canadian association of moversdecember 3, 2007 valuation workshop james a. forbes ca●cbv, cfe...

Canadian Association of Movers December 3, 2007

Valuation Workshop

James A. ForbesCA●CBV, CFE

Advisory

PricewaterhouseCoopers

Agenda

Valuation Primer (When, What, Comparable Transactions)

Valuation Approaches (How)

Valuation Issues

Specialty Issues – Succession Planning

Valuation Primer


Valuation Primer

When are Valuations Used?

Financial ReportingMergers & Acquisitions/

Transaction Support

Reorganizations

TaxPurposes

Income Tax &Estate Planning

Tax Disputes

Disputes

Live Buy and SellTransactions

Family Law

Strategy & SuccessionPlanning


Valuation Primer

Value Concepts and Considerations• Value definition sets parameters of the valuation

assignment• Hypothetical • Fair market value (“FMV”) is defined as

- Highest price- Expressed in terms of money or money’s worth- Obtainable in an open and unrestricted market- Between informed and prudent parties- Acting at arm’s length- Under no compulsion to transact

• Other value terms – fair value, value to owner


Valuation Primer

Price is not the same as Fair Market Value!

• Price is the consideration paid in a negotiated open market transaction involving the purchase and sale of an asset

• Parties often do not have equal information, equal bargaining positions, or equal negotiation experience

• Often impossible, in the absence of an actual transaction, to identify and quantify the synergies that a potential buyer may perceive to exist and for which they are willing to pay


Somewhat Comparable Transactions

Moving and Storage Industry

• Recent actual transactions suggest price multiples in the moving and storage industry to be in the range of 0.1 to 2.6 of revenue with a median of 0.5 (See attached slides).

• Price Multiples of Cash flow (unadjusted) ranged from 2.3 to 7.5, with a median of 2.9.

• Price Multiples of actual reported earnings (unadjusted) ranged from 2.6 to 17.1 with a mean of 10.1.


MOVING AND STORAGE INDUSTRYPUBLIC/PRIVATE M&A TRANSACTION MULTIPLES

Target PriceRevenue Price Premium

Date Target Acquiror ($Mill) ($Mill)(3) Revenue Earnings Book(5) Cash Flow(6) (%)(7)

31-Oct-07 Smithway Motor Express Corporation Western Express Inc. 228.8 54.0 0.2 12.6 1.7 n/a 23.0%Trucking Services 31-Dec-06

9-Oct-07 KD Trucking (1989) Ltd. Dalmac Energy 3.6 3.5 1.0 n/a n/a n/a n/aTrucking Services Fiscal 2006

12-Sep-07 US Xpress Enterprises Inc. 1,471.8 312.6 0.2 15.5 1.2 n/a 5.0%

Freight Trucking Service Provider 31-Dec-06

6-Jul-07 Canada Cartage Diversified Income Fund Nautic Partners LLC 278.0 135.0 0.5 n/m 1 n/a 9.0%31-Dec-06

1-Jun-07 N/A N/A 1.7 0.5 0.3 2.7 1.0 2.3 n/aTransfer and storage 31-Dec-06

1-Jun-07 Logistics Express Inc. 4.9 1.6 0.3 n/a n/a n/a n/aTrucking Services Fiscal 2006

10-May-07 Swift Transportation Company Inc. Saint Corporation 3,172.8 2,407.9 0.8 17.1 2.4 n/a 17.0%Regional Truckload Carrier Services 31-Dec-06

17-Apr-07 Top Brass Movers and Storage Limited N/A 0.4 0.4 1.0 2.9 1.5 2.9 n/a

Family-owned moving and storage 31-May-06

1-Feb-07 Madison Freight Systems Inc. Saia Inc. 15.9 2.5 0.2 n/a n/a n/a n/aTrucking Services Fiscal 2006

Price/

Trimac Transportation Services LP

Mountain Lake Acquisition Company

Provides Canada-wide trucking services, warehousing and distribution centres, general cartage, logistics and moving services.


MOVING AND STORAGE INDUSTRYPUBLIC/PRIVATE M&A TRANSACTION MULTIPLES

Target PriceRevenue Price Premium

Date Target Acquiror ($Mill) ($Mill)(3) Revenue Earnings Book(5) Cash Flow(6) (%)(7)

28-Nov-06 Central Freight Lines Inc. 372.1 41.09489 0.1 neg. n/a n/a 6.0%31-Dec-05

25-Oct-06 Gusgo Transport Ltd 5.4 13.8 2.6 n/a n/a n/a n/aTrucking Services Fiscal 2002

2-Oct-06 PJAX Inc. Vitran Corporation Inc. 164.2 111.6 0.7 14.5 4.5 7.5 n/a31-Dec-05

