building your business value - lgi cfolgicfo.com/pages/images/building-your-business-value.pdf ·...
TRANSCRIPT
![Page 1: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/1.jpg)
BUSINESSVALUATIONS
![Page 2: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/2.jpg)
AGENDA
Morgan L. Rich,Northwestern MutualSteve Lumley,
LGI CFODouglas A. Michel,CPA/ABV, CVA
& Alex E. Kummer, CPA, CVA,
Clark Schaefer Hackett
THE ART
OF
BUSINESS
VALUATION
GROWING
THE VALUE
OF
YOUR
BUSINESS
BUY
SELL
AGREEMENTS
![Page 3: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/3.jpg)
THE ART OFBUSINESS VALUATION
![Page 4: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/4.jpg)
CLOSELY-HELD COMPANIES
• Closely-Held Companieso Shares of which are owned by a relatively
limited number of stockholderso Little, if any tradingo No established market for the stocko Lack marketabilityo Have concentration of management in a
family groupo Influence shareholder’s personal
circumstances on dividend policyo Lack access to public markets for capital
fundso Have greater possibility of asset realization
through a merger, sale, or liquidation of the company
![Page 5: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/5.jpg)
• Gift & Estate Taxes
• Fair & Enforceable Buy-Sell Agreements
• Buying & Selling Shares in the Company
• Employee Stock Ownership Plans (ESOPs)
• Corporate Dissolution
• Divorce
• Mergers & Acquisitions
SITUATION REQUIRINGA VALUATION
![Page 6: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/6.jpg)
DEFINING THEVALUATION ASSIGNMENT
REQUIREMENTS OF THE VALUATION ANALYST:
• Do not perform an audit• Minimum education
requirement• Experience in subject matter• Do use financial statements or
tax returns• Not prohibited from practice in
front of IRS
![Page 7: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/7.jpg)
DEFINING THEVALUATION ASSIGNMENT
(cont.)
THREE TYPES OF REPORTS:• Calculation report
o Can be used as planning tool
• Summary reporto Another planning tool; more
information than the calculation
• For items going before the IRS or for litigationo Detailed report is necessary
to address items required
![Page 8: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/8.jpg)
• Valuators may use projections for determining future earnings, or rely on historical data (or both) for determining the value of a company.
• “Fair Market Value (FMV).” FMV is defined as the price at which a business “would change hands between a willing buyer & a willing seller, neither being under a compulsion to buy or sell & both having reasonable knowledge of relevant facts.”
DEFINITION OF VALUE: PROJECTED EARNINGS VS. HISTORICAL DATA
![Page 9: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/9.jpg)
• Earnings
• Cash Flows
• Assets
• Gross Revenues
• Dividends
• Marketability/Liquidity of the ownership interest
BASIC FACTORSAFFECTING VALUE
ENTITY TYPES:• C Corporation
o Two layers of Taxo No preferential Capital Gains Rateo Classification of Personal Goodwill
• S Corporation
• Partnership
• Limited Liability Company
![Page 10: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/10.jpg)
FINANCIAL ANALYSIS
• Provide key benchmarking ratios
for the use of comparable
companies
• Ratios aid the valuation analyst in
adjusting for the expenses or the
income generating potential of the
company being appraised
• Recasting financial statements
![Page 11: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/11.jpg)
RECASTING
THE
INCOME
STATEMENT
• Start with the Profit & Loss Statement
• Presents the results of the operating activities over a period of time
• Net Income or Loss – the difference between revenues & expenses
• Adjustments:o Salaries & Perks of Ownerso Nonrecurring expenses & incomeo Investments & non-operating expenseso Interest paymentso Depreciation expenseo Rent Expense to fair valueo Discretionary expenses
![Page 12: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/12.jpg)
RECASTING
THE
BALANCE
SHEET
• Presents a snapshot of investing & financing activities (including property & debt)
• Assets (monetary & non-monetary)o Casho Inventoryo Propertyo Equipmento Accounts Receivable
• Liabilitieso Accounts Payable, Accrued Expenseso Loans
• Owner’s Equity
• Sample of Adjustments:o Assets & liabilities on the books (…& not on
