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VALUATION OF THE
COMMON STOCK
of
[@BI203]
[@BI206]
As of:
[@BI212]
Report Dated
9/13/17
Wednesday, September 13, 2017
Client
Address
City, State, Zip
Dear :
The enclosed valuation report has been developed for the exclusive and confidential use
of .... The report has been prepared by (firm name) and was made by and/or under the
direct supervision of the undersigned.
I hereby certify that, to the best of my knowledge and belief, the statements of fact
contained in this report are true and correct, and this report has been prepared in
conformity with the Uniform Standards of Professional Appraisal Practice of The Appraisal
Foundation and the ..... The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and represent my personal, unbiased,
professional analyses, opinions, and conclusions.
Sincerely yours,
FIRM NAME
Individual's name
Title
TABLE OF CONTENTS
INTRODUCTION..........................................................................................................................................................6
ASSIGNMENT DEFINITION............................................................................................................................................6
SUMMARY OF THE CONCLUSION OF THIS REPORT......................................................................................................6
PREMISE OF VALUE.....................................................................................................................................................6
STATEMENT OF SCOPE AND LIMITATIONS....................................................................................................................7
STANDARD OF VALUE.................................................................................................................................................7
THE ECONOMIC OUTLOOK...................................................................................................................................7
THE NATIONAL ECONOMY..........................................................................................................................................7
THE REGIONAL ECONOMY..........................................................................................................................................8
THE LOCAL ECONOMY................................................................................................................................................8
INDUSTRY OUTLOOK...................................................................................................................................................8
OVERVIEW OF THE COMPANY.............................................................................................................................8
BRIEF HISTORY............................................................................................................................................................8
MANAGEMENT.............................................................................................................................................................8
PRODUCTS AND MARKETS..........................................................................................................................................8
MARKETING.................................................................................................................................................................8
CUSTOMERS.................................................................................................................................................................8
COMPETITIVE ENVIRONMENT......................................................................................................................................8
SUPPLY........................................................................................................................................................................8
DESCRIPTION OF FACILITIES........................................................................................................................................8
PERSONNEL..................................................................................................................................................................8
FINANCIAL ANALYSIS.............................................................................................................................................8
NON-PUBLIC PEER GROUP FOR FINANCIAL PERFORMANCE COMPARISON................................................................8
BOOK VALUE AND GENERAL FINANCIAL CONDITION OF THE BUSINESS...................................................................9
Financial Position and Leverage...........................................................................................................................9
Adjustments to the Balance Sheet.........................................................................................................................11
EARNINGS PERFORMANCE AND CAPACITY................................................................................................................12
Reported Revenues and Margins..........................................................................................................................12
Reported Pre-Tax Income.....................................................................................................................................13
CASH FLOW ANALYSIS..............................................................................................................................................14
Adjustments to Reported Earnings.......................................................................................................................14
KEY FINANCIAL RATIO ANALYSIS.............................................................................................................................15
DETERMINATION OF FAIR MARKET VALUE.................................................................................................18
OVERVIEW OF VALUATION APPROACHES..................................................................................................................18
VALUATION METHODOLOGIES CONSIDERED BUT REJECTED....................................................................................18
Book Value Method...............................................................................................................................................18
Adjusted Book Value - Going Concern Method....................................................................................................18
Liquidation Value Method....................................................................................................................................18
Capitalization of Earnings Method......................................................................................................................19
Discounted Cash Flow Method............................................................................................................................19
Capitalization of Excess Earnings Method..........................................................................................................19
Market Approach Methods...................................................................................................................................19
Company Transactions Method............................................................................................................................19
VALUATION METHODS USED....................................................................................................................................20
Book Value............................................................................................................................................................20
Adjusted Book - Going Concern Value.................................................................................................................20
Adjusted Book - Liquidation Value.......................................................................................................................21
Capitalization of Earnings Method......................................................................................................................22
Discounted Cash Flow Method - Summary Projections.......................................................................................32
Discounted Cash Flow Method - Detailed Projections........................................................................................45
Excess Earnings Method......................................................................................................................................54
Market Approach- PubliclyTraded Guideline Company Methods.......................................................................58
Market Approach- Industry Pricing Ratio Methods.............................................................................................86
Transactions in the Company's Stock...................................................................................................................95
CONCLUSION OF VALUE.......................................................................................................................................96
DISCOUNT APPLIED...................................................................................................................................................98
DISCOUNT APPLIED...................................................................................................................................................98
TEST OF REASONABLENESS:..............................................................................................................................98
APPENDIX A: CONTINGENT AND LIMITING CONDITIONS......................................................................100
APPENDIX B: QUALIFICATIONS OF APPRAISER.........................................................................................101
APPENDIX C: SOURCES OF INFORMATION..................................................................................................102
APPENDIX D: SYNOPSES OF GUIDELINE COMPANIES..............................................................................103
INTRODUCTION
Assignment Definition
(Firm's name) has been retained by .... to render the business appraisal services described
below. The following information summarizes our assignment:
Client Name
XXX
Business Name
[@BI203]
Type of Entity
(C-Corporation, S-Corporation, ...)
State of Incorporation/Organization
XXX
Principle Business Location
XXX
Business Interest Valued
[@BI214] interest in ......
Standard of Value
(Fair Market Value, Fair Value ...)
Premise of Value
(Non-Marketable, Minority Interest, ...)
Effective Date of Appraisal
[@BI212]
Purpose and Intended Use of Appraisal
[@BI210]
Summary of the Conclusion of This Report
[BLOCKINCLUDE ID{No Per Share} INCLUDEIF{or(CA226=0,CA227=0,AL55=0)}]
The conclusion of the (fair market value, fair value, ...) of a [@BI214]interest in [@BI203]as of
[@BI212] is $[@CG168]. This opinion is rendered in the context of the specific assignment
described above and is applicable only for the period noted above. The conclusion is
expressed on a (non-marketable/marketable, minority/controlling) interest basis.
[ENDBLOCKINCLUDE ID{No Per Share}]
[BLOCKINCLUDE ID{Per Share Include} INCLUDEIF{and(CA2260,CA2270,AL550)}]
The conclusion of the (fair market value, fair value, ...) of a [@BI214]interest in [@BI203]as of
[@BI212]is $[@CG168]($[@CG169]per share of stock). his opinion is rendered in the context of
the specific assignment described above and is applicable only for the period noted above.
The conclusion is expressed on a (non-marketable/marketable, minority/controlling) interest
basis.
[ENDBLOCKINCLUDE ID{Per Share Include}]
Premise of Value
Although valuation is a range concept, current valuation theory suggests that there are
three basic "levels" of value applicable to a business or business interest. The levels of
value are respectively:
Controlling interest: the value of the enterprise as a whole
As-if freely tradable minority interest: the value of a minority interest, lacking control, but enjoying the benefit of
market liquidity
Non-marketable minority interest: the value of a minority interest, lacking both control and market liquidity
This valuation is prepared on a ... interest basis.
Statement of Scope and Limitations
This valuation report has been prepared in accordance with the (name standards and
governing body). In accordance with these standards, a Statement of Contingent and
Limiting Conditions is provided as Appendix A and a Statement of Appraiser Qualifications is
included in Appendix B.
Preparation of this report involved the review of substantial documentation with respect to
the Company, the ... industry and the national economy. Information reviewed relative to
the Company is summarized in Appendix C. Sources of information related to the industry
and the national economy are cited specifically at appropriate sections of the report.
In conjunction with the preparation of this report, ..... of (firm's name) visited with
management of [@BI203]. This visit, together with other conversations with management,
provided important perspective to our understanding of the information reviewed and
analyzed in the preparation of this valuation opinion.
In all cases we have relied upon the referenced information without independent verification.
This report is, therefore, dependent upon the information provided. A material change in
critical information relied upon in this report would be cause for a reassessment to
determine the effect, if any, upon our conclusion.
Standard of Value
Fair market value is defined as follows:
The amount at which property would change hands between a willing seller and a willing
buyer when neither is under compulsion and when both have reasonable knowledge of the
relevant facts.
Fair market value is similarly defined in various sections of the Internal Revenue Code,
related regulations and interpretations (e.g., Revenue Ruling 59-60). Appendix D includes
some further discussion of the standard.
[Fair Value is defined as follows: .....].
[Investment value is defined as the value of a business or business interest to a specific
owner or prospective owner].
THE ECONOMIC OUTLOOK
In conjunction with the preparation of this valuation opinion, we have reviewed and analyzed
current economic conditions and how the Company and the industries in which it competes
might be impacted.
The National Economy
[For report text and analysis on the national economy by quarter that you can "drop" into
your report, call Wiley-ValuSource at 1-800-825-8763]
The Regional Economy
The Local Economy
Industry Outlook
[For industry-specific report text and analysis that you can "drop" into your report, call WileyValuSource at 1-800-825-8763]
OVERVIEW OF THE COMPANY
Brief History
[@BI203] was founded in ... on .... by ...
Management
Products and Markets
Marketing*
Customers
Competitive Environment
Supply
Description of Facilities
Personnel
FINANCIAL ANALYSIS
Non-Public Peer Group For Financial Performance Comparison
[BLOCKINCLUDE ID{RMA} INCLUDEIF{BZ244=0}]
For purposes of comparison with industry financial measures available from non-public
company sources, we reviewed the Annual Statement Studies, published by Robert Morris
Associates ("RMA"). RMA compiled average percentage income statement and balance
sheets and key financial ratios of [@BZ242] classified under Standard Industrial Classification
(SIC) #[@BW242]. The selected RMA group includes [@BW245] companies. We believe the
RMA data provide limited comparative perspective and strict comparisons should be made
with caution.
[ENDBLOCKINCLUDE ID{RMA}]
[BLOCKINCLUDE ID{IRS} INCLUDEIF{BZ244=1}]
For purposes of comparison with industry financial measures available from non-public
company sources, we reviewed the IRS Corporate Records, published by the Internal
Revenue Service ("IRS"). IRS compiled average percentage income statement and balance
sheets and key financial ratios of [@BX243] classified under Standard Industrial Classification
(SIC) #[@BX242]. The selected IRS group includes [@BX245] companies. We believe the IRS
data provide limited comparative perspective and strict comparisons should be made with
caution.
[ENDBLOCKINCLUDE ID{IRS}]
Book Value and General Financial Condition of the Business
Financial Position and Leverage
As of [@Balance Sheet!D3], total assets were $[@M392], total liabilities were $[@M402] and
reported equity was approximately $[@M403].
The majority of assets include ..... As of [@Balance Sheet!D3], the Company had $[@M383] in
cash. From ... to ... total asset growth was .....
The majority of liabilities include ..... Accounts Payable were $[@M394] as of the date of
valuation. ...........
Historic Balance Sheets
[RANGEINCLUDE ID{Historic Balance Sheets} RANGE{AJ381:BD404}]
[ENDRANGEINCLUDE]
[BLOCKINCLUDE ID{BS ADJ} INCLUDEIF{M429M403}]
Adjustments to the Balance Sheet
The Company's reported book value at the date of valuation was $[@M403]. In
Schedule ..., we have identified adjustments that are required to restate
shareholders' equity and reflect the net asset value of the Company. The numbered
items below correspond to the same adjustments found in Schedule ....
[BLOCKINCLUDE ID{Cash} INCLUDEIF{M383M409}]
The Company's cash balance has been adjusted from $[@M383] to $[@M409] due
to .....