28-Sep-06 USA Truck Inc. Liberate Technologies 439.7 240.4 0.5 15.4 1.6 n/a 24.0%Freight Transportation Services 31-Dec-05

14-Sep-06 Star Transportation Inc. 96.9 39.0 0.4 6.7 1.4 3.3 n/a31-Dec-05

5-Jul-06 Jevic Transportation Inc. 178.6 40.0 0.2 n/a n/a n/a n/aTrucking Transportation Services Fiscal 2005

7-Mar-06 Market Industries Ltd. UTI Worldwide Inc. 350.0 197.1 0.6 n/a n/a n/a n/aTransportation capacity solution services Fiscal 2006

2-Feb-06 Shanlock, Inc. N/A 4.4 3.0 0.7 2.6 2.5 2.4 n/aMoving and storage 31-Dec-05

Mean (excluding high and low): 0.5 10.1 1.7 2.9 13.8%Median 0.5 12.6 1.5 2.9 13.0%High 2.6 17.1 4.5 7.5 24.0%Low 0.1 2.6 0.9 2.3 5.0%

Price/

Sun Capital Partners Inc.

Covenant Transport Inc.

Green Acquistion Company

Newport Partners Income Fund

Regional less-than-truckload (LTL) trucking company that has operations in the southwest, midwest and northwest regions of the United States.

Regional less than truckload carrier providing coverage to the Mid-Atlantic U.S., based in Pittsburgh, PA.

A truckload carrier based in Nashville, TN serving customers throughout the continental U.S.


Notes:

1. Transaction multiples are calculated based on enterprise value, equity price or reported selling price.

2. All figures are in U.S. dollars, unless otherwise indicated.

3. Price = reported selling price (may include liabilities assumed, non-compete agreements and employment/consulting agreements).

4. Enterprise value = equity price + debt/liabilities assumed, non-compete agreements, employment/consulting agreements, or performance bonuses.

5. Book value = preferred equity + minority interest + total common equity.

7. Bloomberg calculates price premium based on the target's 20 day average price prior to announcement.

8. The figures are annualized estimates as trailing 12 month figures are unavailable.

9. "n/a" indicates information was not available from the sources used.

12. "n/m" - not meaningful.

Sources: Bloomberg, DoneDeals, Zephyr, Pratt's StatsDate: October 25, 2007

6. Cash flow in Done Deals is defined as cash flow from operations = net income + depreciation & amortisation + changes in working capital; cash flow in Pratt's Stats is defined as net income + non-cash charges; cash flow in Bloomberg is operating cash flow.

11. Median is the middle value of a list. If the list has an odd number of values, the median is the middle value in the list after sorting the list into increasing order. If the list has an even number of values, the median is equal to the sum of the two middle (after sorting) values divided by two.

10. Mean is the arithmetic average, calculated as the sum of a list of values, divided by the total number of values in the list. The "mean (excluding high and low)" is the arithmetic mean, excluding the highest and lowest value in the list of numbers. If the number of values in the list is equal to or less than 4, the median is used.


Valuation Primer

Value Definitions and Principals• Value

- Is at a point in time- Does not consider hindsight- Is a function of future expected earnings- Is the greater of future earnings potential or the underlying net

asset value• Higher tangible asset backing equates to higher value – greater

downside risk protection• Some level of discount premium may be appropriate in considering

value of a specific ownership interest / shareholding - lack of control / marketability / minority

• Value concept applies equally to purchase of assets or purchase of shares – although purchaser / vendor may have different preferences for deal structure (unique to each deal / owner)


Valuation Primer

Shanlock, Inc. Facts

• Location – Fort Lauderdale

• Years in Business – 10

• Business Description – Moving and Storage

• Income Statement Date – 12/31/2005

• Sales – $4.4 Million

• Net Income (unadjusted) – $1.15 Million

• Book-value (unadjusted) – $1.2 Million

• Cash Flow (unadjusted) – $1.236 Million

What is it Worth?


Valuation Primer

Example – Actual Price Paid

Shanlock, Inc. – Purchase Price of $3.0 Million

• Price to Revenue Multiple 0.7

• Price to Earnings Multiple 2.6

• Price to Book Multiple 2.5

• Price to Cash Flow Multiple 2.4

Valuation Approaches



Overview of Valuation Approaches

Is the Business Enterprise aviable, operating entity?

