the private enterprise pricing model - bizminer users guide_v3.0.pdf · the private enterprise...

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The Private Enterprise Pricing ModelDeveloped by Toby Tatum, MBA, CBA, CVA, MAFFCopyright 2014 by Toby [email protected]

This model was first introduced in the Institute of Business Appraiser’s 2nd

Quarter 2014 edition of their quarterly journal Business Appraisal Practice.

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The Private Enterprise Pricing Model User’s Guide

INTRODUCTION

The Private Enterprise Pricing Model is a business valuation income approach methodologydesigned for the valuation of very small businesses—generally with annual sales revenue not

exceeding around $5 million. This valuation method has been developed on the Microsoft Excelplatform. It is a very simple, user friendly Excel workbook and the logical progression of theanalysis is easy to understand. The purpose of this guide is to assist the user in the properapplication of this valuation methodology.

This Excel-based valuation tool is comprised of six worksheets: Title page Data Input Determine Discount Rate Value Subject BIZCOMPS Data Deal Structure

Three of the worksheets are password protected and cannot be unprotected. Two of them can beswitched between Protected and Unprotected status. Macro buttons are provided to switch backand forth instantly. Therefore, when first opening this workbook you must select the “macroenabled” workbook option. You should keep the worksheets in protected status except whenexecuting the Excel SOLVER utility which will be explained in detail momentarily. TheBIZCOMPS analysis worksheet is permanently unprotected.

All user data entry cells are light blue with a red border and are unprotected except for theBIZCOMPS data entry cells. All remaining cells are protected. However, two of the worksheetsin this valuation model require the user to unprotect them in order to execute the SOLVERutility. When a worksheet is in the unprotected mode, changes can be made to any cell so becareful. If you change the content of any cell that is not light blue with a red border you willcorrupt the model.1

Also, many of the cells have embedded comments and those that do, have a red triangle in theupper right-hand corner. Just pass your cursor over the red triangle and the comment willappear.

The Deal Structure worksheet has been provided primarily for business brokers however, I’msure that business appraisers may find it useful in many instances. In any case, this worksheetmust be the last step in a valuation engagement. For business brokers accustomed to firstdetermining what price to ask for a business or its most probable selling price and then workingdown from there to see what the net proceeds to the seller will be based on that price, this

1The exception to this rule is when you are instructed to change the value in an otherwise protected cell when

employing Excel’s SOLVER utility.

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valuation model may at first seem a little confusing. This is because this model first calculatesthe owner’s net equity ownership interest in the business—i.e., the owner as seller’s net proceedsfrom the sale of the business and from that starting point, essentially builds up the components ofthe ultimate asking/selling price from there by adding the value of the subject company’sgoodwill to the value of the tangible assets the buyer will buy.

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DATA INPUT PROCEDURES

The first step in this valuation process is to input the requisite data. The sources for theempirical data are the BIZCOMPS database, the BizMiner database, the Business ReferenceGuide and the user’s choice of a fair market value salary data provider. There is no specificorder in which the requisite data must be input so we will start by inputting the rules of thumbpricing multiples which appear in Figure 1. In this demonstration we are going to develop a

value indication for Vio Alloro Ristorante, a hypothetical Italian restaurant in Las Vegas withannual sales revenue of $307,058.

Figure 1

To the best of my knowledge, Tom West’s annually updated Business Reference Guide is thebest source for asking/selling price rules of thumb for small businesses. Figure 2 presents thepage from this reference guide from which the data in Figure 1 was obtained.

Input Rules of

Thumb in the

blue cells

Lowest 1.80 Discretionary Cash Flow Multiplier. Price Includes SDE Low Average High

2.15 $63,018 1.80 2.15 2.50

Highest 2.50 goodwill & FF&ESel l ing Pri ce

Indication$113,432 $135,489 $157,545

y Add Inventory? Plus Inventory $1,828 $1,828 $1,828

n Add FF&E?

Total $115,260 $137,317 $159,373

Lowest 2.50 EBITDA Multiplier. Price Includes EBITDA Low Average High

2.75 $18,868 2.50 2.75 3.00

Highest 3.00 goodwill, FF&E and InventorySel l ing Pri ce

Indication$47,170 $51,887 $56,604

n Add Inventory?

n Add FF&E?

Total $47,170 $51,887 $56,604

Lowest 0.25 Gross Sales Multiplier. Price Includes Sales Low Average High

0.30 $341,175 0.25 0.30 0.35

Highest 0.35 goodwill & FF&ESel l ing Pri ce

Indication$85,294 $102,353 $119,411

y Add Inventory? Plus Inventory $1,828 $1,828 $1,828

n Add FF&E?

Total $87,122 $104,181 $121,239Number of

Rules

Averages Low Average High

$83,184 $97,795 $112,405 3

Full Service Restaurant

Business Value based on Rules of Thumb

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Figure 2

Given this rule of thumb data, it is entered in their respective user data input cells as illustratedin Figure 3.

Figure 3Generally, but not always, you will be provided with more than onepricing multiple and in most cases you are provided with a high andlow value for each. In those cases where you are provided with a lowand high pricing multiple, enter both. If you are only provided with asingle multiple, enter it twice as both the high and low values.

