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Canadian Association of Movers December 3, 2007
Valuation Workshop
James A. ForbesCA●CBV, CFE
Advisory
Page 2PricewaterhouseCoopers
Agenda
Valuation Primer (When, What, Comparable Transactions)
Valuation Approaches (How)
Valuation Issues
Specialty Issues – Succession Planning
Valuation Primer
Page 4PricewaterhouseCoopers
Valuation Primer
When are Valuations Used?
Financial ReportingMergers & Acquisitions/
Transaction Support
Reorganizations
TaxPurposes
Income Tax &Estate Planning
Tax Disputes
Disputes
Live Buy and SellTransactions
Family Law
Strategy & SuccessionPlanning
Page 5PricewaterhouseCoopers
Valuation Primer
Value Concepts and Considerations• Value definition sets parameters of the valuation
assignment• Hypothetical • Fair market value (“FMV”) is defined as
- Highest price- Expressed in terms of money or money’s worth- Obtainable in an open and unrestricted market- Between informed and prudent parties- Acting at arm’s length- Under no compulsion to transact
• Other value terms – fair value, value to owner
Page 6PricewaterhouseCoopers
Valuation Primer
Price is not the same as Fair Market Value!
• Price is the consideration paid in a negotiated open market transaction involving the purchase and sale of an asset
• Parties often do not have equal information, equal bargaining positions, or equal negotiation experience
• Often impossible, in the absence of an actual transaction, to identify and quantify the synergies that a potential buyer may perceive to exist and for which they are willing to pay
Page 7PricewaterhouseCoopers
Somewhat Comparable Transactions
Moving and Storage Industry
• Recent actual transactions suggest price multiples in the moving and storage industry to be in the range of 0.1 to 2.6 of revenue with a median of 0.5 (See attached slides).
• Price Multiples of Cash flow (unadjusted) ranged from 2.3 to 7.5, with a median of 2.9.
• Price Multiples of actual reported earnings (unadjusted) ranged from 2.6 to 17.1 with a mean of 10.1.
Page 8PricewaterhouseCoopers
MOVING AND STORAGE INDUSTRYPUBLIC/PRIVATE M&A TRANSACTION MULTIPLES
Target PriceRevenue Price Premium
Date Target Acquiror ($Mill) ($Mill)(3) Revenue Earnings Book(5) Cash Flow(6) (%)(7)
31-Oct-07 Smithway Motor Express Corporation Western Express Inc. 228.8 54.0 0.2 12.6 1.7 n/a 23.0%Trucking Services 31-Dec-06
9-Oct-07 KD Trucking (1989) Ltd. Dalmac Energy 3.6 3.5 1.0 n/a n/a n/a n/aTrucking Services Fiscal 2006
12-Sep-07 US Xpress Enterprises Inc. 1,471.8 312.6 0.2 15.5 1.2 n/a 5.0%
Freight Trucking Service Provider 31-Dec-06
6-Jul-07 Canada Cartage Diversified Income Fund Nautic Partners LLC 278.0 135.0 0.5 n/m 1 n/a 9.0%31-Dec-06
1-Jun-07 N/A N/A 1.7 0.5 0.3 2.7 1.0 2.3 n/aTransfer and storage 31-Dec-06
1-Jun-07 Logistics Express Inc. 4.9 1.6 0.3 n/a n/a n/a n/aTrucking Services Fiscal 2006
10-May-07 Swift Transportation Company Inc. Saint Corporation 3,172.8 2,407.9 0.8 17.1 2.4 n/a 17.0%Regional Truckload Carrier Services 31-Dec-06
17-Apr-07 Top Brass Movers and Storage Limited N/A 0.4 0.4 1.0 2.9 1.5 2.9 n/a
Family-owned moving and storage 31-May-06
1-Feb-07 Madison Freight Systems Inc. Saia Inc. 15.9 2.5 0.2 n/a n/a n/a n/aTrucking Services Fiscal 2006
Price/
Trimac Transportation Services LP
Mountain Lake Acquisition Company
Provides Canada-wide trucking services, warehousing and distribution centres, general cartage, logistics and moving services.