NoYes

Liquidation Approach

• Asset-Based Methodology• Income-Based Methodology

• Capitalized cash flow / earnings• Capitalized EBIT / EBITDA• Market comparables• Other multiples based approaches

(Rules of Thumb)

Going Concern Approach

• Asset-Based Methodology• Orderly vs. forced



Valuations – Asset Based Methodologies• Asset based methodologies are most commonly used to

value holding companies, real estate and equipment• Most common asset based techniques:

- Liquidation Value• Consider using if business is not a going concern• Orderly vs. Forced• Tax considerations

- Adjusted Net Book Value• Commonly used to value holding companies• Tax considerations

- Replacement Cost



Valuations – Asset Based Methodologies Example

Book Value vs. Going Concern Value vs. Liquidation Value

AssetsBook Value

Going Concern

Value

Liquidation Value

Cash 1,000 1,000 1,000 Accounts Receivable 1,500 1,500 700 Inventory 800 800 600 Prepaids 200 200 -

Land 5,000 8,000 7,000 Equipment 2,500 2,500 1,000

11,000 14,000 10,300

Liabilities

Accounts Payable 1,000 1,000 1,000 Long term debt 2,500 2,800 2,500

3,500 3,800 3,500

Net Assets 7,500 10,200 6,800

Holdco. Co.Balance Sheet

As at December 31, 2003



Income Based Methodologies – What are they and When are they Appropriate?

• Underlying premise:- Profitable company earns a reasonable rate of return on

the invested assets- Value is calculated in relation to the cash flow or

earnings available to the stakeholders- Value determined by converting anticipated future

benefits to a present single amount• Separate consideration of excess or redundant assets that

may be extracted from operating business without impairing operations



Income Based Methodologies• Some possible methodologies:

- Capitalized Earnings / Cash Flow- Capitalized EBIT or EBITDA- Discounted Cash Flow- Other multiples – revenue, book value, etc.

• Appropriate multiples or rates of return developed through:- Traditional financial market models

• Capital Asset Pricing Model, Weighted Average Cost of Capital, Build-Up Approach

- Public company comparables – trading and transactional information

- Analysis, experience and judgment



Income Based Methodologies – Earnings Based• Earnings based methodologies are most commonly used to value

operating and going concern businesses• Most common earnings based techniques:

- Capitalized Earnings or cash flow method• Bases include EBITDA / EBIT / After tax earnings / Cash

flow (i.e. Shanlock had an unadjusted earnings multiple of 2.6)

• Use multiple to convert constant stream of earnings or cash flow to a value

- Discounted Cash Flow (“DCF”)• Present value forecast cash flows



Income Based Methodologies – Potential Normalization Adjustments

• Non-arm’s length transactions• Discretionary compensation• Earnings level – tax minimization incentive versus profit

motive• Unusual/non-recurring expenses• Other non-business assets (redundancies)• Existence of related companies / planning vehicles /

services businesses• Owner/Manager Remuneration



Income Based Methodologies – Factors Impacting Selection of Capitalization Rate.

• External Factors- General economic conditions- Opportunities and threats facing company

• Industry Factors- Outlook- Barriers to entry

• Internal Factors- Strengths and weaknesses facing company- Management- Dependency on key customers or individuals



Earnings Multiple

• Inverse of the Capitalization Rate

• Applied to earnings – either historical or future

• Cap Rate = Discount Rate – Growth Rate

• High risk = High return = Low multiple

• Selection of an appropriate earnings multiple requires professional judgement



Determination of an Appropriate Multiple

• Build Up Method – small closely held companies- Risk free rate + risk premium (subjective)

• Capital Asset Pricing Method (CAPM)- Large businesses that are comparable to public

companies- Based on target company’s risk profile against an

average public company- Discount Rate = Rf + (Beta x Equity risk premium)



Income Based Methodologies – Example

EBITDA EBIT

Revenues 125,000 125,000 Expenses before interest and taxes & dep'n (30,000) (30,000) Normalization adjustments:

One time professional fees (5,000) (5,000) Market compensation adj. (10,000) (10,000) Rent at market value adj. (10,000) (10,000)

EBITDA 70,000 Depreciation (20,000) EBIT 50,000

EBITDA/EBIT multiple 6.0 8.5Operating Enterprise Value 420,000 425,000 Less: Interest bearing debt (LT and ST) (100,000) (100,000) Add: Redundant assets (eg, excess WC) 15,000 15,000

Fair Market Value Equity 335,000 340,000



Valuations – Market Based Methodologies

• Market based methodologies are most commonly used to

value operating and going concern businesses

• Review multiples of comparable companies and

transactions in the marketplace

• Difficult to find an exact comparable company

• Application of public equity market multiples



Other Multiple Based Approaches – Rules of Thumb

Advantages:- Simple to apply- Relevant if widely publicized and used

Disadvantages:- No empirical evidence that market actually follows- How to apply (i.e. before debt?)

