Salt Evaporation Plant

Salt Evaporation Plant

Reason for Damages Analysis:

On January 17, 2001, there was a natural gas leak from a natural gas storage facility. Gas was found at the subject’s facility within days of the leak. The level of gas detected was sufficient to cause the Hutchinson Fire Chief to order evacuation of the facility. Dennis Bingham

2007 IBA National Conference

Summary Description of Business

• Our client was a salt evaporation plant that produced food and feed grade, mechanically evaporated salt from injection mining. It also owned hundreds of acres of land under which the salt is found.

• Over many years of salt mining, huge caverns remain from which the natural gas would seep.

Problem

• As of the date of valuation, according to independent experts, there was no method to determine

1. How much gas remained in the ground under the facility and

2. There was no method to totally cure or remediate the presence of the natural gas in the foreseeable future.

How We Attempted to Solve the Valuation

• We set out to find resources that would help us to quantify a loss in value.

• Approach the loss of value from the perspective of what a willing buyer or seller would do.

When a Detrimental Condition Exists

• When there is evidence of environmental contamination, or structural damage, or issues of safety to public health, a detrimental condition is said to exist.

• The main driver of a loss of value when a detrimental condition exists, is an uncertainty for the buyer.

Valuation of Subject with Consideration of Detrimental Condition

Valuation MethodsMethodology for Economic Damages

• In arriving at an estimate of economic damages we prepared two analyses:

1. “but-for” or the unimpaired situation and

2. “after” or the impaired situation

• The difference between these two estimates represents our estimate of economic damages.

Valuation Methods Selected

1. Multiple-period discounting.

2. Adjusted book value.

3. Merger and acquisition methods.

Multiple-Period Discounting Method

• The factors impacting the negative effect on value included the following:

1. Increased risk to the subject’s economic income and,2. The potential that buyers may be unable to obtain financing

and that buyers would require a reduced price for the enterprise due to the risk of future explosion.

• We prepared the “but-for” analysis using a standard valuation methodology (including the build-up method to determine the cost of capital).

• We prepared two “after” the environmental accident forecasts. The forecasts utilized CAPM methodology.

Forecast 1

• We assumed that as a result of the potential interruption in the subject’s economic income stream a willing buyer would require a higher rate of return on the investment to compensate for the higher risk.

Forecast 2

• We assumed that as a result of the potential interruption in the subject’s income stream that lenders would be unwilling to finance the business risk. Therefore, buyers would need more equity invested, which would increase the discount rate.

• We estimated the increased discount rate by calculating a WACC for the subject assuming 10% equity financing.

Adjusted Book Value Method (Excess Earning)

• The factors impacting the negative effect on value included the following:

1. The value of the subject’s real estate would be lower in the “after” scenario because the subject would have an additional risk characteristic that is greater than the companies analyzed in the “but-for” analysis and,

2. Increased risk to the subject’s economic income.• Over the years Shenehon has been involved in numerous

assignments regarding the impact of contamination on real estate values. We compiled a database of 25 such environmental-affected transactions (majority in the MSP area).

• We determined the diminution from “unimpaired” value by environmental issues (for example: hydrocarbon contamination, natural gas/methane contamination, chemical contamination, and toxic metal contamination).

• We identified discounts from unimpaired value for natural gas/methane contamination ranging from 12% to 61% with a median of 14%. After further analysis, we estimated a 15% adjustment was appropriate in this case. This discount was applied to the subject’s fixed assets (land, building, plant equipment and office equipment).

Merger and Acquisition Methods• The value of the subject’s business would be lower in the “after” scenario

because the subject would have an additional risk characteristic that is greater than the companies analyzed in the “but-for” analysis.

• We calculated the “but-for” value using transaction data that was publicly reported on four salt producers. In addition, we used eight private transactions that were reported in Done Deal States (SIC 2899).

• In arriving at an “after” value we relied on the data base of 25 such environmental-affected transactions (majority in the MSP area) discussed earlier.

