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Step by Step Process for Selling Your Business to Your Employees. Business Valuation Issues. 20 th Annual OEOC Conference - April 21, 2006 Rosanne J. Aumiller, CPA/ABV, ASA [email protected] 216.566.9000. Introduction.

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Business valuation issues l.jpg

Step by Step Process for Selling Your Business to Your Employees

Business Valuation Issues

20th Annual OEOC Conference - April 21, 2006

Rosanne J. Aumiller, CPA/ABV, ASA

[email protected]

216.566.9000


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Introduction Employees

  • Barnes Wendling has served Northern Ohio’s closely-held businesses since 1946.

  • Our core clients are privately owned middle market companies.

  • We consider confidentiality, independence, senior level involvement, integrity, & relationship building to be critical success factors.


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Where to Find Us Employees

Akron

1799 Akron-Peninsula Rd. #222

Akron, OH 44313

(330) 701-0128

Cleveland

1215 Superior Avenue, Suite 400

Cleveland, OH 44114

(216) 566-9000

Sheffield Village

5050 Waterford Drive

Sheffield Village, OH 44035

(440) 934-3850

Sandusky

1616 Sycamore Line

Sandusky, OH 44870

(419) 627-2770

Norwalk

48 Executive Drive

Norwalk, OH 44857

(419) 668-8296

www.barneswendling.com


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Estate and Gift Tax Planning Employees

Buy Sell Agreements

Succession Planning

Family Limited Partnerships

ESOPS

Mergers and Acquisitions

Intangible Asset Valuation

Financial Modeling

Buyer/Seller Due Diligence

ESOP Feasibility Study

Appraisal Review

Appraisal Consulting

Raising Capital / Re-Capitalization

Acquisitions

Divestitures

Business & Strategic Planning/Budgeting/Forecasting

Capital Budgeting

Debt Restructuring

Obtaining Financing

Business Valuation

Litigation Support

Forensic Accounting

Corporate Finance


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Some Questions Raised... Employees

  • What should an ESOP Trustee look for in an appraiser?

  • What is a business valuation?

  • What creates value in the ESOP sponsoring company?


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Organizations & Credentials Employees

American Society of Appraisers

  • ASA Accredited Senior Appraiser

    American Institute of CPAs

  • ABV Accredited in Business Valuations

    National Association of Certified Valuation Analysts

  • CVA Certified Valuation Analyst

    Institute of Business Appraisers

  • CBA Certified Business Appraiser


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Number of Professionals Employees

American Society of Appraisers - 2,313 Accredited Members

American Institute of CPAs - 1,701 ABV Holders

Nat’l Assoc. Cert. Val. Analysts – 4,800 CVA Designees

Institute of Business Appraisers – 465 CBAs

It Boils Down to A Relatively Small Number

Source: Borrowman Baker


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What Is a Business Valuation? Employees

  • Product

    • comprehensive written report

    • gives the reader a logical, supportable value conclusion

    • company history, products/services, personnel, markets, economy, analysis, conclusion

  • Service

    • key is client should understand content


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Valuations Have Multiple Uses Employees

XYZ Company may have different “values” depending on the “level of value” and the “standard of value”


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The Valuation Process Employees

  • Identify

    • Purpose – ESOP transaction or annual update

    • Level of Value - control or minority

    • Standard of Value - fair market value

    • Date of Valuation

    • Key Issues – adjust owners' comp; leverage


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Minority vs. Control Interest EmployeesImpact on Value

Control

  • Ohio 2/3 ownership or

  • Greater than 50% voting or

  • As defined in a shareholder agreement

  • Large enough block to control mgmt. decisions

    Minority

  • Discounted value

  • No individual ability to affect mgmt. decisions


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Synergistic (Strategic) Value Employees

Controlling Interest Value

Minority Discount

Control Premium

{

Marketable Minority Interest Value - as if freely traded on an active public market

Discount for Lack of Marketability

Non-marketable Minority Interest

Levels of Value


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Standards of Value Employees

