FAIR MARKET VALUE APPRAISAL

Transcription

1 FAIR MARKET VALUE APPRAISAL Subject Company: ABC Company Subject Interests: 100% interest of the common stock of ABC Company, Inc. Date of Appraisal: December 31, 2013 Date of Report: March 1, 2014

2 DISCLOSURE & DISCLAIMER Green Country Business Valuations, LLC, makes this Sample Report available to any reader under the following disclaimer. It should be read carefully as it contains the context in which this Sample Report is provided and the terms and conditions under which the reader has access to its content. Terms and Conditions of Disclaimer 1) No Warranty Implied or Expressed. This Sample Report is intended to illustrate appraisal practice as it pertains to application of business appraisal and valuation methodology, report drafting, report organization and structure, and is intended to serve as an example of the quality of, Green Country Business Valuations, LLC s work product and nothing more. This Sample Report is believed by the authors to depict good appraisal practice, but no warranty of this is made. Readers are admonished to perform their own due diligence in determining whether any of our work is appropriate for their specific needs. 2) Subject and Facts Hypothetical. The company that is the subject of this appraisal is hypothetical, and any resemblance to any actual business or person is coincidental. The facts and circumstances of the appraisal reported here are hypothetical. Facts relied on by the valuator, such as industry data, economic conditions, references, publications, sources, government documents, studies, or other items may also be hypothetical, and have been included here merely to illustrate the use of such material. Valuation metrics disclosed in this Sample Report, Including but not limited to risk premia, capitalization rates or discount rates, weights given to value indications, and adjustments for liquidity and control (if used) are applicable only to the subject of the appraisal in this Sample Report and no other. In particular all of these variables should not under any circumstances be generalized to apply to other actual companies or other appraisal assignments. 3) Release of Liability and Waiver of all rights to Recovery. By reading this report the Reader agrees to the terms set forth below.

3 a. Recitals. Green Country Business Valuations, LLC, and Authors agree to make the attached Sample Report available to the Reader under the following terms of conditions. Reader acknowledges that it agrees to these terms by the act of reading this Sample Report, and by reading the Sample Report acknowledges that it had read and agreed to every term herein. b. Green Country Business Valuations, LLC, makes No Warranty. Though Green Country Business Valuations, LLC, Authors may represent that these reports are intended to depict good appraisal practice, it makes no warranty whatsoever that they actually do so. c. Disclosure and Reproduction Prohibited. Green Country Business Valuations, LLC, and Authors stress that this report is not boilerplate, and that Reader should not copy or reproduce the report as Reader s own work product. Such reproduction and representation of the reports as Reader s own work product would be in violation of the copyright held by Authors and Green Country Business Valuations, LLC, and would not constitute good appraisal practice. In the event of such usage by Reader, Reader agrees to save, defend, hold harmless, and indemnify Green Country Business Valuations, LLC, authors from any damages, costs or legal fees for which they may become liable as a result of Reader s actions. d. Release of Liability. In consideration for its access to the report, Reader agrees to release Green Country Business Valuations, LLC authors from all liability whatsoever to them, their shareholders, owners, investors, principles, agents, assignees, and successors which could arise from Reader s review or use of the Sample Report, or other information contained therein. e. Jurisdiction. Any disputes arising from this agreement will be adjudicated in the Jurisdiction that Green Country Business Valuations, LLC, in its sole discretion selects.

4 ABC Company, Inc. CONFIDENTIAL INFORMATION 2014, Green Country Business Valuations, LLC All rights reserved. No part of this work may be reproduced or used in any form or by any means graphic, electronic, or mechanical, Including photocopying, recording, taping, or information storage and retrieval systems without prior written permission of Green Country Business Valuations, LLC. Copyright violations will be prosecuted to the fullest extent of the law. DO NOT PHOTOCOPY ANY PORTION OF THIS REPORT! For further information contact: 9524 E. 81 st St. Ste. 1504B Tulsa, OK

5 ABC Company, Inc. Executive Summary The opinion of value as expressed in this executive summary can only be fully understood after reading the accompanying appraisal report and reviewing the sources of information relied upon, the supporting documentation and the underlying assumptions and limiting conditions. Subject of Appraisal: ABC Company, Inc. Nature and Purpose: This business valuation assignment is designed to determine the fair market value on a going concern basis of 100% interest of ABC Company, Inc. This report has been prepared solely for the use of Anywhere Bank in order to comply with the requirements of the Small Business Administration s S.O.P (G). Any opinions or estimates of value presented and discussed in this report applies to this appraisal assignment only and may not be used out of the context presented herein. Any other use of this report may lead the user to an incorrect conclusion for which the preparer of this report can assume no responsibility. Date of Appraisal: The subject interests were appraised as of December 31, Subject Property Overview: ABC Company, Inc. is a plumbing contracting company based in Tulsa, Oklahoma. Founded in 1996, ABC COMPANY, INC. serves both residential and commercial customers in the general construction. The following table highlights the financial performance of the Company:

6 Figure 1 ABC Company, Inc. Historical Performance (As Reported) 12/31/ /31/ /31/ /31/ /31/2009 Sales $ 7,295, % $ 6,489, % $ 5,755, % $ 4,156, % $ 3,529, % Total Operating Expenses $ 5,769, % $ 5,067, % $ 4,499, % $ 3,401, % $ 2,866, % OPERATING INCOME $ 1,526, % $ 1,422, % $ 1,256, % $ 755, % $ 663, % OTHER INCOME Other Income/(Expense) $ 84, % $ 67, % $ 53, % $ 31, % $ 22, % EARNINGS BEFORE TAX $ 1,610, % $ 1,489, % $ 1,309, % $ 786, % $ 685, % Valuation Methods: The valuator used standard valuation procedures, methodology, and approaches as described more fully herein in order to determine the fair market value of the subject property. Specifically, the valuator relied upon Company supplied information, independent research, the accompanying analysis integrated with the Direct Market Data Method under the Market Approach; the Single Period Capitalization Method under the Income Approach; and the Adjusted Book Value Method Including Excess Earnings under the Asset Based Approach to determine the fair market value of the subject interests. Opinion of Value: Based on the facts and analysis contained in this report, the fair market value of a 100% interest in the issued and outstanding common shares of stock in ABC Company, Inc. on a non control (minority interest), non marketable basis is $6,800,000. This executive summary is an inseparable part of this valuation report and both are subject to the Statement of Assumptions and Limiting Conditions found in Section 6.0 of this report, which is an integral part of understanding the results of the analysis presented in the report. Green Country Business Valuations, LLC, L.L.C. Lance LeBlanc

7 Valuator s Certification and Opinion of Value Opinion of Value: In the opinion of the undersigned valuator, using accepted methods of valuation, and subject to the assumptions and limiting conditions incorporated herein, the Fair Market Value of the subject property, comprising a 100% interest in the issued and outstanding common stock of ABC Company, Inc. on a non control, non marketable basis as of December 31, 2013 is: Valuator s Certification: $6,800,000 (Six Million Eight Hundred Thousand Dollars) 1. The statements of fact expressed herein are true and correct to the best of the valuator s knowledge and belief. 2. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and is the valuator s personal, impartial, unbiased professional analyses, opinions, and conclusions. 3. Neither the valuator nor any employee of Green Country Business Valuations, LLC, L.L.C. have any present or prospective interest in the business that is the subject of this report, nor any personal interest with respect to the parties, nor any other interest or bias which would impair a fair and unbiased appraisal. 4. Compensation paid to the valuator for this appraisal is independent of the value reported and is not contingent on the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of the appraisal. 5. The valuator has made a personal inspection of the subject business. 6. The valuation engagement was performed in accordance with the National Association of Certified Valuation Analyst's Professional Standards.