Next, you must be aware of what assets the resulting pricing indicationincludes. In this case, the multiples for Seller’s Discretionary Earningsand Sales Revenue do not include the value of the inventory. For thisreason you should enter “y” for yes to the question “Add Inventory?”Likewise in those cases where the pricing multiple does not include theFF&E you would enter “y” for yes to that question as well.

Note the red triangle in the upper right corner of some of the cells. Thissymbol indicates that there is an imbedded comment. Just pass yourcursor over the red triangle and the comment will appear.

You will not always be provided with the three rules of thumbemployed in this valuation model. Additionally, you may not alwayswant to use all three of these rules of thumb. In either of those cases,you must enter a zero for the lowest and highest value for a rule notutilized in a particular engagement. Attached to the bottom right-handcorner of this data input section is an announcement highlighted inyellow indicating the number of rules of thumb considered. Be surethat this number is correct.

Input Rules of

Thumb in the

blue cells

Lowest 1.80

2.15

Highest 2.50

y Add Inventory?

n Add FF&E?

Lowest 2.50

2.75

Highest 3.00

n Add Inventory?

n Add FF&E?

Lowest 0.25

0.30

Highest 0.35

y Add Inventory?

n Add FF&E?

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I am aware of the concern some may have that this valuation methodology so aggressivelyincorporates business value rules of thumb. As a matter of fact there is very widespreadacceptance and use of these rules of thumb in the main street, mom-n-pop small businessbrokerage industry and therefore I don’t see their use as a problem given the manner in whichthis information is employed in this analysis. Indeed, according to Linda Trugman:

What tends to be very important when valuing the small company is showing thereader some type of “sanity check” that supports your valuation conclusion. One wayof doing this is by using a rule of thumb. The analyst does not want to rely on theserules of thumb as a primary indication of value. Instead, test your value against rulesof thumb for the industry of your subject company to show the reasonableness ofyour conclusion.2

In this valuation model, the rules of thumb are employed for the valuation of a hypotheticalaverage business created from the BizMiner data which is an ideal application for them. Thewell-known objection to the employment of rules of thumb as part of a formal appraisal is their

application directly to the subject businesses’ financial performance data. The value calculationdeveloped for our BizMiner hypothetical business is then combined with another hypotheticalbusiness value calculation created from the BIZCOMPS data that together yields a valueindication for what is essentially the hypothetical typical small business of a given type, size andeven location which in turn serves as the baseline for the valuation of our subject company.

Figure 4The next set of data to enter comes from theBizMiner database. However, beforeproceeding there is a decision to be maderegarding which segments of the available datato employ. For example in this demonstrationthe subject company is a full-service Italianrestaurant in Las Vegas, Nevada. Here we havethe option of basing our analysis on the averagevalues of 16,672 full-service Italian restaurantsin the entire country or 170 in the State ofNevada or 141 in Las Vegas.

On the one hand, the general rule is that thelarger the statistical sample size, the better. On

the other hand the more closely the sample data reflects the profile of the subject company, thebetter. My rule of thumb for sample size is an absolute minimum of 30 comparables but more isalways better. In this case we have access to 141 Italian restaurants in Las Vegas and that’smore than enough to develop a credible value opinion. However, we can further refine our

2Linda Trugman, CPA/ABV, MCBA, ASA, MBA, Valuing “Mom and Pop” Businesses-A Primer, Financial and Litigation

Expert, James Hitchner, Editor, FVLE Issue 18 April/May 2009, p. 9.

$341,175

$18,868

$2,115

$14,979

$2,247

$1,828

$11,645

$7,461

$14,665

$46,370

30.0

Average of 112 Full Service Italian Restaurants in Las Vegas

with annual sales less than $500,000

Sales Revenue

EBITDA

Original cost of Fixed Assets

BizMiner Data

Interest Expense

Total Current Liabilities

Average life for fixed operating equipment

Pre-tax Net Profit

State & Federal Income Tax

Inventory value

Total Current Assets Value

Total Long-term debt

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sample by sales volume categories. In this case BizMiner has segmented the Italian restaurants inLas Vegas to 112 with sales volume less than $500,000, 32 with sales volume between $500,000and $999,999, 21with sales volume between $1 million and $2.49 million. Since our subjectcompany’s annual sales volume is less than $500,000 the decision is to base our analysis on the112 Italian restaurants in Las Vegas with annual sales under $500,000.

The last line of data input in Figure 4 is the average life for fixed operating equipment in years.This is a subjective decision made by the user. The purpose of this metric is to compute expectedfuture reinvestment in fixed operating equipment. In this demonstration I have estimated theaverage life of the FF&E to be 30 years. Given this number, in Figure 5 we see that the annualcost for fixed asset replacements (or reserve for replacements) and additions is $3,330. This userdefined average life in years value has an enormous effect on the ultimately calculated pre-taxweighted average cost of capital so it is important to get it right and this means that you shouldnever simply use reported depreciation expense.

