LTD 3AcquisitionDecember 31 2005

also used the information contained in the business tax forms and the business financialstatements and other readily available company financial information and industry standardinformation for similar companies of size, type and market location.

Additionally, we analyzed the current financial market variables affecting the business’ currentmarket value. We have determined that a 100% ownership interest of Gift Gallery LTD is$330,349.

An anticipated investment of $82,587 would be required as a down payment to purchase thisbusiness.

This evaluation is an accurate mathematical analysis that has determined the value necessary forthis business to be properly structured in order to meet the three criteria previously explained.

This is a sample insert for the evaluator cover letter to show the location of the insert in thissample business analysis/valuation report.

Sincerely,

Robert Smith CVAPresident

Enclosures




TABLE OF CONTENTS

GIFT GALLERY LTD VALUATION

BUSINESS VALUATION SUMMARY ........................................................................... 5FINAL DETERMINATION OF VALUE.......................................................................... 7TEST OF REASONABLENESS........................................................................................ 8SELLER PRETAX CASH POSITION ............................................................................ 10BUYER BALANCE SHEET POSITION ........................................................................ 11OWNER INFORMATION............................................................................................... 13EVALUATOR DATA...................................................................................................... 14BUSINESS PROFILE ...................................................................................................... 15MARKET VARIABLES USED IN ANALYSIS............................................................. 16INCOME STATEMENT ADJUSTMENTS SUMMARY ............................................... 18INCOME STATEMENT ADJUSTMENTS DETAIL ..................................................... 19COMMENTS – ADJUSTMENTS TO INCOME STATEMENT.................................... 20STRUCTURED FINANCING SUMMARY.................................................................... 21BALANCE SHEET ADJUSTMENTS SUMMARY ....................................................... 22BALANCE SHEET ADJUSTMENTS DETAIL ............................................................. 23COMMENTS – ADJUSTMENTS TO BALANCE SHEET............................................ 24PROFORMA FIRST YEAR FINANCIAL BUDGET SUMMARY ............................... 25PROFORMA FIRST YEAR FINANCIAL BUDGET DETAIL...................................... 26COMMENTS – ADJUSTMENTS TO BUDGET............................................................ 27PROFORMA FIRST YEAR FINANCIAL BUDGET DETAIL Q1................................ 28PROFORMA FIRST YEAR FINANCIAL BUDGET DETAIL Q2................................ 29PROFORMA FIRST YEAR FINANCIAL BUDGET DETAIL Q3................................ 30PROFORMA FIRST YEAR FINANCIAL BUDGET DETAIL Q4................................ 31DEFINITION OF MARKET VALUE ............................................................................. 32STATEMENT OF LIMITING CONDITIONS................................................................ 33VALUATION TECHNIQUES (METHODOLOGIES) ................................................... 35EVALUATOR’S COMMENTS....................................................................................... 38APPENDICES .................................................................................................................. 40TAX FORMS.................................................................................................................... 41FINANCIAL STATEMENTS ......................................................................................... 42MISCELLANEOUS SUPPORTING DOCUMENTATION ........................................... 43




BUSINESS VALUATION SUMMARY

Robert Smith, CVA has been asked by Mr. Steven Wilson, to render the business valuationdescribed below. The following information details our assignment:

Client Name: Steven Wilson

Business Name: Gift Gallery LTD

Business Address: North Towne Mall

Madison, WI53710

Type of Entity : S Corporation

State of Incorporation: WI

In Business Since: 1992

Valuation Prepared by: Robert Smith

Business Interest Valued: 100

Effective Date of Appraisal: December 31 2005

Date of Valuation: September 27 2006

Purpose of Evaluation: Acquisition

Standard of Value: Fair Market Value

Business Value: $330,349

Down Payment Required: $82,587

Additional Investment Required: $0

Total Investment Anticipated: $82,587

Summary of Value:

We have determined that a 100% ownership interest of Gift Gallery LTD is $330,349.

An anticipated investment of $82,587 would be required as a down payment to purchase thisbusiness.

The opinion of value is rendered given the variables listed above for the period listed above only.The value is offered on the basis of a 100% marketable interest as noted above.




Scope and Limitations:

In the review of all data, we have relied upon all of the referenced information withoutindependent verification and therefore it is totally dependant upon the information provided byGift Gallery LTD. Any change in the critical information that was relied upon as part of theprocess of this valuation would certainly justify a reassessment of the final conclusion of the fairmarket value.

Standard of Value:

The fair market value is defined as follows: The fair market value of a business is the value atwhich the business would change hands between a willing seller and a willing buyer when neitheris under a compulsion and when both have reasonable knowledge of the relevant facts.

A fair market transaction must be a “win-win” for all parties concerned. The fair market value ofa going business is that value at which the normalized spendable income stream of the businesscan accomplish three critical criteria: 1) It must be able to support the structured market debtservice that would be created from a hypothetical business sale in the business’ market area. 2) Itmust be able to pay the owner a market rate salary as determined by the size, type and location ofthe business to current industry standards of a similar business within the same market area. 3) Itmust be able to pay the owner a market rate of return on his/her investment as determined by thecurrent market standards.

Summary Comments:This is a sample insert for the evaluator summary comments to show the location of the insert inthis sample business analysis/valuation report.




FINAL DETERMINATION OF VALUEVS

BOOK VALUE AND ADJUSTED BOOK VALUE METHODS

Business Value: $330,349

Book Value Method: ($40,001)Less: Adjusted Book Value Method: ($33,628)

Intangibles (Good Will) Value: $363,977

Book Value Method:

The book value as of December 31 2005 was ($40,001). Book value is an accounting valuethat is calculated by subtracting total liabilities from total assets. Book value wasselected because it will give us more of a well rounded look at the state of the companyand it will give us one more comparison to determine the reasonableness of the finaldetermination of value. It was rejected because balance sheets are prepared on ahistorical cost basis, in accordance with Generally Accepted Accounting Principals; thebook value of a business does not necessarily consider the fair market value of theunderlying assets. We are more concerned with the income producing ability of theassets than their book value.

