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Abstraction, Logical Reasoning, and Chaos Theory . . . Oh, Let’s Do Research Math Instead

Abstraction, Logical Reasoning, and Chaos Theory . . . Oh, Let’s Do Research Math Instead. Cecilia Hogan David Lamb. Today’s agenda.

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Abstraction, Logical Reasoning, and Chaos Theory . . . Oh, Let’s Do Research Math Instead

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  1. Abstraction, Logical Reasoning, and Chaos Theory . . . Oh, Let’s Do Research Math Instead Cecilia HoganDavid Lamb

  2. Today’s agenda This session is billed as advanced research. Considering the range of experience at a conference, it is our intention that the depth of the topics covered will be driven by the attendees. We will do our best to keep in interesting for all. • Overview (Q&A and discussion throughout) • Private company math • Public company affiliate math • Foundation math - how to read 990s • Real estate research • Philanthropy capacity • Observations and conclusions

  3. Private Company Math

  4. Closely Held Stock • When a company incorporates, it issues shares, known as “outstanding stock” • The value of the company is divided evenly among the shares • “Publicly held” stock vs. “closely held” • Finding the value of public company stock is easy • Finding the value of private company stock is difficult and expensive

  5. Why value a company? • The value of a company is influenced by the reason you’re asking the question • Reasons to value a private company: • To sell it • To raise capital from investors • Part of a divorce settlement • For a management buyout • For estate planning • For an employee stock ownership plan • For taxation • Change the purpose of the valuation and you change the stock price • Only fundraisers ask how it affects a gift

  6. What is it worth? • What is a company worth? • It’s worth the tangible assets • It’s worth the assets + goodwill • It’s worth whatever someone will pay for it • Situations that increase the value: • A great product or service that people want to buy • Customers who can afford to buy it • Situations that decrease the value: • An obscure product or service with limited appeal • Price is too high or customers are too poor

  7. Valuation in the real world • Information typically is not available on private companies • The value of a company is not necessarily identical to the bottom line on the balance sheet • Companies with a negative cash flow can have a high value • Companies with a positive cash flow might have a modest value

  8. Valuation in the real world • To find out what a company is worth, sell it • Value is partly (sometimes mostly) subjective • Sometimes D&B provides a net worth figure • Read everything you can about your target company – it’s not just numbers

  9. Ways to measure value • Book value • Price/earnings ratio (P/E) • Discounted cash flow • Comparison to similar companies

  10. Comparable companies • Find a similar public company • Downside: a public company is almost always valued higher than an otherwise equivalent private company would be • Find a similar private company that sold recently • Downside: the only commonly available metric is sales, and value is not always clearly tied to sales or even profit • Comparison is only method that is possible if you have no access to the financial statements and appraisals of the assets is comparable companies

  11. Comparison points • Sales • Earnings (Sales – (Costs + Interest + Taxes) • EBIT (Earnings Before Interest and Taxes) • EBITDA (Earnings Before Interest)

  12. Comparison to public companies • Yahoo Stock Screener (http://screen.yahoo.com/stocks.html) • Parameters that can be used • Industry (SIC or NAICS) • Sales • Enter relevant info for the target company • Look for Market Cap. • Your target company value is probably considerably less

  13. Comparison considerations • Your prospect’s industry and company sales rarely match those offered by Yahoo perfectly • Public companies tend to be much larger than their private counterparts • Read the profile to see if the comparison company is similar in purpose to the target • If the public company has flat or negative earnings, it may still have value • Same may be true of the private company

  14. Comparison to other private companies • Business Valuation Resources (www.bvmarketdata.com) • Pratt’s Stats • Database of over 9,500 private company sales from 1990 to present • Deal price ranges from $1 million to $14.4 billion • Updated monthly with about 100 transactions added / month • $595 • Bizcomps • Database of over 9,500 private company sales from 1993 to present • 61% of the companies have gross revenues less than $500K • 18% of the companies have gross revenues over $1 million • $395 • INC. Magazine’s Ultimate Valuation Guide

  15. Inc.’s 2006 Valuation Guide

  16. Inc.’s 2007 Valuation Tables MVIC=Market value of capital + long term liabilities assumed

  17. BizStats.com • Select the industry • Enter the sales • Many elements of the cash flow statement are shown including an estimate of retained earnings

  18. BizStats.com

  19. BizStats.com

  20. Bizstats.com rules of thumb

  21. Business classifieds • BizBuySell – www.bizbuysell.com • GlobalBX – www.globalbx.com • Search for business by line of business and state

  22. Practice: Case study • Privately owned grocery chain (2 stores) in Nebraska • Founded in 1955 • 405 employees • D&B reports sales of $45.8 million • 200,000 square feet • No trend information is available • Major competition is a Super WalMart, recently arrived • Prospect is the son of the deceased founder