Page 9PricewaterhouseCoopers
MOVING AND STORAGE INDUSTRYPUBLIC/PRIVATE M&A TRANSACTION MULTIPLES
Target PriceRevenue Price Premium
Date Target Acquiror ($Mill) ($Mill)(3) Revenue Earnings Book(5) Cash Flow(6) (%)(7)
28-Nov-06 Central Freight Lines Inc. 372.1 41.09489 0.1 neg. n/a n/a 6.0%31-Dec-05
25-Oct-06 Gusgo Transport Ltd 5.4 13.8 2.6 n/a n/a n/a n/aTrucking Services Fiscal 2002
2-Oct-06 PJAX Inc. Vitran Corporation Inc. 164.2 111.6 0.7 14.5 4.5 7.5 n/a31-Dec-05
28-Sep-06 USA Truck Inc. Liberate Technologies 439.7 240.4 0.5 15.4 1.6 n/a 24.0%Freight Transportation Services 31-Dec-05
14-Sep-06 Star Transportation Inc. 96.9 39.0 0.4 6.7 1.4 3.3 n/a31-Dec-05
5-Jul-06 Jevic Transportation Inc. 178.6 40.0 0.2 n/a n/a n/a n/aTrucking Transportation Services Fiscal 2005
7-Mar-06 Market Industries Ltd. UTI Worldwide Inc. 350.0 197.1 0.6 n/a n/a n/a n/aTransportation capacity solution services Fiscal 2006
2-Feb-06 Shanlock, Inc. N/A 4.4 3.0 0.7 2.6 2.5 2.4 n/aMoving and storage 31-Dec-05
Mean (excluding high and low): 0.5 10.1 1.7 2.9 13.8%Median 0.5 12.6 1.5 2.9 13.0%High 2.6 17.1 4.5 7.5 24.0%Low 0.1 2.6 0.9 2.3 5.0%
Price/
Sun Capital Partners Inc.
Covenant Transport Inc.
Green Acquistion Company
Newport Partners Income Fund
Regional less-than-truckload (LTL) trucking company that has operations in the southwest, midwest and northwest regions of the United States.
Regional less than truckload carrier providing coverage to the Mid-Atlantic U.S., based in Pittsburgh, PA.
A truckload carrier based in Nashville, TN serving customers throughout the continental U.S.
Page 10PricewaterhouseCoopers
Notes:
1. Transaction multiples are calculated based on enterprise value, equity price or reported selling price.
2. All figures are in U.S. dollars, unless otherwise indicated.
3. Price = reported selling price (may include liabilities assumed, non-compete agreements and employment/consulting agreements).
4. Enterprise value = equity price + debt/liabilities assumed, non-compete agreements, employment/consulting agreements, or performance bonuses.
5. Book value = preferred equity + minority interest + total common equity.
7. Bloomberg calculates price premium based on the target's 20 day average price prior to announcement.
8. The figures are annualized estimates as trailing 12 month figures are unavailable.
9. "n/a" indicates information was not available from the sources used.
12. "n/m" - not meaningful.
Sources: Bloomberg, DoneDeals, Zephyr, Pratt's StatsDate: October 25, 2007
6. Cash flow in Done Deals is defined as cash flow from operations = net income + depreciation & amortisation + changes in working capital; cash flow in Pratt's Stats is defined as net income + non-cash charges; cash flow in Bloomberg is operating cash flow.
11. Median is the middle value of a list. If the list has an odd number of values, the median is the middle value in the list after sorting the list into increasing order. If the list has an even number of values, the median is equal to the sum of the two middle (after sorting) values divided by two.
10. Mean is the arithmetic average, calculated as the sum of a list of values, divided by the total number of values in the list. The "mean (excluding high and low)" is the arithmetic mean, excluding the highest and lowest value in the list of numbers. If the number of values in the list is equal to or less than 4, the median is used.