For example, from my 22 years in the restaurant business operating six restaurants I can say

unequivocally that most of the very high cost fixed assets in the typical restaurant will last prettymuch forever. These assets include the custom-made stainless steel exhaust hood over thecooking line, the walk-in refrigerator boxes per se (not the refrigeration compressors), thestainless steel workbenches in the back-of-the-house food prep and scullery areas and all of theshelving in the refrigerators, food storage area and scullery and the dining room table bases.Probably 60% to 70% or more of the fixed operating equipment including essentially everythingcustom fabricated out of stainless steel in a restaurant can and most likely will remainoperational for well over 50 years. If you think about it, fixed asset lifespans in this range areprobably fairly normal for most small businesses. Therefore, I recommend that the average lifespan metric in this valuation model should generally be in the 20 to 40 year range. One would bewise to discuss this topic with the business owner.

Figure 5Figure 5 presents calculations basedon the data entered by the user. Theformula for Net Working Capital isTotal Current Assets minus TotalCurrent Liabilities. This means thatall user data should be entered aspositive values. This model alwaysassumes that the current fair market

value of the FF&E is 50% of their original cost, in this case 50% of $46,370. The average annualcost for FF&E replacements (or reserve for replacements) plus additions is $3,330. The annualgrowth rate employed is the geometric average as calculated in Figure 6. This is the geometricaverage of the near term growth rate for the first 5 years, in this demonstration 4.20%, and thelong-term growth rate of 3.83% for years 6 through 100. The average annual increase in working

0.54%

$4,184

$23,185

$3,330

$160.99

15.00%

0.66%State & Federal Income Tax % of revenue

State & Federal Income Tax % of pre-tax net

Average annual FF&E replacement & adds

Average annual increase in working capital

Average fair market value of FF&E

Net Working Capital

Inventory's % of Sales Revenue

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capital of $160.99 is the geometric average annual earnings growth rate times the current assetsminus the current liabilities.

Figure 6

The first data entry in Figure 6 is the fair market value salary estimate for the subject company’sowner/manager. I am aware of two good sources for this data. The first iswww.CareerOneStop.com. The salary data can be obtained from this website free of charge.Another website is www.PayScale.com. However, this website is not free. The cost is $259 persalary estimate but based on the required user data input, the resulting estimate will probably be

more reliable.

Both of these wage data websites can provide wage data for a specific city. However, judgmentis still required. When using CareerOneStop, I generally use the value midway between theaverage wage and upper quartile for a First Line Supervisor or Retail Store Manager or if it is aprofessional practice being valued then the prevailing wage midway between the average andupper quartile for that professional for the city in which the business is located. On the otherhand, for very small businesses, a FMV wage estimate below the median value may beappropriate and in some cases this website may not be helpful and therewith some additionalresearch would be in order to incorporate a realistic FMV owner/manager wage into thisvaluation model.

This valuation model provides for the input of both a near-term and long-term earnings growthrate. The only guidance provided for this data input is a hyperlink to a website that presents theexpected long-term rate of inflation. I included this link because I generally use that value as mydefault long-term earnings growth rate for small businesses. Selection for the first five years’earnings growth rate is entirely up to the user. And, as stated previously, the average growth ratefor future years 1 through 100 is the geometric average of the near term growth rate for years 1through 5 and the long term growth rate for years 6 through 100.3

3The geometric average is the 100

throot of the near-term growth rate raised to the 5

thpower times the long-term

growth rate raised to the 95th

power.

$44,150

4.20%

3.83%

3.85%Geometric average annual growth rate

Valuation date Tuesday, December 31, 2013

Fair Market Value Salary Estimate

Long-term earnings growth rate past year 5

Earnings growth rate estimate years 1-5

10

Figure 74

Now all that remains is entry ofthe BIZCOMPS data as illustratedin Figure 7. This task is a littleeasier said than done and is themost tedious and time consuming

portion of this entire valuation process. Figure 8 presents the first several rows of theBIZCOMPS records selected for this demonstration valuation engagement.

Figure 8

For this demonstration valuation, 118 Italian restaurants were selected from the BIZCOMPSdatabase. As I have recommended in articles published in the Institute of Business Appraiser’sQuarterly journal Business Appraisal Practice and Thomson/Reuters’ Valuation Strategies, oneshould adjust the published selling prices to their most-recent-year equivalent value5, 6 and allseller financed transactions to their all-cash-at-close-of-escrow equivalent value7, 8 which is howwe will proceed with this demonstration. However, following this protocol requires that youhave developed adjustment schedules as described in the aforementioned articles. If you havenot done this then you can only proceed with unadjusted selling prices.

Note that the imported BIZCOMPS data has been sorted in ascending Date of Transaction order.This step and the next, sorting data in ascending Down Payment % order are necessary in orderto make the requisite selling price adjustments. You can skip these steps if you do not makethese adjustments.