[ENDBLOCKINCLUDE ID{Cash}]
[BLOCKINCLUDE ID{A/R} INCLUDEIF{M384M410}]
The accounts receivable were adjusted to their estimated realizable value as of the
[@BI212] date of valuation. In order to quantify the adjustment, the Company's
accounts receivable aging report as of [@BI212] were reviewed and discussed with
management.
[ENDBLOCKINCLUDE ID{A/R}]
[BLOCKINCLUDE ID{Inventory} INCLUDEIF{M385M411}]
Inventory was adjusted to its estimated fair market value as of the [@BI212] date of
valuation. The adjustment was based on .......
[ENDBLOCKINCLUDE ID{Inventory}]
[BLOCKINCLUDE ID{Other C/A} INCLUDEIF{M386M412}]
Other current assets were adjusted to their estimated fair market values as of the
[@BI212] date of valuation. The adjustment was based on .....
[ENDBLOCKINCLUDE ID{Other C/A}]
[BLOCKINCLUDE ID{Fixed Assets} INCLUDEIF{M388M414}]
The Company's fixed assets were adjusted to their estimated fair market values as of
[@BI212]. The fixed assets' estimated fair market value was determined by .......
[ENDBLOCKINCLUDE ID{Fixed Assets}]
[BLOCKINCLUDE ID{Other noncurrents} INCLUDEIF{M390M416}]
Other non-current assets were adjusted to their estimated fair market values as of
[@BI212]. Specifically, adjustments were made to .....................
[ENDBLOCKINCLUDE ID{Other noncurrents}]
[BLOCKINCLUDE ID{Intangible} INCLUDEIF{M389M415}]
Intangible assets were adjusted to their estimated fair market value as of [@BI212].
The adjustment was based on .................
[ENDBLOCKINCLUDE ID{Intangible}]
[BLOCKINCLUDE ID{Nonoperating assets} INCLUDEIF{M391M417}]
For valuation purposes, the non-operating assets were adjusted to their estimated
fair market value as of [@BI212]. The basis for the adjustments was.....
[ENDBLOCKINCLUDE ID{Nonoperating assets}]
[BLOCKINCLUDE ID{A/P} INCLUDEIF{M394M420}]
Accounts payable were adjusted as of the [@BI212] date of valuation. The basis for
the adjustment was ...........
[ENDBLOCKINCLUDE ID{A/P}]
[BLOCKINCLUDE ID{Short Term Notes} INCLUDEIF{M395M421}]
The Company's short-term notes payable were adjusted to .....
[ENDBLOCKINCLUDE ID{Short Term Notes}]
[BLOCKINCLUDE ID{CPLTD} INCLUDEIF{M396M422}]
The current portion of the Company's long-term debt has been adjusted to .......
[ENDBLOCKINCLUDE ID{CPLTD}]
[BLOCKINCLUDE ID{LTD} INCLUDEIF{M399M425}]
Long-term debt has been adjusted to ...
[ENDBLOCKINCLUDE ID{LTD}]
[BLOCKINCLUDE ID{Other NCL} INCLUDEIF{M400M426}]
Other non-current liabilities have been adjusted to ......
[ENDBLOCKINCLUDE ID{Other NCL}]
[BLOCKINCLUDE ID{Nonoperating Liabilities} INCLUDEIF{M401M427}]
Non-operating liabilities were adjusted to ......
[ENDBLOCKINCLUDE ID{Nonoperating Liabilities}]
As adjusted, total shareholders' equity as of the valuation date was $[@M429].
[ENDBLOCKINCLUDE ID{BS ADJ}]
Adjusted Balance Sheet
[RANGEINCLUDE ID{Adjusted Balance Sheet} RANGE{AJ407:AL430}]
[ENDRANGEINCLUDE]
Earnings Performance and Capacity
Reported Revenues and Margins
In [@M381], total revenues were $[@M436] compared to $[@O436] for the prior year.
This represented an [increase/decrease] of approximately $[@M113].
Over the ... year period, the Company's gross profit margin averaged about ...% of
revenues. The gross profit margin for [@M381] was [@M145]. This compares to
[@M62] as reported in the [@M58] data. The gross profit ....
In [@M381], the Company's operating profit margin was [@M147] compared to [@O147]
for the prior year and [@M65] as reported in the [@M58] data. The operating profit .....
Reported Margin Analysis
[RANGEINCLUDE ID{Reported Margin} RANGE{K141:AE152}]
[ENDRANGEINCLUDE]
Reported Pre-Tax Income
The Company's pre-tax income averaged approximately ....... per year from ... to ... with a trend that has been generally ...
Historic Income Statement
[RANGEINCLUDE ID{Historic Income Statement} RANGE{AJ434:BD445}]
[ENDRANGEINCLUDE]
Cash Flow Analysis
The Company's cash flows have .......
[BLOCKINCLUDE ID{Adjustment to Earnings}
INCLUDEIF{SUM(M447:AE447)SUM(M466:AE466)}]
Adjustments to Reported Earnings
Schedule ... adjusts the Company's historical earnings for unusual events, nonrecurring items, discretionary expenditures and the like. The adjustments include:
[BLOCKINCLUDE ID{Revenue Adjust} INCLUDEIF{SUM(M436:AE436)SUM(M455:AE455)}]
Revenue has been adjusted for .....
[ENDBLOCKINCLUDE ID{Revenue Adjust}]
[BLOCKINCLUDE ID{COGS Adjust} INCLUDEIF{SUM(M437:AE437)SUM(M456:AE456)}]
Cost of Goods Sold has been adjusted for .....
[ENDBLOCKINCLUDE ID{COGS Adjust}]
[BLOCKINCLUDE ID{Operating Adjust} INCLUDEIF{SUM(M439:AE439)SUM(M458:AE458)}]
The following operating expenses have been adjusted ........
[ENDBLOCKINCLUDE ID{Operating Adjust}]
[BLOCKINCLUDE ID{Officers' Comp Adjust}
INCLUDEIF{SUM(M440:AE440)SUM(M459:AE459)}]
Officers' Compensation has been adjusted to ... by ....
[ENDBLOCKINCLUDE ID{Officers' Comp Adjust}]
[BLOCKINCLUDE ID{Depreciation Adjust} INCLUDEIF{SUM(M441:AE441)SUM(M460:AE460)}]
Depreciation expense has been adjusted ........
[ENDBLOCKINCLUDE ID{Depreciation Adjust}]
[BLOCKINCLUDE ID{Interest Adjust} INCLUDEIF{SUM(M442:AE442)SUM(M461:AE461)}]
Interest expense has been adjusted ........
[ENDBLOCKINCLUDE ID{Interest Adjust}]
[BLOCKINCLUDE ID{Other Inc/Exp Adjust}
INCLUDEIF{SUM(M444:AE444)SUM(M463:AE463)}]
Other income/expense has been adjusted ........
[ENDBLOCKINCLUDE ID{Other Inc/Exp Adjust}]
[BLOCKINCLUDE ID{Income Taxes Adjust}
INCLUDEIF{SUM(M446:AE446)SUM(M465:AE465)}]
Income taxes have been adjusted ........
[ENDBLOCKINCLUDE ID{Income Taxes Adjust}]
[ENDBLOCKINCLUDE ID{Adjustment to Earnings}]
[BLOCKINCLUDE ID{Annualize} INCLUDEIF{BO326BO327}]
The .... month period ending .... has been annualized by .......
[ENDBLOCKINCLUDE ID{Annualize}]
Key Financial Ratio Analysis
[BLOCKINCLUDE ID{RMA} INCLUDEIF{BZ244=0}]
Schedule ....... presents a key financial ratio analysis of [@BI203] and similarly sized
businesses operating in the same industry. Five categories of ratios (liquidity, debt
coverage, leverage, profitability, and miscellaneous) were used to compare the
operating results of [@BI203] with those of the industry median quartile as computed
by Robert Morris Associates.
[ENDBLOCKINCLUDE ID{RMA}]
[BLOCKINCLUDE ID{IRS} INCLUDEIF{BZ244=1}]
Schedule ....... presents a key financial ratio analysis of [@BI203] and similarly sized
businesses operating in the same industry. Five categories of ratios (liquidity, debt
coverage, leverage, profitability, and miscellaneous) were used to compare the
operating results of [@BI203] with those of the industry median quartile as computed
by the Internal Revenue Service.
[ENDBLOCKINCLUDE ID{IRS}]
The liquidity ratios give an indication of the Company's ability to meet its current
obligations with the use of current assets. As shown in the comparative ratio
analysis, the [@BI203]'s liquidity ratios are ...... compared to the industry median.
This indicates ...........
The coverage ratios indicate the Company's ability to meet its obligations related to
interest bearing debt. As shown in the comparative ratio analysis, [@BI203]'s
coverage ratios are ..... compared to the industry median. This indicates ......
The leverage ratios indicate the extent to which the Company's assets are funded by
debt. As shown in the comparative ratio analysis schedule, [@BI203]'s leverage ratios
are ...... compared to the industry median. This indicates ........
The operating ratios measure management's effectiveness in overseeing the
Company's resources. Compared to the industry median, [@BI203]'s operating ratio
are ...... This indicates ...........
Ratio Analysis & Comparison
[RANGEINCLUDE ID{Ratio Analysis} RANGE{K77:AG102}]
[ENDRANGEINCLUDE]
DETERMINATION OF FAIR MARKET VALUE
Overview of Valuation Approaches
Three basic approaches to value are defined in the Business Valuation Standards of
the American Society of Appraisers:
Asset Based Approach: A general way of determining a value indication of a business's assets and/or
equity using one or more methods based directly on the value of the assets of the business less liabilities.
Income Approach: A general way of determining a value indication of a business's assets and/or equity
using one or more methods wherein a value is determined by converting anticipated benefits.
Market Approach: A general way of determining a value indication of a business's assets and/or equity
using one or more methods that compare the subject to similar investments that have been sold.
The various methods of valuation that appraisers use in practice are typically considered as subdivisions of
these broad approaches. Valuation methods under the Market and Income approaches generally contain
common characteristics such as measures of earning power, discount rates and/or capitalization rates and
multiples.
[BLOCKINCLUDE ID{Rejected} INCLUDEIF{true}]
Valuation Methodologies Considered but Rejected
In our valuation analysis of a [@BI214] interest in the common stock of [@BI203], the
following valuation methodologies were considered but rejected as applicable to the
valuation assignment.
[BLOCKINCLUDE ID{Book Value Reject} INCLUDEIF{and(CI145=0,CK145"N")}]
Book Value Method
The Company's book value as of [@BI212] was $[@CG145]. Book value is an
accounting value that is calculated by subtracting total liabilities from total assets.
Book value was considered for determining the value of [@BI203] because ....... It was
rejected because .....
[ENDBLOCKINCLUDE ID{Book Value Reject}]
[BLOCKINCLUDE ID{Net Asset Rejected} INCLUDEIF{and(CI146=0,CK146"N")}]
Adjusted Book Value - Going Concern Method
The adjusted book value - going concern method develops a valuation indication by
adjusting the reported book values of a subject company's assets to their actual or
estimated fair market values and subtracting its liabilities (adjusted to fair market
value, if appropriate). This method was considered in the valuation of [@BI203]
because .... It was rejected because .......
[ENDBLOCKINCLUDE ID{Net Asset Rejected}]
[BLOCKINCLUDE ID{Liquidation Rejected} INCLUDEIF{and(CI147=0,CK147"N")}]
Liquidation Value Method
The liquidation value method develops a valuation indication by adjusting the
reported book values of a subject company's assets to their actual or estimated fair
market values as if they were to be sold in an orderly, piecemeal manner and
subtracting liabilities (adjusted to their fair market value, if appropriate). This
method was considered in the valuation of [@BI203] because .... It was rejected
because .......