Page 11PricewaterhouseCoopers
Valuation Primer
Value Definitions and Principals• Value
- Is at a point in time- Does not consider hindsight- Is a function of future expected earnings- Is the greater of future earnings potential or the underlying net
asset value• Higher tangible asset backing equates to higher value – greater
downside risk protection• Some level of discount premium may be appropriate in considering
value of a specific ownership interest / shareholding - lack of control / marketability / minority
• Value concept applies equally to purchase of assets or purchase of shares – although purchaser / vendor may have different preferences for deal structure (unique to each deal / owner)
Page 12PricewaterhouseCoopers
Valuation Primer
Shanlock, Inc. Facts
• Location – Fort Lauderdale
• Years in Business – 10
• Business Description – Moving and Storage
• Income Statement Date – 12/31/2005
• Sales – $4.4 Million
• Net Income (unadjusted) – $1.15 Million
• Book-value (unadjusted) – $1.2 Million
• Cash Flow (unadjusted) – $1.236 Million
What is it Worth?
Page 13PricewaterhouseCoopers
Valuation Primer
Example – Actual Price Paid
Shanlock, Inc. – Purchase Price of $3.0 Million
• Price to Revenue Multiple 0.7
• Price to Earnings Multiple 2.6
• Price to Book Multiple 2.5
• Price to Cash Flow Multiple 2.4
Valuation Approaches
Page 15PricewaterhouseCoopers
Valuation Approaches
Overview of Valuation Approaches
Is the Business Enterprise aviable, operating entity?
NoYes
Liquidation Approach
• Asset-Based Methodology• Income-Based Methodology
• Capitalized cash flow / earnings• Capitalized EBIT / EBITDA• Market comparables• Other multiples based approaches
(Rules of Thumb)
Going Concern Approach
• Asset-Based Methodology• Orderly vs. forced
Page 16PricewaterhouseCoopers
Valuation Approaches
Valuations – Asset Based Methodologies• Asset based methodologies are most commonly used to
value holding companies, real estate and equipment• Most common asset based techniques:
- Liquidation Value• Consider using if business is not a going concern• Orderly vs. Forced• Tax considerations
- Adjusted Net Book Value• Commonly used to value holding companies• Tax considerations
- Replacement Cost
Page 17PricewaterhouseCoopers
Valuation Approaches
Valuations – Asset Based Methodologies Example
Book Value vs. Going Concern Value vs. Liquidation Value
AssetsBook Value
Going Concern
Value
Liquidation Value
Cash 1,000 1,000 1,000 Accounts Receivable 1,500 1,500 700 Inventory 800 800 600 Prepaids 200 200 -
Land 5,000 8,000 7,000 Equipment 2,500 2,500 1,000
11,000 14,000 10,300
Liabilities
Accounts Payable 1,000 1,000 1,000 Long term debt 2,500 2,800 2,500
3,500 3,800 3,500
Net Assets 7,500 10,200 6,800
Holdco. Co.Balance Sheet
As at December 31, 2003
Page 18PricewaterhouseCoopers
Valuation Approaches
Income Based Methodologies – What are they and When are they Appropriate?
• Underlying premise:- Profitable company earns a reasonable rate of return on
the invested assets- Value is calculated in relation to the cash flow or
earnings available to the stakeholders- Value determined by converting anticipated future
benefits to a present single amount• Separate consideration of excess or redundant assets that
may be extracted from operating business without impairing operations
Page 19PricewaterhouseCoopers
Valuation Approaches
Income Based Methodologies• Some possible methodologies:
- Capitalized Earnings / Cash Flow- Capitalized EBIT or EBITDA- Discounted Cash Flow- Other multiples – revenue, book value, etc.