8 7. No person except the undersigned participated materially in the preparation of this report. Copies of this report must be signed below by the valuator in blue ink in order to be authorized and complete. Lance LeBlanc Lance LeBlanc, CVA Certified Valuation Analyst

9 Table of Contents Schedule of Tables... Error! Bookmark not defined. 1.0 INTRODUCTION Subject of Appraisal Nature and Purpose of Appraisal Date of Appraisal Company Background Principal Sources of Information Definitions VALUATION METHODOLOGIES Standard of Value Fair Market Value Going Concern Value The Market Approach The Income Approach The Asset Based Approach Revenue Ruling 59 60: Valuation of Closely Held Stocks Premiums and Discounts Control Premiums Discounts for Lack of Control Discounts for Lack of Marketability ECONOMIC AND INDUSTRY REVIEW Economic Analysis National Economy Overview State/Regional/Local Economy Overview Economic Outlook Industry Analysis Nature of the Industry Industry Outlook Impact on Valuation Subject ANALYSIS OF SUBJECT COMPANY Brief History... 30

10 4.2 Prior Transactions Company Operations Products and Services Customer Base Competition Company Outlook Company Financial Review Financial Statement Normalization Detailed Financial Analysis of the Company Impact of Financial Analysis on Appraisal Financial Forecast VALUATION ANALYSIS AND CALCULATIONS Application of the Market Approach Private Company Transaction Method Guideline Public Company Method Application of the Income Approach Economic Income Flow Development Discount and Capitalization Rates Calculation of Estimated Operating Value Application of the Asset Based Approach Adjusted Book Value Method Summary of Estimated Operating Values Valuation Adjustments Control Premium Subject Interest Discount for Lack of Control Subject Interest Discount for Lack of Marketability Subject Interest Non Operating Assets and Liabilities Subject Interest Calculated Values after Valuation Adjustments Reconciliation of Values Value Conclusion FINAL COMMENTS Statement of Assumptions and Limiting Conditions... 90

11 7.0 PROFESSIONAL QUALIFICATIONS OF APPRAISER Appendix A: Sources of Information Appendix B: International Glossary of Business Valuation Terms Table 1 Historical Balance Sheets ( ) Table 2 Historical Income Statements ( ) Table 3 Financial Statement Normalization Adjustments Table 4 Balance Sheet Normalization Adjustments Table 5 Normalized Balance Sheets ( ) Table 6 Income Statement Normalization Adjustments Table 7 Normalization of Income ( ) Table 8 Common Size Normalized Balance Sheets Table 9 Common Size Normalized Income Statements Table 10 Selected Financial Ratios Normalized Basis Table 11 Base Year Income Forecast for Valuation Purposes Table 12 Owner's Discretionary Earnings Calculations Table 13 IBA Data Base Comparable Transactions in SIC Code Table 14 IBA Comparable Transaction Statistics Total Data Base Table 15 IBA Comparable Transaction Statistics Sales Volume Table 16 IBA Comparable Transaction Statistics Geographic Region Table 17 IBA Comparable Transaction Statistics Sale Price to Gross Sales Table 18 IBA Valuation Multiples Direct Market Data Method Table 19 Direct Market Data Method Value Calculations Table 20 Net Cash Flow to Equity Calculation Table 21 Capitalization Rate Build Up Method Table 22 Single Period Capitalization of Income Table 23 Adjusted Book Value Table 24 Reasonable Rate of Return Calculation of Excess Earnings Table 25 Valuation of Intangible Assets Table 26 Adjusted Book Value Incl. Excess Earnings Indicated Operating Value Table 27 Summary of Estimated Operating Values Table 28 Summary of Restricted Stock Studies Table 29 Summary of Selected Court Cases Table 30 Summary Non Operating Assets Table 31 Indicated Equity Values 100% Interest Table 32 Reconciliation of Indicated Equity Values (100% Interest)... 89

12 ABC COMPANY, INC. 1.0 INTRODUCTION 1.1 Subject of Appraisal ABC Company, Inc. is a plumbing contracting company based in Tulsa, Oklahoma. Founded in 1996, ABC Company, Inc. serves both residential and commercial customers in the general construction 1.2 Nature and Purpose of Appraisal This purpose of this appraisal is to determine the fair market value on a going concern basis of 100% interest in the issued and outstanding common stock of ABC Company, Inc. on a non marketable non controlling basis. Marketability is defined as the ability to convert the investment to cash very quickly at minimal costs, and with a high degree of certainty of realizing the anticipated amount of proceeds. 1 The Company s stock is currently owned by Mr. Mike (30,000 shares) and Mrs. Shirley Jones (20,000 shares) and their children Mark (3,000 shares) and Jill (2,000 shares), and as such is considered closely held. Generally, closely held companies cannot be converted to cash (or a cash equivalent) quickly with any degree of reasonable certainty or a reasonable estimate of the net proceeds to be realized (i.e., including such estimable costs of sale or conversion). As a result of this general characteristic of closely held companies, they are referred to as nonmarketable, i.e., there is no efficient market or process by which to easily liquidate a shareholder s interest (or investment) in a closely held company. This report has been prepared solely for the use of Anywhere Bank in order to satisfy the Small Business Administration S.O.P (G) requirements for a business changing hands. Any opinions or estimates of value presented and discussed in this report applies to this appraisal assignment only and may not be used out of the context presented herein. Any other use of this report may lead 1 Pratt, Shannon P., Robert F. Reilly, and Robert P. Schweihs Valuing a business: The analysis and appraisal of closely held companies, 4th edition. New York: McGraw Hill. p. 26.

13 the user to an incorrect conclusion for which the preparer of this report can assume no responsibility. 1.3 Date of Appraisal The subject interest, 100% interest in the common stock of ABC Company, Inc. (a closely held company) was appraised as of December 31, Company Background ABC Company, Inc. is a plumbing contracting company based in Tulsa, Oklahoma. ABC Company, Inc. serves both residential and commercial customers in the general construction market. The company was founded and started by Mike Jones father Reginald in There are currently four shareholders with Mike and Shirley owning 90.9% of the shares between them. The remaining shares are owned by their children, Mark and Jill. 1.5 Principal Sources of Information In performing the different valuation analyses, various information sources were utilized, Including Company supplied data and information, RMA Annual Financial Statement Studies, Institute of Business Appraisers Transaction Data Base, Ibbotson Associates Valuation Edition 2013 Yearbook, a variety of business appraisal and valuation technical reference books and various websites, as well as other sources as cited in this document. Refer to Appendix A: Sources of Information for a more complete schedule of sources used to develop this report and the analysis Included. 1.6 Definitions Appendix B: International Glossary of Business Valuation Terms contains the generally accepted business appraisal and valuation terms and their respective definitions and descriptions. All of those terms used in this report are used in the context of the glossary provided in Appendix B. Appendix B is provided as an aid in understanding the analyses, discussions, and opinions presented herein, however, it is the content of the report itself that provides the basis for the opinion of value reported herein.