ALL ASSUME CASH EQUIVALVENT VALUE

  • Fair Market Value - hypothetical willing buyer/seller, refer to Rev Ruling 59-60

  • Investment Value

  • Strategic Value

  • Fair Value


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IRS Revenue Ruling 59-60 EmployeesSet the guidelines for valuing private interests

Fair Market Value

“The amount at which property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”


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IRS Revenue Ruling 59-60 Employees

Eight factors to consider:

  • Nature of the business & history

  • Economic & industry outlook

  • Book value of stock & co. financial condition

  • Earning capacity

  • Dividend paying capacity

  • Intangible value - goodwill or other

  • Sales of stock and size of block

  • Market price of similar public stocks


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DOL Requirements Employees

  • ESOP cannot over pay for stock – adequate consideration

  • FMV as of transaction date

  • Utilize qualified valuator as professional advisor to the trustee

  • Valuator – independent of ESOP, Company & selling shareholder(s)

  • Similar to IRS Revenue Ruling 59-60


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Two Key Drivers Employees

  • Future Cash Flow Available to Shareholders

  • Volatility or Risk Associated with Future Cash Flow


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Factors that Drive Value Employees

  • Internal Factors:

    Quantitative

    Qualitative

  • External Factors:

    Economic climate


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Factors that Drive Value EmployeesTotal Invested Capital

  • After initial valuation stock price may decline if leveraged

  • As debt is repaid, stock price increases


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How is a Business Valued? Employees

Approach

Method

Value is based upon….

Estimated future profitability (cash flow)

Discounted Cash Flow

or

Capitalized Earnings

INCOME

Historical profitability/ (cash flow)

Private company transactions involving similar businesses

Comparable Sale

or

Guideline Company

MARKET

Public company stock prices

ASSET

Adjusted Net Assets

Appraisal of hard assets


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Discounts and Premiums Employees

  • Minority discount

  • Control premium

  • Lack of marketability

  • Key person discount

  • Blockage discount



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What goes into our work? Employees

THE KNOWLEDGE AND EXPERIENCE OF BW’s CONSULTING PROFESSIONALS

Industry Data

Research Insight (Standard &Poor's Public Company Data)

Partnership Profiles (Database of limited partnership transactions)

Pratt's Stats Database (Private company transactions)

FactSet Mergerstat Transaction Data

Various trade and industry publications

Unique Resources

BW’s Proprietary Internal Database (Given the number of engagements we have completed, we have a huge body of valuation data)

ScanUS (Mapping software used to graphically display relevant data can be a powerful analysis tool)

WELL-RESEARCHED, DEFENDABLE RESULTS & OPINIONS

External Resources

Financial Consulting Group (Access to the knowledge of hundreds of valuation professionals)

CPA Associates International

Association of Certified Fraud Examiners


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What Information Do We Need? Employees

Financial & Operational Data

  • Capital expenditures over the last 5 years and plans for the future

  • Distributions/dividends paid

  • Industry data the company may receive as part of a trade group

  • Sales by product line

  • Summary of employees by function, organizational chart, terms of labor contracts if applicable

  • Owners compensation for last 5 years

  • Complete document request will be provided

  • Five years of financials and tax returns

  • Business plan or budget for next 1 to 5 years

  • Shareholder agreements

  • Fixed asset/depreciation schedules

  • Terms of debt

  • Terms of capital and operating leases

  • Identify competitors

  • Management structure


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Valuation Process Timeline Employees

Data Request – List to Client

Analyze Financials/ Operational Data

Site Visit and Interview

Apply Valuation Methods

Client gathers data

Present Final Report to Client

Final MSDP

Week 1

Week 2

Week 3

Week 4

Draft Report

Identify Key Issues

Research Comparable Transaction Data


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Conclusion Employees

  • Challenge - to balance objectivity with providing a reasonable value range to meet client’s needs

  • Questions?

  • Thank you


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