How To Value Your Business

HOW TO VALUE YOUR BUSINESSFor Companies Worth between $1-10 Million

Presented by

Tom MacPherson

Summit Acquisitions Group

www.SummitAcquisitions.com

2Summit Acquisitions Group, LLC

AREAS TO BE DISCUSSED

� What is Fair Market Value?

� Reasons for a Valuation

� Professional Appraisal vs. Valuation Opinion

� What is ODCF? (Owners’ Discretionary Cash Flow)

� Formula for Valuation

� Valuation Example/Worksheet

� Other Valuation Factors

� Questions


FAIR MARKET VALUE - COMMON

Common Definition:FMV of a business is commonly defined as “the

value that a willing seller and a willing buyer, both

being informed of the relevant facts about the

company, would complete an acquisition

transaction, with neither party under any

compulsion to do so.”


FAIR MARKET VALUE - REAL

Real World Definition:FMV of a business should really defined as “the

value that a willing seller and a willing buyer, both

being informed of the relevant facts about the

company, would complete an acquisition

transaction, with neither party under any

compulsion to do so –

and a willing banker would finance.”


REASONS FOR VALUATION

� to buy or sell a business

� for bank financing

� for divorce

� for estate planning


PROFESSIONAL APPRAISAL

VS.

VALUATION OPINION

TYPES OF VALUATIONS


Income Approach: based on ability of the business to

generate desired economic benefit for the owners.

� Discounted cash flow method *

� Capitalization of earnings method

� Multiple of discretionary earnings method *

� Multiple of EBITDA method

Asset Approach: based on the value of business assets.

� Asset accumulation method

� Capitalized excess earnings method

Market Approach: establishes the business value in

comparison to historic sales involving similar businesses.

� Comparative transaction method *

� Guideline publicly traded company method

PROFESSIONAL APPRAISAL


VALUATION OPINION

Valuation Method most used by Business Intermediaries:

Since experienced business intermediaries are “in the market” at

all times, they know what buyers are willing to pay for businesses

–

a Multiple of Owner’s Discretionary Cash Flow

(ODCF)


COST

Valuation Opinion takes much less time

to prepare than a Professional Appraisal,

costs 50-80% less than an Appraisal – and

Valuation is usually within 5-10% of the Appraisal.


Owner’s Discretionary Cash Flow

“Net Income before Income Taxes” plus ADDBACKS:

+ Interest

+ Owners’ Compensation (salaries, wages, bonus, car allowance, health and life insurance, etc.)

+ Depreciation and Amortization

+/- Non-Recurring one-time expenses/income

+ Compensation to family members not working in the business

+ Personal items paid for by the business

= Amount of cash over which the owner has discretion – to pay himself or re-invest.

WHAT IS ODCF?


FORMULA FOR VALUATION

MAXIMUM VALUE OF A BUSINESS – BASED UPON ACQUISITION FINANCING

There may be a simpler, more elegant valuation formula, but…

1) W = (Probable Cash Flow Available for Debt Service) ODCF less (a) new owner’s (buyer’s) compensation to live on, and (b) Addbacks not “allowed” by the bank. This number represents the bank’s opinion of “probable cash” available for future debt service;

2) X = (Cushioned Cash) 75% of W. Cash Available for Debt Service after 25% Cushion for unforeseen circumstances (aka DSCR);

3) Y = (Highest Amount to be Financed) X divided by $140,000 (annual debt service per $1M at today’s SBA interest rate) times $1,000,000. This will give the maximum amount (in millions of dollars) of debt that can be financed by the probable available cash – with a 25% bank “cushion”; and

4) Z = (Highest Value of the Business) Y + .25Y. This represents the highest value of the business – to be financed by an outside lender. This additional 25% represents a 20% cash down payment by the buyer.


VALUATION EXAMPLE/WORKSHEET

Example Yours

500,000$ Net Income

250,000$ Total Addbacks

750,000$ Owner's Discretionary Cash Flow (ODCF)

(125,000)$ Compensation for New Owner to Live On

(150,000)$ Addbacks Not "Allowed" by Bank

W 475,000$ Probable Cash Available for Debt Service (PCADS)

X 356,250$ Cushioned Cash (Cash Available net of 25% Bank "Cushion") = 75% of PCADS

Y 2,544,643$ Highest Amount to be Financed = Cushioned Cash divided by $140,000 tim es $1,000,000

($140,000 = Annual Debt Dervice per $1M at SBA Interest Rate - 7.25%)

636,161$ 20% Down Payment

Z 3,180,804$ Highest Value of the Business

4.24 Multiple of ODCF


OTHER VALUATION FACTORS

Qualitative Factors Reducing the

Highest Value of the Enterprise:

� Competition

� Regulations

� Concentration of Customers

� Products or Service Lines

� Supplier Relationships

� Market Position

� Management and Employees

� Adequacy of Physical Facility

� Operating Efficiencies and Inefficiencies

� Reasons for Sale


QUESTIONS

FAQ’S:

� What about Rules of Thumb?

� Aren’t there foreign buyers who are willing to pay a

premium for my business?

� Can’t I get paid for the potential of my business?

� Will I be able to replace my current income with the

proceeds of the sale?


CONCLUSION

Tom MacPherson | 770.367.4356 | [email protected]

4200 Settler Heights Drive, Suite 300 | Fort Mill, SC 29708 | www.SummitAcquisitions.com

If you have any questions, please contact:

Documents

How To Value Your Business