Adjusted Book Value – Going Concern Method:

The adjusted book value as of December 31 2005 was ($33,628). The adjusted bookvalue of this going concern method develops a valuation indicated by adjusting thereported book values of a subject company’s assets to its actual or estimated fair marketvalues and subtracting its liabilities (adjusted to fair market value, if appropriate). Thismethod was considered in the valuation of Gift Gallery LTD because it would benecessary to compare the estimated fair market value of the assets to the finaldetermination of value. If the fair market value of the assets is worth more than thedetermined value of the business, it would be better to sell the assets outright, not thebusiness as a going concern. This method was rejected because the estimated fair marketvalue of the assets individually is not an indicator of the income producing ability of theassemblage of all of the assets.




TEST OF REASONABLENESS

To test the reasonableness of our opinion as to the fair market value of Gift Gallery LTD, we performed aproof of valuation analysis. This analysis includes assumptions regarding the cash down payment, the termsof the purchase notes, and the Company’s projected cash flows. This analysis looks at the final opinion ofthe fair market value and determines the functionality of the ensuing projected cash flows and anticipatedfinancing conclusions. The assumptions regarding the terms of the hypothetical purchase are presented inthe following schedule and represents the findings from our analysis.

Final determination of market value: $330,349

From normalized income statement:

Net operating income (NPBT): $101,300

Balance available to retire monthly debt service: $7,608

Buyer return on investment $ (ROI) : $10,009

Source of Purchase Funds Amount Terms (yrs) Interest Mo. Payment

Financial Institution Financing:

Auto / Truck $6,697 4 7.00 $160Inventory $75,539 3 7.00 $2,332Machinery/Equipment $0 0.00 NaNOffice Furniture/Fixtures $19,832 3 7.50 $617Other Financing $0 0.00 NaNReal Estate $0 0.00 NaNSeller Financing $145,694 3 7.00 $4,499

Total $247,762 $7,608

Based upon the hypothetical terms presented above, the Company’s projected cash flows were estimated toascertain whether or not they cover the hypothetical interest and principal payments. The buyer post-salecash flow was calculated in the following manner:

1. The projected before-tax income was reduced by interest payments on hypothetical purchasenotes.

2. The projected post-sale pre-tax income was reduced by an income tax factor of 0.0%.3. All non-cash expenses were added back.4. The principal portion of all debt instruments (re-sale and post-sale) was deducted.

Test #1:Opinion of business value: $330,349Total Down payment + Debt: $330,349

Variance (Should be “0”): $0

Test #2:Balance available to retire monthly debt plus ROI: $8,442Structured monthly debt service payments: - $7,608Monthly Cash Flow Before Taxes (ROI) - $834

Variance (Should be “0”): $0




TEST OF REASONABLENESS (CONTINUED)

Test #3:Net operating income (NPBT): $101,300Less: Balance available to retire debt service: $91,291

Amount available for buyer ROI: $10,009

Buyer required return on investment $ (ROI) : $10,009Amount available for buyer ROI: $10,009Variance (Should be “0”): $0

Test Conclusion:

The final opinion of value for Gift Gallery LTD of $330,349 passes the “test of reasonableness” because: 1)The total of all of the purchase funds created from the down payment and structured financing, equals thefinal opinion of value. 2) The total monthly payments of all structured financing at the hypothetical saleprice, equals the total amount of the spendable cash flow available to make such payments. 3) The totalamount of cash flow needed to give the buyer a fair market return on their investment equals the balance ofthe spendable cash flow that is made available to make such a payment. 4) The integrity of the buyer’s ROIis maintained because a fair market salary was used in the normalization of income streams process andtherefore does not dilute the total cash flow stream structured for the buyer.

Therefore:

Based on the above analysis, the priced cash flows are sufficient to pay the assumed interest and principledue on the hypothetical purchase notes and existing notes.




SELLER PRETAX CASH POSITION

HYPOTHETICAL TERMS OF ASSET SALE AT CALCULATED MARKET VALUE

Cash received from sale:Down payment from Buyer: $82,587

Financial Institution Financing:Auto/truck $6,697Inventory $75,539Machinery/Equipment $0Other Financing $0Office Furniture/Fixtures $19,832Real Estate $0

Other Cash/Credit:Existing Cash from Business: $39,775Accounts Receivable Trade: $8,263Accounts Receivable Other: $0Costs in Excess of Billings: $0Prepaid Expenses: $0Deposits: $0Notes Receivable: $0

Total Cash Received: $232,693

Less cash/credit paid out from sale:Accounts Payable Trade: $18,720Accounts Payable Other: $12,004Notes Payable Other: $264,626Accrued Expenses: $4,502Notes Payable Current/Long Term: $0Billings in Excess of Costs: $0Other Current Liabilities: $7,021Deferred Liabilities: $0Other Long Term Liabilities: $0

Total Cash Paid Out: $306,873

Net Cash/Credit Received from Sale: ($74,180)

*The following unlisted balance sheet line-items are considered to be contributing assets and are assumedto stay in the business with the hypothetical buyer: Other Current Assets, Other Fixed Assets, Other Assets.Note: The actual seller proceeds received from a sale is totally dependent upon the final purchase terms.