[ENDBLOCKINCLUDE ID{Liquidation Rejected}]
[BLOCKINCLUDE ID{Cap of Earnings Rejected} INCLUDEIF{and(CI148=0,CK148"N")}]
Capitalization of Earnings Method
The capitalization of earnings method develops a valuation indication by multiplying
an earnings or cash flow base by a risk-adjusted capitalization factor. This method
was considered in the valuation of [@BI203] because .... It was rejected because .......
[ENDBLOCKINCLUDE ID{Cap of Earnings Rejected}]
[BLOCKINCLUDE ID{DCF Rejected} INCLUDEIF{or(and(CI149=0,ck149"N"),
and(CI150=0,CK150"N"))}]
Discounted Cash Flow Method
The discounted cash flows method develops a valuation indication by discounting a
projected earnings or cash flow stream to the present value. This method was
considered in the valuation of [@BI203] because .... It was rejected because .......
[ENDBLOCKINCLUDE ID{DCF Rejected}]
[BLOCKINCLUDE ID{Cap of Excess Rejected} INCLUDEIF{and(CI151=0,CK151"N")}]
Capitalization of Excess Earnings Method
The capitalization of excess earnings method develops a valuation indication by
multiplying an earnings base by an intangible asset capitalization factor and adding
tangible assets and liabilities (adjusted to fair market value, if appropriate). This
method was considered in the valuation of [@BI203] because .... It was rejected
because .......
[ENDBLOCKINCLUDE ID{Cap of Excess Rejected}]
[BLOCKINCLUDE ID{Market Approach Rejected} INCLUDEIF{cn162=1}]
Market Approach Methods
The market approach develops a valuation indication based on valuation factors
derived from guideline companies or industry pricing statistics. This method was
considered in the valuation of [@BI203] because .... It was rejected because .......
[ENDBLOCKINCLUDE ID{Market Approach Rejected}]
[BLOCKINCLUDE ID{Transactions Rejected} INCLUDEIF{and(ci161=0,CK161"N")}]
Company Transactions Method
Schedule ... shows recent transactions involving the Company's stock. We have
rejected these transactions as indicative of the Company's fair market value as of the
date of valuation because .......
[ENDBLOCKINCLUDE ID{Transactions Rejected}]
[BLOCKINCLUDE ID{scratch pad 1 rejected} INCLUDEIF{and(ci162=0,ck162"N")}]
[@CA162]
Enter text for scratch pad analysis here.
[ENDBLOCKINCLUDE ID{scratch pad 1 rejected}]
[BLOCKINCLUDE ID{scratch pad 2 rejected} INCLUDEIF{and(ci163=0,ck163"N")}]
[@CA163]
Enter text for scratch pad analysis here.
[ENDBLOCKINCLUDE ID{scratch pad 2 rejected}]
[ENDBLOCKINCLUDE ID{Rejected}]
Valuation Methods Used
[RANGEINCLUDE ID{Valuation Conclusions} RANGE{CA142:CI168}]
[ENDRANGEINCLUDE]
[BLOCKINCLUDE ID{Book Value Used} INCLUDEIF{CI1450}]
Book Value
The book value of [@BI203] as of [@BI212] was $[@CG145]. Book value is an
accounting value that is calculated by subtracting total liabilities from total assets. In
our opinion, book value is an accurate measure of the Company's fair market value
as of because ....
[ENDBLOCKINCLUDE ID{Book Value Used}]
[BLOCKINCLUDE ID{Going Concern Value} INCLUDEIF{CI1460}]
Adjusted Book - Going Concern Value
The adjusted book value - going concern method develops a valuation indication by
adjusting the reported book values of a subject company's assets to their actual or
estimated fair market values and subtracting its liabilities (adjusted to fair market
value, if appropriate). The indicated value should not be interpreted as an estimate
of liquidation value. Neither an orderly nor a forced liquidation is contemplated.
The estimate of the Company's net asset value is developed in Schedule ......, where
required adjustments are applied to reported equity. The specific adjustments were
described in the analysis of the balance sheet. The result of adjusting the balance
sheet is an adjusted net equity of $[@CU188].
[BLOCKINCLUDE ID{Minority Discount Include} INCLUDEIF{CA199=1}]
Application of Minority Interest Discount
A minority interest discount is a reduction in the initial indicated value due to a lack
of control prerogatives such as declaring dividends, liquidating the company, going
public, issuing or buying stock, directing management, setting management's
salaries, etc. In our opinion, a minority interest discount of [@CS190] is appropriate
because .......
[ENDBLOCKINCLUDE ID{Minority Discount Include}]
[FILEINCLUDE ID{marketability} INCLUDEIF{ca200=1} FILE{MARKET.DOC}]
[ENDFILEINCLUDE ID{marketability}]
[BLOCKINCLUDE ID{Marketability Discount Include} INCLUDEIF{CA200=1}]
Discount Applied
In our opinion, a discount of [@CS192] is required for lack of marketability. The
discount reflects an expectation for ........
[ENDBLOCKINCLUDE ID{Marketability Discount Include}]
[BLOCKINCLUDE ID{Minority Yes} INCLUDEIF{and(CA199=1,CA200=0)}]
As determined after application of a [@CS190] minority interest discount, the indicated
fair market value of the Company's common stock is $[@CU195].
[ENDBLOCKINCLUDE ID{Minority Yes}]
[BLOCKINCLUDE ID{Marketability Yes} INCLUDEIF{and(CA199=0,CA200=1)}]
As determined after application of a [@CS192] discount for lack of marketability, the
indicated fair market value of the Company's common stock is $[@CU195].
[ENDBLOCKINCLUDE ID{Marketability Yes}]
[BLOCKINCLUDE ID{Minority and Marketability Yes} INCLUDEIF{and(CA199=1,CA200=1)}]
As determined after application of a [@CS190] minority interest discount and a
[@CS192] discount for lack of marketability, the indicated fair market value of the
Company's common stock is $[@CU195].
[ENDBLOCKINCLUDE ID{Minority and Marketability Yes}]
[ENDBLOCKINCLUDE ID{Going Concern Value}]
[BLOCKINCLUDE ID{Liquidation Value} INCLUDEIF{CI1470}]
Adjusted Book - Liquidation Value
The adjusted book value - liquidation method develops a valuation indication by
adjusting the reported book values of a subject company's assets to their actual or
estimated liquidation values and subtracting its liabilities (adjusted to fair market
value, if appropriate).
The estimate of the Company's liquidation value is developed in Schedule ......, where
required adjustments are applied to reported equity. The specific adjustments were
described in the analysis of the balance sheet. The result of adjusting the balance
sheet is an adjusted net equity of $[@CU204].
[BLOCKINCLUDE ID{Minority Discount Include1} INCLUDEIF{CA199=1}]
Application of Minority Interest Discount
A minority interest discount is a reduction to the initial indicated value due to a lack
of control prerogatives such as declaring dividends, liquidating the company, going
public, issuing or buying stock, directing management, setting management's
salaries, etc. In our opinion, a minority interest discount of [@CS206] is appropriate
because .......
[ENDBLOCKINCLUDE ID{Minority Discount Include1}]
[FILEINCLUDE ID{Marketability Discount1} INCLUDEIF{and(CI146=0,CA200=1)}
FILE{MARKET.DOC}]
[ENDFILEINCLUDE ID{Marketability Discount1}]
[BLOCKINCLUDE ID{Marketability Discount Include1} INCLUDEIF{and(CI146=0,CA200=1)}]
Discount Applied
In our opinion, a discount of [@CS208] is required for lack of marketability. The
discount reflects an expectation for ........
[ENDBLOCKINCLUDE ID{Marketability Discount Include1}]
[BLOCKINCLUDE ID{Market1} INCLUDEIF{and(CI1460,CA200=1)}]
The discount for lack of marketability has been discussed above. In our opinion, a
discount of [@cs208] is required for lack of marketability. The discount reflects .......
[ENDBLOCKINCLUDE ID{Market1}]
[BLOCKINCLUDE ID{Minority1 Yes} INCLUDEIF{and(CA199=1,CA200=0)}]
As determined after application of a [@CS206] minority interest discount, the indicated
fair market value of the Company's common stock is $[@CU211].
[ENDBLOCKINCLUDE ID{Minority1 Yes}]
[BLOCKINCLUDE ID{Marketability1 Yes} INCLUDEIF{and(CA199=0,CA200=1)}]
As determined after application of a [@CS208] discount for lack of marketability, the
indicated fair market value of the Company's common stock is $[@CU211].
[ENDBLOCKINCLUDE ID{Marketability1 Yes}]
[BLOCKINCLUDE ID{Minority and Marketability1 Yes} INCLUDEIF{and(CA199=1,CA200=1)}]
As determined after application of a [@CS206] minority interest discount and a
[@CS208] discount for lack of marketability, the indicated fair market value of the
Company's common stock is $[@CU211].
[ENDBLOCKINCLUDE ID{Minority and Marketability1 Yes}]
[ENDBLOCKINCLUDE ID{Liquidation Value}]
[BLOCKINCLUDE ID{Capitalization of Earnings} INCLUDEIF{CI1480}]
Capitalization of Earnings Method
Capitalization of earnings requires estimates of: (1) ongoing earning power and (2) a
capitalization rate (or multiple). The capitalization rate is the required rate of return
minus the growth rate. The capitalization multiple is the reciprocal of the
capitalization rate. "Capitalization" of earnings effectively determines the present
value of the Company's ongoing earning or cash flow power, growing perpetually at a
fixed rate and discounted at the required rate of return.
Estimate of Ongoing Earning Power
[BLOCKINCLUDE ID{coe Pretax earnings} INCLUDEIF{and(BU202=1,BU203=1)}]
The analysis in Schedule .... derives two measures of weighted average pre-tax
earnings.
$[@AL77]
effects of ........
Dollar-based estimate: Weighted average dollar amount which helps to capture the
$[@AL89]
Margin-based estimate: Weighted average pre-tax earnings margin ([@AL87])
times weighted average revenues ($[@AL83]). Sustainable revenues and margins are estimated in the
context of ....
The analysis provides an estimate of ongoing pre-tax earnings of $[@AL91] by [averaging, weight
averaging, etc]. the results of the dollar-based and margin-based estimates.
[ENDBLOCKINCLUDE ID{coe Pretax earnings}]
[BLOCKINCLUDE ID{coe Aftertax earnings} INCLUDEIF{and(bu202=1,bu203=2)}]
The analysis in Schedule .... derives two measures of weighted average pre-tax
earnings.
$[@AL77]
effects of ........
Dollar-based estimate: Weighted average dollar amount which helps to capture the
$[@AL89]
Margin-based estimate: Weighted average pre-tax earnings margin ([@AL87])
times weighted average revenues ($[@AL83]). Sustainable revenues and margins are estimated in the
context of ....
The analysis provides an estimate of ongoing pre-tax earnings of $[@AL91] by [averaging, weight
averaging, etc]. the results of the dollar-based and margin-based estimates.
The ongoing pre-tax earnings are reduced by an estimate of state and federal income
taxes to calculate estimated ongoing net earnings of $[@AL98].
[ENDBLOCKINCLUDE ID{coe Aftertax earnings}]
[BLOCKINCLUDE ID{EBIT} INCLUDEIF{and(bu202=1,or(bu203=3,bu203=5))}]
The analysis in Schedule .... derives two measures of weighted average earnings
before interest and taxes (EBIT).