  23. Using valuation guides • INC. Guide • Median sales for grocery stores: $773M • Median sale price: $200M • Valuation multipliers: • Best: 4.47 • Second and third best: 0.28 • BizStats Guideline • 11-18% of annual sales + inventory

  24. Using valuation guides • Estimates using INC: • Sales of the target are well below the median, encouraging us to consider a lower estimated value • Using the second best multiplier: 0.28 $46 million = $12.88 million • Estimate using BizStats rules of thumb • 11% of sales ≈ $5 million + inventory • 18% of sales ≈ $8.2 million + inventory

  25. Business Classified • BizBuySell (search on 9/12/06) • No grocery stores found in Nebraska • Widened the search to include surrounding states • Results:

  26. BizBuySell 1

  27. BizBuySell 2

  28. Summary: Estimated company value • Target company sales: $46 million • Based on classifieds found, the target company is larger than most in the region • Known, but smaller stores are asking the low 6-figures • BV Resources (aka INC valuation guide) value: • Median revenue = $773 million • Low sales price = $14 million • Median sales price = $200 million • High sales price = $1.6 billion • BV Resources multiplier • 4.47*$46 million =$205.6 million • 0.28*$46 million = $12.9 million • D&B reported net worth: $6.9 million • Biz Stats rule of thumb for grocery stores = $5 million to 8.2 million + inventory

  29. Estimated value • The target company is worth • $300,000-600,000 • $2,000,000-10,000,000 • $10,000,000-20,000,000 • Over $50,000,000 • None of the above • I haven’t got a clue

  30. Making sense of it all • The problem of company valuation is the same as for personal net worth:you can’t get the necessary information • The good news: you don’t need to pin down the precise value • You’d like to know: • If it’s $1M vs $100M • If it’s a going concern • If the industry is above or below the diagonal on the INC chart.

  31. Making sense of it all Households with a net worth of $1M-$10M, 2001 IRS data, published in 2006

  32. If the prospect owns 50% • Assume a company value of between $2 million and $10 million • The prospect’s share in the target company could be between • $5M (50% of $10 M) and • $1M (50% of $2 M) • Let’s split the difference at $3 million • Reduce the proportions of net worth (from the IRS chart) for property and stock because of the semi-rural area • This makes closely held stock a higher percentage of the prospect’s net worth – say 25%

  33. If the prospect owns 50% • Net worth could be about $12 million (private company ownership of $3 million x 4) • 2%-5% might be philanthropic capacity • Capacity ≈ $240,000-$600,000

  34. Consolidated resource list • Yahoo! Stock Screener: screen.yahoo.com/stocks.html • BV Resources: www.bvmarketdata.com • Inc. Valuation Guide: www.inc.com/valuation/index.html • BizStats: www.bizstats.com • BizBuySell: bizbuysell.com • GlobalBX: www.globalbx.com • www.lambresearch.com • White Paper www.blackbaud.com/resources/white-papers.aspx

  35. Public Company Affiliate Math

  36. The things to find • Who’s who • Compensation of directors • Stock holdings • Compensation of company leaders • Stock options • Other details (severance & retirement plans & more) • Current value of stock • Current stock holdings

  37. Compensation of Directors Annual Compensation of Non-Employee Directors Only non-employee directors are compensated for serving as directors of the Company. Pursuant to guidelines approved by the Board of Directors on recommendation from the Nominating Committee, for each fiscal year of service non-employee directors receive a retainer of $100,000, which may be in the form of cash or stock options, and $100,000 in equity compensation in the form of stock options. New non-employee directors first become eligible to receive the regular annual non-employee director compensation in the first full fiscal year after they join the Board of Directors. Stock options are granted under the 2005 Non-Employee Director Sub-Plan to the Starbucks Corporation 2005 Long-Term Equity Incentive Plan (the “Non-Employee Director Stock Plan”). The number of stock options granted is determined by dividing the dollar amount of compensation to be received in the form of stock options by the closing market price of the Common Stock on the grant date, multiplied by three. These stock options vest one year after the date of grant and have an exercise price equal to the closing market price of the Common Stock on the grant date. Stock options granted to non-employee directors generally cease vesting as of the date a non-employee director no longer serves on the Board. However, unvested stock options held by non-employee directors will vest in full upon a non-employee director’s death or “retirement” (generally defined as leaving the Board after attaining age 55 and at least six years of Board service).