Plus the seller will receive the following cash payments from the buyer:

Principal balance of seller loan: $145,694Monthly Payments: $4,499For a term period of: 3@ Interest Rate: 7.00




BUYER BALANCE SHEET POSITION


Period BeginningDate of Sale

CURRENT ASSETSCash $0Accounts Receivable – Trade $0Accounts Receivable – Other $0Costs in Excess of Billings $0Inventory $125,898Prepaid Expenses $0Other $0

Total Current Assets $125,898==============

FIXED ASSETSAutos & Trucks $12,500Machinery & Equipment $0Office Furniture & Equipment $41,318Real Estate $0

Leasehold Improvements $79,867Other Fixed Assets $0Total Depreciable Assets $133,685Less: Accumulated Depreciation $0Net Book Value $133,685Land $0Total Fixed Assets $133,685

==============OTHER ASSETSDeposits $0Notes Receivable $0Other $0

Total Other Assets $0==============

TOTAL ASSETS $259,583==============




CURRENT LIABILITIESAccounts Payable – Trade $0Accounts Payable – Other $0Notes payable $0Notes Payable – Current of LTD $76,279Billings in Excess of Costs $0Accrued Expenses $0Other Current Liabilities $0

Total Current Liabilities $76,279==============

LONG TERM LIABILITIESNotes Payable – LT of LTD $247,762Less: Notes Payable Current $76,279Deferred Liabilities $0Other Long Term Liabilities $0

Total Long Term Liabilities $171,483==============

TOTAL LIABILITIES $247,762==============

NETWORTHCapital stock $0Paid in Capital / Treasury Stock $82,587

Other Equities ($70,766)Retained Earnings $0Profit and Losses – YTD $0

Total Net worth $11,821==============

TOTAL LIABILITIES $259,583AND NETWORTH ==============




OWNER INFORMATION

Company Name: Gift Gallery LTD

Located: Madison WI, 53710

Number of shares issued: 500

Total number of shares outstanding: 1000

Owner Name # Shares Owned % OwnershipSteven Wilson 500 50.00

Totals 500 50




EVALUATOR DATA

APPRAISER’S INFORMATION

Name: Robert Smith

Title: President

Designation: (If entered) CVA

Company: Business Valuations Services LLC

Address: 636 Maple Rd.Suite 100Middleton, WI 53562

Phone: 608 555-1234

Email: [email protected]

Website: www.bvs.com

% of Business Being Valuated: 100

Date of Valuation: September 27 2006

Effective Date of Appraisal: December 31 2005

Purpose of Valuation: Acquisition

Ownership Interest Being Valuated: 100

Type of Financial Statements Used: Tax forms

Type of Sale: Asset

LETTER INFORMATION

Report addressed to: Steven WilsonTitle: President

Company: Gift Gallery LTD

Address: 1258 Collectibles Place

Waunakee, WI 53597




BUSINESS PROFILE

Business Name: Gift Gallery LTD

Business Address: North Towne Mall

Madison, WI53710

Website: www.giftgallery.com

SIC/NAICS Code: 5199/453220

SIC/NAICS Description: Gift Novelty and Souvenir Stores

Business Owner: Steven Wilson

Title: President

Business Owner’s Phone: 608 555-1258

Business Owner’s Email: [email protected]

Type of Entity : S Corporation

State of Incorporation: WI

In Business Since: 1992

Stock:Number of Shares Outstanding: 1000

Number of Share Holders: 1

Number of Shares Issued: 500




MARKET VARIABLES USED IN ANALYSIS

INVESTMENT CRITERIA

Down Payment (as a % of S/P): 25

Investor Required Rate of Return:

Subject Business NPBT (as % of Sales): .8

Investor Other Cash Investments:Deferred MaintenanceWorking Capital

MARKET STANDARDS

Owner Market Salary in Dollars:Owner Market Salary as % of Sales

FINANCING

Number of Years to Analyze Income Statement 1Beginning Year to Analyze 2005Ending Month of Fiscal Year December

LOANS:

Auto/TruckMarket Value $8,929Loan to Value Ratio (%) 75Amount to Finance $6,697Term Length (Years) 4Interest Rate % 7.0

InventoryMarket Value $125,898Loan to Value Ratio (%) 60Amount to Finance $75,539Term Length (Years) 3Interest Rate % 7.0




MARKET VARIABLES USED IN ANALYSIS (CONTINUED)

Machinery and EquipmentMarket ValueLoan to Value Ratio (%)Amount to Finance $0Term Length (Years)Interest Rate %

Office Furniture/FixturesMarket Value $33,054Loan to Value Ratio (%) 60Amount to Finance $19,832Term Length (Years) 3Interest Rate % 7.5

Seller FinancingAssets Used as Collateral GBSA - 2nd PositionTerm Length (Years) 3Interest Rate % 7.0




Year 1

INCOME STATEMENT ADJUSTMENTS SUMMARYActual Adjustment AdjustedYear Year YearEnding Ending Ending

% 12-31-2005 12-31-2005 % 12-31-2005INCOME:Sales 100 $1,251,098 100 $1,251,098

Total Income 100 $1,251,098 $0 100 $1,251,098==== ========= ========= ==== =========

Cost of Goods Sold:Direct Costs - Inventory 46.07 $576,350 $0 46.07 $576,350Direct Costs - Other 0.25 $3,103 $0 0.25 $3,103

Total Cost of Goods Sold 46.32 $579,453 $0 46.32 $579,453==== ========= ========= ==== =========

GROSS PROFIT 53.68 $671,645 $0 53.68 $671,645==== ========= ========= ==== =========

LESS: OPERATING COSTS

Total Variable Costs 12.33 $154,249 ($8,250) 11.67 $145,999(See detail schedule on next page) ==== ========= ========= ==== =========

Fixed CostsTotal Fixed Costs 37.33 $466,976 ($51,510) 33.21 $415,466

(See detail schedule on next page) ==== ========= ========= ==== =========

Total Operating Expenses 49.65 $621,225 ($59,760) 44.88 $561,465(Fixed Costs plus Variable Costs) ==== ========= ========= ==== ========

Other Income (Expenses)Total Other Income (Expenses) -3.61 ($45,105) $36,225 -0.71 ($8,880)