$[@AL77]
effects of ........
Dollar-based estimate: Weighted average dollar amount which helps to capture the
$[@AL89]
Margin-based estimate: Weighted average EBIT margin ([@AL87]) times weighted
average revenues ($[@AL83]). Sustainable revenues and margins are estimated in the context of ....
The analysis provides an estimate of ongoing earnings before interest and taxes of $[@AL91] by
[averaging, weight averaging, etc]. the results of the dollar-based and margin-based
estimates.
[ENDBLOCKINCLUDE ID{EBIT}]
[BLOCKINCLUDE ID{EBI} INCLUDEIF{and(bu202=1,bu203=5)}]
The ongoing EBIT is reduced by an estimate of state and federal income taxes to
calculate estimated debt-free ongoing net earnings of $[@AL98]
[ENDBLOCKINCLUDE ID{EBI}]
[BLOCKINCLUDE ID{EBITDA} INCLUDEIF{and(bu202=1,bu203=4)}]
The analysis in Schedule .... derives two measures of weighted average earnings
before interest, taxes, depreciation, and amortization (EBITDA).
$[@AL77]
Dollar-based estimate: Weighted average dollar amount which helps
capture the effects of ........
to
$[@AL89]
Margin-based estimate: Weighted average EBITDA margin ([@AL87]) times
weighted average revenues ($[@AL83]). Sustainable revenues and margins are estimated in the context
of ....
The analysis provides an estimate of ongoing EBITDA of $[@AL91] by [averaging, weight
averaging, etc]. the results of the dollar-based and margin-based estimates.
[ENDBLOCKINCLUDE ID{EBITDA}]
[BLOCKINCLUDE ID{pretax cash} INCLUDEIF{and(bu202=2,bu203=1)}]
The analysis in Schedule .... derives two measures of weighted average pre-tax cash
flows (pre-tax earnings plus depreciation and amortization).
$[@AL113]
effects of ........
Dollar-based estimate: Weighted average dollar amount which helps to capture the
$[@AL125]
Margin-based estimate: Weighted average pre-tax cash flow margin ([@AL123])
times weighted average revenues ($[@AL119]). Sustainable revenues and margins are estimated in the
context of ....
The analysis provides an estimate of ongoing pre-tax gross cash flow of $[@AL127] by [averaging,
weight averaging, etc]. the results of the dollar-based and margin-based estimates.
To convert the ongoing gross cash flow to an ongoing net cash flow the following
adjustments were made:
1. Subtracted estimated ongoing increase of $[@AL128] in working capital.
[Discuss how estimate derived]
2. Subtracted estimated ongoing increase of $[@AL129] in capital assets.
[Discuss how estimate derived]
3. Added estimated ongoing increase of $[@AL130] in long-term debt.
[Discuss how estimate derived]
The result in an estimate of ongoing pre-tax net cash flow of $[@AL131].
[ENDBLOCKINCLUDE ID{pretax cash}]
[BLOCKINCLUDE ID{EBITDA cash} INCLUDEIF{and(bu202=2,bu203=4)}]
The analysis in Schedule .... derives two measures of weighted average earnings
before interest, taxes, depreciation and amortization (EBITDA).
$[@AL113]
effects of ........
Dollar-based estimate: Weighted average dollar amount which helps to capture the
$[@AL125]
Margin-based estimate: Weighted average EBITDA margin ([@AL123]) times
weighted average revenues ($[@AL119]). Sustainable revenues and margins are estimated in the context
of ....
The analysis provides an estimate of ongoing EBITDA of $[@AL127] by [averaging, weight
averaging, etc]. the results of the dollar-based and margin-based estimates.
To convert the ongoing gross cash flow to an ongoing net cash flow the following
adjustments were made:
1. Subtracted estimated ongoing increase of $[@AL128] in working capital.
[Discuss how estimate derived]
2. Subtracted estimated ongoing increase of $[@AL129] in capital assets.
[Discuss how estimate derived]
3. Added estimated ongoing increase of $[@AL130] in long-term debt.
[Discuss how estimate derived]
The result in an estimate of ongoing EBITDA net cash flow of $[@AL131].
[ENDBLOCKINCLUDE ID{EBITDA cash}]
[BLOCKINCLUDE ID{aftertax cash} INCLUDEIF{and(bu202=2,bu203=2)}]
The analysis in Schedule .... derives two measures of weighted average pre-tax cash
flows (pre-tax earnings plus depreciation and amortization).
$[@AL146]
effects of ........
Dollar-based estimate: Weighted average dollar amount which helps to capture the
$[@AL158]
Margin-based estimate: Weighted average pre-tax cash flow margin ([@AL156])
times weighted average revenues ($[@AL152]). Sustainable revenues and margins are estimated in the
context of ....
The analysis provides an estimate of ongoing pre-tax gross cash flow of $[@AL160] by [averaging,
weight averaging, etc]. the results of the dollar-based and margin-based estimates.
To convert the ongoing pre-tax gross cash flow to an ongoing after-tax net cash flow
the following adjustments were made:
1. Subtract depreciation and amortization to derive taxable cash flow base.
2. Subtract estimated state and federal income taxes to derive after-tax
gross cash flow base.
3. Add back estimated ongoing depreciation and amortization
4. Subtracted estimated ongoing increase of $[@AL169] in working capital.
[Discuss how estimate derived]
5. Subtracted estimated ongoing increase of $[@AL170] in capital assets.
[Discuss how estimate derived]
6. Added estimated ongoing increase of $[@AL171] in long-term debt.
[Discuss how estimate derived]
The result in an estimate of ongoing after-tax net cash flow of $[@AL172] .
[ENDBLOCKINCLUDE ID{aftertax cash}]
[BLOCKINCLUDE ID{EBI cash} INCLUDEIF{and(bu202=2,bu203=5)}]
The analysis in Schedule .... derives two measures of weighted average earnings
before interest, taxes, depreciation and amortization (EBITDA).
$[@AL146]
Dollar-based estimate: Weighted average dollar amount which helps
capture the effects of ........
to
$[@AL158]
Margin-based estimate: Weighted average EBITDA margin ([@AL156]) times
weighted average revenues ($[@AL152]). Sustainable revenues and margins are estimated in the context
of ....
The analysis provides an estimate of ongoing EBITDA of $[@AL160] by [averaging, weight
averaging, etc]. the results of the dollar-based and margin-based estimates.
To convert the ongoing gross EBITDA to an ongoing debt-free after-tax net cash flow
the following adjustments were made:
1. Subtract depreciation and amortization to derive taxable cash flow base.
2. Subtract estimated state and federal income taxes to derive after-tax
gross cash flow base.
3. Add back estimated ongoing depreciation and amortization
4. Subtracted estimated ongoing increase of $[@AL169] in working capital.
[Discuss how estimate derived]
5. Subtracted estimated ongoing increase of $[@AL170] in capital assets.
[Discuss how estimate derived]
6. Added estimated ongoing increase of $[@AL171] in long-term debt.
[Discuss how estimate derived]
The result in an estimate of ongoing debt-free after-tax net cash flow of $[@AL172] .
[ENDBLOCKINCLUDE ID{EBI cash}]
Selection of Earnings Multiple (Capitalization Factor)
There are two primary methods for "building up" a capitalization rate - the build-up
method or the capital asset pricing model.
[BLOCKINCLUDE ID{coe buildup} INCLUDEIF{bu204=1}]
The buildup method requires summation of the components of the required rate of
return on investment, adjusted by subtraction of the expected long-term earnings or
cash flow growth rate. The appropriate capitalization rate components for the
Company include (see Schedule .....):
Current risk-free rate. This is measured as the yield to maturity on long-term U.S.
Treasury bonds, which was about [@F209] as of the valuation date.
+ Common stock equity premium (average annual returns for large capitalization
stocks minus average annual returns for long-term government bonds). Based on
Stocks, Bonds, Bills, and Inflation, Yearbook, a publication of Ibbotson & Associates,
the common stock equity risk premium averaged [@F210] from 1926 to 19[@CA272] .
+ Small capitalization equity risk premium (average annual returns for small
capitalization stocks minus average annual returns for long-term government bonds).
Based on Stocks, Bonds, Bills, and Inflation, Yearbook, a publication of Ibbotson &
Associates, the small stock risk premium averaged [@F211] from 1926 to 19[@CA272] .
+ Specific company risk premium. Based upon Company-specific factors cyclical risk, risks of competitive encroachment, size and various operating
concentrations (key-executive dependency, customer concentration, and the like) the summation requires an additional risk premium of [@F212] .
[ENDBLOCKINCLUDE ID{coe buildup}]
[BLOCKINCLUDE ID{coe buildup cash to earnings} INCLUDEIF{and(bu204=1,f215>0)}]
+ Cash flow to earnings conversion factor. The foregoing factors sum to a cash
flow discount rate of [@F213]. To convert the discount rate to an earnings based
discount rate, an additional [@F215] is added to the summation to account for the
estimated difference between the Company's cash flows and earnings.
[ENDBLOCKINCLUDE ID{coe buildup cash to earnings}]
[BLOCKINCLUDE ID{coe buildup adjust to pretax} INCLUDEIF{and(bu204=1,bu203=1)}]
+ Adjust to a pre-tax basis. The discount rate has been adjusted by [@F218] to convert it to a pre-tax
basis.
[ENDBLOCKINCLUDE ID{coe buildup adjust to pretax}]
[BLOCKINCLUDE ID{coe buildup adjust to EBIT} INCLUDEIF{and(bu204=1,bu203=3)}]
+ Adjust to an EBIT basis. The discount rate has been adjusted by [@F218] to convert it to an earnings
before interest and taxes basis.
[ENDBLOCKINCLUDE ID{coe buildup adjust to EBIT}]
[BLOCKINCLUDE ID{coe buildup adjust to EBITDA} INCLUDEIF{and(bu204=1,bu203=4)}]
+ Adjust to an EBITDA basis. The discount rate has b een adjusted by [@F218] to convert it to an
earnings before interest, taxes, depreciation and amortization basis.
[ENDBLOCKINCLUDE ID{coe buildup adjust to EBITDA}]
[BLOCKINCLUDE ID{coe buildup WACC} INCLUDEIF{and(bu204=1,bu203>2)}]
Because the ongoing [earnings/cash flow] base is on a debt-free basis (i.e., all of the
interest expense has been removed), the discount rate must be converted to a
weighted-average cost of capital (WACC). The WACC requires the following inputs:
1.
The cost of equity (calculated above)
2.
The pre-tax cost of debt ([@CB191])
3.
The marginal income tax rate ([@CB192]).
4.
The percentage of debt ([@CB193]) and the percentage of equity ([@CB194]) in the Company's
capital structure (equity plus interest bearing long-term debt).
The formula for calculating the WACC is as follows:
Cost of equity times percentage of equity in capital structure
+ (Cost of debt times one minus marginal tax rate) times percentage of debt
Using the above formula, the calculated WACC is [@F221].
[ENDBLOCKINCLUDE ID{coe buildup WACC}]
[BLOCKINCLUDE ID{coe buildup growth} INCLUDEIF{bu204=1}]
Expected long-term earnings growth rate. We estimate [@F223] long-term compound annual growth.
Step 1: Select the Valuwrite menu option above and then select
the UPDATE COMMANDS option
Step 2: When the “Can’t find the Data Source” dialog appears,
select “YES” and locate the VSPRO data file that you want to
base your report on.