14 2.0 VALUATION METHODOLOGIES 2.1 Standard of Value The standard of value to be used for this valuation assignment is fair market value on a going concern basis. The term fair market value includes the following basic assumptions: The hypothetical purchaser is prudent and seeking a fair return; There are no benefits attributed to synergies that may be realized by the purchaser; The interests in the Company would be sold for cash or cash equivalents; and The Company would be marketed for a reasonable amount of time. The following sections describe fair market value and its relationship to business appraisals. 2.2 Fair Market Value The most commonly used definition of fair market value is defined in Revenue Ruling as: The price at which the 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. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property. 2 Consistent with Revenue Ruling 59 60, the International Glossary of Business Valuation Terms (Appendix B), which has been adopted by all of the major business appraisal organizations (American Institute of Certified Public Accountants, the American Society of Valuators, the Canadian Institute of 2 Appendix B

15 Chartered Business Valuators, the National Association of Certified Valuation Analysts, and The Institute of Business Valuators), defines fair market value as: The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm s length in an open and unrestricted market, when neither is under any compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. 3 Implied in both of these definitions is that the value be stated in cash or on a cash equivalent basis (in other words, its relative liquidity) and that the subject property would have been available in the open market long enough such that the natural economic and related forces of the marketplace could establish a value the fair market value. There are two standard premises of value that need to be considered: (1) as a going concern and (2) as if the company was in liquidation. This approach is consistent with various other appraisal disciplines in that the subject of the valuation (or appraisal) should be valued based on its highest and best use, given the market conditions at the time of the valuation. Furthermore, fair market value is also defined by two primary Treasury Regulations designed to provide guidance for estate planning and valuation purposes. The following definition is consistent with the definitions cited above: The fair market value (of the property being valued) is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. 2.3 Going Concern Value A going concern value assumes that the company will continue its business, generally in the manner in which it has conducted itself in the past, and is based on the company s ability to generate cash earnings. The foundation for business 3 Treasury Regulation (Estate Planning) and Treasury Regulation (b) (Estate Valuation).

16 valuation is based on the same principles used in valuing real estate. The three approaches to be considered are: The Market Approach, The Income Approach The Asset Based Approach. There are many acceptable valuation methods available under each of these approaches. The applicability of each approach and method utilized can be determined by the nature of the business, the fact pattern, and the available information to determine the fair market value of the subject business The Market Approach One of the foundations for the validity of using the various market based approaches to the appraisal of a business or a specific interest in a business is based in part on the Principle of Substitution; in other words, the economic value of a business tends to be determined by the cost of acquiring an equally desirable substitute. Prudent individuals will not pay more for something than they would pay for an equally desirable substitute. 4 The market is considered by some to be fundamental to valuation, as fair market value should be determined by the market. Generally in valuing smaller, thinly traded or privately held companies, the value of stock or securities of corporations engaged in the same or similar lines of business and listed on a major exchange that allows a comparison to be made between the pricing multiples exhibited by the guideline public company and the subject company could be taken into consideration along with other factors ( Guideline Public Company Method ). In the case of very small companies or where there are no similar enough guideline companies, a search could be done to locate entire companies that have been bought and sold, whether one of the parties is publicly traded or closely 4 Trugman, Gary R., Understanding business valuation a practical guide to valuing small to medium sized businesses, 2nd edition. (New York, NY: American Institute of Certified Public Accountants, 2002) pp

17 held, that enables pricing multiples to be developed and then applied to the subject business. A variety of methods can be taken when not considering the Guideline Public Company Method. They are commonly referred to as Direct Market Data, Private Company Transaction, Public Company Transaction, or Merger and Acquisition Method The Income Approach The Income Approach is sometimes referred to as the investment value approach. This approach assumes that an investor could invest in a business enterprise or assets with similar investment characteristics (in particular return expectations), although not necessarily the same business or property. This method is predicated upon the principle of anticipation in that the value of a business enterprise and its assets is a function of future benefits and returns attributable to the business and its assets. The computations used in the Income Approach generally determine that the value of the business is equal to the expected discounted future Income (represented by net cash flow) at an appropriate rate of return (discount rate). The ultimate discount rate used in the valuation analyses is developed in such a way that it takes into account most of the underlying risks and uncertainties involved with the achievement of the forecasted net cash flow. The risk borne by the investor is two fold: (1) Return on the investment, and (2) Return of the investment The return should represent the risk of achieving both, a fair return on and a full return of investment. This can be accomplished by capitalizing a single period Income stream or by calculating the present value (discounting) of a multi period forecast. This future look at the Income from a business is speculative by nature and must be considered with that in mind. Most often, history is used as a starting point to develop such a forecast to use in arriving at an estimate of value. The future

18 possibilities should be taken into account as valuation is in essence a prophecy into the future The Asset Based Approach The Asset Based Approach may also be referred to as the cost approach and is based primarily on the fair market value of the balance sheet (Including all assets and liabilities) of the company being valued. Each piece of the company is valued separately, and then added together to arrive at the total value of the company. The costs of duplicating or replacing the individual components of the business are determined item by item, using special appraisal professionals as needed. This method is generally only suitable for the valuation of interests that have the benefit of control; i.e., the interest being valued has the ability and authority to make decisions regarding the disposition or acquisition of assets and liabilities. Perhaps, most importantly, one must recognize that this approach has some limitations when there are intangible assets present which are part of the interest being valued. In this case, the Asset Based Approach must be modified and amended with other acceptable methods of determining value such as Internal Revenue Service Revenue Ruling (generally used in determining the fair market value of intangible assets). 2.4 Revenue Ruling 59 60: Valuation of Closely Held Stocks Primary reliance is placed on many of the elements listed in Internal Revenue Service Ruling 59 60, which describes guidelines for the valuation of closely held stocks. Revenue Ruling explicitly states that all relevant factors should be taken into consideration, including the following: The nature of the business and the history of the enterprise from its Inception. (Reference Section 4.0 Analysis of Subject Company) The economic outlook in general and the condition and outlook of the specific industry in particular. (Reference Section 3.0 Economic and Industry Review) The book value of the stock and financial condition of the business. (Reference Section 4.8 Company Financial Review)

19 The earning capacity of the company. (Reference Section 4.8 Company Financial Review) The dividend paying capacity of the company. (Reference Section 4.8 Company Financial Review) Whether or not the enterprise has goodwill or other intangible value. (Reference Section 5.0 Valuation Analysis and Calculations) Sales of the stock and the size of the block of stock to be valued. (Reference Section 4.2 Prior Transactions) The market price of stocks of corporations engaged in the same or similar line of business having their stocks actively traded in a free and open market either on an exchange or over the counter. (Reference Section 5.1 Application of the Market Approach) Each valuation is unique; therefore, there is no set formula to the approach and methods to be used in determining the fair market value of a given business. Different methods will be applicable in different situations based on a variety of circumstances. Business valuation is not an exact science; Revenue Ruling states that a sound valuation will be based on all relevant facts, but the elements of common sense, informed judgment, and reasonableness must enter into the process of weighing those facts and determining their aggregate significance. In addition, the formula approach, promulgated in Revenue Ruling , has been used for valuing intangibles when no better method exists. This means that the valuation relies on fair market value of net tangible assets, earning a fair return plus capitalization of excess earnings. The fair market value of specific shares of stock in an unlisted corporation will vary as general economic conditions change. Uncertainty as to the stability or continuity of future Income from the business decreases its value because of the increased risk of loss in the future. In summary, the valuation of shares of stock of a closely held company with uncertain future prospects is a highly speculative procedure. There is no single