==== ========= ========= ==== ========

NET OPERATING INCOME (NPBT) 0.42 $5,315 $95,985 8.10 $101,300(Before Debt Service) ==== ========= ========= ==== ========

LESS: ANNUAL DEBT SERVICE $91,291========

CASH FLOW AFTER DEBT SERVICE 12.12 $10,009(Return on Investment ROI) ==== ========

Earnings Before Interest, Taxes, Depreciation, Amortization (EBITDA) 9.45 $118,264==== ========

Debt Service Coverage Ratio (DSCR) 1.11========




INCOME STATEMENT ADJUSTMENTS DETAIL

Actual Adjustment AdjustedYear Year YearEnding Ending Ending

% 12-31-2005 12-31-2005 % 2-31-2005

Variable CostsAdvertising & Promotion 6.30 $78,760 $0 6.30 $78,760Auto & Truck Gas, Oil, Repairs 0.42 $5,312 ($3,250) 0.16 $2,062Bad Debt 0.01 $90 $0 0.01 $90Bank Charges/Credit Card Fees 1.67 $20,905 $0 1.67 $20,905Employee Benefits 0.72 $8,956 ($5,000) 0.32 $3,956Delivery 0.44 $5,498 $0 0.44 $5,498Labor - Temporary 0.14 $1,758 $0 0.14 $1,758License & Permits 0.02 $254 $0 0.02 $254Miscellaneous 0.02 $247 $0 0.02 $247Office Supplies 0.49 $6,096 $0 0.49 $6,096Rentals 0.16 $1,976 $0 0.16 $1,976Sales Training 0.09 $1,076 $0 0.09 $1,076Shop Supplies & Small tools 1.51 $18,926 $0 1.51 $18,926Travel & Lodging & Entertainment 0.23 $2,857 $0 0.23 $2,857Uniforms 0.12 $1,538 $0 0.12 $1,538

Total Variable Costs 12.33 $154,249 ($8,250) 11.67 $145,999==== ========= ======= ==== ========

Fixed Costs:Contributions 0.15 $1,820 $0 0.15 $1,820Depreciation 1.81 $22,619 ($5,655) 1.36 $16,964Dues & Subscriptions 0.02 $232 $0 0.02 $232Insurance - Auto & Liability 0.73 $9,092 $0 0.73 $9,092Insurance - Group Health 1.06 $13,258 $0 1.06 $13,258Insurance - Officer 0.22 $2,756 ($2,756) 0.00 $0Payroll Tax - Office 2.43 $30,389 ($1,400) 2.32 $28,989Postage, Mailings 0.06 $728 $0 0.06 $728Professional Fees 0.24 $3,052 $0 0.24 $3,052Property Taxes 0.03 $339 $0 0.03 $339Rent 5.42 $67,793 $0 5.42 $67,793Repairs & Maintenance 0.34 $4,195 $0 0.34 $4,195Salaries - Owner 6.59 $82,500 ($23,699) 4.70 $58,801Salaries - Office/Shop 16.43 $205,534 ($18,000) 14.99 $187,534Telephone 1.24 $15,499 $0 1.24 $15,499Utilities 0.57 $7,170 $0 0.57 $7,170

Total Fixed Costs 37.33 $466,976 ($51,510) 33.21 $415,466==== ========= ======= ==== ========

Total Operating Costs 49.65 $621,225 ($59,760) 44.88 $561,465==== ========= ======= ==== ========




COMMENTS – ADJUSTMENTS TO INCOME STATEMENT

ADJUSTMENTS FOR YEAR: 2005

Line Item Adjusted CommentsAuto & Truck Gas, Oil, Repairs Removed owner's personal car expense which is not

to industry standard.

Employee Benefits Add back owner's bonus that is included in this line-item.

Depreciation Add back accelerated depreciation the which theaccountant says is $5,655.

Insurance - Officer Removed owner's personal insurance expense.

Payroll Tax - Office Adjusted to match the adjustments made in the owner'ssalary and the shop salaries.

Salaries - Office/Shop Owner's spouse is on payroll but works less than full time.




STRUCTURED FINANCING SUMMARY

Source of Purchase Funds Amount Terms (yrs) Interest Mo. Payment

Financial Institution Financing:

Auto / Truck $6,697 4 7.00 $160Inventory $75,539 3 7.00 $2,332Machinery/Equipment $0 0.00 NaNOffice Furniture/Fixtures $19,832 3 7.50 $617Other Financing $0 0.00 NaNReal Estate $0 0.00 NaNSeller Financing $145,694 3 7.00 $4,499

Total $247,762 $7,608




Year 1

BALANCE SHEET ADJUSTMENTS SUMMARY

Actual Adjustment AdjustedYear Year YearEnding Ending Ending12-31-2005 12-31-2005 2-31-2005

CURRENT ASSETSTotal Current Assets $177,146 ($565) $176,581

========= ========= =========FIXED ASSETSTotal Fixed Assets $89,726 $6,938 $96,664

========= ========= =========OTHER ASSETS

Total Other Assets $0 $0 $0========= ========= =========

TOTAL ASSETS $266,872 $6,373 $273,245========= ========= ========

CURRENT LIABILITIESTotal Current Liabilities $306,873 $0 $306,873

========= ========= =========LONG TERM LIABILITIES

Total Current Liabilities $0 $0 $0========= ========= =========

TOTAL LIABILITIES $306,873 $0 $306,873========= ========= ========

NETWORTHTotal Net worth ($40,001) $6,373 ($33,628)

========= ========= =========TOTAL LIABILITIES $266,872 $6,373 $273,245AND NETWORTH ========= ========= =========




BALANCE SHEET ADJUSTMENTS DETAIL

Actual Adjustment AdjustedYear Year YearEnding Ending Ending12-31-2005 12-31-2005 2-31-2005

