AN INTRODUCTION TO PRIVATE BUSINESS VALUATION. Chris Toye, MBA, CFA, CFP CGA

Transcription

1 AN INTRODUCTION TO PRIVATE BUSINESS VALUATION Chris Toye, MBA, CFA, CFP CGA

2 WHEN IS A VALUATION REQUIRED? Estate Planning Transactions Structuring shareholder agreements/disputes Business reorganizations Marital disputes Employee share ownership plans/stock options Mergers, acquisitions and divestitures Expropriation Going public/going private transactions

3 WHAT IS FAIR MARKET VALUE? The highest price available in an open and unrestricted market between prudent and informed parties, acting at arm s length and under no compulsion to act, expressed in terms of cash or cash equivalents

4 PUBLIC VERSUS PRIVATE VALUATION Information and Analysis Size Liquidity Volatility

5 THE PRINCIPLES OF VALUATION Value is determined at a specific point in time and incorporates facts known at that time and forecasts made at that point Value is Prospective. It is equal to the present value of all benefits anticipated The market dictates the appropriate rate of return The higher the underlying net tangible asset value, the higher the going-concern value Value has two components: Commercial or transferable value Non-commercial or non-transferable value Value is influenced by liquidity The value of a minority interest may be less than the value of a controlling interest

6 SPECIAL INTEREST PURCHASERS The quantum of economic benefit derived Risk of achieving the benefit Number of Special Interest Purchasers

7 VALUATION TECHNIQUES Asset based techniques Earning/Cash Flow based approaches

8 CASE STUDY BLUENOSE BREWERIES LTD. One owner 100% of equity Retiring No family to assume the company

9 CASE STUDY BLUENOSE BREWERIES LTD. Balance Sheet As of March 31, 2009 Assets ($000s) Liabilities and Net Worth ($000s) Current Assets Current Liabilities Cash $ 300 Accounts Payable $ 200 Accounts Receivable 600 Inventory 2,000 Long Term Assets Long Term Liabilities Property, Plant & Equipment 5,000 6% Bonds due March 31, ,000 Land 500 Shareholder s Equity Common Shares 1,000 (1,000,000, no-par value) Retained Earnings 5,200 Total Assets $8,400 Quick Ratio = $900,000 = 4.5:1 $200,000 Debt/Equity = $2,200,000 =.35:1 $6,200,000 Total Liabilities & Shareholder s Equity $8,400

10 CASE STUDY BLUENOSE BREWERIES LTD. Balance Sheet As of March 31, 2009 Assets ($000s) Liabilities and Net Worth ($000s) Current Assets Current Liabilities Cash $ 100 Accounts Payable $ 200 Accounts Receivable 300 Inventory 2,000 Long Term Assets Long Term Liabilities Property, Plant & Equipment 5,000 6% Bonds due March 31, ,200 Total Assets $7,400 Shareholder s Equity Common Shares 1,000 (1,000,000, no-par value) Retained Earnings 2,000 Total Liabilities & Shareholder s Equity $7,400 Quick Ratio = $400,000 = 2:1 $200,000 Debt/Equity = $4,400,000 = 1.47:1 $3,000,000

11 AMOUNT AVAILABLE FOR WITHDRAWAL Redundant Asset Land ACB = $500,000 FMV = $1,000,000 Capital Gain = $500,000 Taxable Capital Gain = $250,000 40% = $100,000 Net = $900,000 Equity Withdrawal = $3,200,000 Total Withdrawal = $4,100,000

12 CASE STUDY BLUENOSE BREWERIES LTD. Income Statement Year Ending March 31, 2009 ($000s) Revenue Sales $8,000 Cost of Goods Sold 3,000 Gross Margin 5,000 Expenses Administration 200 Salaries/wages 500 Marketing 200 Insurance 100 Depreciation 800 Interest 120 Pre-Tax Income 3,080 Tax 1,000 Net Income 2,080

13 EBIT-DA (Earnings Before Interest, Taxes, Depreciation/Amortization) Net Income = $2,080,000 Plus Taxes = $1,000,000 Plus Depreciation = $800,000 Plus Interest = $120,000 Equals: $4,000,000 Range = $3,500,000 to $4,500,000

14 ANNUAL REINVESTMENT NET OF THE TAX SHIELD Annual Reinvestment Required $600,000 Tax Shield = (UCC x T x CCA) x (1 + (.5 x R)) (R+CCA) (1 + R) = $600,000 x 30% x 15% x (1 + (.5 x 12%)) (12% + 15%) (1 + 12%) = $100,000 x 0.95 = $95,000 Net annual investment = $505,000 Range = $475,000 to $535,000

15 THE DISCOUNT RATE (MULTIPLIER) Base (Risk Free Rate) Return + Risk Return + Growth Factor Base Rate = Long Term Government Bond Rate = 5% Risk Factors Tangible Asset Backing External Risks (Competition) Internal Risks = 10% Growth Factor = Assume constant cash flow Inflation = Assume constant 2.5% = (15% - 2.5%)/( %) Return on Unlevered Equity (Ku) = 12%

16 WEIGHTED AVERAGE COST OF CAPITAL (WACC) WACC = Unlevered Return on Equity or Ku X (1 - TXD) (D+E) WACC = 12% (1 30% x $4,400,000) $7,400,000 = 10% Range = 9% to 11% Multiplier = 11.1X to 9.1X

17 VALUATION ESTIMATE Low High Maintainable Cash Flow $3,500,000 $4,500,000 Less Income Tax ($1,000,000) ($1,300,000) Equals Operating Cash Flow $2,500,000 $3,200,000 Less Capital Reinvestment Net of Tax Shield ($475,000) ($535,000) Equals Maintainable Cash Flow $2,025,000 $2,665,000 Divided by WACC 9% (or multiplied by 11.1) 11% (or multiplied by 9.1) Equals Capitalized Discretionary Cash Flow $22,477,500 $24,251,500 Plus Realizable Value of Redundant Assets $900,000 $900,000 Plus Capital Withdrawals $3,200,000 $3,200,000 Minus Interest Bearing Debt ($4,400,000) ($4,400,000) Equals Fair Market Value of Equity $22,177,500 $23,951,500

18 ASSETS OR SHARES? Vendor Usually Prefers a Share Sale Capital Gains (Losses) Possible deferral CGE of up to $750,000 Purchaser Usually Prefers an Asset Sale Step up of UCC Purchases only assets and assumes only liabilities wanted