• Appropriate multiples or rates of return developed through:- Traditional financial market models
• Capital Asset Pricing Model, Weighted Average Cost of Capital, Build-Up Approach
- Public company comparables – trading and transactional information
- Analysis, experience and judgment
Page 20PricewaterhouseCoopers
Valuation Approaches
Income Based Methodologies – Earnings Based• Earnings based methodologies are most commonly used to value
operating and going concern businesses• Most common earnings based techniques:
- Capitalized Earnings or cash flow method• Bases include EBITDA / EBIT / After tax earnings / Cash
flow (i.e. Shanlock had an unadjusted earnings multiple of 2.6)
• Use multiple to convert constant stream of earnings or cash flow to a value
- Discounted Cash Flow (“DCF”)• Present value forecast cash flows
Page 21PricewaterhouseCoopers
Valuation Approaches
Income Based Methodologies – Potential Normalization Adjustments
• Non-arm’s length transactions• Discretionary compensation• Earnings level – tax minimization incentive versus profit
motive• Unusual/non-recurring expenses• Other non-business assets (redundancies)• Existence of related companies / planning vehicles /
services businesses• Owner/Manager Remuneration
Page 22PricewaterhouseCoopers
Valuation Approaches
Income Based Methodologies – Factors Impacting Selection of Capitalization Rate.
• External Factors- General economic conditions- Opportunities and threats facing company
• Industry Factors- Outlook- Barriers to entry
• Internal Factors- Strengths and weaknesses facing company- Management- Dependency on key customers or individuals
Page 23PricewaterhouseCoopers
Valuation Approaches
Earnings Multiple
• Inverse of the Capitalization Rate
• Applied to earnings – either historical or future
• Cap Rate = Discount Rate – Growth Rate
• High risk = High return = Low multiple
• Selection of an appropriate earnings multiple requires professional judgement
Page 24PricewaterhouseCoopers
Valuation Approaches
Determination of an Appropriate Multiple
• Build Up Method – small closely held companies- Risk free rate + risk premium (subjective)
• Capital Asset Pricing Method (CAPM)- Large businesses that are comparable to public
companies- Based on target company’s risk profile against an
average public company- Discount Rate = Rf + (Beta x Equity risk premium)
Page 25PricewaterhouseCoopers
Valuation Approaches
Income Based Methodologies – Example
EBITDA EBIT
Revenues 125,000 125,000 Expenses before interest and taxes & dep'n (30,000) (30,000) Normalization adjustments:
One time professional fees (5,000) (5,000) Market compensation adj. (10,000) (10,000) Rent at market value adj. (10,000) (10,000)
EBITDA 70,000 Depreciation (20,000) EBIT 50,000
EBITDA/EBIT multiple 6.0 8.5Operating Enterprise Value 420,000 425,000 Less: Interest bearing debt (LT and ST) (100,000) (100,000) Add: Redundant assets (eg, excess WC) 15,000 15,000
Fair Market Value Equity 335,000 340,000
Page 26PricewaterhouseCoopers
Valuation Approaches
Valuations – Market Based Methodologies
• Market based methodologies are most commonly used to
value operating and going concern businesses
• Review multiples of comparable companies and
transactions in the marketplace
• Difficult to find an exact comparable company
• Application of public equity market multiples
Page 27PricewaterhouseCoopers
Valuation Approaches
Other Multiple Based Approaches – Rules of Thumb
Advantages:- Simple to apply- Relevant if widely publicized and used
Disadvantages:- No empirical evidence that market actually follows- How to apply (i.e. before debt?)
- Wide range of values
- Too general for specific company- Sometimes not earnings based (i.e. multiple of sales)
Conclusion
- Used as a reasonability check most often
Valuation Issues
Page 29PricewaterhouseCoopers
Valuation Issues
Estate and Tax Planning• For documenting corporate reorganizations, CRA requires
reasonable effort to determine valuation• Valuation estimate by expert valuator who is independent
and has relevant industry expertise would meet criteria• Company’s accountants may not qualify as independent
expert valuators• CRA concept of family control – applying a discount on
individual family shareholding generally not appropriate• Better to obtain valuation upfront rather than disputing later
as penalties and interest costs can be quite high
Page 30PricewaterhouseCoopers
Valuation Issues
Size of Interests/Shareholdings• For example, a 20% interest in the equity of a company
that is controlled by a person or group of persons dealing at arm’s length (through direct ownership of more than 50% of the voting equity .
• It is not likely to have a value equal to 20% of the total value of the company.
• Premium values (more than a proportionate share of the value of the whole) have historically been considered in valuing the holdings of a controlling shareholder or group.
• The sum of the values of all the various equity interests in a business, each valued on their specific merits, will not always equate with the total value of the business.