  38. Compensation of Non-Employee Directors Fiscal 2006 Compensation of Non-Employee Directors The table below sets forth, for each non-employee director, the amount of cash compensation paid and the number of stock options received for his or her service during fiscal 2006. Non-Employee DirectorCash($)Stock Options (#)(1) Barbara Bass     0       19,724   William W. Bradley     100,000       9,862   Mellody Hobson     0       19,724   Olden Lee     0       19,724   James G. Shennan, Jr.      100,000       9,862   Javier G. Teruel     0       19,724   Myron E. Ullman, III     0       19,724   Craig E. Weatherup     0       19,724   Gregory B. Maffei(2)     0       19,724   (1)All stock options included in the table were granted on November 16, 2005, with an exercise price of $30.42 per share, and vested in full on November 16, 2006 other than with respect to Mr. Maffei, as explained below. (2)Mr. Maffei resigned from the Board of Directors in March 2006. Under the terms of the Non-Employee Director Stock Plan, the options listed in the table and granted to Mr. Maffei did not vest and were cancelled upon his resignation.

  39. Details, details Initial Stock Option Grant for New Non-Employee Directors Upon first joining the Board of Directors, non-employee directors are granted an initial stock option to acquire 30,000 shares of Common Stock under the Non-Employee Director Stock Plan. These options vest in equal annual installments over a three-year period and have an exercise price equal to the fair market value of the Common Stock on the date of grant. None of the directors in the table above was granted an initial stock option in fiscal 2006.

  40. More details Director Stock Ownership Guidelines Under stock ownership guidelines approved by the Board and included in the Corporate Governance Principles and Practices for the Board, each non-employee director is required to have invested at least $200,000 to purchase shares of Common Stock within four years of May 7, 2003 (the date of adoption of the guidelines) for non-employee directors serving on the Board at that time, or within four years of being elected to the Board, for non-employee directors elected after May 7, 2003. Vested stock options do not count toward meeting the requirement. Each non-employee director must continue to hold the shares purchased as a result of this investment for so long as such director serves on the Board.

  41. Ownership of Common Stock The following table sets forth information concerning the beneficial ownership of Common Stock of the Company of (i) those persons known by management of the Company to own beneficially more than 5% of the Company’s outstanding Common Stock, (ii) the directors of the Company, (iii) the Named Executive Officers listed in the Summary Compensation Table on page 21 of this proxy statement, and (iv) all current directors and executive officers of the Company as a group. Information provided for Capital Research and Management Company and Sands Capital Management, LLC is based on the most recent Schedule 13G filings by those firms, each filed with the SEC on February 10, 2006. Information for all other persons is provided as of December 1, 2006. Except as otherwise noted, the beneficial owners listed have sole voting and investment power with respect to shares beneficially owned. An asterisk in the percent of class column indicates beneficial ownership of less than 1%.

  42. Beneficial Ownership of Stock Name of Beneficial OwnerBeneficial OwnershipPercent of Class(1) Capital Research and Management Company     44,788,400 (2)     5.9   Sands Capital Management, LLC   42,254,297 (3)     5.6   Howard Schultz     31,594,204 (4)     4.1   James L. Donald     2,238,824 (5)     *   Barbara Bass     662,794 (6)     *   Howard P. Behar     917,581 (7)     *   William W. Bradley     87,410 (8)     *   Mellody Hobson     40,224 (9)     *   Olden Lee     160,004 (10)     *   >>>> snip <<<<<  

  43. But it’s all in the footnotes . . . >>> snip <<< (4) Includes 14,465,264 shares subject to options exercisable within 60 days of December 1, 2006. Also includes 124,144 shares of Common Stock held by the Schultz Family Foundation as to which Mr. Schultz disclaims beneficial ownership, and 6,756,164 shares of Common Stock that remain subject to a variable prepaid forward contract between Mr. Schultz and an unaffiliated third party. Under the variable prepaid forward contract, Mr. Schultz received a cash payment in March 2001 in exchange for a promise to deliver at the maturity of the contract up to 6,756,164 shares of Common Stock (as adjusted for stock splits since March 2001) or an equivalent amount of cash, in accordance with a formula set forth in the contract. On February 17, 2004, the contract was amended to revise the formula and extend the maturity date to March 16, 2007. As more fully discussed on page 18 of this proxy statement, also includes 3,394,184 deferred stock units representing stock option gains that were deferred in 1997 into an equivalent number of deferred stock units under the Company’s 1997 Deferred Stock Plan. In the event of a stock split, the number of deferred stock units is adjusted proportionately. On November 13, 2006, Mr. Schultz elected to re-defer the distribution of these stock units into an equal number of shares of Common Stock from December 21, 2007 until the earliest to occur of (i) his termination of employment with the Company and (ii) December 21, 2012, subject to any additional deferral elections made in accordance with the terms and conditions of the 1997 Deferred Stock Plan and approved by the Compensation Committee.  (5) Includes 2,238,824 shares subject to options exercisable within 60 days of December 1, 2006.  (6) Includes 628,228 shares subject to options exercisable within 60 days of December 1, 2006. Also includes 28,000 shares held indirectly by trust and 6,566 deferred stock units under the Non-Employee Director Deferral Plan.  (7) Includes 880,000 shares subject to options exercisable within 60 days of December 1, 2006. >>> snip <<<