CURRENT ASSET ADJUSTMENTSInventory $126,463 ($565) $125,898

Total Current Assets $177,146 ($565) $176,581========= ========= =========

FIXED ASSET ADJUSTMENTSTotal Depreciable Assets $133,685 $0 $133,685

========= ========= =========LESS Accumulated Depreciation $43,959 ($6,938) $37,021

Net Book Value $89,726 $6,938 $96,664Total Fixed Assets $89,726 $6,938 $96,664

========= ========= =========

OTHER ASSET ADJUSTMENTSTotal Other Assets $0 $0 $0

TOTAL ASSET ADJUSTMENTS $266,872 $6,373 $273,245========= ========= =========

CURRENT LIABILITIES ADJUSTMENTSTotal Current Liabilities $306,873 $0 $306,873

========= ========= =========

LONG TERM LIABILITIES ADJUSTMENTSTotal Long Term Liabilities $0 $0 $0

========= ========= =========

TOTAL LIABILITIES $306,873 $0 $306,873========= ========= =========

NETWORTH ADJUSTMENTSOther Equities $0 $6,373 $6,373

Total Networth ($40,001) $6,373 ($33,628)========= ========= =========




COMMENTS – ADJUSTMENTS TO BALANCE SHEET


Line Item Adjusted CommentsInventory Inventory value less obsolete inventory equals market

value.

Autos & Trucks Adjustment made to accumulated depreciation line-item toestimated market value.

Office Furniture / Equipment Adjusted made to accumulated depreciatioin line-item toestimated market value.

Less Accumulated Depreciation Add back accelerated depreciation for adjusteditems (autos and office furniture/fixtures.

Other Equities Equity adustment for depreciation entry.




PROFORMA FIRST YEAR FINANCIAL BUDGET SUMMARY


Budget Assumptions:Sales Increase = 5%Price Increase = 2%

BudgetYear Ending

% 12/31/06INCOME:

Sales 100 $1,339,926Total Income 100 $1,339,926

===== =========Cost of Goods Sold:Direct Costs - Inventory 45.16 $605,168Direct Costs - Other 0.24 $3,258

—— ————

Total Cost of Goods Sold 45.41 $608,426===== =========

GROSS PROFIT 54.59 $731,500(Total Income less COS) ===== =========

LESS: OPERATING COSTSTotal Variable Costs 12.09 $161,961

(See detail schedule on next page) —— ————

Fixed CostsTotal Fixed Costs 35.98 $482,095

(See detail schedule on next page) —— ————

Total Operating Costs(Fixed Costs plus Variable Costs)

Total Operating Costs 48.07 $644,056==== =========

Other Income (Expenses)Total Other Income (Expenses) 2.46 ($32,409)

(See detail schedule on next page)

BUDGET- NET OPERATING INCOME 4.11 $55,035==== =========




PROFORMA FIRST YEAR FINANCIAL BUDGET DETAIL


BudgetYear Ending

% 12/31/06

Variable Costs:Advertising & Promotion 6.17 $82,698Auto & Truck Gas, Oil, Repairs 0.42 $5,578Bad Debt 0.01 $95Bank Charges/Credit Card Fees 1.64 $21,950Employee Benefits 0.70 $9,404Delivery 0.43 $5,773Labor - Temporary 0.14 $1,846License & Permits 0.02 $267Miscellaneous 0.02 $259Office Supplies 0.48 $6,401Rentals 0.15 $2,075Sales Training 0.08 $1,130Shop Supplies & Small tools 1.48 $19,872Travel & Lodging & Entertainment 0.22 $3,000Uniforms 0.12 $1,615

—— ————Total Variable Costs 12.09 $161,961

===== ========Fixed Costs:Contributions 0.19 $2,500Depreciation 1.69 $22,619Dues & Subscriptions 0.02 $232Insurance - Auto & Liability 0.73 $9,842Insurance - Group Health 1.09 $14,584Insurance - Officer 0.21 $2,756Payroll Tax - Office 2.38 $31,839Postage, Mailings 0.05 $728Professional Fees 0.23 $3,052Property Taxes 0.03 $339Rent 5.06 $67,793Repairs & Maintenance 0.31 $4,195Salaries - Owner 6.53 $87,500Salaries - Office/Shop 15.76 $211,160Telephone 1.16 $15,499Utilities 0.56 $7,457—— ————

Total Fixed Costs 35.98 $482,095===== ========

Total Operating Costs 48.07 $644,056===== ========

Other Income (Expenses):Other Income 0.02 $269Other Expense - Interest 1.72 $23,085Other Expense 0.72 $9,593

Total Other Income (Expenses) 2.46 ($32,409)===== ========




COMMENTS – ADJUSTMENTS TO BUDGET


Line Item Adjusted Comments ________Direct Costs - Labor It is determined that this line-item percentage will remain

consistant.

Advertising & Promotion Advertising is determined to be adequate.

Bank Charges/Credit Card Fees These are mostly charge card fees that areestimated to remain consistent.

Contributions Budgeted increase in community giving projects.

Insurance - Auto & Liability Estimated increase for liability insurance.

Insurance - Group Health Estimated 10% increase for health insurance.

Payroll Tax - Office Increased to adjust for owner and employee budgetedincreases.

Salaries - Owner Budgeted salary increase.

Salaries - Office/Shop Budgeted 3% increase in wages.

Utilities Budgeted a 4% increase in utilities from price increases.