Page 31PricewaterhouseCoopers
Valuation Issues
Marketability/Minority Discounts• Key in succession based valuations, there are often issues
relating to various sized holdings of possibly different classes of equity shares, often with varying rights.
• Discounts from the per share total value to account for disadvantages arising from marketability and minority issues must be established.
• A key issue in many private company valuations is the determination of an appropriate minority/marketability discount to apply to a specific minority holding.
• Substantial discounts based on fact may become more commonplace in the future, particularly in family law matters.
Page 32PricewaterhouseCoopers
Valuation Issues
Redundant Assets• assets that are not necessary to its business operations. • these excess or redundant assets, which might be in the
form of cash, real estate, or other investments, can be distributed to the shareholders or converted to cash and used for other purposes without affecting the business’ operations.
• after considering disposal costs, if any, can constitute a value in addition to the earnings value of the operations.
• examples include: real estate, investments, cars, boats, art.
Page 33PricewaterhouseCoopers
Valuation Issues
Value Drivers and Diminishers
Positive
• Track records and growth expectations
• Contractual relationships vs. handshakes
• Higher tangible asset value
• Proprietary technology / intangibles
• Niche markets
• Barriers to entry
• Strength / depth of management
Negative
• Declining earnings
• Business based on handshakes
• Reliance on key customers / employees
• Union issues / contingencies
• Outstanding litigation
• Other contingencies
• Business risks
• Economic / industry risks
Page 34PricewaterhouseCoopers
Valuation Issues
Shareholder Agreement Formulas• Pros and cons of the valuation formula
- Avoid trying to boil it down to a specific formula – differences can cause problems
• Valuation issues to address include:- Formula definition – how detailed- Clear definitions of valuation terms are key – what is “value”?- Agreeing on valuation date- Addressing minority discounts- Designate the valuator(s) up front- Dealing with major assumptions regarding on-going business,
personal / commercial goodwill, treatment of insurance proceeds- Inclusion of clauses to protect each in event of transfer of
ownership - Ensure agreement is vetted by valuator
Specialty Issues – Succession Planning
Page 36PricewaterhouseCoopers
Specialty Issues – Succession Planning
Valuation Issues in a Family Owned Business
• Goodwill Quantification• Non-arms length transactions• Discretionary compensation• Earnings levels – tax minimization incentive versus profit motive
• Other non-business assets (redundancies)
• Use of publicly available data
Family Owners(50% each)
Opco
Page 37PricewaterhouseCoopers
Specialty Issues – Succession Planning
Valuation Issues in a Family Owned Business – Goodwill• Definition:
- Intangible Value (Value in Excess of Net Assets)- Ability to earn “super profits” in excess of a normal
return on assets. • Sources:
- Goodwill of location;- Goodwill of product;- Goodwill of service;- Personal Goodwill;- Personal relationships and work of owner/manager;
and- Non-Commercial (Value to Owner)
Page 38PricewaterhouseCoopers
Specialty Issues – Succession Planning
Valuation Issues for a Business Interest Held Through a Holding Company
Holding company
• Asset based approach
• Latent tax liabilities
• Selling costs
• Tax planning opportunities in realizing the value of the interest
Business interest
• Form of interest (instrument, terms of preference shares, restrictions)
• Value of interest (public vs. private)
• Minority discount/control premium
Owner X
20%
Opco
100%
Holdco
Owner Y
Children X
Trust
50%30%
Page 39PricewaterhouseCoopers
Specialty Issues – Succession Planning
Valuation Formula Buyout Clauses – Do They Work?• Pros and Cons of the valuation formula• Valuation issues to address include:
- Formula definition – how detailed- Valuation date- Addressing minority discounts- Agreeing the valuator(s) up front- Dealing with major assumptions regarding on-going
business, personal/commercial goodwill, treatment of insurance proceeds
Page 40PricewaterhouseCoopers
Specialty Issues – Succession Planning
Conclusion
• Ensure key valuation issues are addressed in the valuation formula of your Shareholders Agreement.
• Negotiating the transaction goes beyond price.