4The Weighted Harmonic Mean SP/SDE ratio is the sum of your array’s adjusted selling prices divided by the sum

of your array’s reported SDE. Do not use the arithmetic average of each comparable’s SP/SDE ratio. Doing so willresult in an incorrect value indication.5

Toby Tatum, Adjusting Seller Financed Selling Prices to Their All-Cash Equivalent Value, Business AppraisalPractice, 3

rdQuarter 2012, copyright 2012 by the Institute of Business Appraisers, p. 14 and Analysis of the

BIZCOMPS Database Past and Present, Business Appraisal Practice, 3rd

Quarter 2013, p.19.6

Based on Fred Hall’s article published in the 1st

Quarter 2014 edition of Business Appraisal Practice, the need toadjust prior year reported selling prices to their as-though-sold-in-the-most-recent-year equivalent value shouldgenerally be limited to businesses with sales revenue below $1 million.7

Toby Tatum, Using The BIZCOMPS Database to Value Small Businesses, Valuation Strategies, January/February2014, copyright 2013 by Thomson Reuters/Tax Accounting, p. 12.8

All of these articles are posted on my website: www.TobyTatum.net under the Publications & Media link

SIC Business Description Revenue SDE PriceDown

Payment

Date of

Transaction

Seller

Finance

adjustment

Year of Sale

adjustment

Adjusted

Selling

Price

sp/sde z score

5812.09 Restr-Italian 256 61 240 27% 3/16/1999 1 1 240

5812.09 Restr-Italian 408 60 76 25% 6/3/1999 1 1 76

5812.09 Restr-Italian 810 92 151 56% 9/30/1999 1 1 151

5812.09 Restr-Italian 225 32 200 100% 10/7/1999 1 1 200

5812.09 Restr-Italian 332 64 57 100% 2/19/2000 1 1 57

5812.09 Restr-Italian 378 68 108 15% 2/28/2000 1 1 108

$580,789

$129,481

1.111

Average Sellers Discretionary Earnings

Weighted Harmonic Mean Selling Price ÷ SDE

Average Revenue

BizComps Data

11

Figure 9Figure 9 is the adjustment schedule used to adjustthe reported selling prices to their as-though-sold-in-2012 equivalent value.9 Figure 10 is theadjustment recommendation to adjust all seller

financed transactions to their 100% down paymentequivalent value.10 In accordance with Figure 10,the reported selling prices for all transactions thatwere partially financed by the seller will bereduced to 92.4% of that reported amount. Thesetwo adjustments are multiplicative meaning that aselling price that requires that both adjustments beapplied the procedure is to multiply the actualselling price first by the sale date adjustment andthen multiply that adjusted value by the seller

financed adjustment.

Figure 10

9A detailed explanation of how this table was developed is presented beginning on page 30.

10A detailed explanation of how Figure 10 was developed is presented beginning on page 29.

12

Figure 11 re-presents the BIZCOMPS data with the adjusted selling prices.

Figure 11

At this point forward processing of the BIZCOMPS data will be the same for everyone whetherthe selling prices were adjusted or not. Our next step is to calculate the selling price divided byseller’s discretionary earnings multiple (sp/sde). Of course, you must delete any comparableswhere no selling price and/or seller’s discretionary earnings were reported and then re-sort thedata in descending sp/sde order so that the deleted records drop out of the analysis. Yourworksheet should now look like Figure 12.

Figure 12

And finally, we need to calculate each sp/sde multiplier’s z-score. The purpose of this step is toidentify and then remove statistical outliers. To calculate each record’s z score, use Excel’sStandardize function. The requisite data for this step is provided adjacent to the BIZCOMPSdata as illustrated in Figure 13.

Figure 13

Starting in cell L2 enter this: =STANDARDIZE(

Within the parentheses enter the cell address for the comparable’s sp/sde multiplier followed by

a comma then the cell address P2 for Average of SP/SDE followed by a comma then the cell


Payment

Date of

Transaction

Seller

Finance

adjustment

Year of Sale

adjustment

Adjusted

Selling

Pricesp/sde z score

5812.09 Restr-Italian 457 128 185 3% 12/16/2009 92.40% 89.88% 154

5812.09 Restr-Italian 378 68 108 15% 2/28/2000 92.40% 85.08% 85

5812.09 Restr-Italian 375 85 65 15% 4/30/2003 92.40% 87.32% 52

5812.09 Restr-Italian 1,100 200 530 18% 5/31/2006 92.40% 80.69% 395

5812.09 Restr-Italian 255 69 385 18% 7/7/2008 92.40% 89.80% 319


Payment

Date of

Transaction

Seller

Finance

adjustment

Year of Sale

adjustment

Adjusted

Selling

Pricesp/sde z score

5812.09 Restr-Italian 215 20 450 44% 9/14/2002 92.40% 88.79% 369 18.46

5812.09 Restr-Italian 240 30 680 75% 10/31/2007 92.40% 82.89% 521 17.36

5812.09 Restr-Italian 224 13 170 100% 3/31/2010 100.00% 87.27% 148 11.41

5812.09 Restr-Italian 240 31 345 100% 4/10/2003 100.00% 87.32% 301 9.72

5812.09 Restr-Italian 312 8 90 70% 10/31/2000 92.40% 85.08% 71 8.84

5812.09 Restr-Italian 130 45 440 100% 4/3/2009 100.00% 89.88% 395 8.79

5812.09 Restr-Italian 300 60 444 53% 3/5/2008 92.40% 89.80% 368 6.14

13

address Q2 for STDEV.S of SP/SDE and close parentheses.11 For example the first comparable’s

sp/sde value in Figure 13 is 18.46 in cell K2. So the first z score would be

=STANDARDIZE(K2,P$2,Q$2)

Be sure to include the dollar sign in between the P and the 2 of the cell address for the AverageSP/SDE and between the Q and the 2 for the STDEV.S or SP/SDE values. Now, copy thisformula in cell K2—i.e., the first z score and paste this formula in all remaining records’ z-scorecell.