PROFORMA FIRST YEAR FINANCIAL BUDGET DETAIL Q1

M1 % Amount M2 % Amount M3 % AmountIncome:

5.6 $75,036 6.7 $89,775 7.6 $101,834==== ===== ==== ===== ==== =====

Cost of Goods Sold:Direct Costs - Labor 0.00 $0 0.00 $0 0.00 $0Direct Costs - Inventory 45.16 $33,889 45.16 $40,546 45.16 $45,993Direct Costs - Equipment 0.00 $0 0.00 $0 0.00 $0Direct Costs - Subcontractor 0.00 $0 0.00 $0 0.00 $0Direct Costs - Other 0.24 $182 0.24 $218 0.24 $248

—— ——— —— ——— —— ———Total Cost of Goods Sold 45.4 $34,071 45.4 $40,764 45.4 $46,241

==== ===== ==== ===== ==== =====Gross Profit 54.59 $40,965 54.59 $49,011 54.59 $55,593

==== ===== ==== ===== ==== =====Variable Costs:Advertising & Promotion 6.17 $4,631 6.17 $5,541 6.17 $6,285Auto & Truck Gas, Oil, Repairs 0.42 $312 0.42 $374 0.42 $424Bad Debt 0.01 $5 0.01 $6 0.01 $7Bank Charges/Credit Card Fees 1.64 $1,229 1.64 $1,471 1.64 $1,668Employee Benefits 0.70 $527 0.70 $630 0.70 $715Delivery 0.43 $323 0.43 $387 0.43 $439Insurance - W. C. Direct Labor 0.00 $0 0.00 $0 0.00 $0Labor- Temporary 0.14 $103 0.14 $124 0.14 $140License & Permits 0.02 $15 0.02 $18 0.02 $20Miscellaneous 0.02 $15 0.02 $17 0.02 $20Office Supplies 0.48 $358 0.48 $429 0.48 $486Other 0.00 $0 0.00 $0 0.00 $0Payroll Taxes (Direct Labor) 0.00 $0 0.00 $0 0.00 $0Rentals 0.15 $116 0.15 $139 0.15 $158Sales Commissions 0.00 $0 0.00 $0 0.00 $0Sales Training 0.08 $63 0.08 $76 0.08 $86Shop Supplies & Small tools 1.48 $1,113 1.48 $1,331 1.48 $1,510Travel & Lodging & Entertainment 0.22 $168 0.22 $201 0.22 $228U.P.S./FedEx 0.00 $0 0.00 $0 0.00 $0Uniforms 0.12 $90 0.12 $108 0.12 $123Warranty Expense 0.00 $0 0.00 $0 0.00 $0

—— ——— —— ——— —— ———Total Variable Costs 12.08 $9,068 12.08 $10,852 12.08 $12,309

==== ===== ==== ===== ==== =====Fixed Costs:Contributions 0.28 $208 0.23 $208 0.20 $208Depreciation 2.51 $1,885 2.10 $1,885 1.85 $1,885Dues & Subscriptions 0.03 $19 0.02 $19 0.02 $19Insurance - Auto & Liability 1.09 $820 0.91 $820 0.81 $820Insurance - Group Health 1.62 $1,215 1.35 $1,215 1.19 $1,215Insurance - Officer 0.31 $230 0.26 $230 0.23 $230Insurance - W. C. Office 0.00 $0 0.00 $0 0.00 $0Other - Expenses 0.00 $0 0.00 $0 0.00 $0Payroll Tax - Office 3.54 $2,653 2.96 $2,653 2.61 $2,653Postage, Mailings 0.08 $61 0.07 $61 0.06 $61Professional Fees 0.34 $254 0.28 $254 0.25 $254Property Taxes 0.04 $28 0.03 $28 0.03 $28Rent 7.53 $5,649 6.29 $5,649 5.55 $5,649Repairs & Maintenance 0.47 $350 0.39 $350 0.34 $350Salaries - Owner 9.72 $7,292 8.12 $7,292 7.16 $7,292Salaries - Office/Shop 23.45 $17,597 19.60 $17,597 17.28 $17,597Telephone 1.72 $1,292 1.44 $1,292 1.27 $1,292Utilities 0.83 $621 0.69 $621 0.61 $621

—— ——— —— ——— —— ———Total Fixed Costs 53.56 $40,174 44.74 $40,174 39.46 $40,174

==== ===== ==== ===== ==== =====Total Operating Costs 65.62 $49,242 56.84 $51,026 51.54 $52,483

==== ===== ==== ===== ==== =====Other Income (Expenses):Other Income 0.02 $15 0.02 $18 0.02 $20Other Expense– Interest 1.72 $1,293 1.72 $1,547 1.72

$1,754Other Expense 0.72 $537 0.72 $643 0.72 $729

Total Other Income (Expenses) -2.42 ($1,815) -2.42 ($2,172) -2.42 ($2,463)==== ===== ==== ===== ==== =====

BUDGET– NET OPERATING INCOME -13.45 ($10,092) -4.66 ($4,187) 0.64 $647==== ===== ==== ===== ==== =====





M4 % Amount M5 % Amount M6 % AmountIncome:

7.5 $100,494 7.9 $105,854 7.4 $99,155==== ===== ==== ===== ==== =====



==== ===== ==== ===== ==== =====Gross Profit 54.59 $54,862 54.59 $57,789 54.59 $54,132




—— ——— —— ——— —— ———Total Fixed Costs 40 $40,174 37.97 $40,174 40.53 $40,174


==== ===== ==== ===== ==== =====Other Income (Expenses):Other Income 0.02 $20 0.02 $21 0.02 $20Other Expense – Interest 1.72 $1,731 1.72 $1,824 1.72

$1,708Other Expense 0.72 $719 0.72 $758 0.72 $710


BUDGET– NET OPERATING INCOME 0.11 $113 2.13 $2,258 -0.43 ($428)==== ===== ==== ===== ==== =====





M7 % Amount M8% Amount M9 % AmountIncome:

6.8 $91,115 7.8 $104,514 7.7 $103,174==== ===== ==== ===== ==== =====



==== ===== ==== ===== ==== =====Gross Profit 54.59 $49,742 54.59 $57,057 54.59 $56,325







$1,778Other Expense 0.72 $652 0.72 $748 0.72 $739


BUDGET– NET OPERATING INCOME -4.00 ($3,649) 1.65 $1,723 1.15 $1,183==== ===== ==== ===== ==== =====





M10 % Amount M11 % Amount M12% AmountIncome:

7.8 $104,514 5.6 $135,333 17.1 $229,127==== ===== ==== ===== ==== =====



==== ===== ==== ===== ==== =====Gross Profit 54.59 $57,057 54.59 $73,882 54.59 $125,086

==== ===== ==== ===== ==== =====Variable Costs:Advertising & Promotion 6.17 $6,450 6.17 $8,352 6.17 $14,141Auto & Truck Gas, Oil, Repairs 0.42 $435 0.42 $563 0.42 $954Bad Debt 0.01 $7 0.01 $10 0.01 $16Bank Charges/Credit Card Fees 1.64 $1,712 1.64 $2,217 1.64 $3,753Employee Benefits 0.70 $734 0.70 $950 0.70 $1,608Delivery 0.43 $450 0.43 $583 0.43 $987Insurance - W. C. Direct Labor 0.00 $0 0.00 $0 0.00 $0Labor- Temporary 0.14 $144 0.14 $186 0.14 $316License & Permits 0.02 $21 0.02 $27 0.02 $46Miscellaneous 0.02 $20 0.02 $26 0.02 $44Office Supplies 0.48 $499 0.48 $647 0.48 $1,095Other 0.00 $0 0.00 $0 0.00 $0Payroll Taxes (Direct Labor) 0.00 $0 0.00 $0 0.00 $0Rentals 0.15 $162 0.15 $210 0.15 $355Sales Commissions 0.00 $0 0.00 $0 0.00 $0Sales Training 0.08 $88 0.08 $114 0.08 $193Shop Supplies & Small tools 1.48 $1,550 1.48 $2,007 1.48 $3,398Travel & Lodging & Entertainment 0.22 $234 0.22 $303 0.22 $513U.P.S./FedEx 0.00 $0 0.00 $0 0.00 $0Uniforms 0.12 $126 0.12 $163 0.12 $276Warranty Expense 0.00 $0 0.00 $0 0.00 $0






$3,948Other Expense 0.72 $748 0.72 $969 0.72 $1,640


BUDGET– NET OPERATING INCOME 1.65 $1,723 10.40 $14,076 22.55 $51,675==== ===== ==== ===== ==== =====




DEFINITION OF MARKET VALUE

The market value is the most probable price that a business should bring in a competitive

and open market under all conditions necessary for a fair sale presuming the buyer and

seller each act prudently, knowledgeably, and assuming the price is not affected by undue

stimuli. Implicit in this definition the consummation of a sale as of a specified date and

the title from seller to buyer under condition by:

1. Buyer and seller are typically motivated.

2. Both parties are well informed or well advised and each of them is acting in what

one considers one’s own best interests.

3. A reasonable time is allowed for exposure in the open market.

4. Payment is made in terms of cash of the same currency which the business has

adopted as their accounting standard or in terms of financial arrangements

comparable thereto.

5. The price represents the normal consideration for the business sold unaffected by

special or creative financing or sales concessions granted by anyone associated

with the sale.

A fair market transaction must be a “win-win” for all parties concerned. The fair market

value of a going business, in its specific market, is that value where the normalized

spendable income stream of the business can accomplish three criteria.

1. It must be able to support the structured debt service that is created from the

business sale.

2. It must be able to pay the owner a fair salary as determined by the size, type and

location of the business to current market standards.

3. It must be able to pay the owner a fair return on their investment as determined by

current market standards.




33

STATEMENT OF LIMITING CONDITIONS

1. The establishing of the fair market value of this business is not based in whole or

in part upon: the race, color, sex or national origin of the prospective owners or

occupants of the business evaluated; or upon the race, color, sex or national origin

of the present owners or occupants of the businesses in the vicinity of the business

evaluated.

2. The evaluator has personally inspected the business, both inside and out.

3. To the best of the evaluator’s knowledge and belief, all statements and

information in this report are true and correct and the evaluator has not knowingly

withheld any significant information.

4. This evaluation has been made in conformity with the use of good, common

accepted business and accounting practices.

5. The evaluator has relied upon the representations made to him/her by the owners

and/or management of the subject business. All information, where possible, has

been verified by the evaluator. The information, although not guaranteed by the

evaluator, has been compiled from sources we believe reliable.

6. The evaluator has used financial sources such as the business’ tax forms to assure

the accuracy of this report. These forms are signed by the owner and/or

management of the business certifying to the government that it is a true and

accurate representation of the financial condition of the business.




34

7. The evaluator has mathematically compiled the final opinion of value through the

use of commonly accepted accounting practices. The evaluator assumes no

liability in the determining of this value.

8. This analysis cannot be duplicated or otherwise copied in whole or in part without

the permission of the evaluator.

9. It is understood that the evaluator is not required to give testimony or appear in

court because of having made this evaluation with reference to the business in

question, unless arrangements have been previously make.

10. This is a sample insert for the evaluator limiting conditions to show the location of the

insert in this sample business analysis/valuation report.




35

VALUATION TECHNIQUES (METHODOLOGIES)

This evaluation has not used some of the industries’ typical valuation techniques because

of their commonly known inaccuracy. One of the major problems with using the different

techniques listed below is that the price they establish gives no guarantee or even a

probable chance that the evaluated business will be able to support the debt service which

the sale has created. If the debt service payments cannot be made, there is certainly no

chance of profit, even in companies that were profitable before the sale. Some evaluators

believe that if you use more than one of these techniques you can then average them for a

more accurate answer. This is just not true. A list of these valuation techniques and the

reasons for their inherent inaccuracy are provided below.

