Determining the Value of a Business

1. Determining the Value of a Business Travis McMurray, MBA, CPA/ABV/CFF/CGMA, CMA/CFM Blackburn, Childers & Steagall, PLC TRINITY VALUATION CONSULTING GROUP, PLC

2. Calculation of Value EBITDA X 5 (or 6) = Value

3. What is EBITDA? Earnings before Interest, Taxes, Depreciation & Amortization Do you just look at the current year? Do you average the last few years? If so, how many years? Is it a straight average or is it a weighted average?

4. Past Indicative of the Future… Does the overall economy have any impact? What about the industry life cycle? Is the current EBITDA a good estimate for the future EBITDA? Why do we use EBITDA? What about net income? What about cash flow? Does it matter if the company has no debt versus significant debt? What about discretionary spending?

5. Multiple Is it 5 or 6? What does this even represent? Should it be higher than 6? Should it be lower than 5? What if this is an asset sale/purchase instead of a stock sale/purchase?

6. Basics of Valuing a Business • Formula Approaches • May be good for a starting point/estimate • These approaches generally don’t consider risk factors • Economy • Industry • Company Specific • May not consider the amount of debt • Can work for certain industries • Also utilized in Franchise situations

7. Definition of Value Investment Value (Synergistic Value) Fair Market Value Fair Value

8. Approaches to Valuation • Asset Approach • Value of the individual parts equals the whole • Value of the assets less the value of the liabilities (debts) • Difficulty in valuing Goodwill or other intangibles • Market Approach • Industries that adopt a common formula approach • Difficulty in finding comparable transactions or publicly traded companies • Income Approach

9. Income Approach • Two Components • Economic Benefit Stream • Multiple (or Capitalization Rate) • Economic Benefit Stream • Pretax Earnings • After Tax Earnings • Pretax Cash Flow • After Tax Cash Flow • EBIT • EBITDA • Debt Free Approach

10. Capitalization Rate (Multiple) • Buildup Method • Risk-Free Rate of Return • Equity Risk Premium • Small Stock Premium • Industry Risk Premium • Company Specific Premium • Weighted Average Cost of Capital (WACC)

11. Capitalization Rate Example Multiple = 100/Cap Rate or 4.08

12. Company Specific Risk Size of Operations Depth of Management/Importance of Key Personnel Diversification (product line/customer base/suppliers) Stability of Earnings/Earning Margin Financial Structure

13. Case Study Company with 20 year history Economic Benefit Stream: $760,000 Cap Rate (without Company Specific Risk or Industry Risk) = 15.35% Value = $4,951,000 (rounded) Net Asset Value of Tangible Assets = $589,000 What would you be willing to pay?

14. Additional Information What if the company were in the coal industry? What if the sole owner was responsible for 100% of the management of the company? What if the sole owner was 65 years old and not interested in continuing to be employed by a new owner? What if the company had a verbal month-to-month lease with a third party on their property? What if this property had a railroad spur for loading/unloading? What if the third-party landlord were 80 years old? What if the company had only one customer? What if there wasn’t a written contract with the sole customer? How much would you pay for that?

15. Due Diligence • Fact finding • Financial health of the company • Contracts/agreements • Key employees • Processes/structures • Patents/trademarks • Risk assessment • Competitors • Customers • Suppliers • Industry • Management