20 formula acceptable for determining the fair market value of a closely held business; therefore, the valuator must look to all relevant factors to establish the fair market value of a business as of a given date. To establish a uniform system for valuing businesses, the Internal Revenue Service issued Revenue Ruling 59 60, which lists the factors to consider. 2.6 Premiums and Discounts Businesses are not bought and sold after applying premiums and discounts. Instead, discounts and premiums are the result of using less than perfect data to measure value. In addition, it is critical to identify the valuation basis for each indicated value (based on the specific valuation method) before applying valuation discounts and premiums. This is necessary as different business valuation methods produce a value with attributes different from the value required for the particular valuation. In cases where the value calculated differs from the subject interest being considered, valuation adjustments in the form of premiums and/or discounts must be applied to restate the indicated value to the desired basis. Therefore, the final value determined in the appraisal of a closely held business may be more or less than the calculated value using the various approaches and methods that would be appropriate for the Subject Company and interest being valued. The type and magnitude of the discount(s) or premium(s) will vary based on where the analytical starting point was. The starting points are directly dependent on which methods (under the chosen approach) of valuation were used during the valuation assignment, as well as other relevant factors, including the sources used to develop pricing multiples or a discount rate and normalization adjustments. The following sections discuss the general attributes of valuation calculations and the nature of the premiums and discounts (referred to as valuation adjustments) that may be required Control Premiums A controlling interest in a company is perceived as more valuable than a noncontrolling interest because the non controlling interest generally has less control

21 over the policy setting, strategic direction and operational aspects of the company. An investor will generally pay more (i.e., a premium) for the rights (or abilities) afforded a controlling interest. A control premium has also been defined as the additional consideration that an investor would pay over a marketable minority equity value (the Wall Street Journal price) in order to own a controlling interest in the common stock of the company. 5 A control premium will be considered and discussed in Section Control Premium Subject Interest Discounts for Lack of Control Discounts for lack of control (or DLOC ) recognize that control is a very important benefit of ownership. There is usually less perceived risk in an investment when the investor has the benefit of control. A minority owner without special rights or powers cannot control the paying of dividends, cannot sell the assets of the company, and cannot direct or manage the activities of the company. A DLOC will be considered and discussed in Section Discount for Lack of Control Subject Interest. Appropriate empirical studies and analyses will be Included in this discussion as required Discounts for Lack of Marketability Recall that, Marketability is defined as the ability to convert the investment to cash very quickly at minimal costs, and with a high degree of certainty of realizing the anticipated amount of proceeds. Specifically, marketability relates to the liquidity of an investment relative to a comparable and actively traded alternative. As discussed in Section 2.2 Fair Market Value, liquidity is referred to as the ability to convert a subject interest to cash or a cash equivalent. Taking the current equities market as an example, in general, an equity position in a publicly traded company can be sold and converted to cash in approximately three days. The phrase used most prevalently to describe this degree of marketability is as if

22 publicly traded. The term marketability is generally used interchangeably with the phrase as if publicly traded. As a result, the market clearing price of a non marketable security is discounted relative to the marketable value. The discount is generally expressed as a percent of a marketable value and also referred to as a discount for lack of marketability (or a DLOM ). A DLOM will be considered and discussed in Section Discount for Lack of Marketability Subject Interest. Appropriate empirical studies and analyses will be Included in this discussion as required. 3.0 ECONOMIC AND INDUSTRY REVIEW According to Revenue Ruling issued by the Internal Revenue Service (the IRS ), business appraisals are considered in large part, a prophecy as to the future and must be based on facts available at the required date of appraisal Economic Analysis The economic outlook in general and the condition and outlook of the specific industry in particular is cited by the IRS as one of the major considerations in conducting a business appraisal. Economic, industry, and related market conditions all have an impact on companies and their value. Therefore, these factors will be considered and taken into account in the analyses which will lead to an opinion of value. It is important to note that there are some factors that weigh more heavily on one company versus another, once again ensuring the specific facts and circumstances unique to the subject interest are considered in the appropriate context National Economy Overview The national economy, for the most part, will not impact the Company directly as its business is derived from the local and regional populated markets; however, since the regional and local economies will generally follow trends in the national economy, expectations are that the Company will also see similar effects on its 6 Internal Revenue Service, Revenue Ruling 59 60, Section 3. Approach to Valuation, paragraph.03.

23 business environment. The following discussion will highlight the state of the economy on a national level, highlighting those areas which may have an impact on the region. The persistence of high gas and oil prices into the second quarter of 2013, after several years of double digit percentage Increases and anticipated new record highs in the following summer months, is finally leading to higher prices in the broader economy. There is a growing sense among consumers and businesses that the rise in energy prices is more permanent than they thought, and they are starting to adjust their spending and supplier contracts accordingly. This information catches the attention of the Federal Reserve, as it means current inflation trends are becoming more entrenched in the rest of the economy and will soon start to filter into expectations about future inflation. The trucking and transportation industry is now actively and openly passing along higher fuel costs to their customers. Air fares and hotel room rates are on the rise. Perhaps more insidious is the jump in rents, as high home prices and rising interest rates shut more potential home buyers out of the housing market. The idea is that higher prices lead to ever higher prices. The only way for the Fed to short circuit this process is to slow demand enough so that companies can no longer safely pass along price Increases without losing a significant number of customers and market share. Overall National Economic Outlook December 31, 2013 economic indicators sent mixed signals as to its health. After a strong start to the calendar year, GDP backslid from 5.6% growth to 2.7% in the second quarter. This number is important because it is a sign of the strength of the economy as a whole. Recall that the Gross Domestic Product ( GDP ) measures the growth of the economy in broad terms consisting of three major components: (1) Consumption (primarily measured in terms of disposable income);

24 (2) Business Investment (generally measured by changes in capital expenditures and inventory); and (3) Government Spending. 2.7% growth is still a very good number. The consumer price index, which measures inflation, spiked to 4.6% in the second quarter after a 2.2% first quarter. This number can largely be viewed as energy driven. The producer price index, which measures inflation at the wholesale level and is often viewed as inflation in the economic pipeline, also jumped to 4.7% after a first quarter decrease. It is important to re state that ABC Company is a local company deriving the majority of their revenues from local customers. The overall health of the local economy is much more impactful on the health of the company than the national economy. However, the national economy does impact the company in a broader sense in areas such as inflation and energy prices, both of which have an impact on ABC Company s success State/Regional/Local Economy Overview State of Oklahoma Demographics: In 2013, Oklahoma had a household population of 8.8 million 4.5 million (51 percent) females and 4.3 million (49 percent) males. The median age was 34.3 years. Twenty seven percent of the population were under 18 years and 9 percent were 65 years and older. In 2012 there were 3.3 million households in Oklahoma. The average household size was 2.7 people. Families made up 69 percent of the households in Oklahoma. This figure includes both married couple families (50 percent) and other families (19 percent). Nonfamily households made up 31percent of all households in Oklahoma. Most of the nonfamily households were people living alone, but some were comprised of people living in households in which no one was related to the householder. In 2012, 83 percent of people 25 years and over had at least graduated from high school and 27 percent had a bachelor's degree or higher. Seventeen percent were