Step 3: Edit and amend the “Working Report”
Step 4: Select Create Final Report
VALUATION OF THE
COMMON STOCK
of
[@BI203]
[@BI206]
As of:
[@BI212]
Report Dated
9/13/17
Wednesday, September 13, 2017
Client
Address
City, State, Zip
Dear :
The enclosed valuation report has been developed for the exclusive and confidential use
of .... The report has been prepared by (firm name) and was made by and/or under the
direct supervision of the undersigned.
I hereby certify that, to the best of my knowledge and belief, the statements of fact
contained in this report are true and correct, and this report has been prepared in
conformity with the Uniform Standards of Professional Appraisal Practice of The Appraisal
Foundation and the ..... The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and represent my personal, unbiased,
professional analyses, opinions, and conclusions.
Sincerely yours,
FIRM NAME
Individual's name
Title
TABLE OF CONTENTS
INTRODUCTION..........................................................................................................................................................6
ASSIGNMENT DEFINITION............................................................................................................................................6
SUMMARY OF THE CONCLUSION OF THIS REPORT......................................................................................................6
PREMISE OF VALUE.....................................................................................................................................................6
STATEMENT OF SCOPE AND LIMITATIONS....................................................................................................................7
STANDARD OF VALUE.................................................................................................................................................7
THE ECONOMIC OUTLOOK...................................................................................................................................7
THE NATIONAL ECONOMY..........................................................................................................................................7
THE REGIONAL ECONOMY..........................................................................................................................................8
THE LOCAL ECONOMY................................................................................................................................................8
INDUSTRY OUTLOOK...................................................................................................................................................8
OVERVIEW OF THE COMPANY.............................................................................................................................8
BRIEF HISTORY............................................................................................................................................................8
MANAGEMENT.............................................................................................................................................................8
PRODUCTS AND MARKETS..........................................................................................................................................8
MARKETING.................................................................................................................................................................8
CUSTOMERS.................................................................................................................................................................8
COMPETITIVE ENVIRONMENT......................................................................................................................................8
SUPPLY........................................................................................................................................................................8
DESCRIPTION OF FACILITIES........................................................................................................................................8
PERSONNEL..................................................................................................................................................................8
FINANCIAL ANALYSIS.............................................................................................................................................8
NON-PUBLIC PEER GROUP FOR FINANCIAL PERFORMANCE COMPARISON................................................................8
BOOK VALUE AND GENERAL FINANCIAL CONDITION OF THE BUSINESS...................................................................9
Financial Position and Leverage...........................................................................................................................9
Adjustments to the Balance Sheet.........................................................................................................................11
EARNINGS PERFORMANCE AND CAPACITY................................................................................................................12
Reported Revenues and Margins..........................................................................................................................12
Reported Pre-Tax Income.....................................................................................................................................13
CASH FLOW ANALYSIS..............................................................................................................................................14
Adjustments to Reported Earnings.......................................................................................................................14
KEY FINANCIAL RATIO ANALYSIS.............................................................................................................................15
DETERMINATION OF FAIR MARKET VALUE.................................................................................................18
OVERVIEW OF VALUATION APPROACHES..................................................................................................................18
VALUATION METHODOLOGIES CONSIDERED BUT REJECTED....................................................................................18
Book Value Method...............................................................................................................................................18
Adjusted Book Value - Going Concern Method....................................................................................................18
Liquidation Value Method....................................................................................................................................18
Capitalization of Earnings Method......................................................................................................................19
Discounted Cash Flow Method............................................................................................................................19
Capitalization of Excess Earnings Method..........................................................................................................19
Market Approach Methods...................................................................................................................................19
Company Transactions Method............................................................................................................................19
VALUATION METHODS USED....................................................................................................................................20
Book Value............................................................................................................................................................20
Adjusted Book - Going Concern Value.................................................................................................................20
Adjusted Book - Liquidation Value.......................................................................................................................21
Capitalization of Earnings Method......................................................................................................................22
Discounted Cash Flow Method - Summary Projections.......................................................................................32
Discounted Cash Flow Method - Detailed Projections........................................................................................45
Excess Earnings Method......................................................................................................................................54
Market Approach- PubliclyTraded Guideline Company Methods.......................................................................58
Market Approach- Industry Pricing Ratio Methods.............................................................................................86
Transactions in the Company's Stock...................................................................................................................95
CONCLUSION OF VALUE.......................................................................................................................................96
DISCOUNT APPLIED...................................................................................................................................................98
DISCOUNT APPLIED...................................................................................................................................................98
TEST OF REASONABLENESS:..............................................................................................................................98
APPENDIX A: CONTINGENT AND LIMITING CONDITIONS......................................................................100
APPENDIX B: QUALIFICATIONS OF APPRAISER.........................................................................................101
APPENDIX C: SOURCES OF INFORMATION..................................................................................................102
APPENDIX D: SYNOPSES OF GUIDELINE COMPANIES..............................................................................103
INTRODUCTION
Assignment Definition
(Firm's name) has been retained by .... to render the business appraisal services described
below. The following information summarizes our assignment:
Client Name
XXX
Business Name
[@BI203]
Type of Entity
(C-Corporation, S-Corporation, ...)
State of Incorporation/Organization
XXX
Principle Business Location
XXX
Business Interest Valued
[@BI214] interest in ......
Standard of Value
(Fair Market Value, Fair Value ...)
Premise of Value
(Non-Marketable, Minority Interest, ...)
Effective Date of Appraisal
[@BI212]
Purpose and Intended Use of Appraisal
[@BI210]
Summary of the Conclusion of This Report
[BLOCKINCLUDE ID{No Per Share} INCLUDEIF{or(CA226=0,CA227=0,AL55=0)}]
The conclusion of the (fair market value, fair value, ...) of a [@BI214]interest in [@BI203]as of
[@BI212] is $[@CG168]. This opinion is rendered in the context of the specific assignment
described above and is applicable only for the period noted above. The conclusion is
expressed on a (non-marketable/marketable, minority/controlling) interest basis.
[ENDBLOCKINCLUDE ID{No Per Share}]
[BLOCKINCLUDE ID{Per Share Include} INCLUDEIF{and(CA2260,CA2270,AL550)}]
The conclusion of the (fair market value, fair value, ...) of a [@BI214]interest in [@BI203]as of
[@BI212]is $[@CG168]($[@CG169]per share of stock). his opinion is rendered in the context of
the specific assignment described above and is applicable only for the period noted above.
The conclusion is expressed on a (non-marketable/marketable, minority/controlling) interest
basis.
[ENDBLOCKINCLUDE ID{Per Share Include}]
Premise of Value
Although valuation is a range concept, current valuation theory suggests that there are
three basic "levels" of value applicable to a business or business interest. The levels of
value are respectively:
Controlling interest: the value of the enterprise as a whole
As-if freely tradable minority interest: the value of a minority interest, lacking control, but enjoying the benefit of
market liquidity
Non-marketable minority interest: the value of a minority interest, lacking both control and market liquidity
This valuation is prepared on a ... interest basis.
Statement of Scope and Limitations
This valuation report has been prepared in accordance with the (name standards and
governing body). In accordance with these standards, a Statement of Contingent and
Limiting Conditions is provided as Appendix A and a Statement of Appraiser Qualifications is
included in Appendix B.
Preparation of this report involved the review of substantial documentation with respect to
the Company, the ... industry and the national economy. Information reviewed relative to
the Company is summarized in Appendix C. Sources of information related to the industry
and the national economy are cited specifically at appropriate sections of the report.
In conjunction with the preparation of this report, ..... of (firm's name) visited with
management of [@BI203]. This visit, together with other conversations with management,
provided important perspective to our understanding of the information reviewed and
analyzed in the preparation of this valuation opinion.
In all cases we have relied upon the referenced information without independent verification.
This report is, therefore, dependent upon the information provided. A material change in
critical information relied upon in this report would be cause for a reassessment to
determine the effect, if any, upon our conclusion.
Standard of Value
Fair market value is defined as follows:
The amount at which property would change hands between a willing seller and a willing
buyer when neither is under compulsion and when both have reasonable knowledge of the
relevant facts.
Fair market value is similarly defined in various sections of the Internal Revenue Code,
related regulations and interpretations (e.g., Revenue Ruling 59-60). Appendix D includes
some further discussion of the standard.
[Fair Value is defined as follows: .....].
[Investment value is defined as the value of a business or business interest to a specific
owner or prospective owner].
THE ECONOMIC OUTLOOK
In conjunction with the preparation of this valuation opinion, we have reviewed and analyzed
current economic conditions and how the Company and the industries in which it competes
might be impacted.
The National Economy
[For report text and analysis on the national economy by quarter that you can "drop" into
your report, call Wiley-ValuSource at 1-800-825-8763]
The Regional Economy
The Local Economy
Industry Outlook
[For industry-specific report text and analysis that you can "drop" into your report, call WileyValuSource at 1-800-825-8763]
OVERVIEW OF THE COMPANY
Brief History
[@BI203] was founded in ... on .... by ...
Management
Products and Markets
Marketing*
Customers
Competitive Environment
Supply
Description of Facilities
Personnel
FINANCIAL ANALYSIS
Non-Public Peer Group For Financial Performance Comparison
[BLOCKINCLUDE ID{RMA} INCLUDEIF{BZ244=0}]
For purposes of comparison with industry financial measures available from non-public
company sources, we reviewed the Annual Statement Studies, published by Robert Morris
Associates ("RMA"). RMA compiled average percentage income statement and balance
sheets and key financial ratios of [@BZ242] classified under Standard Industrial Classification
(SIC) #[@BW242]. The selected RMA group includes [@BW245] companies. We believe the
RMA data provide limited comparative perspective and strict comparisons should be made
with caution.
[ENDBLOCKINCLUDE ID{RMA}]
[BLOCKINCLUDE ID{IRS} INCLUDEIF{BZ244=1}]
For purposes of comparison with industry financial measures available from non-public
company sources, we reviewed the IRS Corporate Records, published by the Internal
Revenue Service ("IRS"). IRS compiled average percentage income statement and balance
sheets and key financial ratios of [@BX243] classified under Standard Industrial Classification
(SIC) #[@BX242]. The selected IRS group includes [@BX245] companies. We believe the IRS
data provide limited comparative perspective and strict comparisons should be made with
caution.
[ENDBLOCKINCLUDE ID{IRS}]
Book Value and General Financial Condition of the Business
Financial Position and Leverage
As of [@Balance Sheet!D3], total assets were $[@M392], total liabilities were $[@M402] and
reported equity was approximately $[@M403].
The majority of assets include ..... As of [@Balance Sheet!D3], the Company had $[@M383] in
cash. From ... to ... total asset growth was .....
The majority of liabilities include ..... Accounts Payable were $[@M394] as of the date of
valuation. ...........
Historic Balance Sheets
[RANGEINCLUDE ID{Historic Balance Sheets} RANGE{AJ381:BD404}]
[ENDRANGEINCLUDE]
[BLOCKINCLUDE ID{BS ADJ} INCLUDEIF{M429M403}]
Adjustments to the Balance Sheet
The Company's reported book value at the date of valuation was $[@M403]. In
Schedule ..., we have identified adjustments that are required to restate
shareholders' equity and reflect the net asset value of the Company. The numbered
items below correspond to the same adjustments found in Schedule ....
[BLOCKINCLUDE ID{Cash} INCLUDEIF{M383M409}]
The Company's cash balance has been adjusted from $[@M383] to $[@M409] due
to .....