• We determined the diminution from “unimpaired” value by environmental issued (for example: hydrocarbon contamination, natural gas/methane contamination, chemical contamination, and toxic metal contamination).

• We identified discounts from unimpaired value for natural gas/methane contamination ranged from 12% t0 61% with a median of 14%. After further analysis, we estimated a 15% adjustment was appropriate in this case. This discount was applied to the subject’s fixed assets.

• We separately adjusted the salt reserves and goodwill multiples by 22% and 10% respectively.

Summary

UN-Fairness Opinion

Consulting firm (David) v. Big (Bad?) Investment Bank

(Goliath)Peter Butler


Fujitsu’s acquisition of Amdahl Valuation problem

12.00/share = fair price? Yes – Big (Bad?) Investment bank No – Small consulting firm

Amdahl Conversion from hardware/equipment (40%

of revenue) distributor to provider of computer information services and software (60%)

IT – faster growth; larger multiples

Why unfair? Financial analysis Relative valuation (Historical)

Blended 60/40 mix: $19.97 - $22.41 Price/sales; price/book

Relative valuation (forward-looking) Blended 60/40 mix: $16.95 Price/earning (future)

Acquisition premium 18.5% (5-days out) v. 45.61% (60/40 mix) 1.6% (day before) v. 45.61%

Amdahl recently traded as high as $13.375

Undue influence - “Googlewack” facts Fujitsu already 42% shareholder in Amdahl Fujitsu – major supplier to Amdahl Two companies shared research & development Fujitsu controlled at least 3 seats on Amdahl’s board of

directors Fujitsu had access to non-public information None of the other large Amdahl shareholders was even

consulted regarding the transaction before the announcement Prior to offer, Fujitsu acknowledged that it would not sell its

shares in the event of a competing bid Assurances from Fujitsu that current Amdahl management

would keep jobs Amdahl agreed to inform Fujitsu if there were other interested

parties

Analysts’ responses The $12 offer did not take into account the

future value of Amdahl’s growing software and services business.

When it looked like the company was on the brink of doing a lot better, it’s going to be Fujitsu that ends up making the real money.

Being in a position of major supplier and 42% shareholder allows Fujitsu to buy the company for $850 million, of which nearly half could be paid from Amdahl’s balance sheet.

Big (Bad?) Investment Bank “Un-Fairness Opinion”

Choice of comparable companies – suspect Low future growth expectations relative to

transformation of company and industry Used adjusted and worst case scenarios that

were between 20% - 80% below earning projections of Amdahl management

Amdahl management’s projections conservative based on street’s consensus

Only spoke with Fujitsu’s investment bankers

Fujitsu is also a client

Conclusions UNFAIR fairness opinion If you come up against big (Bad?)

investment bank – do not be intimidated

Chances are the shareholders’ best interests have not been accounted for

Engagement Type: Business Valuation

Client: 100% Shareholder of Company

Valuation Method: Discounted Cash Flow Model (DCF)

Numerator: Cash Flows to Total Invested Capital (TIC)

Denominator: Weighted Average Cost of Capital (WACC)

Capital Structure: Actual (calculated by iteration)

Value of Equity: TIC minus actual debt

The Case of the Disappearing DebtValuation or Lost Profits with Changing Assumptions

Keith Pinkerton2007 IBA National Conference

Engagement Type: Business Valuation


Valuation Method: DCF

Numerator: Cash Flows to TIC

Denominator: WACC

Capital Structure: Hypothetical

Value of Equity: TIC minus hypothesized debt

The Case of the Disappearing Debt

Engagement Type: Calculation of Lost Profits (Into Perpetuity)



Numerator: Cash Flows to TIC

Denominator: WACC

Capital Structure: Actual (calculated by iteration)

Value of Equity: TIC minus actual debt


Engagement Type: Calculation of Lost Profits (Into Perpetuity)