25 dropouts; they were not enrolled in school and had not graduated from high school. Income: The median Income of households in Oklahoma was $45,604. Eightythree percent of the households received earnings and 15 percent received retirement Income other than Social Security. Twenty three percent of the households received Social Security. The average Income from Social Security was $12,432. These Income sources are not mutually exclusive; that is, some households received Income from more than one source. Housing Costs: The median monthly housing costs for mortgaged owners was $1,206, non mortgaged owners $307, and renters $709. Thirty two percent of owners with mortgages, 13 percent of owners without mortgages, and 48 percent of renters in Oklahoma spent 30 percent or more of household Income on housing. City of Tulsa Located in northeastern Oklahoma, the area is well served by abundance of major roadways; Including interstates and state and national highways. Tulsa has in recent years undergone a transition from a city of regional commerce to a city of international influence. Between 2007 and 2013, the Tulsa metropolitan area grew 20.5 percent, making it the fastest growing metropolitan area in the nation. As of July 2013, the Tulsa metropolitan area had an estimated population of 5,138,223. Tulsa is often considered a poster child for cities worldwide experiencing rapid growth and urban sprawl Economic Outlook The U.S. economy is expected to be well positioned for long term growth at historical long term averages. Real GDP (i.e., taking into account the estimated capacity to produce more) is expected to grow at about its potential equilibrium rate (between 3.1 percent and 3.3 percent per year) through In addition, inflation is expected to remain relatively low and stable with the CPI (excluding food and energy inputs) forecasted to Increase at a level 2.4% through the sixyear forecast period ending The labor market (measured by unemployment) is also expected to remain stable at 5.0%. Finally, an increase in

26 short term borrowing rates (measured by 91 Day Treasury Bills) and a widening of the spread to longer term borrowing rates (measured by 10 Year Treasury Notes) return the interest rate environment (and the financial markets in general) to more familiar ground.26 Locally, the economy of the city of Tulsa is showing tremendous growth by every conceivable metric. The population is growing and commercial construction is booming. Personal income rose 15.6% (6.1% increase on a per capita basis) from The unemployment rate dropped from 5.5% in June 2012 to 4.9% in All this growth while the area C.P.I. remained at 2.2% which is largely, if not totally attributable to energy prices. Given the strength and potential of the local economy, a case could be made that the regional and local economies may continue to perform better than the national forecasters expectations. 3.2 Industry Analysis ABC Company is broadly classified as a construction contractor for which there are at least 21 individual SIC codes ranging from 1521 through 1799 and are divided in to two groups: general contractors and subcontractors. General contractors typically bid on an entire construction project where subcontractors typically bid on a particular aspect of a construction project. ABC Company classifies itself as SIC 1711 Plumbing Work and specifically includes one or more of the following: (1) Performing plumbing work at the site (e.g. plumbing installation); (2) Servicing plumbing systems at the site; and, (3) The combination of selling and installing plumbing Nature of the Industry Broadly speaking, industry contractors install and maintain plumbing fixtures, fittings and equipment. Industry activities include work on household pipes and drains, installation of gas cooking and heating appliances and work on bathroom and toilet fixtures and venting systems. Emergency repair work (e.g. unclogging

27 drains or repairing burst water mains) represents a significant source of industry revenue. Contractors may also supply plumbing appliances and coupling products for construction projects. It is often the case with construction projects that bids are solicited formally through a request for proposal process (most large or commercial projects) or informally through references (most small or residential). The construction industry is generally anti cyclical and is considered a high risk business largely due to the competitive nature of the bidding process and equipment costs. It is considered difficult to enter give the initial capital investment needs and time needed to build a customer base Industry Outlook Demand for plumbing services and supplies was uneven across the U.S in 2013, according to a survey of contractors nationwide reported in Contractor Magazine online. Contractors in Syracuse, N.Y. and Cleveland, OH reported to have nothing going on, while contractors in Kansas City and cities across California couldn t find enough help. High prices for metals and other raw materials, continuing consolidation of suppliers and more green building initiatives were some of the trends that began to affect the plumbing industry in Overall, plumbing contractors and manufacturers were optimistic about 2013 prospects, although no one expected the year to be better than Housing began to slow due to rising mortgage rates; however, many areas saw strengthening in commercial projects and sustained growth in the remodeling and renovation sector. Plumbing Fixtures & Fittings Market size demand for plumbing fixtures and fittings in the U.S. totaled $9.7 billion in 2012 based on annual growth of 3.0 percent from Plumbing product demand is related to building construction, as more than 95 percent of fixtures and fittings are installed inside buildings. Trends in plumbing fixture and fitting demand, however, do not necessarily move in lockstep with those of building construction, as the aftermarket in plumbing products can support demand in face of weak new construction activity.

28 Construction Industry The general construction industry is fragmented, with smaller operations collectively dominating. There are a number of large players with nationwide coverage. Many smaller companies manage to survive in this competitive market due to the localized, specialized nature of their operations. The construction sector is highly dependent on both local and national economic conditions. The residential construction industry is acutely dependent upon mortgage rates. The U.S. construction and engineering industry generated total revenues of $479.3 billion in 2012, representing an Increase of 6.1 percent on the previous year s value and a compound annual growth rate (CAGR) of 1.2 percent between 2009 and Following a robust gain of 11 percent in 2011, total domestic construction increased 9.2 percent in 2012, in nominal terms. Total construction is expected to decelerate to 6.9 percent, in 2013, followed by a mild three year downturn. Total construction grew 8.3 percent in the first quarter of 2013, with spending on residential construction rising a modest 0.7 percent and nonresidential construction growing 2.7 percent. This trend is expected to continue, with nonresidential investment exceeding residential investment into the fourth quarter of 2007, a reversal not witnessed for several years. 3.3 Impact on Valuation Subject The economy has a direct effect on all businesses; the nature of the industry and how the subject business operates tend to modify the net impact on the subject business, many times either intensifying or diminishing the effect. Recall that the Gross Domestic Product ( GDP ) measures the growth of the economy in broad terms consisting of three major components: (1) Consumption (primarily measured in terms of disposable income); (2) Business investment (generally measured by changes in capital expenditures and inventory); and

29 (3) Government spending. ABC Company, Inc. is a small, local, and capital intensive business which tends to rely on the changes in the consumption factors for an indication as to the impact on their businesses. More specifically, inflation (generally measured by the CPI) and unemployment trends are more likely to directly impact these businesses. At the national economic level, many signs remain strong. GDP growth is expected to remain positive and inflation is expected remain at or near current levels. The Tulsa metropolitan area has one of the strongest economies of any large market in the United States. Most metrics are strong and forecasts are for that to continue. Tempering enthusiasm would be the trend of rising energy prices and the Federal Reserve s increasing of short term interest rates. ABC Company has does not carry much short term debt but the company does borrow money. However, most economic projections are for interest rates to level off and inflation to remain under control. The valuator has not seen any evidence of factors that would disrupt the current consensus forecast of continued economic growth, low inflation and stable employment. The appraiser believes that all economic and industry indicators discussed throughout the previous sections suggest that it will be operationally status quo for the Company. The valuator would expect to see steady (although moderate) growth in the business tempered by competition over the long term with some possibilities to capitalize on the various business trends and opportunities outlined in the previous sections. Given the owner s continued leadership of the Company into the foreseeable future, the Company s stable local presence along with the vibrant local economy, and the apparent resiliency exhibited by the industry, the long term expectation in terms of Company growth (defined broadly) is assumed to 3.0%. This section will be referred to as the valuator s opinion of value is developed throughout the remainder of the valuation report.