[ENDBLOCKINCLUDE ID{Cash}]
[BLOCKINCLUDE ID{A/R} INCLUDEIF{M384M410}]
The accounts receivable were adjusted to their estimated realizable value as of the
[@BI212] date of valuation. In order to quantify the adjustment, the Company's
accounts receivable aging report as of [@BI212] were reviewed and discussed with
management.
[ENDBLOCKINCLUDE ID{A/R}]
[BLOCKINCLUDE ID{Inventory} INCLUDEIF{M385M411}]
Inventory was adjusted to its estimated fair market value as of the [@BI212] date of
valuation. The adjustment was based on .......
[ENDBLOCKINCLUDE ID{Inventory}]
[BLOCKINCLUDE ID{Other C/A} INCLUDEIF{M386M412}]
Other current assets were adjusted to their estimated fair market values as of the
[@BI212] date of valuation. The adjustment was based on .....
[ENDBLOCKINCLUDE ID{Other C/A}]
[BLOCKINCLUDE ID{Fixed Assets} INCLUDEIF{M388M414}]
The Company's fixed assets were adjusted to their estimated fair market values as of
[@BI212]. The fixed assets' estimated fair market value was determined by .......
[ENDBLOCKINCLUDE ID{Fixed Assets}]
[BLOCKINCLUDE ID{Other noncurrents} INCLUDEIF{M390M416}]
Other non-current assets were adjusted to their estimated fair market values as of
[@BI212]. Specifically, adjustments were made to .....................
[ENDBLOCKINCLUDE ID{Other noncurrents}]
[BLOCKINCLUDE ID{Intangible} INCLUDEIF{M389M415}]
Intangible assets were adjusted to their estimated fair market value as of [@BI212].
The adjustment was based on .................
[ENDBLOCKINCLUDE ID{Intangible}]
[BLOCKINCLUDE ID{Nonoperating assets} INCLUDEIF{M391M417}]
For valuation purposes, the non-operating assets were adjusted to their estimated
fair market value as of [@BI212]. The basis for the adjustments was.....
[ENDBLOCKINCLUDE ID{Nonoperating assets}]
[BLOCKINCLUDE ID{A/P} INCLUDEIF{M394M420}]
Accounts payable were adjusted as of the [@BI212] date of valuation. The basis for
the adjustment was ...........
[ENDBLOCKINCLUDE ID{A/P}]
[BLOCKINCLUDE ID{Short Term Notes} INCLUDEIF{M395M421}]
The Company's short-term notes payable were adjusted to .....
[ENDBLOCKINCLUDE ID{Short Term Notes}]
[BLOCKINCLUDE ID{CPLTD} INCLUDEIF{M396M422}]
The current portion of the Company's long-term debt has been adjusted to .......
[ENDBLOCKINCLUDE ID{CPLTD}]
[BLOCKINCLUDE ID{LTD} INCLUDEIF{M399M425}]
Long-term debt has been adjusted to ...
[ENDBLOCKINCLUDE ID{LTD}]
[BLOCKINCLUDE ID{Other NCL} INCLUDEIF{M400M426}]
Other non-current liabilities have been adjusted to ......
[ENDBLOCKINCLUDE ID{Other NCL}]
[BLOCKINCLUDE ID{Nonoperating Liabilities} INCLUDEIF{M401M427}]
Non-operating liabilities were adjusted to ......
[ENDBLOCKINCLUDE ID{Nonoperating Liabilities}]
As adjusted, total shareholders' equity as of the valuation date was $[@M429].
[ENDBLOCKINCLUDE ID{BS ADJ}]
Adjusted Balance Sheet
[RANGEINCLUDE ID{Adjusted Balance Sheet} RANGE{AJ407:AL430}]
[ENDRANGEINCLUDE]
Earnings Performance and Capacity
Reported Revenues and Margins
In [@M381], total revenues were $[@M436] compared to $[@O436] for the prior year.
This represented an [increase/decrease] of approximately $[@M113].
Over the ... year period, the Company's gross profit margin averaged about ...% of
revenues. The gross profit margin for [@M381] was [@M145]. This compares to
[@M62] as reported in the [@M58] data. The gross profit ....
In [@M381], the Company's operating profit margin was [@M147] compared to [@O147]
for the prior year and [@M65] as reported in the [@M58] data. The operating profit .....
Reported Margin Analysis
[RANGEINCLUDE ID{Reported Margin} RANGE{K141:AE152}]
[ENDRANGEINCLUDE]
Reported Pre-Tax Income
The Company's pre-tax income averaged approximately ....... per year from ... to ... with a trend that has been generally ...
Historic Income Statement
[RANGEINCLUDE ID{Historic Income Statement} RANGE{AJ434:BD445}]
[ENDRANGEINCLUDE]
Cash Flow Analysis
The Company's cash flows have .......
[BLOCKINCLUDE ID{Adjustment to Earnings}
INCLUDEIF{SUM(M447:AE447)SUM(M466:AE466)}]
Adjustments to Reported Earnings
Schedule ... adjusts the Company's historical earnings for unusual events, nonrecurring items, discretionary expenditures and the like. The adjustments include:
[BLOCKINCLUDE ID{Revenue Adjust} INCLUDEIF{SUM(M436:AE436)SUM(M455:AE455)}]
Revenue has been adjusted for .....
[ENDBLOCKINCLUDE ID{Revenue Adjust}]
[BLOCKINCLUDE ID{COGS Adjust} INCLUDEIF{SUM(M437:AE437)SUM(M456:AE456)}]
Cost of Goods Sold has been adjusted for .....
[ENDBLOCKINCLUDE ID{COGS Adjust}]
[BLOCKINCLUDE ID{Operating Adjust} INCLUDEIF{SUM(M439:AE439)SUM(M458:AE458)}]
The following operating expenses have been adjusted ........
[ENDBLOCKINCLUDE ID{Operating Adjust}]
[BLOCKINCLUDE ID{Officers' Comp Adjust}
INCLUDEIF{SUM(M440:AE440)SUM(M459:AE459)}]
Officers' Compensation has been adjusted to ... by ....
[ENDBLOCKINCLUDE ID{Officers' Comp Adjust}]
[BLOCKINCLUDE ID{Depreciation Adjust} INCLUDEIF{SUM(M441:AE441)SUM(M460:AE460)}]
Depreciation expense has been adjusted ........
[ENDBLOCKINCLUDE ID{Depreciation Adjust}]
[BLOCKINCLUDE ID{Interest Adjust} INCLUDEIF{SUM(M442:AE442)SUM(M461:AE461)}]
Interest expense has been adjusted ........
[ENDBLOCKINCLUDE ID{Interest Adjust}]
[BLOCKINCLUDE ID{Other Inc/Exp Adjust}
INCLUDEIF{SUM(M444:AE444)SUM(M463:AE463)}]
Other income/expense has been adjusted ........
[ENDBLOCKINCLUDE ID{Other Inc/Exp Adjust}]
[BLOCKINCLUDE ID{Income Taxes Adjust}
INCLUDEIF{SUM(M446:AE446)SUM(M465:AE465)}]
Income taxes have been adjusted ........
[ENDBLOCKINCLUDE ID{Income Taxes Adjust}]
[ENDBLOCKINCLUDE ID{Adjustment to Earnings}]
[BLOCKINCLUDE ID{Annualize} INCLUDEIF{BO326BO327}]
The .... month period ending .... has been annualized by .......
[ENDBLOCKINCLUDE ID{Annualize}]
Key Financial Ratio Analysis
[BLOCKINCLUDE ID{RMA} INCLUDEIF{BZ244=0}]
Schedule ....... presents a key financial ratio analysis of [@BI203] and similarly sized
businesses operating in the same industry. Five categories of ratios (liquidity, debt
coverage, leverage, profitability, and miscellaneous) were used to compare the
operating results of [@BI203] with those of the industry median quartile as computed
by Robert Morris Associates.
[ENDBLOCKINCLUDE ID{RMA}]
[BLOCKINCLUDE ID{IRS} INCLUDEIF{BZ244=1}]
Schedule ....... presents a key financial ratio analysis of [@BI203] and similarly sized
businesses operating in the same industry. Five categories of ratios (liquidity, debt
coverage, leverage, profitability, and miscellaneous) were used to compare the
operating results of [@BI203] with those of the industry median quartile as computed
by the Internal Revenue Service.
[ENDBLOCKINCLUDE ID{IRS}]
The liquidity ratios give an indication of the Company's ability to meet its current
obligations with the use of current assets. As shown in the comparative ratio
analysis, the [@BI203]'s liquidity ratios are ...... compared to the industry median.
This indicates ...........
The coverage ratios indicate the Company's ability to meet its obligations related to
interest bearing debt. As shown in the comparative ratio analysis, [@BI203]'s
coverage ratios are ..... compared to the industry median. This indicates ......
The leverage ratios indicate the extent to which the Company's assets are funded by
debt. As shown in the comparative ratio analysis schedule, [@BI203]'s leverage ratios
are ...... compared to the industry median. This indicates ........
The operating ratios measure management's effectiveness in overseeing the
Company's resources. Compared to the industry median, [@BI203]'s operating ratio
are ...... This indicates ...........
Ratio Analysis & Comparison
[RANGEINCLUDE ID{Ratio Analysis} RANGE{K77:AG102}]
[ENDRANGEINCLUDE]
DETERMINATION OF FAIR MARKET VALUE
Overview of Valuation Approaches
Three basic approaches to value are defined in the Business Valuation Standards of
the American Society of Appraisers:
Asset Based Approach: A general way of determining a value indication of a business's assets and/or
equity using one or more methods based directly on the value of the assets of the business less liabilities.
Income Approach: A general way of determining a value indication of a business's assets and/or equity
using one or more methods wherein a value is determined by converting anticipated benefits.
Market Approach: A general way of determining a value indication of a business's assets and/or equity
using one or more methods that compare the subject to similar investments that have been sold.
The various methods of valuation that appraisers use in practice are typically considered as subdivisions of
these broad approaches. Valuation methods under the Market and Income approaches generally contain
common characteristics such as measures of earning power, discount rates and/or capitalization rates and
multiples.
[BLOCKINCLUDE ID{Rejected} INCLUDEIF{true}]
Valuation Methodologies Considered but Rejected
In our valuation analysis of a [@BI214] interest in the common stock of [@BI203], the
following valuation methodologies were considered but rejected as applicable to the
valuation assignment.
[BLOCKINCLUDE ID{Book Value Reject} INCLUDEIF{and(CI145=0,CK145"N")}]
Book Value Method
The Company's book value as of [@BI212] was $[@CG145]. Book value is an
accounting value that is calculated by subtracting total liabilities from total assets.
Book value was considered for determining the value of [@BI203] because ....... It was
rejected because .....
[ENDBLOCKINCLUDE ID{Book Value Reject}]
[BLOCKINCLUDE ID{Net Asset Rejected} INCLUDEIF{and(CI146=0,CK146"N")}]
Adjusted Book Value - Going Concern Method
The adjusted book value - going concern method develops a valuation indication by
adjusting the reported book values of a subject company's assets to their actual or
estimated fair market values and subtracting its liabilities (adjusted to fair market
value, if appropriate). This method was considered in the valuation of [@BI203]
because .... It was rejected because .......
