Post on 27-Nov-2014
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PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
V
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
VALUATION
What is a Firm Really Worth?
IRS Revenue Ruling 59‐60
The price a willing buyer might pay a willing seller for a property, when neither is under compulsion to carry out the transaction and when both parties are able to trade and are reasonably informed about both the property in question and the business in which it operates.
Rules of Thumb are Worthless!!!
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
COMPONENTS OF VALUE
Earnings Value (Book of Business Value)
Balance Sheet / Tangible Net Worth (Liquidation Value)
Working Capital
Earnings Value + Balance Sheet –Working Capital = Fair Market Value
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
METHODOLOGIES OR MYSTERIES?
Asset Approach (Tangible Basis)
Income Approach (Net Present Value of Discounted Future Cash Flows)
Market Approach (Comparable Transactions)
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
KEY FACTORS AFFECTING VALUE EIBTDA, EBITDA, EBITDA
Business Structure
Employment Agreements
Concentration Risks
Key Personnel
Market, Competitors & Trends
Tangible Balance Sheet
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
EBITDA, EBITDA, EBITDA PRIMARY DRIVER of Valuation
Earnings Before Interest, Taxes, Depreciation & Amortization
Gross or Net (i.e. Revenues or Earnings?)
Normalization of Pro Forma EBITDA (i.e. elimination of non‐recurring items & extraordinary items, as well as adjustment to reflect operations under a third party’s business model)
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
IMPACT OF EBITDA vs. REVENUES
Comm. Rev’s $400,000 $400,000Profit Margin 30% 20%
EBITA $120,000 $80,000Multiple 6 6
Value $720,000 $480,000
Value/Revenues 1.8 1.2
Revenue Multiple = Value ExpressionEBITDA Multiple = Value Calculation
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
BUSINESS STRUCTURE “C” Corporation vs. “S” Corporation
Are Capital Gains “Passing” you by?
Tax Benefits Equate to REAL dollars for BOTHparties
Structure can not only impeded Valuation, but can also impede the ability to get a “deal done”
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
EMPLOYMENT AGREEMENTS
Can NOT sell what is not YOURS
Non‐solicitation & non‐piracy provisions
Non‐Competition
Vesting &/or other Deferred Compensation
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
CONCENTRATION RISKS
Lines of Business or Products
Customer Base
Markets
Geographic Region
Production Staff
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
KEY PERSONNEL
Who “runs” the Agency? Sales? Operations?
How deep is the “bench”?
Should I stay or should I go?
Method of Compensation
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
MARKET, COMPETITORS & TRENDS
Trend Analysis‐Market‐ Products‐ Historical Performance
Competitor Analysis
Niche / Strategic Benefits
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
TANGIBLE BALANCE SHEET
Net Tangible Worth (Deficit)
Stock deals assume the Balance Sheet – both Stated & Unstated Obligations
Work Capital – Pay attention to the language!!!!
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
SUMMATION & QUESTIONS
Earnings Value + Tangible Balance – Working Capital = Fair Market Value
Intangible nature of the Industry makes EBITDA the Key Driver of Valuation
Final Questions?