- Wide range of values

- Too general for specific company- Sometimes not earnings based (i.e. multiple of sales)

Conclusion

- Used as a reasonability check most often

Valuation Issues


Valuation Issues

Estate and Tax Planning• For documenting corporate reorganizations, CRA requires

reasonable effort to determine valuation• Valuation estimate by expert valuator who is independent

and has relevant industry expertise would meet criteria• Company’s accountants may not qualify as independent

expert valuators• CRA concept of family control – applying a discount on

individual family shareholding generally not appropriate• Better to obtain valuation upfront rather than disputing later

as penalties and interest costs can be quite high


Valuation Issues

Size of Interests/Shareholdings• For example, a 20% interest in the equity of a company

that is controlled by a person or group of persons dealing at arm’s length (through direct ownership of more than 50% of the voting equity .

• It is not likely to have a value equal to 20% of the total value of the company.

• Premium values (more than a proportionate share of the value of the whole) have historically been considered in valuing the holdings of a controlling shareholder or group.

• The sum of the values of all the various equity interests in a business, each valued on their specific merits, will not always equate with the total value of the business.


Valuation Issues

Marketability/Minority Discounts• Key in succession based valuations, there are often issues

relating to various sized holdings of possibly different classes of equity shares, often with varying rights.

• Discounts from the per share total value to account for disadvantages arising from marketability and minority issues must be established.

• A key issue in many private company valuations is the determination of an appropriate minority/marketability discount to apply to a specific minority holding.

• Substantial discounts based on fact may become more commonplace in the future, particularly in family law matters.


Valuation Issues

Redundant Assets• assets that are not necessary to its business operations. • these excess or redundant assets, which might be in the

form of cash, real estate, or other investments, can be distributed to the shareholders or converted to cash and used for other purposes without affecting the business’ operations.

• after considering disposal costs, if any, can constitute a value in addition to the earnings value of the operations.

• examples include: real estate, investments, cars, boats, art.


Valuation Issues

Value Drivers and Diminishers

Positive

• Track records and growth expectations

• Contractual relationships vs. handshakes

• Higher tangible asset value

• Proprietary technology / intangibles

• Niche markets

• Barriers to entry

• Strength / depth of management

Negative

• Declining earnings

• Business based on handshakes

• Reliance on key customers / employees

• Union issues / contingencies

• Outstanding litigation

• Other contingencies

• Business risks

• Economic / industry risks


Valuation Issues

Shareholder Agreement Formulas• Pros and cons of the valuation formula

- Avoid trying to boil it down to a specific formula – differences can cause problems

• Valuation issues to address include:- Formula definition – how detailed- Clear definitions of valuation terms are key – what is “value”?- Agreeing on valuation date- Addressing minority discounts- Designate the valuator(s) up front- Dealing with major assumptions regarding on-going business,

personal / commercial goodwill, treatment of insurance proceeds- Inclusion of clauses to protect each in event of transfer of

ownership - Ensure agreement is vetted by valuator



Valuation Issues in a Family Owned Business

• Goodwill Quantification• Non-arms length transactions• Discretionary compensation• Earnings levels – tax minimization incentive versus profit motive

• Other non-business assets (redundancies)

• Use of publicly available data

Family Owners(50% each)

Opco



Valuation Issues in a Family Owned Business – Goodwill• Definition:

- Intangible Value (Value in Excess of Net Assets)- Ability to earn “super profits” in excess of a normal

return on assets. • Sources:

- Goodwill of location;- Goodwill of product;- Goodwill of service;- Personal Goodwill;- Personal relationships and work of owner/manager;

and- Non-Commercial (Value to Owner)



Valuation Issues for a Business Interest Held Through a Holding Company

Holding company

• Asset based approach

• Latent tax liabilities

• Selling costs

• Tax planning opportunities in realizing the value of the interest

Business interest

• Form of interest (instrument, terms of preference shares, restrictions)

• Value of interest (public vs. private)

• Minority discount/control premium

Owner X

20%

Opco

100%

Holdco

Owner Y

Children X

Trust

50%30%



Valuation Formula Buyout Clauses – Do They Work?• Pros and Cons of the valuation formula• Valuation issues to address include:

- Formula definition – how detailed- Valuation date- Addressing minority discounts- Agreeing the valuator(s) up front- Dealing with major assumptions regarding on-going

business, personal/commercial goodwill, treatment of insurance proceeds



Conclusion

• Ensure key valuation issues are addressed in the valuation formula of your Shareholders Agreement.

• Negotiating the transaction goes beyond price.

canadian association of moversdecember 3, 2007 valuation workshop james a. forbes ca●cbv, cfe...

Documents

pricewaterhousecoopers

valuation primer slide

valuation primer price

value terms fair value

principals value

valuation primer shanlock

agenda valuation primer

bookvalue unadjusted