[ENDBLOCKINCLUDE ID{Net Asset Rejected}]
[BLOCKINCLUDE ID{Liquidation Rejected} INCLUDEIF{and(CI147=0,CK147"N")}]
Liquidation Value Method
The liquidation value method develops a valuation indication by adjusting the
reported book values of a subject company's assets to their actual or estimated fair
market values as if they were to be sold in an orderly, piecemeal manner and
subtracting liabilities (adjusted to their fair market value, if appropriate). This
method was considered in the valuation of [@BI203] because .... It was rejected
because .......
[ENDBLOCKINCLUDE ID{Liquidation Rejected}]
[BLOCKINCLUDE ID{Cap of Earnings Rejected} INCLUDEIF{and(CI148=0,CK148"N")}]
Capitalization of Earnings Method
The capitalization of earnings method develops a valuation indication by multiplying
an earnings or cash flow base by a risk-adjusted capitalization factor. This method
was considered in the valuation of [@BI203] because .... It was rejected because .......
[ENDBLOCKINCLUDE ID{Cap of Earnings Rejected}]
[BLOCKINCLUDE ID{DCF Rejected} INCLUDEIF{or(and(CI149=0,ck149"N"),
and(CI150=0,CK150"N"))}]
Discounted Cash Flow Method
The discounted cash flows method develops a valuation indication by discounting a
projected earnings or cash flow stream to the present value. This method was
considered in the valuation of [@BI203] because .... It was rejected because .......
[ENDBLOCKINCLUDE ID{DCF Rejected}]
[BLOCKINCLUDE ID{Cap of Excess Rejected} INCLUDEIF{and(CI151=0,CK151"N")}]
Capitalization of Excess Earnings Method
The capitalization of excess earnings method develops a valuation indication by
multiplying an earnings base by an intangible asset capitalization factor and adding
tangible assets and liabilities (adjusted to fair market value, if appropriate). This
method was considered in the valuation of [@BI203] because .... It was rejected
because .......
[ENDBLOCKINCLUDE ID{Cap of Excess Rejected}]
[BLOCKINCLUDE ID{Market Approach Rejected} INCLUDEIF{cn162=1}]
Market Approach Methods
The market approach develops a valuation indication based on valuation factors
derived from guideline companies or industry pricing statistics. This method was
considered in the valuation of [@BI203] because .... It was rejected because .......
[ENDBLOCKINCLUDE ID{Market Approach Rejected}]
[BLOCKINCLUDE ID{Transactions Rejected} INCLUDEIF{and(ci161=0,CK161"N")}]
Company Transactions Method
Schedule ... shows recent transactions involving the Company's stock. We have
rejected these transactions as indicative of the Company's fair market value as of the
date of valuation because .......
[ENDBLOCKINCLUDE ID{Transactions Rejected}]
[BLOCKINCLUDE ID{scratch pad 1 rejected} INCLUDEIF{and(ci162=0,ck162"N")}]
[@CA162]
Enter text for scratch pad analysis here.
[ENDBLOCKINCLUDE ID{scratch pad 1 rejected}]
[BLOCKINCLUDE ID{scratch pad 2 rejected} INCLUDEIF{and(ci163=0,ck163"N")}]
[@CA163]
Enter text for scratch pad analysis here.
[ENDBLOCKINCLUDE ID{scratch pad 2 rejected}]
[ENDBLOCKINCLUDE ID{Rejected}]
Valuation Methods Used
[RANGEINCLUDE ID{Valuation Conclusions} RANGE{CA142:CI168}]
[ENDRANGEINCLUDE]
[BLOCKINCLUDE ID{Book Value Used} INCLUDEIF{CI1450}]
Book Value
The book value of [@BI203] as of [@BI212] was $[@CG145]. Book value is an
accounting value that is calculated by subtracting total liabilities from total assets. In
our opinion, book value is an accurate measure of the Company's fair market value
as of because ....
[ENDBLOCKINCLUDE ID{Book Value Used}]
[BLOCKINCLUDE ID{Going Concern Value} INCLUDEIF{CI1460}]
Adjusted Book - Going Concern Value
The adjusted book value - going concern method develops a valuation indication by
adjusting the reported book values of a subject company's assets to their actual or
estimated fair market values and subtracting its liabilities (adjusted to fair market
value, if appropriate). The indicated value should not be interpreted as an estimate
of liquidation value. Neither an orderly nor a forced liquidation is contemplated.
The estimate of the Company's net asset value is developed in Schedule ......, where
required adjustments are applied to reported equity. The specific adjustments were
described in the analysis of the balance sheet. The result of adjusting the balance
sheet is an adjusted net equity of $[@CU188].
[BLOCKINCLUDE ID{Minority Discount Include} INCLUDEIF{CA199=1}]
Application of Minority Interest Discount
A minority interest discount is a reduction in the initial indicated value due to a lack
of control prerogatives such as declaring dividends, liquidating the company, going
public, issuing or buying stock, directing management, setting management's
salaries, etc. In our opinion, a minority interest discount of [@CS190] is appropriate
because .......
[ENDBLOCKINCLUDE ID{Minority Discount Include}]
[FILEINCLUDE ID{marketability} INCLUDEIF{ca200=1} FILE{MARKET.DOC}]
[ENDFILEINCLUDE ID{marketability}]
[BLOCKINCLUDE ID{Marketability Discount Include} INCLUDEIF{CA200=1}]
Discount Applied
In our opinion, a discount of [@CS192] is required for lack of marketability. The
discount reflects an expectation for ........
[ENDBLOCKINCLUDE ID{Marketability Discount Include}]
[BLOCKINCLUDE ID{Minority Yes} INCLUDEIF{and(CA199=1,CA200=0)}]
As determined after application of a [@CS190] minority interest discount, the indicated
fair market value of the Company's common stock is $[@CU195].
[ENDBLOCKINCLUDE ID{Minority Yes}]
[BLOCKINCLUDE ID{Marketability Yes} INCLUDEIF{and(CA199=0,CA200=1)}]
As determined after application of a [@CS192] discount for lack of marketability, the
indicated fair market value of the Company's common stock is $[@CU195].
[ENDBLOCKINCLUDE ID{Marketability Yes}]
[BLOCKINCLUDE ID{Minority and Marketability Yes} INCLUDEIF{and(CA199=1,CA200=1)}]
As determined after application of a [@CS190] minority interest discount and a
[@CS192] discount for lack of marketability, the indicated fair market value of the
Company's common stock is $[@CU195].
[ENDBLOCKINCLUDE ID{Minority and Marketability Yes}]
[ENDBLOCKINCLUDE ID{Going Concern Value}]
[BLOCKINCLUDE ID{Liquidation Value} INCLUDEIF{CI1470}]
Adjusted Book - Liquidation Value
The adjusted book value - liquidation method develops a valuation indication by
adjusting the reported book values of a subject company's assets to their actual or
estimated liquidation values and subtracting its liabilities (adjusted to fair market
value, if appropriate).
The estimate of the Company's liquidation value is developed in Schedule ......, where
required adjustments are applied to reported equity. The specific adjustments were
described in the analysis of the balance sheet. The result of adjusting the balance
sheet is an adjusted net equity of $[@CU204].
[BLOCKINCLUDE ID{Minority Discount Include1} INCLUDEIF{CA199=1}]
Application of Minority Interest Discount
A minority interest discount is a reduction to the initial indicated value due to a lack
of control prerogatives such as declaring dividends, liquidating the company, going
public, issuing or buying stock, directing management, setting management's
salaries, etc. In our opinion, a minority interest discount of [@CS206] is appropriate
because .......
[ENDBLOCKINCLUDE ID{Minority Discount Include1}]
[FILEINCLUDE ID{Marketability Discount1} INCLUDEIF{and(CI146=0,CA200=1)}
FILE{MARKET.DOC}]
[ENDFILEINCLUDE ID{Marketability Discount1}]
[BLOCKINCLUDE ID{Marketability Discount Include1} INCLUDEIF{and(CI146=0,CA200=1)}]
Discount Applied
In our opinion, a discount of [@CS208] is required for lack of marketability. The
discount reflects an expectation for ........
[ENDBLOCKINCLUDE ID{Marketability Discount Include1}]
[BLOCKINCLUDE ID{Market1} INCLUDEIF{and(CI1460,CA200=1)}]
The discount for lack of marketability has been discussed above. In our opinion, a
discount of [@cs208] is required for lack of marketability. The discount reflects .......
[ENDBLOCKINCLUDE ID{Market1}]
[BLOCKINCLUDE ID{Minority1 Yes} INCLUDEIF{and(CA199=1,CA200=0)}]
As determined after application of a [@CS206] minority interest discount, the indicated
fair market value of the Company's common stock is $[@CU211].
[ENDBLOCKINCLUDE ID{Minority1 Yes}]
[BLOCKINCLUDE ID{Marketability1 Yes} INCLUDEIF{and(CA199=0,CA200=1)}]
As determined after application of a [@CS208] discount for lack of marketability, the
indicated fair market value of the Company's common stock is $[@CU211].
[ENDBLOCKINCLUDE ID{Marketability1 Yes}]
[BLOCKINCLUDE ID{Minority and Marketability1 Yes} INCLUDEIF{and(CA199=1,CA200=1)}]
As determined after application of a [@CS206] minority interest discount and a
[@CS208] discount for lack of marketability, the indicated fair market value of the
Company's common stock is $[@CU211].
[ENDBLOCKINCLUDE ID{Minority and Marketability1 Yes}]
[ENDBLOCKINCLUDE ID{Liquidation Value}]
[BLOCKINCLUDE ID{Capitalization of Earnings} INCLUDEIF{CI1480}]
Capitalization of Earnings Method
Capitalization of earnings requires estimates of: (1) ongoing earning power and (2) a
capitalization rate (or multiple). The capitalization rate is the required rate of return
minus the growth rate. The capitalization multiple is the reciprocal of the
capitalization rate. "Capitalization" of earnings effectively determines the present
value of the Company's ongoing earning or cash flow power, growing perpetually at a
fixed rate and discounted at the required rate of return.
Estimate of Ongoing Earning Power
[BLOCKINCLUDE ID{coe Pretax earnings} INCLUDEIF{and(BU202=1,BU203=1)}]
The analysis in Schedule .... derives two measures of weighted average pre-tax
earnings.
$[@AL77]
effects of ........
Dollar-based estimate: Weighted average dollar amount which helps to capture the
$[@AL89]
Margin-based estimate: Weighted average pre-tax earnings margin ([@AL87])
times weighted average revenues ($[@AL83]). Sustainable revenues and margins are estimated in the
context of ....
The analysis provides an estimate of ongoing pre-tax earnings of $[@AL91] by [averaging, weight
averaging, etc]. the results of the dollar-based and margin-based estimates.
[ENDBLOCKINCLUDE ID{coe Pretax earnings}]
[BLOCKINCLUDE ID{coe Aftertax earnings} INCLUDEIF{and(bu202=1,bu203=2)}]
The analysis in Schedule .... derives two measures of weighted average pre-tax
earnings.
$[@AL77]
effects of ........
Dollar-based estimate: Weighted average dollar amount which helps to capture the
$[@AL89]
Margin-based estimate: Weighted average pre-tax earnings margin ([@AL87])
times weighted average revenues ($[@AL83]). Sustainable revenues and margins are estimated in the
context of ....
The analysis provides an estimate of ongoing pre-tax earnings of $[@AL91] by [averaging, weight
averaging, etc]. the results of the dollar-based and margin-based estimates.
The ongoing pre-tax earnings are reduced by an estimate of state and federal income
taxes to calculate estimated ongoing net earnings of $[@AL98].
