1. Outline: Chapter 15 Business Valuation General Concepts that Guide the Determination of Value Basic Information Required for a Valuation Discounted Cash Flow Market Comparisons Techniques and their Drawbacks Copyright 2013 Cornwall, Vang & Hartman

2. Concepts that Guide the Determination of Value Fair market value Going-concern value Highest and best use Future benefits Substitutes and alternatives Discounted cash flow analysis Objectivity Copyright 2013 Cornwall, Vang & Hartman

3. Information Required for a Valuation Income statements and/or tax returns Balance sheet Rates of return consistent with the risk level Interviews with current owners and staff Assessment of future business environment Copyright 2013 Cornwall, Vang & Hartman

4. Information Checklist for Management Interviews Table 15.1 1. List of employees and salaries. 2. List of all owner’s personal expenses 3. Summary of equipment needing repair or replacement 4. Key employees likely to stay with the company 5. List of judgments or potential judgments against the firm. 6. list of receivables that are unlikely to be collected 7. list of payables that are past due 8. Expectations to keep customers satisfied 9. Common problems 10. Cost accounting capabilities 11. Outlook for the industry Copyright 2013 Cornwall, Vang & Hartman

5. Estimating Cash Flow EBIT +owner’s salary -reasonable salary +depreciation +personal expenses =EBITDA -equipment purchased -inventory investment =Free Cash Flow Copyright 2013 Cornwall, Vang & Hartman

6. Expected Long-Run Annualized Returns Table 15.2 Type of Purchaser/Investor Expected Returns Publicly Traded Companies12-18% Privately Held Companies (with substantial history) 20-35% Angel Investors20-50% Venture Capitalists35-80% Copyright 2013 Cornwall, Vang & Hartman

7. Relationship of Price and Net Present Value Table 15.10 Price > Net Present ValueBuyer earns more than the required rate of return Price < Net Present ValueBuyer earns less than the required rate of return Price = Net Present ValueBuyer earns exactly the required rate of return Copyright 2013 Cornwall, Vang & Hartman

8. Ratio Formulas for Market Approach Table 15.11 VariableRatio Net incomePrice/Earnings Earnings per sharePrice/Earnings Pretax earningsPrice/Pretax earnings per share Cash flowPrice/Cash flow EBITDAPrice/EBITDA DividendsPrice/Dividends Gross revenuePrice/Sales Total assetsPrice/Assets Book value per sharePrice/Book values per share Number of total customersPrice/Number of customers Industry specific measurementsPrice/Unit Copyright 2013 Cornwall, Vang & Hartman

9. Outline: Chapter 16 Exit Planning Self-assessment revisited The ethical side of the entrepreneur’s transition A model of exit planning Exit options The process of selling a business Post exit issues Copyright 2013 Cornwall, Vang & Hartman

10. Exit Planning The process of preparing for the transition of both the entrepreneur and the business Copyright 2013 Cornwall, Vang & Hartman

11. The Exit Planning Process Figure 16.1 Copyright 2013 Cornwall, Vang & Hartman Self-assessment: Goals related to financial, professional, family, etc. Establish exit time frame Manage financial statements Conduct external audit Develop business plan for sale of business

12. Exit Through Ownership Transfer Type of ExitAdvantagesDisadvantages Asset SaleCash saleImmediate tax on full sale Clean breakLower face value sale price Earn-out possible Stock SaleHigher face value of sale price Potential volatility of stock from sale Tax deferment of sale price Restrictions on sale of stock Copyright 2013 Cornwall, Vang & Hartman

13. Exit Through Partial or Limited Transfer Type of ExitAdvantagesDisadvantages MergerPotential synergiesCultures may clash Tax deferment of sale price Limited opportunity for immediate cash IPOTaking some cash out possible Limits on sale of stock Can bring in professional management Copyright 2013 Cornwall, Vang & Hartman

14. Exit Through Partial or Limited Transfer (Continued) Type of ExitAdvantagesDisadvantages Strategic AllianceReduces risk to existing value May be long time, if at all, to actual exit ESOPCan maintain business culture May be long time, if at all, to actual exit Family Business Transfer Can maintain business culture Challenges of generational succession Copyright 2013 Cornwall, Vang & Hartman

15. Exit Through Bankruptcy Type of ExitAdvantagesDisadvantages BankruptcyOrderly end to business Ethical challenges Results in no realization of wealth from business Can hurt entrepreneur’s ability to fund future deals Copyright 2013 Cornwall, Vang & Hartman

16. Exit Through Liquidation Type of ExitAdvantagesDisadvantages LiquidationMay result in more value, especially for service business No value for going concern Can be viewed as “failure” Copyright 2013 Cornwall, Vang & Hartman

17. Sale Process of a Business Figure 16.2 Initial Inquiry Letter of Intent Deal Price and Basic Structure Agreed Upon Purchase Agreement and Closing Due Diligence 10 % of deals proceed to next stage 50 % of deals proceed to next stage Copyright 2013 Cornwall, Vang & Hartman