the books)o Obsolete inventoryo Uncollectible accounts receivableo Loans to ownerso Casho Goodwill
![Page 13: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/13.jpg)
RECASTING THE STATEMENTOF CASH FLOWS
• Recently the cash flow statement has been perceived “as more
important than the income statement…”
• Shows inflows & outflows
o Operating
o Investing
o Financing
![Page 14: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/14.jpg)
APPROACH TOVALUATIONS
• Consider three approaches to
value:
o Asset approach
o Market approach
o Income approach
![Page 15: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/15.jpg)
VALUATION METHODS
• Comparables Price
• Capitalization of Earnings
• Adjusted Book Value (Net Tangible
Assets)
• Present Value of Future Income Stream
• Use of more than one method is
permitted
![Page 16: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/16.jpg)
WEIGHTING THE RESULTS
WEIGHTING THE VALUATION METHODS APPLIED:• The weights must total 100% but cannot be randomly assigned
• The weighting scale must be justified by the appraiser
• The weights assessed by the appraiser should be based on the factors of each individual case
![Page 17: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/17.jpg)
PREMISE OF VALUE
• Under ‘Fair Market Value’ normalizing
adjustments are made for unusual or non-
recurring items
• Under ‘Investment Value’ a valuation
professional can make assumptions
based on who the buyer is
![Page 18: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/18.jpg)
VALUATION FOR 100% INTEREST VS. NON-
CONTROLLING INTEREST
• Controlling:
o Have control of business
decisions
• Non-controlling:
o Cannot force a sale or
liquidation, set company
policy, etc…
![Page 19: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/19.jpg)
APPLICATION OF DISCOUNTS
• Discount for lack of control when valuing
a non-controlling interest
• Nonvoting Discount
• Discount for lack of marketability
• Lack of marketability is applicable for both
controlling interest & non-controlling
interest
![Page 20: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/20.jpg)
REVENUE
RULINGS &
CURRENT
EVENTS
SECTION 2704 –
PROPOSED VALUATION REGULATIONS
• These proposed regulations appear to
limit the availability of minority interest &
marketability discounts used in fair market
valuations for family limited partnerships,
& family controlled entities. These are
proposed regulations, not effective until
final regulations are approved.
![Page 21: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/21.jpg)
ACTION STEPS FOR A VALUATION PROJECT
• Start Early:o Valuation must be performed by a competent professionalo Change in valuation practice, theory & regulation is constant
• Engage specialists:o Certified Valuation Analysts (CVA issued by the National
Association of Certified Valuation Analysts, NACVA)o Certified Exit Planning Advisor (CEPA issued by the Exit
Planning Institute, EPI)
![Page 22: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/22.jpg)
GROWING THE VALUEOF YOUR BUSINESS
![Page 23: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/23.jpg)
VALUE DRIVERS –Help you sell at a higher range for your industry
• Look through the eyes of the buyer
• Value drivers enhance growth prospects or reduce risk of ownership
• Better performance of drivers equals higher selling price (also more earnings along the way)
• Let’s look at the key value drivers
![Page 24: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/24.jpg)
STABLE & PREDICTABLECASH FLOW
• EBITDA – earnings before interest, taxes, depreciation & amortization. Often thought of as cash flow & multiplied by an earnings multiple by purchaser to obtain value
• Reducing the risk of losing cash flow in a transfer leads to a higher value
![Page 25: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/25.jpg)
• Strong management team
• Low turnover
• Can the business run without the owner?
• Workforce experience & expertise
MANAGEMENT &PERSONNEL QUALITY
![Page 26: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/26.jpg)
PROVEN BUSINESS MODELFOR GROWTH
• Documented
• Growth potential of industry
• Additional available markets
• Cross-sell opportunities
• Can high profit margin sales be
expanded?