Numerator: Cash Flows TIC

Denominator: WACC

Capital Structure: Hypothetical

Value of Equity: TIC minus hypothesized debt


Key Points Start-up company. VC Funding 8/1/03, Val Date 1/1/04

Technology-based (Internet) company

Gross revenues from inception less than $500K

Litigated matter, opposing expert uses DCF to TIC

10-year DCF with imbedded Gordon Growth model

Employs a hypothetical 60/40 (d/e) capital structure

CoE = 22%, CoD = 4.2%, WACC = 14.9%

Initially subtracts no debt b/c “there is no debt” @ t=0 Later claims no debt subtract b/c it’s a lost profits

calculation, not a valuation



CASH FLOWS TO EQUITY CASH FLOWS TO & EQUITY DISCOUNT RATE TIC AND WACC

2000 2001 2002 Terminal 2000 2001 2002 Terminal

EBIT $19,000 $19,950 $20,948 $21,995 $19,000 $19,950 $20,948 $21,995Less Interest Expense $4,000 $4,200 $4,410 $4,631 $4,000 $4,200 $4,410 $4,631EBT $15,000 $15,750 $16,538 $17,364 $15,000 $15,750 $16,538 $17,364Less Income tax @ 40% $6,000 $6,300 $6,615 $6,946 $6,000 $6,300 $6,615 $6,946Net Income $9,000 $9,450 $9,923 $10,419 $9,000 $9,450 $9,923 $10,419

Adjustments for Cash FlowPlus Depreciation $9,000 $9,450 $9,923 $10,419 $9,000 $9,450 $9,923 $10,419Less CAPEX ($11,000) ($11,550) ($12,128) ($12,734) ($11,000) ($11,550) ($12,128) ($12,734)Less W/C ($1,000) ($1,050) ($1,103) ($1,158) ($1,000) ($1,050) ($1,103) ($1,158)Plus Interest, net of tax $0 $0 $0 $0 $2,400 $2,520 $2,646 $2,778Plus Inc. in Long Term Debt $2,000 $2,100 $2,205 $2,315 $0 $0 $0 $0

Cash Flow $8,000 $8,400 $8,820 $9,261 $8,400 $8,820 $9,261 $9,724

Discount rateEquity 25.0% 25.0%Debt (after tax) 6.0% 6.0%

Applicable Discount Rate 25.0% 15.5%

Sustainable Growth Rate 5.0% 5.0%Capitalization Rate 20.0% 10.5%

Undiscounted Terminal Value $46,305 $92,610

Present Value of Cash Flows $6,400 $5,376 $4,516 $23,708 $7,273 $6,612 $6,011 $60,105

Sum of Present Values $40,000 $80,000Less Debt $0 $40,000

Value of Equity $40,000 $40,000

This example is a partial re-production from Valuing A Business , by Pratt, et al, 4th Edition, pages 189-195

Difference: $873

Difference: $1,236

Go


2000 2001 2002 Terminal Total

Difference in PV of Cash Flows $873 $1,236 $1,495 $36,397 $40,000Percent of Total Difference 2.2% 3.1% 3.7% 91.0% 100.0%

Should some amount of debt be subtracted even in finite period of lost profits. . . when cash flow to total invested capital is the measure

of damages… and when the plaintiff group does not include creditors?

Application to Finite Cash Flow Stream

Appraising Appraising the“Googlewacks”the“Googlewacks”

2007 IBA National Symposium2007 IBA National Symposium

Masterminds Track IIMasterminds Track II

June 22, 2007June 22, 2007

Conrad Business Appraisers

KC Conrad


Unique Business Unique Business Valuations: Valuations:

Reining in that Final Reining in that Final ValueValue

Conrad Business Appraisers 2007 IBA National Conference

Valuation Problem:Valuation Problem:Customer Base Substantially – U.S. Government

Intelligence Community 39%

Department of Defense 61%

Subject produced “things” which are deployed or sent into the field.