[ENDBLOCKINCLUDE ID{coe Aftertax earnings}]
[BLOCKINCLUDE ID{EBIT} INCLUDEIF{and(bu202=1,or(bu203=3,bu203=5))}]
The analysis in Schedule .... derives two measures of weighted average earnings
before interest and taxes (EBIT).
$[@AL77]
effects of ........
Dollar-based estimate: Weighted average dollar amount which helps to capture the
$[@AL89]
Margin-based estimate: Weighted average EBIT margin ([@AL87]) times weighted
average revenues ($[@AL83]). Sustainable revenues and margins are estimated in the context of ....
The analysis provides an estimate of ongoing earnings before interest and taxes of $[@AL91] by
[averaging, weight averaging, etc]. the results of the dollar-based and margin-based
estimates.
[ENDBLOCKINCLUDE ID{EBIT}]
[BLOCKINCLUDE ID{EBI} INCLUDEIF{and(bu202=1,bu203=5)}]
The ongoing EBIT is reduced by an estimate of state and federal income taxes to
calculate estimated debt-free ongoing net earnings of $[@AL98]
[ENDBLOCKINCLUDE ID{EBI}]
[BLOCKINCLUDE ID{EBITDA} INCLUDEIF{and(bu202=1,bu203=4)}]
The analysis in Schedule .... derives two measures of weighted average earnings
before interest, taxes, depreciation, and amortization (EBITDA).
$[@AL77]
Dollar-based estimate: Weighted average dollar amount which helps
capture the effects of ........
to
$[@AL89]
Margin-based estimate: Weighted average EBITDA margin ([@AL87]) times
weighted average revenues ($[@AL83]). Sustainable revenues and margins are estimated in the context
of ....
The analysis provides an estimate of ongoing EBITDA of $[@AL91] by [averaging, weight
averaging, etc]. the results of the dollar-based and margin-based estimates.
[ENDBLOCKINCLUDE ID{EBITDA}]
[BLOCKINCLUDE ID{pretax cash} INCLUDEIF{and(bu202=2,bu203=1)}]
The analysis in Schedule .... derives two measures of weighted average pre-tax cash
flows (pre-tax earnings plus depreciation and amortization).
$[@AL113]
effects of ........
Dollar-based estimate: Weighted average dollar amount which helps to capture the
$[@AL125]
Margin-based estimate: Weighted average pre-tax cash flow margin ([@AL123])
times weighted average revenues ($[@AL119]). Sustainable revenues and margins are estimated in the
context of ....
The analysis provides an estimate of ongoing pre-tax gross cash flow of $[@AL127] by [averaging,
weight averaging, etc]. the results of the dollar-based and margin-based estimates.
To convert the ongoing gross cash flow to an ongoing net cash flow the following
adjustments were made:
1. Subtracted estimated ongoing increase of $[@AL128] in working capital.
[Discuss how estimate derived]
2. Subtracted estimated ongoing increase of $[@AL129] in capital assets.
[Discuss how estimate derived]
3. Added estimated ongoing increase of $[@AL130] in long-term debt.
[Discuss how estimate derived]
The result in an estimate of ongoing pre-tax net cash flow of $[@AL131].
[ENDBLOCKINCLUDE ID{pretax cash}]
[BLOCKINCLUDE ID{EBITDA cash} INCLUDEIF{and(bu202=2,bu203=4)}]
The analysis in Schedule .... derives two measures of weighted average earnings
before interest, taxes, depreciation and amortization (EBITDA).
$[@AL113]
effects of ........
Dollar-based estimate: Weighted average dollar amount which helps to capture the
$[@AL125]
Margin-based estimate: Weighted average EBITDA margin ([@AL123]) times
weighted average revenues ($[@AL119]). Sustainable revenues and margins are estimated in the context
of ....
The analysis provides an estimate of ongoing EBITDA of $[@AL127] by [averaging, weight
averaging, etc]. the results of the dollar-based and margin-based estimates.
To convert the ongoing gross cash flow to an ongoing net cash flow the following
adjustments were made:
1. Subtracted estimated ongoing increase of $[@AL128] in working capital.
[Discuss how estimate derived]
2. Subtracted estimated ongoing increase of $[@AL129] in capital assets.
[Discuss how estimate derived]
3. Added estimated ongoing increase of $[@AL130] in long-term debt.
[Discuss how estimate derived]
The result in an estimate of ongoing EBITDA net cash flow of $[@AL131].
[ENDBLOCKINCLUDE ID{EBITDA cash}]
[BLOCKINCLUDE ID{aftertax cash} INCLUDEIF{and(bu202=2,bu203=2)}]
The analysis in Schedule .... derives two measures of weighted average pre-tax cash
flows (pre-tax earnings plus depreciation and amortization).
$[@AL146]
effects of ........
Dollar-based estimate: Weighted average dollar amount which helps to capture the
$[@AL158]
Margin-based estimate: Weighted average pre-tax cash flow margin ([@AL156])
times weighted average revenues ($[@AL152]). Sustainable revenues and margins are estimated in the
context of ....
The analysis provides an estimate of ongoing pre-tax gross cash flow of $[@AL160] by [averaging,
weight averaging, etc]. the results of the dollar-based and margin-based estimates.
To convert the ongoing pre-tax gross cash flow to an ongoing after-tax net cash flow
the following adjustments were made:
1. Subtract depreciation and amortization to derive taxable cash flow base.
2. Subtract estimated state and federal income taxes to derive after-tax
gross cash flow base.
3. Add back estimated ongoing depreciation and amortization
4. Subtracted estimated ongoing increase of $[@AL169] in working capital.
[Discuss how estimate derived]
5. Subtracted estimated ongoing increase of $[@AL170] in capital assets.
[Discuss how estimate derived]
6. Added estimated ongoing increase of $[@AL171] in long-term debt.
[Discuss how estimate derived]
The result in an estimate of ongoing after-tax net cash flow of $[@AL172] .
[ENDBLOCKINCLUDE ID{aftertax cash}]
[BLOCKINCLUDE ID{EBI cash} INCLUDEIF{and(bu202=2,bu203=5)}]
The analysis in Schedule .... derives two measures of weighted average earnings
before interest, taxes, depreciation and amortization (EBITDA).
$[@AL146]
Dollar-based estimate: Weighted average dollar amount which helps
capture the effects of ........
to
$[@AL158]
Margin-based estimate: Weighted average EBITDA margin ([@AL156]) times
weighted average revenues ($[@AL152]). Sustainable revenues and margins are estimated in the context
of ....
The analysis provides an estimate of ongoing EBITDA of $[@AL160] by [averaging, weight
averaging, etc]. the results of the dollar-based and margin-based estimates.
To convert the ongoing gross EBITDA to an ongoing debt-free after-tax net cash flow
the following adjustments were made:
1. Subtract depreciation and amortization to derive taxable cash flow base.
2. Subtract estimated state and federal income taxes to derive after-tax
gross cash flow base.
3. Add back estimated ongoing depreciation and amortization
4. Subtracted estimated ongoing increase of $[@AL169] in working capital.
[Discuss how estimate derived]
5. Subtracted estimated ongoing increase of $[@AL170] in capital assets.
[Discuss how estimate derived]
6. Added estimated ongoing increase of $[@AL171] in long-term debt.
[Discuss how estimate derived]
The result in an estimate of ongoing debt-free after-tax net cash flow of $[@AL172] .
[ENDBLOCKINCLUDE ID{EBI cash}]
Selection of Earnings Multiple (Capitalization Factor)
There are two primary methods for "building up" a capitalization rate - the build-up
method or the capital asset pricing model.
[BLOCKINCLUDE ID{coe buildup} INCLUDEIF{bu204=1}]
The buildup method requires summation of the components of the required rate of
return on investment, adjusted by subtraction of the expected long-term earnings or
cash flow growth rate. The appropriate capitalization rate components for the
Company include (see Schedule .....):
Current risk-free rate. This is measured as the yield to maturity on long-term U.S.
Treasury bonds, which was about [@F209] as of the valuation date.
+ Common stock equity premium (average annual returns for large capitalization
stocks minus average annual returns for long-term government bonds). Based on
Stocks, Bonds, Bills, and Inflation, Yearbook, a publication of Ibbotson & Associates,
the common stock equity risk premium averaged [@F210] from 1926 to 19[@CA272] .
+ Small capitalization equity risk premium (average annual returns for small
capitalization stocks minus average annual returns for long-term government bonds).
Based on Stocks, Bonds, Bills, and Inflation, Yearbook, a publication of Ibbotson &
Associates, the small stock risk premium averaged [@F211] from 1926 to 19[@CA272] .
+ Specific company risk premium. Based upon Company-specific factors cyclical risk, risks of competitive encroachment, size and various operating
concentrations (key-executive dependency, customer concentration, and the like) the summation requires an additional risk premium of [@F212] .
[ENDBLOCKINCLUDE ID{coe buildup}]
[BLOCKINCLUDE ID{coe buildup cash to earnings} INCLUDEIF{and(bu204=1,f215>0)}]
+ Cash flow to earnings conversion factor. The foregoing factors sum to a cash
flow discount rate of [@F213]. To convert the discount rate to an earnings based
discount rate, an additional [@F215] is added to the summation to account for the
estimated difference between the Company's cash flows and earnings.
[ENDBLOCKINCLUDE ID{coe buildup cash to earnings}]
[BLOCKINCLUDE ID{coe buildup adjust to pretax} INCLUDEIF{and(bu204=1,bu203=1)}]
+ Adjust to a pre-tax basis. The discount rate has been adjusted by [@F218] to convert it to a pre-tax
basis.
[ENDBLOCKINCLUDE ID{coe buildup adjust to pretax}]
[BLOCKINCLUDE ID{coe buildup adjust to EBIT} INCLUDEIF{and(bu204=1,bu203=3)}]
+ Adjust to an EBIT basis. The discount rate has been adjusted by [@F218] to convert it to an earnings
before interest and taxes basis.
[ENDBLOCKINCLUDE ID{coe buildup adjust to EBIT}]
[BLOCKINCLUDE ID{coe buildup adjust to EBITDA} INCLUDEIF{and(bu204=1,bu203=4)}]
+ Adjust to an EBITDA basis. The discount rate has b een adjusted by [@F218] to convert it to an
earnings before interest, taxes, depreciation and amortization basis.
[ENDBLOCKINCLUDE ID{coe buildup adjust to EBITDA}]
[BLOCKINCLUDE ID{coe buildup WACC} INCLUDEIF{and(bu204=1,bu203>2)}]
Because the ongoing [earnings/cash flow] base is on a debt-free basis (i.e., all of the
interest expense has been removed), the discount rate must be converted to a
weighted-average cost of capital (WACC). The WACC requires the following inputs:
1.
The cost of equity (calculated above)
2.
The pre-tax cost of debt ([@CB191])
3.
The marginal income tax rate ([@CB192]).
4.
The percentage of debt ([@CB193]) and the percentage of equity ([@CB194]) in the Company's
capital structure (equity plus interest bearing long-term debt).
The formula for calculating the WACC is as follows:
Cost of equity times percentage of equity in capital structure
+ (Cost of debt times one minus marginal tax rate) times percentage of debt
Using the above formula, the calculated WACC is [@F221].
[ENDBLOCKINCLUDE ID{coe buildup WACC}]
[BLOCKINCLUDE ID{coe buildup growth} INCLUDEIF{bu204=1}]
Expected long-term earnings growth rate. We estimate [@F223] long-term compound annual growth.