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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 216.566.9000. Introduction.

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Business Valuation Issues

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business valuation issues

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


  • 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.

Where to Find Us


1799 Akron-Peninsula Rd. #222

Akron, OH 44313

(330) 701-0128


1215 Superior Avenue, Suite 400

Cleveland, OH 44114

(216) 566-9000

Sheffield Village

5050 Waterford Drive

Sheffield Village, OH 44035

(440) 934-3850


1616 Sycamore Line

Sandusky, OH 44870

(419) 627-2770


48 Executive Drive

Norwalk, OH 44857

(419) 668-8296

Estate and Gift Tax Planning

Buy Sell Agreements

Succession Planning

Family Limited Partnerships


Mergers and Acquisitions

Intangible Asset Valuation

Financial Modeling

Buyer/Seller Due Diligence

ESOP Feasibility Study

Appraisal Review

Appraisal Consulting

Raising Capital / Re-Capitalization



Business & Strategic Planning/Budgeting/Forecasting

Capital Budgeting

Debt Restructuring

Obtaining Financing

Business Valuation

Litigation Support

Forensic Accounting

Corporate Finance

some questions raised
Some Questions Raised...
  • What should an ESOP Trustee look for in an appraiser?
  • What is a business valuation?
  • What creates value in the ESOP sponsoring company?
organizations credentials
Organizations & Credentials

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
number of professionals
Number of Professionals

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

what is a business valuation
What Is a Business Valuation?
  • 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
valuations have multiple uses
Valuations Have Multiple Uses

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

the valuation process
The Valuation Process
  • 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
minority vs control interest impact on value
Minority vs. Control InterestImpact on Value


  • Ohio 2/3 ownership or
  • Greater than 50% voting or
  • As defined in a shareholder agreement
  • Large enough block to control mgmt. decisions


  • Discounted value
  • No individual ability to affect mgmt. decisions
levels of value

Synergistic (Strategic) Value

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
standards of value
Standards of Value


  • Fair Market Value - hypothetical willing buyer/seller, refer to Rev Ruling 59-60
  • Investment Value
  • Strategic Value
  • Fair Value
irs revenue ruling 59 60 set the guidelines for valuing private interests
IRS Revenue Ruling 59-60Set 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.”

irs revenue ruling 59 60
IRS Revenue Ruling 59-60

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
dol requirements
DOL Requirements
  • 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
two key drivers
Two Key Drivers
  • Future Cash Flow Available to Shareholders
  • Volatility or Risk Associated with Future Cash Flow
factors that drive value
Factors that Drive Value
  • Internal Factors:



  • External Factors:

Economic climate

factors that drive value total invested capital
Factors that Drive Value Total Invested Capital
  • After initial valuation stock price may decline if leveraged
  • As debt is repaid, stock price increases
how is a business valued
How is a Business Valued?



Value is based upon….

Estimated future profitability (cash flow)

Discounted Cash Flow


Capitalized Earnings


Historical profitability/ (cash flow)

Private company transactions involving similar businesses

Comparable Sale


Guideline Company


Public company stock prices


Adjusted Net Assets

Appraisal of hard assets

discounts and premiums
Discounts and Premiums
  • Minority discount
  • Control premium
  • Lack of marketability
  • Key person discount
  • Blockage discount
what goes into our work
What goes into our work?


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)


External Resources

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

CPA Associates International

Association of Certified Fraud Examiners

what information do we need
What Information Do We Need?

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
valuation process timeline
Valuation Process Timeline

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

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