Description of Business:Description of Business:

The Company’s Three Main Products:

- Software Engineering

- Electro-Mechanical Integration

- Prototyping Services(Commonly known as bending metal & writing code)


Description of Business:Description of Business:The Company provided critical system engineering and software engineering expertise for the development of advanced systems for the:

Intelligence Community

Department of Defense

Homeland Security


Description of Business:Description of Business:

These services where used for:

• Space Systems

• C4ISR

• Intelligence & Defense Community

Command, Control, Communications, Computer, Intelligence, Surveillance and Reconnaissance (C4ISR)


Obstacle:Obstacle:


did not hold the required

U.S. Government

Security Clearance


Problems to Solve:Problems to Solve:- What information would Subject provide (security issues) ?

- What economic factors affect the company?

- Who are their competitors?

- Availability of industry data?

- Potential pool of buyers?



Approach to Value 1:Approach to Value 1:


I formed negative questions during management’s interview:

• You probably do not provide services on a sub-contracting basis?

• The economy doesn’t affect the business you do for the government?

• All of your competitors a larger than you?

• They don’t do exactly what you do?

• You never had a problem getting employees through security clearance?

• Hypothetically speaking…?

Approach to Value 2:Approach to Value 2:

Searched : Lockheed Martin; Boeing; Raytheon; Honeywell; Northrop Grumman

Reviewed 10k’s: For similar type of services offered and outlook

Examined likely pool of potential buyers


Value Conclusion:Value Conclusion:Income Approach – MPDM

Market Approach – Guideline Company

$ 23,600,000.00$ 23,600,000.00


Appraising the Googlewacks

Brent McDade

2007 IBA National Symposium

Masterminds Track II

June 22, 2007

Beefy Brisket Chop Shop

• Valuation Date 10/31/2004

• Controlling Interest Basis

• Divorce


Historical Industry Conditions

• Recent history very attractive

• Low carb diets and realization that fat not all bad increasing domestic demand

• Lots of production along the Canadian border

• Canada a net exporter of cattle to be processed in the United States


Looming Concern: BSE

• Bovine Spongiform Encephalopathy

• Outbreak in UK in 1986

• Related to: – Scrapie in sheep and goats– Chronic Wasting Disease in deer and elk– FSE in cats– Variant Creutzfeldt-Jakob Disease (vCJD)

in humans


Mad Cow Disease

• Cause not known• Believed to be transmitted by eating infected

protein (prion)• Resistant to heat, UV light, radiation, normal

sterilization processes• Not destroyed by cooking• Transmitted by eating material infected with

prions• Back of mind concern until …


May 20, 2003

• BSE discovered in Alberta, Canada

• United States almost immediately bans importation of Canadian cattle and beef products

• Supply of cattle moves sharply to the left, increasing costs

• Company suffers from short supply of Canadian beef, but not nearly as much as plants further north

• Company in fixed price contracts, so profitability suffers a little

• Company begins selling some spot market cuts domestically

• U.S. beef product prices increase somewhat, as supply from Canadian processors eliminated


Fiscal Year Ending October 31, 2003• Industry rocked by BSE

• Cattle prices in the US skyrocket, particularly near the Canadian border

• Tyson, Smithfield, and other big players close plants

• The Company benefits from all this and has its most profitable year ever, driven by a large upswing in inventory valuation

• Location near Omaha allows the Company to access US cattle at prices lower than more distant plants

• Company successful in maximizing revenue per carcass with sales to Japan and Mexico

• By this time, oversupply of cattle in Canada has resulted in incentives to build processing capacity there – moves quickly, since age of cattle is a significant factor in quality (value) of cuts

• US begins importing Canadian boxed beef – but not Canadian cattle – in 8/03


If anything can go wrong, it will…

• In December of 2003, BSE is found in the U.S. herd

• Almost immediately, 40 countries close their borders to US beef products

• Ouch

• Company begins hurriedly refocusing its marketing efforts on domestic sales

– Requires operational changes, as cuts are somewhat different

– Inventory of cuts preferred by Europeans not very valuable

– Inventory of “parts” valuable in Mexico and Asia less than worthless, as brains go from product to hazardous waste

– New Canadian competitors ramping up production; Canadian cattle prices about 70% of cattle prices in US


Fiscal Year Ending October 31, 2004

• Company has its worst year in recent history, reflecting about 10 months of closed-border activity