Now this worksheet should look like Figure 14.

Figure 14

Next, copy the entire z score column of data and paste it back as “values.” This is necessarybecause our next step is to identify and remove the statistical outliers. If the z scores are left asformulas, all these scores will change when you delete the outliers and we don’t want that tohappen.

With the z scores now repasted as values, scroll down to the bottom of your list of comparablesand delete all records with a value less than -2.00.12 Generally there won’t be any such recordsbut on rare occasions you will come across one. With this done, re-sort the data in ascending zscore order. Scroll all the way down to the bottom of the list as illustrated in Figure 15.

11The formula =STDEV.S means “standard deviation of the sample.

12Do NOT discard outlier records by deleting that row in the worksheet. In every case, select the records to be

deleted and then delete them. The reason for this method is that the calculations presented in Figure 13 arebased on a BIZCOMPS analysis template of 1,000 rows which should not be changed.

SDE PriceDown

Payment

Date of

Transaction

Seller

Finance

adjustment

Year of Sale

adjustment

Adjusted

Selling

Pricesp/sde z score

20 450 44% 9/14/2002 92.40% 88.79% 369 18.46 5.592168

30 680 75% 10/31/2007 92.40% 82.89% 521 17.36 5.215899

13 170 100% 3/31/2010 100.00% 87.27% 148 11.41 3.1793

31 345 100% 4/10/2003 100.00% 87.32% 301 9.72 2.599175

8 90 70% 10/31/2000 92.40% 85.08% 71 8.84 2.299996

45 440 100% 4/3/2009 100.00% 89.88% 395 8.79 2.280891

60 444 53% 3/5/2008 92.40% 89.80% 368 6.14 1.374218

14

Figure 15

Now, delete all records with z scores greater than 2.00. In this demonstration the bottom 6 rowsof data will be deleted.

This step results in new values appearing in the data calculation cells adjacent to the BIZCOMPSdata as illustrated in Figure 16. Compare Figure 16 with Figure 13.

Figure 16

The processing of the BIZCOMPS data is complete. The data appearing in Figure 16 is to bemanually entered into the BIZCOMPS section of the Data Input worksheet as illustrated inFigure 17.

Figure 17

Now we can proceed with the valuation procedures. Go to the Determine Discount Rateworksheet. The top part of this worksheet shows the valuation of our two hypotheticalbusinesses side-by-side. Figure 18 is the valuation of our first hypothetical business via the rulesof thumb.

SDE PriceDown

Payment

Date of

Transaction

Seller

Finance

adjustment

Year of Sale

adjustment

Adjusted

Selling

Pricesp/sde z score

69 385 18% 7/7/2008 92.40% 89.80% 319 4.63 0.857082

70 406 100% 1/20/2011 100.00% 83.35% 338 4.83 0.927108

73 410 100% 7/14/2003 100.00% 87.32% 358 4.90 0.951066

32 200 100% 10/7/1999 100.00% 87.09% 174 5.44 1.135561

60 444 53% 3/5/2008 92.40% 89.80% 368 6.14 1.374218

45 440 100% 4/3/2009 100.00% 89.88% 395 8.79 2.280891

8 90 70% 10/31/2000 92.40% 85.08% 71 8.84 2.299996

31 345 100% 4/10/2003 100.00% 87.32% 301 9.72 2.599175

13 170 100% 3/31/2010 100.00% 87.27% 148 11.41 3.1793

30 680 75% 10/31/2007 92.40% 82.89% 521 17.36 5.215899

20 450 44% 9/14/2002 92.40% 88.79% 369 18.46 5.592168

count average sales avg SDE Avg of SP/SDE STDEV.S of SP/SDE Weighted Harmonic Mean SP/SDE

104 $580.789 $129.481 1.532 1.250 1.111

$580,789

$129,481

1.111

Average Revenue


Weighted Harmonic Selling Price ÷ SDE

BizComps Data

15

Sales Revenue $341,175

Discretionary Cash Flow $63,018

FMV Owner/Mgr. Salary $44,150 12.94%

EBITDA $18,868 5.53% of sales

Most probable selling price for goodwill plus FF&E $97,795

Plus Inventory $1,828 0.54%

Plus remaining current assets $9,817 2.88%

Minus total current liabilities -$7,461 -2.19%

Market Value of Invested Capital $101,979 29.89%

EBITDA $18,868 5.53%

Less fixed asset replacement and additions -$3,330 -0.98%

less additions to working capital -$161 -0.05%

Pre-Tax Net Cash Flow To Invested Capital $15,377 4.51%

Rules of Thumb

Percentage

of Sales

Revenue


A

Figure 18

There is nothing for the user to do here except select which Rule of Thumb value to select, i.e.,low value, average value or high value. All of the data appearing here is formula driven. Notethat the Most Probable Selling Price of $97,795 is the average value appearing at the bottom ofthe Rules of Thumb Data Input worksheet presented as Figure 1. Here we see our firsthypothetical company’s calculated value for invested capital and pre-tax net cash flow toinvested capital. Note the calculated percentages. These are percentages of sales revenue andare used to compute these costs for our second hypothetical business presented in Figure 19.These percentages are the BizMiner average values.