30 4.0 ANALYSIS OF SUBJECT COMPANY 4.1 Brief History ABC Company, Inc. has been in operations for over 17 years. The business was incorporated in January of 1996 as C Corporation in the state of Oklahoma. The company was founded by Reginald Jones who operated the company until his death in 2007, when day to day management was taken over by his son Mike and his wife Shirley. The company has been capitalized with 55,000 shares of common stock. Ownership is as follows: Shareholder # of Shares Percent Mike Jones 30, % Shirley Jones 20, % Mark Jones 3, % Jill Jones 2, % Total 55, % ABC Company, Inc. has no subsidiaries, but does have an affiliated company. The Jones Family Limited Partnership owns the company s facilities and leases the facilities to ABC Company, Inc. The Company has occupied the same premises since the opening of the business at 5529 Red Bluff Blvd. in Tulsa, Oklahoma. The Company s primary focus is providing plumbing service and fixtures to the Tulsa metropolitan area. Under the leadership of the company s founder, Reginald Jones, ABC Company was strictly a service company. Residential work comprised 95% of the company s business. Commercial business arrived exclusively through referral. Upon Reginald s death in 2007, the company s revenues held steady due to the reputation Reginald had developed over the years. To grow the business, Mike and Shirley recognized that the company would have to open new distribution channels. The decision was made in 2008 to increase their marketing efforts towards the General Contracting sector and expand into Bartlesville and

31 Muskogee. Commercial new construction jobs are bigger ticket items that small independent plumbing contractors cannot bid on due to bonding requirements. To that end, the company led by Mike s efforts increased their involvement in trade association meetings. This networking has led to larger jobs in the commercial arena. The company has been a consistent performer in terms of revenue over the past five years. For the fiscal year ended December 31, 2009 (two years after the death of founder Reginald), sales were $3,529,000. The company has not seen a decrease in sales since. The 2013 year closed with the company having its best sales year ever with $7,295,000. Mike and Shirley attribute this jump to the increased marketing efforts taking root and commercial business picking. A more complete financial analysis of the Company will be considered and discussed in Section 4.8 Company Financial Analysis. The Company continues to operate as it has over the past few years and there are no plans to change its focus on the consumer retail business. 4.2 Prior Transactions There have been no prior transactions in the Company s stock reported to the valuator nor was the valuator able to find any information relating to such transactions. Reginald Jones will stipulates that another family member is to be given the first right to buy or refuse to buy shares as he wished this business to remain in the family as long as practical. 4.3 Company Operations The Company is located at 5529 Red Bluff Blvd., Tulsa, Oklahoma and occupies both floors (approximately 5,400 square feet) of a two story building. The property is owned by the Jones Family Limited Partnership and is leased back to the Company. The upper floor consists of offices with some inventory storage. The first floor has shops, work areas, garaging, and inventory. The company does not have a large amount of walk in traffic but there is outdoor parking to accommodate the employees and customers.

32 The Company has regularly passed all required inspections conducted by the national as well as state affiliated environmental protection agencies. The Company employs 51 people. The employee turnover rate is very low by industry standards, which implies a high degree of employee satisfaction, a relative constant level of construction work, and low employee costs. The Company's production workers have excellent skills and are paid accordingly. There is an adequate supply of labor in the area when occasional help is needed and the compensation for these individuals is average for the area. The Company operates as a union shop. Of the 51 employees, 15 are permanent staff and about 36 are construction staff supervised by foremen. Due to the seasonality of new construction work, the Company hires more sub contractors and laborers during the summer and fall. The hours of operation are 7:00 a.m. to 5:00 p.m., Monday through Friday. The management team is as follows: Mike Jones 56, Co owner, Chief Executive Officer, & President Shirley Jones 50, Co owner and Vice President Don Smith 47, Construction Manager Jack Schwartz 23, Estimator Steve Gonzalez 39 Maintenance Foreman David Black 38, Office Manager and Controller The management team intends to remain in place outside of Mr. & Mrs. Jones. The valuator s site visit observed all equipment and the facility itself in good working condition. 4.4 Products and Services A simple explanation would say that the Company provides plumbing products and services to both residential and commercial customers. However, a deeper

33 examination reveals that residential demand is for service and commercial demand is for installation of fixtures for new construction. Services Include but are not limited to: Cleaning of garbage disposals and water heaters Pressure tests to detect hairline leaks Dripping Faucets Low Water Pressure Running Toilet Leaky Pipes Slow or Clogged Drains Water heater problems Septic tank leaks Sewer line breaks or leaks Products installed Include but are not limited to: Kitchen sinks Sewer lines Toilets Faucets Water Heaters Septic Systems Natural Gas Piping 4.5 Customer Base The Tulsa metropolitan area serves as the primary base of operation and also provides the majority of the company s revenues but their reach has continued to grow as they have customers in Bartlesville and Muskogee. There is no single large customer because of the nature of the business providing service to a large area.

34 4.6 Competition The plumbing market in greater Tulsa is very competitive. While many contractors purport to serve both the residential and commercial market, the reality is that many serve only the residential market. Compounding this issue is the prevalence of many home based business contractors that have one truck and operate as sole proprietorship for all intents and purposes. Acquiring commercial business, particularly in the new construction arena, require a more robust operation due to bonding requirements. The competition is weeded out to some degree in this world. Certain financial thresholds must be met in order to obtain the bonding needed to compete in this arena. Given the 25 year history of the Company, the marketing efforts of Mike Jones in networking throughout the local general contracting trade associations, the company feels like this gives them a competitive advantage. With that said, there still remains strong completion among companies that maintain a strong presence in the residential and commercial markets. They are as follows: Alpha Plumbing Company Bravo Plumbing Company Delta Plumbing Company 4.7 Company Outlook The following comments were noted earlier, however, the valuator believes they are worth repeating (from Section Industry Outlook): The national economy s two main statistics, G.D.P. and the Consumer Price Index show stable growth and very little inflation. The local economy in Tulsa is vibrant and healthy. The overall plumbing industry is expected to grow. The Company is well located with very good accessibility. It also has a strong, loyal following developed over the past 17 plus years of operation. It has a solid

35 regulatory record and relies on the marketing and networking efforts of its current owner/operator for much of its success. The Company is expected to maintain its position in the market and as such may see continued growth in line with that predicted for the local and regional economies. There was no evidence of any out of the ordinary economic or industry factors that would affect the Company negatively; therefore, the valuator has a relatively high level of confidence that the Company will perform well within the parameters outlined in this report. 4.8 Company Financial Review This section of the report presents discussion and analyses regarding the financial condition and historical trends of ABC Company, Inc. This analysis allows the valuator to understand the financial characteristics of the subject business and provides the basis for determining how effectively management has operated the Company. The Company s financial statements 7 were reviewed and analyzed as of December 31, 2013, using the historical financial statements as summarized in the following tables: PROCEED TO NEXT PAGE 7 Company financial statements were prepared in accordance with generally accepted accounting principles according to the Company s accountant and owner. The appraiser did not find any information contradicting that assertion.

