1. T HE ABC’ S OF B USINESS V ALUATION Jim Turner, C.P.A. CVA Turner Business Appraisers & Advisors

2. S EMINAR O BJECTIVES You will learn how to utilize the 3 established approaches to value a business and we will estimate the value employing a good rule of thumb By the end of our session you will understand the basic steps required to calculate the value of a business….Valuation is both an Art and a Science We will discuss the nuances of valuing businesses; including marketability discounts, normalizing adjustments and the concept of control

3. B USINESS V ALUATION & THE B ABY B OOMERS 75 Million baby boomers 7 Million own privately held businesses It is forecasted that between 1.36 and 2 million firms will be for sale in the next five to ten years

4. United States birth rate (births per 1000 population). The red segment from 1946 to 1964 is the postwar baby boom. [2] [2]

5. W HY V ALUE A B USINESS ? Buy/Sell decisions Gift or Estate Tax (IRS) Shareholder actions Equitable distribution Key man or Key Woman Life insurance

6. W HO ARE THE EXPERTS ABV = Accredited in Business Valuation CVA = Certified Valuation Analyst is a CPA, MBA, Ph.d or Degreed Financial Professional ASA = An Accredited Senior Appraiser

7. A PPROACHES TO V ALUING A B USINESS The established approaches to value IRS Revenue Ruling 59-60 Income Approach Market Approach Asset Approach Sanity Check/Quick estimate Rules of thumb

8. S AMPLE B USINESS V ALUATION Purpose of the valuation – The owner is contemplating selling the business; so he wants to know the fair market value of the business in exchange Common deal terms of a small business transaction Asset Sale Includes: Equipment, inventory and goodwill Does not include: Cash or accounts receivable

9. T HE A MERICAN D REAM

10. O UR ENTREPRENEURS Living the Dream!

11. S AMPLE B USINESS V ALUATION

13. S AMPLE B USINESS V ALUATION I NCOME A PPROACH

14. S AMPLE B USINESS V ALUATION I BBOTSON B UILD -U P M ETHOD Source: 2013 Ibbotson® Stocks, Bonds, Bills and Inflation Valuation Yearbook, Morningstar, Inc., Chicago, Illinois.

15. S AMPLE B USINESS V ALUATION I NCOME A PPROACH

16. S AMPLE B USINESS V ALUATION M ARKETABILITY D ISCOUNT (I NCOME A PPROACH )

17. S AMPLE V ALUATION M ARKET A PPROACH P RATTS S TATTS ® D ATABASE SIC:5812/NAICS:722515

18. S AMPLE V ALUATION M ARKET A PPROACH

19. S AMPLE V ALUATION A DJUSTED N ET A SSET V ALUE A PPROACH The appraised fair market value of the equipment was $60

20. S AMPLE B USINESS V ALUATION Summarized results table Based upon the results of the 3 approaches to value; our opinion of value for the subject company is $1,500

21. S ANITY T EST

22. S ANITY T EST C ONTINUATION

23. U SING R ULES OF T HUMB

24. R ULES OF T HUMB The single best source for rules of thumb for small business is the, “Business Reference Guide,” published by Business Brokerage Press Pricing multiples: multiples of EBITDA or SDE Sellers discretionary earnings is earnings before interest, taxes, depreciation and amortization plus one owners salary or “EBITDAOC “ – Multiple of sales

25. R ULES OF T HUMB Restaurants --- Limited Service (NAICS 722211) Rules of Thumb 30 to 40 percent of annual sales for independents; 45 to 60 percent for many franchises---plus inventory 1.5 to 2.5 SDE (Sellers Discretionary Earnings) plus inventory Source: West, Thomas L., 2013 Business Reference Guide, “Published by Business Brokerage Press.” Page-689

26. R ULES OF T HUMB *Rule of Thumb #1 is in harmony with the results of the income approach and our opinion of value - $1,500.

27. P ART II – T HE FUTURE AFFECTS VALUE TODAY

28. I NDUSTRY I NDICATORS US consumer spending on services, a measure of demand for specialty eateries, rose 1.9 percent in August 2013 compared to the same month in 2012. US personal income, which drives consumer spending at specialty eateries, rose 3.7 percent in August 2013 compared to the same month in 2012. US retail sales for food services and drinking places, an indicator of specialty eatery sales, increased 3.8 percent in the first nine months of 2013 compared to the same period in 2012. http://subscriber.hoovers.com.proxy183.nclive.org/H/industry360/overview.html?industryId=1445

29. I NDUSTRY G ROWTH F ORECAST Source:http://subscriber.hoovers.com.proxy183.nclive.org/H/industry360/overview.html?industryId=1445 First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry Economic Research Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro" approach to modeling the economy captures the links between industries and the aggregate economy.