Generally it’s best to value the subject business via the rules of thumb based on the average

value. However, this valuation model allows you to use either the highest or lowest valuesappearing at the bottom of the Rules of Thumb Data Input worksheet.

Figure 19 presents our second hypothetical business valued via the BIZCOMPS data.

Enter “A” for

average ROT

value, “L” for

low ROT value

or “H” for high

ROT value

16

Average of 2

Market Value

of

Invested Capital

$126,477

Average of 2

Pre-tax cash flow

to invested capital

$47,383

Figure 19

In the first two rows of Figure 19 we see values that are based on our statistical sample ofcomparable transactions drawn from the BIZCOMPS database. They are the sample array’saverage sales revenue and average discretionary cash flow. Our calculated weighted harmonicaverage selling price ÷ seller’s discretionary cash flow multiplier appears in the grey box, in thisexample 1.111. Note that the values for the remaining currents assets, total current liabilities,

fixed asset replacement costs and additions to working capital are the same percentage of salesrevenue that appear in Figure 5. BIZCOMPS’ reported selling price reflects only that portion ofthe actual selling price allocated to goodwill and the FF&E. Therefore it is always necessary toadd the total value of current assets in this section of the model in order to calculate the value ofinvested capital. The value of the current assets in this model is BizMiner’s total current assets’percentage of sales revenue times the average sales revenue from the BIZCOMPS data.

Figure 20 presents the average of the two key valuation metrics calculated in Figures 18 and 19.

Figure 20

$580,789

$129,481

$44,150 7.60%

$85,331 14.69% of sales

$143,853 1.111SDE

Multiplier

$3,112 0.54%

$16,712 2.88%

-$12,701 -2.19%

$150,976 25.99%

$85,331 14.69%

-$5,668 -0.98%

-$274 -0.05%

$79,388 13.67%

EBITDA

Pre-Tax Net Cash Flow To Invested Capital


EBITDA

Less fixed asset replacement and additions

less additions to working capital

Most probable selling price for goodwill plus FF&E

Plus inventoryPlus remaining current assets

Minus total current liabilities

Market Value of Invested CapitalPercentage

of Sales

Revenue

Bizcomps

Sales Revenue

Discretionary Cash Flow

FMV Owner/Mgr. Salary

17

VALUATION OF THE SUBJECT COMPANY

We are now at the point where the rubber meets the road; that is, calculating the baseline pre-taxweighted average cost of capital. This is accomplished in the Determine Discount Rateworksheet illustrated in Figure 21.

21

First of all, ignore the currently displayed pre-tax weighted average cost of capital discount rateappearing in the green cell now indicating 48.37%. This value is left over from the last valuationproject. We need to recalculate it.

This discount rate is calculated via Excel’s Solver function once we have a baseline value for thepre-tax cash flow to invested capital and the Present value of Invested Capital appearing in thisdemonstration as $47,383 and $126,477 (from Figure 20). The task now is to instruct Excel tomake the brown cell, now indicating a value of $135,893 equal to the value in the red cell of$126,477 by changing the value in the green cell.13 We see the results of this step in Figure 22.

Figure 22

13Prior to this step, unprotect the worksheet by clicking the Unprotect Worksheet macro button.

48.37%

4.20%

3.83%

44.52%

Year # 0 0.5 1.5

Pre-Tax Net Cash Flow To Invested Capital $47,383 $49,373 $51,447

$40,534 $28,468

Present Market Value of Invested Capital $135,893 $126,477



Present Value of Pre-Tax Cash Flow to Invested Capital for 100 years


Pre-Tax Weighted Average Cost of Capital Discount Rate =

Pre-Tax Weighted Average Cost of Capital Capitalization Rate =

52.29%

4.20%

3.83%

48.45%

Year # 0 0.5 1.5


$40,008 $27,374








18

Don’t be concerned if the calculated pre-tax weighted average cost of capital discount rate ishigher or lower than expected or what seems reasonable; there is more fine-tuning yet to come.

This brings us to the final step in the process which is to value our subject company. We beginby entering our subject company’s financial data as illustrated in Figure 23.

Figure 23

Once this data is entered, the first phase of the valuation of the subject company has beensimultaneously calculated as illustrated in Figure 24. For the moment, ignore the CompanySpecific Risk Adjustment now appearing as -4.235%. This value is left over from the previousvaluation engagement and none of the value indications below are correct.