CAPITALIZATION OF EARNINGS

This approach is an income approach where the earnings of the business are capitalized

into the total value. The accuracy of this technique is dependent upon the evaluator being

able to accurately select at rate of return that reflects both the tangible and the intangible

assets of the business. The more stable the business’ income stream, the lower he

capitalization rate. If the income stream is more speculative, the capitalization rate is

higher. The technique also applies a weighted average and a division factor to the

earnings of those years analyzed. Since a small discrepancy in the arbitrary selection of

the factor of the rate of return can adversely affect the business’ value by many thousands

of dollars, it was not used for this evaluation.

PRICE TO EARNING (P/E) RATIO APPROACH

The users of this approach believe that the value of a business is determined according to

a relationship that the selling price of common stocks in publicly-owned and traded

companies has to the annual earnings of these companies. One of the shortcomings here

is that this ratio is determined from the sale of smaller “blocks” of stock, a much different

situation than purchasing 100% of a company or even a controlling share. Many times,

the P/E ratio within an industry increases or decreases for reasons not associated with the




36

industry but rather due to other market conditions (such as political circumstances of the

time). These factors could seriously distort the value of the business. For these reasons,

this technique cannot be considered accurate.

DISCOUNTED FUTURE EARNINGS APPROACH

This valuation approach establishes the market value of a business by projecting the

value of its future cash flows and then discounting them back to their present value. This

approach relies on the evaluator’s ability to perform two almost impossible tasks. First,

the evaluator must be able to accurately project future cash flows for periods as distant as

ten years. Second, the evaluator must establish a realistic discount value to apply to these

future cash flows. These can only be considered as “educated guesses”, not an acceptable

accurate valuation technique.

COST TO CREATE APPROACH

With this approach, an examination of the subject business’ records will show us what

was the actual cost to create (start) the business. This cost includes organizational costs,

assemblage of personal costs, acquisition of lease or real estate costs, assemblage of fixed

assets costs, development of intangible (goodwill) costs and the costs of the net tangible

assets. This method requires the summation of all of these costs. There are many

problems with this approach with the biggest being the reality of having an accurate way

to figure the intangible costs; it is simply impossible to accurately calculate and therefore

makes this technique inaccurate.

ECONOMIC MULTIPLES OF VALUE APPROACH

The economic multiples approach is simply the use of “market” originated multiples that

are multiplied to different areas of a business’ financial statement. An example of this

would be that hotels and motels “should” sell for between 3 and 4 times their gross sales.

There is no accuracy when using multiples. No one knows from where they came or how

they were created. A range of multiples such as the example given above can show a

difference in the market value (selling price) of tens and even hundreds of thousands of




37

dollars. Therefore, this valuation technique cannot be considered accurate enough for this

analysis.

THE RULES OF THUMB APPROACH

This approach closely resembles the “Multiples” approach. Over a period of time,

different industry shortcuts for valuation are created. One example of this would be that

taverns are “supposed” to sell for $10,000 per bar stool. If the seller wants to increase the

value, why not just add some more bar stools? From this example one can see how even

the slightest difference in the number will affect the final valuation by many thousands of

dollars.

BALANCE SHEET (SUMMATION OF ASSETS) APPROACH

In this approach the value of a business is established by the summation of the market

value of its assets. In it, the current market value of all of the business’ assets, including

the intangibles, are totaled to arrive at the total market value for the business. Upon

inspection of the balance sheet, the intangibles (also known as goodwill) may or may not

be found. If an established value for goodwill was carried over from the allocation of the

selling price from a prior sale, the goodwill can not be depreciated and remains on the

balance sheet without change. If there was not a prior sale, none is listed. How can you

verify the value of goodwill if it is listed? How do you establish the value of goodwill if it

is not listed? Since the fair market of “goodwill” cannot be substantiated, the total value

arrived at by this approach is distorted to an unacceptable level.




38

EVALUATOR’S COMMENTS

The business valuation in this study is an evaluation of the subject business as a going

business only. This valuation is not an appraisal of the individual parts making up this

business, but rather an evaluation of how the individual parts work together to create

the spendable cash flows that form it into a going business.

In this evaluation it is not the evaluator’s intention to determine if the integral parts

that make up this business are being used for their best or highest income producing

value. It is an evaluation of the income that they are creating. The market values of

those individual assets that can be used as collateral to support the structured business

loans are only considered. If the business’ value as an existing business is less than

the current market value of its parts, the parts should then be sold separately for their

higher value.

A business is worth that price at which it will support its structured debt service and

pay a fair salary to the owner along with a fair return on the owner’s investment. This

evaluation considers all of these criteria using the listed existing market variables of

interest rates, loan terms, rent factors, wage rates and other factors as listed under the

attached schedule entitled “Market Variables Used in Analysis”. Mathematically,

under these existing variables, there is only ONE business value that will allow the

business to meet these three criteria. This evaluation is a study that calculates that

value.

Once the business’ value is determined, the breakdown of its price is not a function of

determining the market value of its individual parts (assets) but rather is a function of

tax allocations that must be properly determined by accountants and tax attorneys. An

example of items that would be allocated and included in a business’ value would be:

real estate and land (if any), furniture, fixtures, equipment, goodwill, covenants not-




39

to-compete, management consulting agreements, customer lists, telephone numbers,

signage, trade names, business records, leases, licenses, franchise rights and so on.

This is a sample insert for the evaluator comments to show the location of the insert in this

sample business analysis/valuation report.




40

APPENDICES




41

TAX FORMS




42

FINANCIALSTATEMENTS




43

MISCELLANEOUSSUPPORTING

DOCUMENTATION

Gift Gallery LTDAcquisitionDecember 31 2005



OFFERED AT: $330,349

Type of Business: Gift Novelty and Souvenir Stores

Business Profile:

This successful gift shop is located in the heart of a very high foot traffic shopping mallthat is known to be the best in the area. You may add additional text here to better detailthe attributes of this business.

Gift Gallery LTDAcquisitionDecember 31 2005



Gift Gallery LTDNorth Towne Mall

Madison, WI 53710www.giftgallery.com

Documents

BUSINESS ANALYSIS/VALUATION