• Margins down dramatically

• Despite record production and revenue, pretax income down well over 50% from 2003

• Pretax income about 60% of historical norm

• Company struggling to reinvent itself as a supplier to the US market


Valuation Date October 31, 2004

• October 21-23, 2004: Meetings between US and Japanese officials result in tremendous uncertainty about when, if ever, the Japanese border will reopen to US beef

• Australia has become the world’s largest exporter of beef products and the leading supplier to Japan

• Plants are continuing to close in the United States as the public companies shift their operations to other countries


Capitalization of Earnings

• Based ongoing earning power estimate on:

– Average 2004 adjusted pretax with historical normal pretax (2000 – 2002)

– Pre-BSE level of production x 2004 level of gross profit per head – assumes production rebounds but profitability based on current

• Used relatively low multiple due to high risk and little room for volume growth


Key Points Summary

• Admittedly simple valuation method despite complex business

• It was important to focus on the fundamentals of valuation throughout the process– What cash flows would the business generate going

forward?

– How risky are those cash flows?

– By how much would a reasonable investor expect them to grow?


Damages From an Alleged Wrongful Lease Termination

Renaissance Investment, Inc.

V.

U.S. Army Corps of Engineers, Little Rock District

Bill Herber


The Ugly Nature of Litigation

Were it not for judicial privilege and sovereign immunity, the government would be held liable for defamation for its closing argument. Its use of falsehoods, distortions, and exaggerations mixed with precious little truth are designed for one purpose: To generate unwarranted hatred and animosity towards Mr. Lehman and Mr. Ginther. In effect, the government has artfully weaved unreliable, inadmissable evidence with unwarranted inferences to recast two honorable and successful men into criminals. The challenge to the Board is to resist being seduced by the sophistic, but grossly unsupportable government arguments and examine the objective, uncontroverted facts of this case on the merits.

Renaissance v. United States

Appellant’s Opening ArgumentReply Brief, February 25, 1997

• Renaissance alleges the Corp of Engineers twice wrongfully terminated a long term lease.

• The commercial concession lease was for operation of an excursion boat and attendant facilities located on 11 acres of land at Table Rock Lake near Branson, Missouri.– The questions before the court was did the Corp of

Engineers unjustly terminate a long term lease.– If the lease was wrongfully terminated, what were the

damages or lost profits.

Case Summary

• November 2, 1997 – for non-payment of rent.

• September 19, 1989 – failure to provide minimum facilities.

• Renaissance Investment, Inc. sought damages of $43,782,828 plus interest of $5,980 per day from the date of breach.

Lease Revocation

• Signed: September 1, 1987• Landlord: Department of Army• Lessee: Originally Steve Lehman – transferred to Renaissance

Investment, Inc. • September 1, 1986 to September 31, 2011 25 Year term – no options.• Rental: Fixed – $3,500 annually, paid quarterly.• Graduated/%: 1.8% on all revenues.• Minimal Facilities Due:

- (1) 450 passenger Paddle Wheeler,$450,000; - (1) 15’ x 70’ Dock, $45,000;- (1) 200’ x 110’ Parking Area, $60,000- (1) 80’ x 30’ Building, $65,000;- Landscaping $20,000; - Lighting – 4 lot, 40 walkway, $10,000; Road Sign $22,000; Info Signs

(6) $1,000; - Utility Connections, $18,000

• After the second lease year, unless waived by the District Eng.– 5% of yearly gross income to be reinvested in park.

• No exclusive right for excursion boat operations.

Lease Summary

• Determine the lost profits for the riverboat project as envisioned by Renaissance Investments, Inc.

• Shenehon conducted a lost profit analysis subtracting the initial construction costs.

• Explaining to the court the difference between Evolutionary vs. Revolutionary Business Types.

• Why do Evolutionary Businesses have no “goodwill” value at the onset, but must develop it over time and therefore requires an operating history.

Purpose of the Analysis

• Had ability to complete project in a timely manner.