30. F EDERAL R ESERVE B EIGE B OOK Fifth District--Richmond Beige Book -- October 16, 2013 District economic conditions improved modestly, on balance, since our last report. Source: http://www.federalreserve.gov/monetarypolicy/beigebook/beigebook201310.htm?richmond

31. N ORTH C AROLINA E CONOMIC O UTLOOK S UMMER 2013 Executive Summary: A Return to Growth, and the Old Issues Economic improvement is expected to continue in North Carolina in the second half of 2013 and in 2014. Nationally, 2 million payroll jobs will be added in 2013, and 2.5 million payroll jobs will be added in 2014, thereby lowering the jobless rate to 6.8% at the end of 2013 and 6.2% at the close of 2014. Source: http://ag-econ.ncsu.edu/sites/ag- econ.ncsu.edu/files/faculty/walden/nceconomicoutlooksummer2013.pdf

32. C HARLOTTE MSA E CONOMY The Charlotte-Concord-Gastonia area economy grew by nearly five percent in real terms in 2012 making it the 29th fastest growing out of 381 metropolitan areas in the country. This growth was broad-based and propelled by strengthening financial services and durable goods manufacturing among others. Source:http://www.nccommerce.com/LinkClick.aspx?fileticket=5USMpqUbpJU%3d&tabid=3466&mid=9134

33. T HE ABC’ S OF B USINESS V ALUATION S AMPLE #2 What if the business is expected to experience revenue and profit growth in subsequent years? Sample 2 revenue & expense growth assumptions:

34. S AMPLE -2 WITH 4-5% ANNUAL GROWTH

35. S AMPLE -2 DCF WITH FORECASTED 4-5 % ANNUAL GROWTH RATE

36. P ART III – “A PPLES TO A PPLES ” C OMMON SIZE A NALYSIS

37. C OMMON S IZE B ALANCE SHEET *Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43-9b7c- cbd4b6e1e2f2

38. C OMMON S IZE INCOME STATEMENTS *Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43-9b7c- cbd4b6e1e2f2

39. LIQUIDITY A measure of the company's ability to meet obligations as they come due. Checking the pulse of a business: Key Financial Ratios

40. = (Cash + Accounts Receivable) / Total Current Liabilities

41. PROFITS & PROFIT MARGIN A measure of whether the trends in profit are favorable for the company.

42. = Gross Profit / Sales

43. ASSETS A measure of how effectively the company is utilizing its gross fixed assets.

44. = Net Income / Total Equity

45. O VERVIEW OF I&N, LLC. RATIOS COMPARED TO INDUSTRY PEERS RatingMetric LIQUIDITY PROFITS & PROFIT MARGIN SALES BORROWING ASSETS Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43-9b7c- cbd4b6e1e2f2

46. P ART IV – “N ORMALIZING ” IS AN EFFORT TO ADJUST TAX OR GAAP BASIS FINANCIALS INTO ECONOMIC REALITY It is widely accepted that most financial statements often paint a picture that is different from economic reality* Highly aggressive expensing policies to reduce income taxes Excessive or insufficient compensation to owner(s) Lavish perquisites (perks) paid to the owner(s) Leases (Capital vs. Operating) Source: “Business Valuations: Fundamentals, Techniques and Theory,” 1995-2009 National Association of Certified Valuation Analysts 2009.v3, page-3-3

47. S AMPLE #3 N ORMALIZING A DJUSTMENT TO OWNERS COMPENSATION

48. N ORMALIZED N ET C ASH F LOW

49. S AMPLE #3 C APITALIZATION OF E ARNINGS METHOD W / WAGE NORMALIZING

50. C ONCLUSION Fifty-one percent is usually one-hundred percent better than forty-nine percent. Peanuts, popcorn, cotton-candy, cigarettes….discount for a lack of marketability Render unto Caesar that which is Caesars (normalizing adjustments)

51. O UR E NTREPRENEURS AFTER THE S ALE