Advanced Valuation Analytics

Troubled ESOPs

Barry GoodmanCFA, ASA, CPA/ABV, CBA, CFP

Advanced Valuation Analytics, Ltd.

Advanced Valuation Analytics

Balance Sheet

1998 1999 2000 2001 2002 2003Current Assets- Cash and Equivalents $500,000 $550,000 $600,000 $450,000 $300,000 $125,000Trade Receivables 4,000,000 4,500,000 5,000,000 5,500,000 4,200,000 3,100,000Inventory 2,400,000 2,600,000 2,750,000 2,850,000 3,000,000 2,600,000Other Current Assets 200,000 200,000 200,000 200,000 200,000 200,000Total Current Assets 7,100,000 7,850,000 8,550,000 9,000,000 7,700,000 6,025,000Property & Equipment 8,085,885 8,085,885 8,085,885 8,085,885 8,085,885 8,085,885Other Assets 933,346 933,346 933,346 933,346 933,346 933,346Total Assets $16,119,231 $16,869,231 $17,569,231 $18,019,231 $16,719,231 $15,044,231Current Liabilities $3,000,000 $3,500,000 $4,500,000 $6,000,000 $7,000,000 $6,500,000Long-Term Liabilities 5,000,000 4,500,000 4,000,000 3,500,000 3,500,000 3,500,000Other Liabilities 0 0 0 0 0 0Total Liabilities $8,000,000 $8,000,000 $8,500,000 $9,500,000 $10,500,000 $10,000,000Equity $8,119,231 $8,869,231 $9,069,231 $8,519,231 $6,219,231 $5,044,231Total Liabilities & Equity $16,119,231 $16,869,231 $17,569,231 $18,019,231 $16,719,231 $15,044,231

Working Capital $4,100,000 $4,350,000 $4,050,000 $3,000,000 $700,000 ($475,000)

Advanced Valuation Analytics

Income Statement1998 1999 2000 2001 2002 2003

Net Sales $30,000,000 $33,000,000 $32,000,000 $30,000,000 $26,500,000 $23,000,000Cost of Sales 21,500,000 24,500,000 24,000,000 20,000,000 20,000,000 20,000,000Gross Margin 8,500,000 8,500,000 8,000,000 10,000,000 6,500,000 3,000,000Operating Expenses 4,900,000 4,950,000 3,600,000 4,000,000 4,500,000 4,300,000Depreciation 1,100,000 1,350,000 1,900,000 1,900,000 2,000,000 1,900,000Other- 0 0 0 0 0 0Operating Profit 2,500,000 2,200,000 2,500,000 4,100,000 0 (3,200,000)Interest Expense 770,000 930,000 1,050,000 1,030,000 600,000 450,000Other Income (Loss) 25,000 25,000 25,000 25,000 25,000 25,000Income Before Taxes 1,705,000 1,295,000 1,475,000 3,095,000 (575,000) (3,625,000)Income Taxes 716,100 543,900 619,500 1,299,900 (241,500) (1,522,500)Net Income $988,900 $751,100 $855,500 $1,795,100 ($333,500) ($2,102,500)EBI $1,450,000 $1,276,000 $1,450,000 $2,378,000 $0 ($1,856,000)EBIT $2,500,000 $2,200,000 $2,500,000 $4,100,000 $0 ($3,200,000)EBITDA $3,600,000 $3,550,000 $4,400,000 $6,000,000 $2,000,000 ($1,300,000)Net Income (Unadj) $959,306 $775,000 $865,000 $4,021,100 $926,500 ($3,625,000) Depreciation/Amort. 1,100,000 1,350,000 1,900,000 1,900,000 2,000,000 1,900,000 Changes Work Cap 908,330 181,816 (293,408) (3,972,523) (807,008) 4,027,840 Investing Act (1,604,564) (7,918,481) (801,652) (785,937) (1,098,795) (1,767,503) Financing Act (1,967,445) 6,331,404 (2,005,511) (764,264) (1,020,697) (535,337) Dividends 0 0 0 0 0 0Cash Flow ($604,373) $719,739 ($335,571) $398,376 $0 $0

Advanced Valuation Analytics

2006 2007 2008 2009 2010 2011$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

-$2,000,000

-$1,000,000

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

Net Sales EBITDA

Net

Sal

es

EBITD

ANet Sales and EBIDTA

Advanced Valuation Analytics

Valuation Numbers: This Year vs. Last YearLast This Percent

Factor Valuation Year ChangeValue of Company $3,000,000 $2,537,000 -15.4%Value Per Share $5.00 $4.23 -15.4%Value-Guideline Method $4,480,755 $3,031,840 -32.3%Value-Guideline Method-IC $12,651,100 $10,545,000 -16.6%Value-Capitalization 5,061,144 2,174,274 -57.0%Value-Capitalization-IC 13,231,489 9,687,434 -26.8%Current Earnings -$333,500 -$2,102,500 NACash Flow Capacity 450,000 382,025 -15.1%EBITDA Capacity 3,300,000 2,775,000 -15.9%Revenue 26,500,000 23,000,000 -13.2%Total Debt 8,170,345 7,513,160 -8.0%Book Value 6,219,231 5,044,231 -18.9%Current Treasuries 5.77% 4.36% -24.4%Risk Premium 12.88% 13.68% 6.2%Capitalization Rate 6.51% 3.94% -39.5%Comparables Information: Price Index 100.00 82.76 -17.2% Price/Earnings Ratio 18.27 30.24 65.5% Price/EBITDA Ratio 5.62 3.12 -44.5% IC/EBITDA Ratio 7.94 6.40 -19.4% Price/Book Value 0.97 0.57 -41.2% Price/Sales 0.61 0.38 -37.7%

Advanced Valuation Analytics

Capitalization Of Cash Flow Method• Estimate the capitalization rate.• Estimate the cash flow capacity.• Divide the cash flow capacity by the capitalization rate.

Advanced Valuation Analytics

Capitalization Rate• Risk free rate of return• Equity risk premium• Small stock premium• Company-specific risk premium• Equals the discount rate• Subtract the long-term growth rate

Advanced Valuation Analytics

Cash Flow Capacity• Most recent year• Mean or weighted average• Another way to estimate cash flow capacity-

• Projected Year

Advanced Valuation Analytics

Gradual Increase

2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,000,000$1,050,000

$1,102,500$1,157,625

$1,215,506$1,276,281

$1,340,095$1,407,100

$1,477,455

CA

SH

FLO

W

Advanced Valuation Analytics

Erratic History

2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$2,500,000

$500,000

$25,000

$1,500,000

$2,000,000

$1,000,000

$2,400,000$2,520,000

$2,646,000

CA

SH

FLO

W

Advanced Valuation Analytics

Hockey Stick

2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$1,000,000$1,050,000 $1,102,500 $1,157,625 $1,215,506$1,276,281

$2,500,000

$3,125,000

$3,906,250

CA

SH

FLO

W

Advanced Valuation Analytics

Sources of Market Data• Publicly-traded stocks• Iba data base• Pratt’s stats• Done deals• Zweig’s valuation survey• Other specialized sources

Advanced Valuation Analytics

Company Results• Net income• EBITDA• Cash flow• Owner’s discretionary cash flow• Revenue

Advanced Valuation Analytics

Discounts/PremiumsDoes the interest

holder have control over the entity?

Is there a publicmarket for the

interest?

YES NO

Is there a publicmarket for the

interest?

Controlling,as if freely

traded value

YESYES

Controlling,non freely

traded value

Non-controlling,as if freely

traded value

NO NO

Non-controlling,non freely

traded value