• Had capital in place to proceed.• Had competent management.• Based on plans for a dinner riverboat of

340 seats (which was much greater than originally planned.)

All of the above items were disputed at trial.

Assumptions by Renaissance Which Were Challenged in Court

• Determine proper methodology.• Study industry competition.• Completed supply and demand study.• Completed very detailed study of anticipated

revenue and expenses based on what was to be constructed.

• Completed detailed costs to build the anticipated project.

• Arrived at value damages by using DCF and subtracting costs to develop.

• Compared our Pro-forma to Renaissance Pro-forma, outline differences.

Outline of Project

Renaissance Vision

Present Value – Shenehon Analysis

• The appeal was denied in all aspects.

– Off the record, $600,000 was offered to Renaissance in settlement of all claims.

Case Results

• Studied ability to perform financially. Looked at individuals and corporation and whether they could get money to build.

• Studied feasibility of project.– Cost to build.– Review Plans and documents.

• Additional Research– Became an expert in tourism projections

• How to secure funding.• Building a vessel.• Getting all approvals.• Assemble a management team.• Provide a factual foundation for the court.

• Learned how to build a case.

Unique Aspects of Case

Appraising the “Googlewacks”

Institute of Business Appraisers

2007 National Symposium


June 22, 2007

Daniel R. Van Vleet, ASA, CBAManaging DirectorDuff & Phelps, LLC

(312) [email protected]

Valuation Problem

• Executive Options Issued in 1998

• Executive Terminated in 1998 & Attempted Exercise in 1999 3 Months Prior to IPO– Company Refused and Executive Sued– Right to Exercise Upheld in Proceedings– Relatively Small Equity Position

• Issue: FMV of Stock as of 1999– Determination of Damages

• FMV Minus Strike Price Equals Damages

Description of Subject Company

• Dot-Com in Financial Services Sector

• Started in 1997 with Minimal Capital

• S-1 Registration Statement Filed as of VD

• Several Rounds of Venture Capital Funding– Convertible Preferred Voting Securities

• Significant Cash Burn Rate

• Valuation Date 3 Months Prior to IPO– Several Hurdles Remained

• IPO or Die Trying

Financial Characteristics

• From Inception to Valuation Date– $5 Million in Revenues– $20 Million in Operational Losses

• As of Valuation Date– $50 Million in Cash and $45 Million in Equity– $75 Million in Convertible Preferred Equity– Multiple Pre S-1 Transactions with VC Firms– Complex Capital Structure - Options & Warrants– Three Years of Projections

• Cash Flow Positive in the Third Year

Guideline Public Company Method

• Identified 10 Guideline Public Companies– Industry not an Important Characteristic– Sales less than $50 million– In Business as a Result of the Internet

• Developed Revenue Multiples– All Guideline Companies Reported Losses– Revenue Multiples Ranged from 20 to 120– Used Average and Median Multiples– Assumed Conversion of Preferred Stock

• Applied a DLOM

Guideline Transaction Method

• Identified 700 S-1 Filings During 1998

• Narrowed the List– Industry not a Prominent Concern– Less than $50 Million in Revenues– In Business as a Result of the Internet– Not Public as of the Valuation Date– Eliminated Pass-through’s and Banks– Focused on Service Companies– Availability of Pre-IPO Arms Length Transactions

• Transactions Occurred Within 5 Months of IPO

Guideline Transaction Method

• Identified Transactions– Disclosed in “Recent Sales of Unregistered

Securities” Item No. 15 in S-1

• Developed Revenue Multiples– All Companies Reported Operating Losses– Multiples Ranged from 6 to 60– No Statistical Relationships– Used the Average and Median Multiples

• No DLOM Applied– Transactions Involved Private Securities

Discounted Cash Flow Method

• Private Placement Memorandum Projections– 2 Years of Losses and 1 Year of Profits– Extended Projections by 5 Years– Started at Terminal Year and Worked Backwards– Scaled Back PPM Revenue Growth Projections– Used Standard Equity Rate Analysis

• D&P and Ibbotson

• CF Adjustments for WC, Dep. and Cap. Ex.