• Can the company grow by acquisition?
![Page 27: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/27.jpg)
• Low customer concentration
• Repeat sales
• Predictable sales
• Positive sales & margin trends
• Sales volume
• Cyclical or seasonal vs. steady sales
• Strong customer service
DIVERSE SALES
![Page 28: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/28.jpg)
PROCESSES, SYSTEMS & PROCEDURES
• Documented & strong
• Examples:
o Internal accounting control
o Recruiting & retention
o Customer acquisition
o Quality control
o Developed marketing
strategy
![Page 29: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/29.jpg)
RELIABLE FINANCIALINFORMATION• Sales reports broken out by customer,
product line, sku, territory
• Detailed P&L statements with sales, cost of goods sold & margins by product or service, region or department
• Expenses assigned to profit centers
• Updated & understandable financials
• Dashboard with key performance indicators
![Page 30: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/30.jpg)
![Page 31: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/31.jpg)
• Name recognition
• Customer awareness & satisfaction
• Reputation
• Brand recognition
• Lack of legal issues
GOODWILL
![Page 32: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/32.jpg)
BARRIERS
TO
ENTRY
• Copyrights, trademarks & patents
• Trade secrets
• Proprietary designs & know-how
• Brand or trade names
• Training
• Databases
• Exclusive agreements or licenses
![Page 33: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/33.jpg)
ASSETMANAGEMENT
• Receivable aging, collections, bad debt
• Inventory turnover
• Updated & organized equipment
• Vendor relations & concentration
• Payables days outstanding
![Page 34: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/34.jpg)
KEY FINANCIAL DISCIPLINES
• Understand the four mission critical
systems every business needs – cash
flow, operations, finance & revenue
• Know your business & where cash may
be hiding
• Understand debt & how to effectively
use it
• Know & understand your financial
strategy
![Page 35: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/35.jpg)
KEY FINANCIAL DISCIPLINES
• Focus on cash flow from operations
• Use strategic planning & develop a
budget & forecast
• Understand that not all sales are good
• Develop a firm support base of
advisors
![Page 36: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/36.jpg)
REALIZING YOURBUSINESS VALUE
• Bo Burlingham – have a clear understanding of who you are, what you want out of your business & why (to reach your preferred outcome)
• Develop options regarding your eventual exit
• Have a vision of what you will do next
![Page 37: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/37.jpg)
BUY SELLAGREEMENTS
![Page 38: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/38.jpg)
DISCUSSIONAGENDA
• Northwestern Mutual – A Brief
Intro
• Process
• Case Study
• Other Opportunities
![Page 39: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/39.jpg)
NORTHWESTERN MUTUAL –A BRIEF INTRO• Northwestern Mutual has been in operation
since 1857
• Has paid dividends continuously since 1872
• 330 offices serving over 3.7 million people
• $338 billion in assets
• Enjoys the highest financial ratings of any insurance company
![Page 40: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/40.jpg)
• Analyze the existing document
• Operate the agreement
• Build the team
• Implementation of the solution
• Review the outcome
PROCESS
![Page 41: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/41.jpg)
• Three owners of an engineering firm
• Current buy sell formula valued the company at $9mm
• Professional valuation put the company at $21mm
• This disenfranchised each partner’s estate by $4mm
• Solution, re-write the agreement & purchase term insurance
CASE
STUDY
![Page 42: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/42.jpg)
OTHEROPPORTUNITIES
• Transitioning from generation 1 to generation 2
• How does your valuation play into your financial plan or estate plan as a whole?
• Key Employees – how to attract, retain & reward them
![Page 43: Building Your Business Value - LGI CFOlgicfo.com/pages/images/building-your-business-value.pdf · through a merger, sale, or liquidation of the company • Gift & Estate Taxes](https://reader035.vdocuments.mx/reader035/viewer/2022071513/613468dcdfd10f4dd73bb657/html5/thumbnails/43.jpg)
QUESTIONS?THANK YOU FOR JOINING US TODAY!