Figure 24

Private Enterprise Pricing Model 2013

Via Alloro Ristorante Tuesday, December 31, 2013

Annual sales revenue $307,058.00

EBIDA $15,292.00

Owner's Discretionary Cash Flow $59,442.00

Interest expense on long-term debt $2,798.00

Total Current Assets $11,208.00

Value of Inventory $1,631.00

Total Current Liabilities $7,102.00

Total Interest Bearing Debt $13,587.00

Original Cost of Fixed Assets $44,092.00

Average life for fixed operating equipment 30.00

Current Fair Market Value of Fixed Operating Equipment $22,046.00

Less Fixed Asset Reserve for Replacements and Additions -$1,469.73

less additions to working capital -$172.45

Pre-Tax Cash Flow to Invested Capital $13,649.81

Estimated after tax cash flow to equity $8,847.94

Earnings growth rate estimate years 1-5 4.20%

Long-term earnings growth rate past year 5 3.83%

31-Dec-13

Average Discount Rate for Pre-Tax Cash Flow to Invested Capital 52.29%

Company Specific Risk Adjustment -4.235%

Subject company's discount rate for pre-tax cash flow to invested capital 48.06%

Sum of the Present Values =Market Value of Invested Capital (MVIC) $39,378.62

Plus Current Liabilities $7,102.00

Subject Company's Enterprise Value (value of total assets including goodwill) $46,480.62

Preliminary Value of Owner's Equity (Enterprise value minus total liabilit ies) $25,791.62

Plus excess assets & plus or minus other adjustments $0.00

Value of Owner's Equity $25,791.62

Value of Subject Company's Goodwill (enterprise value-tangible assets) $13,226.62

Valuation of

Present Value of Pre-tax Cash Flow to Invested Capital (100 years)-->

Via Alloro RistoranteFrom Figure 22

19

We’re not done yet. Figure 25 shows the subject company’s valuation multiples compared to ourtwo hypothetical company’s multiples based on the current and incorrect CSRA of -4.235.

Figure 25

Now we are going to use Excel’s Solver process again.14 We are going to force each of oursubject company’s valuation multiples to match the hypothetical multiples, one at a time. So,first let’s force our subject company’s multiple of discretionary cash flow of .593 to equal theBIZCOMPS multiple of 1.111. We do this via Solver by making the value in the cell indicating.593 equal 1.111 by changing the Company Specific Risk Adjustment (cell B26). We see theresults of this step in Figure 26.

Figure 26

Now the Company Specific Risk Adjustment has changed to -25.422% as we see in Figure 27

14Remember to first unprotect the worksheet

Subject Company Multiple Bizcomps Multiple

Multiple of Discretionary Cash flow for goodwill and FF&E only 0.593 1.111

Subject Company Multiple Rule of Thumb Multiple

Multiple of EBITDA for goodwill + inventory + FF&E 2.413 2.75

A

Multiple of Discretionary Cash Flow 0.593 2.15

Multiple of Sales Revenue 0.115 0.30

Comparison of Valuation Multiples



Subject Company Multiple Rule of Thumb Multiple


A




Average

or Low or

High ROT

value

20

Figure 27

Next, we repeat this process of forcing our subject company’s remaining four multiples, one at atime, to equal our comparables’ multiples. When this step is repeated forcing our subject’smultiple of EBITDA to equal the Rule of Thumb value of 2.75 we get a new Company Specific

Risk Adjustment of -10.112%. Forcing our subject’s discretionary cash flow to equal the Rule ofThumb value of 2.15 yields a revised Company Specific Risk Adjustment of -36.746%.Repeating this step by forcing our subject’s sales revenue multiple to equal the Rule of Thumbvalue of .30 yields a revised Company Specific Risk Adjustment of -32.095%. And finally,when we set our subject’s multiple of MVIC÷ EBITDA to equal 2.428 and we get a revisedCompany Specific Risk Adjustment of -1.069%.

The final step is to calculate the average value of the five different Company Specific RiskAdjustments. In this demonstration that is -25.422% + -10.112 + -36.745% +-32.095% +-1.069÷ 5 = -21.089. This value becomes our “official” Company Specific Risk Adjustment. As each

CSRA is calculated, enter them in the holding place provided as illustrated in Figure 28

Figure 28

Thus with the value of minus 21.089% inserted in cell B26 we get our final value indication aspresented in Figure 29.

31-Dec-13







Preliminary Value of Owner's Equity (Enterprise value minus total liabilities) $56,559.07





Via Alloro Ristorante

-25.422%

-10.112%

-36.746%

-32.095%

-1.069%

-21.089% Average CSRA

Holding place for the five

calculated Company Specific

Risk Adjustments.

21

Figure 29

Now the differences between our subject’s valuation multiples and our comparables’corresponding multiples are in optimum balance as we see in Figure 30.

Figure 30

Figure 31

Figure 31 is an expanded view of the comparisons of the Rules of Thumb multiples. Note theuser data entry cells on the right side of this view. For each Rule of Thumb the user is required toenter a value between 1 and 4. These numbers correspond to the bundle of assets each Rule ofThumb includes.1= Only the value of the goodwill2= Goodwill plus FF&E3= Goodwill plus FF&E plus inventory4=Goodwill plus inventory

31-Dec-13















Subject Company Multiple Rule of Thumb Multiples


a



Subject Company Multiple Model Composit MVIC/EBIT DA

Multiple MVIC ÷ EBITA 3.924 2.428


Subject Company Multiple Rule of Thumb Multiples

Multiple of EBITDA for goodwill + inventory + FF&E 3.762 2.75 3

A

Multiple of Discretionary Cash Flow 0.940 2.15 2

Multiple of Sales Revenue 0.182 0.30 2

22

The value of the subject’s goodwill is simply the enterprise value minus the value of the tangibleassets as they appear in Figure 23.15

Figure 32 presents a revised implied after-tax cost of invested capital and after-tax cost of equitycapital specifically for our subject company based on our final calculations for the pre-taxweighted average cost of capital which in this demonstration are 26.95% and 26.36%. Ourrevised implied after-tax weighted average cost of capital and our after-tax cost of equity capital

are presented to serve as a sanity check on these values that you may have determined via theCapital Asset Pricing Model/Build Up Method. These values serve no purpose in this valuationmodel.