  44. Executive Compensation Overview of Compensation Philosophy and Program.  The Committee believes that compensation paid to executive officers should be closely aligned with the performance of the Company on both a short-term and a long-term basis, and that such compensation should assist the Company in attracting and retaining key executives critical to its long-term success. To that end, the Committee believes that the compensation packages for executive officers should consist of three principal components: •  annual base salary;    •  annual incentive bonus, the amount of which is dependent on Company and, for most executives, individual performance during the prior fiscal year; and    •  long-term incentive compensation, currently delivered in the form of stock options that are awarded each year based on the prior year’s performance and other factors described below, and that are designed to align executive officers’ interests with those of shareholders by rewarding outstanding performance and providing long-term incentives.   The Committee considers multiple factors when it determines the amount of total direct compensation (the sum of base salary, incentive bonus and long-term compensation delivered through stock option awards) to award to executive officers each year. Among these factors are:  •  how proposed amounts of total direct compensation to the Company’s executives compare to amounts paid to similar executives by targeted peer group companies both for the prior year and over a multi-year period; >>>> snip <<<<<

  45. Bonus Plan Annual Incentive Bonus.  Incentive bonuses are generally granted based on a percentage of each executive officer’s base salary. During fiscal 2006, the president and chief executive officer, the chairman, the president, Starbucks Coffee U.S., the president, Starbucks Coffee International and the executive vice presidents of the Company, a total of eight officers, participated in the Company’s Executive Management Bonus Plan (the “EMB Plan”). >>>>snip<<< Under the EMB Plan as in effect during fiscal 2006, 80% of the target bonus was based on the achievement of the specified objective performance goal approved by the Committee and the Independent Directors for the fiscal year (other than for the chairman and the president and chief executive officer, for whom 100% of the target bonus was based on the objective performance goal). In fiscal 2006, an earnings per share target was the objective performance measure upon which the objective performance goal was based. The terms of the objective performance goal permit bonus payouts of up to 200% of the target bonus in the event (as was the case in fiscal 2006) that the Company’s actual financial performance was better than the earnings per share target based on a scale approved by the Committee and the Independent Directors within the first 90 days of fiscal 2006. >>>snip<<<

  46. Compensation details (not in the table, by the way) Compensation of the Chief Executive Officer and the Chairman Base Salary.  In fiscal 2006, Mr. Donald’s annualized base salary, which was also determined in accordance with the factors used for all executive officers, was $1,000,000. His salary falls slightly below the median of salaries paid to chief executive officers by the comparator group companies. Annual Incentive Bonus.  For Mr. Donald, the EMB Plan provided a bonus target of $1,000,000, or 100% of base salary, for achievement of the objective performance goal. Under the terms of the EMB Plan, Mr. Donald earned a bonus of $2,000,000 for fiscal 2006. Because the Company achieved earnings per share at a level permitting payout of 200% of the target bonus . . . >>> snip<<<

  47. Compensation Table Annual Compensation Long-Term Comp. -------------------------------------------- --------------------------- Other No. of Annual Securities Other Fiscal Salary Bonus Comp. Underlying Comp Name/PositionYear($)($)(1)($)(2)Options(3)($)(4) James L. Donald     2006     978,846       2,000,000       26,666       966,469       2,100   president and     2005       887,308       1,800,000       8,024       800,000       2,050   CEO 2004       832,308       1,404,000 (5)   83,611       600,000        — Howard Schultz     2006       1,190,000       2,380,000       950,521       966,469       278,224   chairman     2005       1,176,269       2,380,000       683,831       1,000,000       243,460         2004       1,179,154       2,490,00(6)     726,538       1,100,000       3,000   MartinColes     2006       629,712       825,500       11,670       120,808       46   president,     2005       607,885       786,656       6,892       100,000       300   Starbucks Coffee     2004       265,385       530,000 (7)     502,294       400,000        —   International                    

  48. Once again, it’s all in the footnotes (2)As shown in the table below, “Other Annual Compensation” for some of the Named Executive Officers includes the aggregate incremental cost to the Company of one or more of: (A) personal use by executives, their families and invited guests of Company aircraft (“Aircraft”); (B) security services (“Security”); (C) relocation and temporary housing expenses paid to the Named Executive Officer (“Relo”) >>>snip<<<

  49. Stock Option Grants No. of Securities Exercise Underlying Price per Expiration Name Options Share Date ------------------------------------------------------------------------------ Donald 966,469 (1) $30.42 11/16/15 Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Five percent ($) Ten percent ($) ------------------------------------------------------------------- 18,489,494 46,856,008

  50. And where are the detail? You got it. (2)Mr. Donald’s and Mr. Schultz’s options become exercisable in one 322,157 share increment on November 16, 2006 and two 322,156 share increments on November 16, 2007 and 2008, respectively.

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