36 Table 1 Historical Balance Sheets ( ) 12 / 3 1/ / 3 1/ / 3 1/ / 3 1/ / 3 1/ ASSETS Current Assets Cash $ 1,403, % $ 1,435, % $ 1,005, % $ 350, % $ 209, % Accounts Receivable $ 891, % $ 714, % $ 689, % $ 750, % $ 290, % Inventory $ 49, % $ 45, % $ 39, % $ 30, % $ 25, % Short Term Investments $ 2,150, % $ 1,220, % $ 514, % $ 65, % $ 50, % TOTAL CURR. ASSETS $ 4,493, % $ 3,414, % $ 2,247, % $ 1,195, % $ 574, % FIXED ASSETS Property, Plant, & Equipment $ 900, % $ 675, % $ 550, % $ 475, % $ 450, % Land $ 900, % $ 900, % $ 900, % $ 900, % $ 900, % Other Fixed Assets $ 25, % $ 18, % $ 13, % $ 15, % $ 12, % TOTAL FIXED ASSETS $ 1,825, % $ 1,593, % $ 1,463, % $ 1,390, % $ 1,362, % OTHER ASSETS Deposits $ 150, % $ 150, % $ 150, % $ 150, % $ 150, % TOTAL ASSETS $ 6,468, % $ 5,157, % $ 3,860, % $ 2,735, % $ 2,086, % CURRENT LIABILITIES Notes Payable (Short-term) $ 135, % $ 119, % $ 111, % $ 88, % $ 73, % Accounts Payable $ 10, % $ 12, % $ 15, % $ 13, % $ 11, % Other Current Liabilities $ 3, % $ 4, % $ 2, % $ 5, % $ 3, % TOTAL CURR. LIAB $ 148, % $ 135, % $ 128, % $ 106, % $ 87, % LONG TERM DEBT Notes Payable $ 1,831, % $ 1,517, % $ 1,158, % $ 830, % $ 705, % TOTAL LIABILITIES $ 1,831, % $ 1,517, % $ 1,158, % $ 830, % $ 705, % Common Stock $ 55, % $ 55, % $ 55, % $ 55, % $ 55, % Paid In Capital $ 465, % $ 465, % $ 465, % $ 465, % $ 465, % Retained Earnings $ 3,969, % $ 2,985, % $ 2,054, % $ 1,236, % $ 774, % TOTAL EQUITY $ 4,489, % $ 3,505, % $ 2,574, % $ 1,756, % $ 1,294, % TOTAL LIAB & EQUITY $ 6,468, % $ 5,157, % $ 3,860, % $ 2,692, % $ 2,086, %

37 Table 2 Historical Income Statements ( ) 6/30/2006 6/30/2005 6/30/2004 6/30/2003 6/30/2002 SALES $ 7,295, % $ 6,489, % $ 5,755, % $ 4,156, % $ 3,529, % OPERATING EXPENSES Officer's Compensation $ 240, % $ 192, % $ 168, % $ 144, % $ 120, % Other Salaries & Wages $ 3,495, % $ 3,109, % $ 2,757, % $ 1,991, % $ 1,691, % Rent $ 66, % $ 54, % $ 48, % $ 42, % $ 36, % Payroll Taxes $ 405, % $ 360, % $ 320, % $ 231, % $ 196, % Truck/Equipment/Auto Expense $ 633, % $ 520, % $ 463, % $ 411, % $ 325, % Insurance $ 78, % $ 61, % $ 49, % $ 36, % $ 29, % Legal/Professional Expenses $ 41, % $ 31, % $ 29, % $ 27, % $ 26, % Travel & Entertainment $ 5, % $ 5, % $ 5, % $ 4, % $ 4, % Director Fees $ 18, % $ 10, % $ 6, % $ 5, % $ 3, % Pension & Profit Sharing $ 73, % $ 65, % $ 58, % $ 42, % $ 35, % Depreciation & Amortization $ 73, % $ 84, % $ 86, % $ 68, % $ 57, % Interest Expense $ 120, % $ 107, % $ 94, % $ 68, % $ 58, % Other Operating Expense $ 522, % $ 469, % $ 416, % $ 332, % $ 286, % Total Operating Expenses $ 5,769, % $ 5,067, % $ 4,499, % $ 3,401, % $ 2,866, % OPERATING INCOME $ 1,526, % $ 1,422, % $ 1,256, % $ 755, % $ 663, % OTHER INCOME Other Income/(Expense) $ 84, % $ 67, % $ 53, % $ 31, % $ 22, % EARNINGS BEFORE TAX $ 1,610, % $ 1,489, % $ 1,309, % $ 786, % $ 685, % Income Tax Expense $ 626, % $ 558, % $ 491, % $ 324, % $ 270, % NET INCOM E (LOSS) $ 984, % $ 931, % $ 8 18, % $ 462, % $ 415, % Before a proper and complete financial analysis can be performed, the Company s financial statements must be normalized. The following section discusses the theory of normalizing financial statements and the results of the ensuing analysis Financial Statement Normalization Overview Business valuation procedures require that the valuator review the financial statements to determine if any adjustments are needed to better reflect the economic value of an appraisal subject (in other words, normalizing the financial statements). Generally speaking, most adjustments are made due to the controlling interests choices regarding implementation of certain accounting treatments and tax planning strategies. Closely held businesses rarely attract passive investors and as such the final presentation of financial statements are not necessarily high on the controlling interest s priorities. One of their main focuses is on financial strategies that minimize taxable Income which sometimes

38 result in inconsistent operating performance. The objective of normalizing the financial statements is to convert the historical financial statements and performance statistics into amounts that may better reflect the real economics of the underlying business. These normalization adjustments are not always precise; however, they are based on the valuator s analysis of the subject, including interviews with management and their advisors (e.g., lawyers and accountants). In general, when a situation exists and appears to need such an adjustment, the adjustment is made if the following conditions are generally present: The amounts presented on historical financial statements are inconsistent with the valuator s perspective of fair market value for a particular line item. Fair market value can be reasonably determined based on initial findings. The authority to make the normalization adjustments required is borne by the interest being appraised (or some other disclosed circumstance exists; e.g., shareholder or other binding agreement). These normalization adjustments generally take four forms: (1) Comparability, (2) Non Recurring, (3) Non Operating, and (4) Discretionary. The following table illustrates these normalization adjustments and the potential impact they have on the perspective of control of the Company s operation:

39 Table 3 Financial Statement Normalization Adjustments Normalization Adjustment Basis Assumes Full Benefit of Control Non Controlling Interests Can Affect Examples Comparability Non GAAP YES YES Changing Cash to Accrual Basis of Accounting Non Economic YES YES Section 179 Deductions, Other Depreciation Non Recurring YES YES Floods, Fires, Accidents, Fixed Asset Sales, One Time Contracts Non Operating YES NO Cars, Planes, Boats, Marketable Securities Unrelated Income Producing Assets (e.g., Real Estate), Other unrelated assets/liabilities Discretionary YES NO Salaries, Benefits, Employee Perquisites, (Automobile Expenses, Entertainment), Rent, Contributions, Other Related Entity Transactions Finally, it should be noted that normalization adjustments are purposely hypothetical in nature and are made solely to assist the valuator in developing an opinion of value as included in this report. Normalization adjustments are not intended to formally restate the subject s historical results or provide the basis for a business forecast of the future. This section is geared towards the economic analysis of a company for only one purpose, to support the appraisal of the subject interest as more fully described throughout this report. Subject Company Financial Statement Normalization A balance sheet and income statement analysis was performed in order to detect any anomalies, either of performance or in how the Company has been utilizing its assets and managing the business historically. Once the initial review is completed, the findings are used to normalize the financial statements, in essence ensuring the financial results are consistent with what a hypothetical buyer would expect to receive. In accordance with our review of the financial statements, discussions with the owner of the Company, and considering what a hypothetical buyer of the