• Applied a DLOM

Discount for Lack of Marketability

• Willamette Pre-IPO Studies• John D. Emory Studies

– Dot-Com Studies for 1997 Through 2000• 53 Transactions Averaged 54%

– Dated Transactions Prior to IPO• 0-30 Days – 30% 91-120 Days – 49%

• IPO/VC Academic Studies – 1987-2000– 50% Remain Private– 20% are Acquired– 9% Fail– 21% go IPO

Key Points Summary

• The “Dot-Com” Era

• Historical Losses and Cash Burn Rates

• Projected Financials

• Shares Outstanding Used in the Analysis

• FMV and Pre-IPO Transactions

• Failed IPO’s and Post IPO Performance

• Pre-IPO DLOM Studies

• The SEC and “Cheap Stock” Issues

• Rule 144 and 6 Month “Lock-up” Period

No Financial StatementsPRESENTED BY ERNEST E. DUTCHER, MCBA

NATIONAL BUSINESS APPRAISERS, LLC

2007 IBA National Symposium


June 22, 2007


Unique Business Valuations: Reining in that Final Value

This Medical Practice case study is presented as follows:

Valuation Problem

Description of the Subject Business

Approaches Used in the Valuation

Value Conclusion

No Financial Statements

Subject Business29 DOCTOR “MEDICAL GROUP WITHOUT WALLS”

• Valuation problem – Individual practice financial data not available for all practices or IPA due to 10-year time lapse.

• Description of the business – A 29 doctor multi-specialty “group without walls” who’s practice area covered about 22 separate business locations in Davis (East Sacramento), California. Doctors had formed an Independent Practice Association (IPA) to handle billing, HMO contract negoti-ations, etc. The IPA negotiated a sale of the Group to a 503 (c) (3) not-for-profit medical foundation.


Subject BusinessTables Referenced Below From Actual Report

• Approach to Value #1 - Appraiser had appraised a multi-specialty 29-doctor medical group in a nearby city in the San Francisco to Sacramento corridor. These historical income statements (Table B) were used to establish a foundation for the average expense percentages as related to net revenues and expenses (Table B-1) to apply to certain known factors in the Subject Group (Table B), resulting in an estimate of the various income and expense items for a pro-forma income statement. (Table C).


Subject Business Tables Referenced Below From Actual Report

• Approach to Value #2 – A series of tables were prepared to evaluate the real and estimated production expectation of each of the 29 physician partners plus 6 additional hired physicians in the IPA. Production estimates were prepared from the data found in Medical Group Management Study (Physician Compensation and Production Survey: 1994 Report Based on 1993 Data.

• Tables D, D-1, D-2 and D-3 reflect the adjusted estimates the 9 specialties represented in the IPA, used in Table C.


Subject Business Tables Referenced Below From Actual Report

• Approach to Value #3 – The following methods were used in this valuation: Income Approach (Table E), Excess Earnings Approach ( Table G), Market Approach (Table I) and Cost Approach (Table O). The results of these approaches were weighted and the Conclusion of Market Values are presented in Table J. The value of the donated assets shown in Partners 1994 Tax Returns was $1,632,377. These assets were valued at $2,515,255 by NBA, or about 54% higher that claimed on Partners returns.


Subject Business

• Value Conclusion: Value of contributed “good-will” of about $1.632 million claimed on tax returns but reduced to $100,000 by the IRS. Interest and penalties on the over $1.5 million disclaimed amount, reflected a growing tax liability of over $3 million.

Value of contributed goodwill estimated at $2.5 million by the NBA appraisal upheld in U.S. Tax Court with the concession by the IRS on Value issues. Amendments utilizing the higher values are contemplated by Partners, as well as litigation expenses.


Key Points Summarya. Lack of actual financial data will not

necessarily invalidate a report.b. Identify all possible sources of data used. It

will be asked on cross-exam.c. Keep final analysis as simple as possible. It

will be appreciated by the Court. (Table A)d. Do not be intimidated by the IRS. They are as human as we are.e. The pay is good.