40 business would expect, adjustments were made to both the historical balance sheets and Income statements of the Company. The following balance sheet normalization adjustments were made and are summarized in the table below: Table 4 Balance Sheet Normalization Adjustments Normalization Adjustment Note Item Basis Non Controlling Interest Affect Description & Discussion 1 Inventory Comparability NO Peachtree Plumbing currently utilizes a LIFO policy when managing their inventory. We adjusted inventory under LIFO for tax purposes to $53,650 as of 12/31/2013. Shirley Jones indicated at site visit that the ratio between inventory's FIFO values and the Company's revenue has not encountered much change in the past. With that, the ratio of 0.74% ($53,650 (FIFO inventory)/$7,295,000 Revenue)) is used to normalize the inventory items on the historic balance sheet in each year from 2009 to Short term Investments 3 Land Non Operating NO 4 Deposits Non Operating NO 1,2,3,4 Total Equity YES Non Operating NO The company carries a large balance in short term investments. Site meeting with Shirley Jones revealed these are non essential to day to day management of the business and are removed from the balance. The company owns land that is adjacent to the current operating location and is intended for future expansion. Any potential sale of Peachtree Plumbing would include this adjacent land. It's current market value is $900,000 and it is treated as non operating property by Peachtree Plumbing. Peachtree Plumbing uses Wells Fargo bank as their primary financial institution. The company owns various CDs issued by the bank and are non operating and nonessential in the operation of the business. Cumulative impact of adjustments in Notes 1,2,3, & 4. Refer to following schedule for the balance sheet impact by year of adjustment required. Summary of Balance Sheet Adjustments by Year Note 12/31/ /31/ /31/ /31/ /31/ Inventory $ 4,650 $ 3,019 $ 3,587 $ 754 $ 1,115 2 Short term Investments $ (2,150,000) $ (1,220,000) $ (514,000) $ (65,000) $ (50,000) 3 Land $ (900,000) $ (900,000) $ (900,000) $ (900,000) $ (900,000) 4 Deposits $ (150,000) $ (150,000) $ (150,000) $ (150,000) $ (150,000) 1,2,3,4 Total Equity $ (3,195,350) $ (2,266,981) $ (1,560,413) $ (1,114,246) $ (1,098,885)

41 Table 5 Normalized Balance Sheets ( ) Summary of Balance Sheets 12/31/ /31/2012 Normalized Actual Adjustment Note Normalized Actual Adjustment Note Normalized ASSETS Current Assets Cash $ 1,403, % $ 1,403, % $ 1,435, % $ 1,435, % Accounts Receivable $ 891, % $ 891, % $ 714, % $ 714, % Inventory $ 49, % $ 4,650 1 $ 53, % $ 45, % $ 3,019 1 $ 48, % Short Term Investments $ 2,150, % $ (2,150,000) 2 $ 0.0% $ 1,220, % $ (1,220,000) 2 $ 0.0% TOTAL CURRENT ASSETS $ 4,493, % $ 2,347, % $ 3,414, % $ 2,197, % FIXED ASSETS Property, Plant, & Equipment $ 900, % $ 900, % $ 675, % $ 675, % Land $ 900, % $ (900,000) 3 $ 0.0% $ 900, % $ (900,000) 3 $ 0.0% Other Fixed Assets $ 25, % $ 25, % $ 18, % $ 18, % TOTAL FIXED ASSETS $ 1,825, % $ 925, % $ 1,593, % $ 693, % OTHER ASSETS Deposits $ 150, % $ (150,000) 4 $ $ 150, % $ (150,000) 4 $ 0.0% TOTAL ASSETS $ 6,468, % $ (3,195,350) $ 3,272, % $ 5,157, % $ (2,266,981) $ 2,890, % CURRENT LIABILITIES Notes Payable (Short term) $ 135, % $ 135, % $ 119, % $ 119, % Accounts Payable $ 10, % $ 10, % $ 12, % $ 12, % Other Current Liabilities $ 3, % $ 3, % $ 4, % $ 4, % TOTAL CURRENT LIABILITES $ 148, % $ 148, % $ 135, % $ 135, % LONG TERM DEBT Notes Payable $ 1,831, % $ 1,831, % $ 1,517, % $ 1,517, % TOTAL LIABILITIES $ 1,831, % $ 1,831, % $ 1,517, % $ 1,517, % Common Stock $ 55, % $ 55, % $ 55, % $ 55, % Paid In Capital $ 465, % $ 465, % $ 465, % $ 465, % Retained Earnings $ 3,969, % $ (3,195,350) 1,2,3,4 $ 773, % $ 2,985, % $ (2,266,981) 1,2,3,4 $ 718, % TOTAL EQUITY $ 4,489, % $ (3,195,350) $ 1,293, % $ 3,505, % $ (2,266,981) $ 1,238, % TOTAL LIABILITIES & EQUITY $ 6,468, % $ (3,195,350) $ 3,272, % $ 5,157, % $ (2,266,981) $ 2,890, %

42 Summary of Balance Sheets 12/31/ /31/2010 Normalized Actual Adjustment Note Normalized Actual Adjustment Note Normalized ASSETS Current Assets Cash $ 1,005, % $ 1,005, % $ 350, % $ 350, % Accounts Receivable $ 689, % $ 689, % $ 750, % $ 750, % Inventory $ 39, % $ 3,587 1 $ 42, % $ 30, % $ $ 30, % Short Term Investments $ 514, % $ (514,000) 2 $ 0.0% $ 65, % $ (65,000) 2 $ 0.0% TOTAL CURRENT ASSETS $ 2,247, % $ 1,736, % $ 1,195, % $ 1,130, % FIXED ASSETS Property, Plant, & Equipment $ 550, % $ 550, % $ 475, % $ 475, % Land $ 900, % $ (900,000) 3 $ 0.0% $ 900, % $ (900,000) 3 $ 0.0% Other Fixed Assets $ 13, % $ 13, % $ 15, % $ 15, % TOTAL FIXED ASSETS $ 1,463, % $ 563, % $ 1,390, % $ 490, % OTHER ASSETS Deposits $ 150, % $ (150,000) 4 $ 0.0% $ 150, % $ (150,000) 4 $ 0.00% TOTAL ASSETS $ 3,860, % $ (1,560,413) $ 2,299, % $ 2,735, % $ (1,114,246) $ 1,620, % CURRENT LIABILITIES Notes Payable (Short term) $ 111, % $ 111, % $ 88, % $ 88, % Accounts Payable $ 15, % $ 15, % $ 13, % $ 13, % Other Current Liabilities $ 2, % $ 2, % $ 5, % $ 5, % TOTAL CURRENT LIABILITES $ 128, % $ 128, % $ 106, % $ 106, % LONG TERM DEBT Notes Payable $ 1,158, % $ 1,158, % $ 830, % $ 830, % TOTAL LIABILITIES $ 1,158, % $ 1,158, % $ 830, % $ 830, % Common Stock $ 55, % $ 55, % $ 55, % $ 55, % Paid In Capital $ 465, % $ 465, % $ 465, % $ 465, % Retained Earnings $ 2,054, % $ (1,560,413) 1,2,3,4 $ 493, % $ 1,236, % $ (1,114,246) 1,2,3,4 $ 121, % Dividends $ $ 0.0% $ 43, % $ 43, % TOTAL EQUITY $ 2,574, % $ (1,560,413) $ 1,013, % $ 1,799, % $ (1,114,246) $ 684, % TOTAL LIABILITIES & EQUITY $ 3,860, % $ (1,560,413) $ 2,299, % $ 2,735, % $ (1,114,246) $ 1,620, % PROCEED TO NEXT PAGE

43 Table 6 Income Statement Normalization Adjustments