ASSIGNMENT:

Partial Fee SimpleInterest in a Rail Corridor

Bob Strachota


NorthStar Corridor in Minneapolis, Minnesota

Value of 12Train Tripsper Day of43 minutes each through this primaryBurlingtonNorthern Two RailCorridor

Corridor appraisers, mainly working for major railroads, articulated four possible

methods for Valuation of Corridors:

•Across-the-Fence value (ATF)•Liquidation Value (discounted ATF)•Subjective Percentage Replacement Methods Replacement Cost)•Value as a Linear Corridor (Income Approach)

Problem #1: No Established Method for Income ApproachAppraisal of a fee simple partial interest

Answer: Use Applicable Business Valuation AND RealEstate Valuation Principles

Problem #2: Neither Burlington Northern nor the Northstar Committee could provide us with Information

Answer: Use Available Data - Burlington Northern is a Public Company and Department of Transportation Provides Detailed Data pertaining to Cargo Hauled on Rail Corridors.

Example: Weightof Carloads from theDOT

Step 1: Corridor Capacity Calculation

Length of the Corridor (40 miles x two rails) 80Miles Legal, Northstar Committee

Capacity of Freight Trains per Day Two Rails 82Trains Capacity Study for Northstar

Rail Cars per day* 8,200Rail Cars U.S. DOT (100 cars per train)Annual rail Cars Capacity 2,993,000Rail Cars

Average Weight of Rail Car Haul 70Tons U.S. Bureau of Transport StatisticsBNSF 2005 10K, 2006 10Q

Ton Mile Capacity Calculation (annual) Tons per Rail Car X Rail Cars X Miles 16,868,778,231Ton-Miles

How We Did It

Step 2: Projection of Revenues and EBITDA including per Ton-MileSource

Total Revenues - 2006 $14,515,047,500 BNSF 2006 10Q, Value Line

Revenue Ton Miles* 626,403,750,000Ton/Miles BNSF 2005 10K, 2006 10QRevenue per Ton Mile $0.0232 Revenues/TonMiles

Projected EBITDA Margin 30.6% BNSF 2005 10K, 2006 10Q

Average Length of a Haul 1,068Miles BNSF 2005 10K

Total Annual Cars Delivered 10,400,000Cars BNSF 2006 2nd quarter 10QRevenues per Car Delivered $1,396EBITDA per Car Delivered $427

Ton Miles per Rail Car (Annual) 60,231 Ton/Miles per Car

Route Miles 24,000Miles BNSF 2005 10K

* Defined as loaded miles traveled times weight of contents

How We Did It

Step 3: Estimate the Potential Revenues and EBITDA for the Subject

Ton Mile Capacity Calculation (annual) Tons per Rail Car X Rail Cars X miles 16,868,778,231 TonMiles

Revenues per Ton-Mile $0.0232 BNSF 2005 10K, 2006 10Q

Revenue Potential at Capacityfor Subject Rail Corridor $390,883,863 TonMiles times Price per TonMile

Percent EBITDA 30.6% BNSF 2006 10Q EBITDA, Value Line

EBITDA Potential at Capacity Utilizationfor the Northstar Corridor $119,545,860

Step 4 - Develop a Price to Earnings Ratio from the Public Market

EBITDA Potential at Capacity Utilizationfor the Northstar Corridor $119,545,860

Market Value of BNSF as of Valuation Date $26,739,174,000 Public Markets, average 3Q trailing

2006 EBITDA for BNSF Railroad $4,439,205,622 BNSF 2006 10Q EBITDA, Value Line

Price to EBITDA (from market stock price) 6.02

Market Value of 100% North Star Corridor $719,886,421

How We Did It

Step 5 - Estimate the Total Utilization of the Corridor by the Easement Acquisition

Market Value of 100% Corridor $719,886,421

Allocation of Corridor to Commuter Rail 15.4%

$110,553,986Rounded To Rounded To

$110,600,000

How We Did It

Date post:	15-Jan-2016
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Salt Evaporation Plant

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