Figure 32

Calculating the implied after-tax cost of capital for the subject company also requires invokingExcel’s Solver process. In this case you would instruct solver to set the value in the top orangecell equal to the value of the MVIC in Figure 28 and then solve for the after-tax weightedaverage cost of capital in the yellow cell. Next, repeat the process by setting the value of owner’sequity equal to the preliminary value of owner’s equity in Figure 28 by changing the value in itscorresponding yellow cell.

Figure 33 on the following page presents an alternative value calculation method.

In this alternative calculation method, our BIZCOMPS multiple is applied to the subjectcompany’s discretionary cash flow and current assets are added to equal the subject’s enterprisevalue. Similarly, each of the Rules of Thumb multiples are applied to the subject company’sfinancial performance data along with the consolidated MVIC÷ EBITDA multiple and theaverage of these five subjectively weighted value indications becomes the final value indication.

In other words, the value indication developed via the method demonstrated in Figure 33 isaccomplished by applying the Rule of Thumb pricing multiples directly to the subject company’sfinancial performance data which is generally considered a material departure from acceptable,certified business appraisal practices. I have added this valuation feature primarily todemonstrate that employment of Rules of Thumb via the PEPM results in a value indicationdifferent from their application directly to the subject company’s financial performance data.

All of the data in this template is entered automatically. The only user data entry required here isa subjectively determined weight for each value indication.

15Note that the value of the tangible assets is based on the user’s opinion for the current fair market value of the

fixed operating equipment. This is a subjective user defined value.

Implied after-tax weighted average cost of capital for the subject company 26.95%

Sum of present values of the estimated after-tax return on invested capital $60,004.44

Implied after-tax cost of equity capital for the subject company 26.36%

Sum of present values of the estimated after-tax return on owner's equity $46,417.41

23

Figure 33Bizcomps Multiple 1.111 66,040.06

Plus Current Assets $11,208.00

Enterprise Value = $77,248.06

Subjective Weight 1.00

Weighted Value= $77,248.06

Multiple of EBITDA for goodwill + inventory + FF&E 2.75 42,053.00

Add Inventory No

Add FF&E No




Multiple of Discretionary Cash Flow 2.15 $127,800.30

Add Inventory Yes 1,631.00

Add FF&E No




Multiple of Sales Revenue 0.30 $92,117.40

Add Inventory Yes 1,631.00

Add FF&E No




Model Composit MVIC/EBITDA 3.257 $57,529.44

Add Current Liabilities $7,102.00




Weighted Average of All Five= $81,422.44

$60,733.44

$0.00

$60,733.44

$52,274.44

Preliminary Value of Owner's Equity (Enterprise value minus total liabilities)

Plus excess assets & plus or minus other adjustments

Preliminary Value of Owner's Equity (Enterprise value minus total liabilities) including adjustments

Value of Subject Company's Goodwill (enterprise value-tangible assets)

Rules of Thumb

25

SENSITIVITY ANALYSES

Recall from Figure 1 that you have the option of selecting the rules of thumb’s lowest or highestvalue instead of using the average value. Figure 34 shows the revised pre-tax weighted averagecost of capital based on the lower value for the Present Market Value of Invested Capital.

Figure 34

Figure 35 is our revised valuation of the subject company. In this case, as expected, the value ofthe owner’s equity declined from $46,417.44 to $40,451.02.

Figure 35

Figures 36 and 37 present a revised valuation analysis based on using the highest rule of thumbvalues.

55.85%

4.20%

3.83%

52.00%

Year # 0 0.5 1.5


$39,549 $26,443








31-Dec-13













26

Figure 36

Figure 37

Recall that the “raw” BIZCOMPS comparables’ reported selling prices were adjusted totransform all selling prices to their as-though-sold-in-the-most-recent-year and further adjusted ifthe transaction included seller financing. Given those adjustments the BIZCOMPS dataemployed in the analysis was presented in Figure 16 reproduced here as Figure 38.

Figure 38

Figure 39 presents a revision of this analysis based on the actual, unadjusted selling prices andFigure 40 presents a revision of this data inserted into the Data Input worksheet alongside theoriginal data first presented in Figure 17.

49.19%

4.20%

3.83%

45.34%

Year # 0 0.5 1.5


$40,422 $28,232








31-Dec-13














104 $580.789 $129.481 1.532 1.250 1.111

27

Figure 39

Figure 40Original Data (Figure 17) Revised

As expected, the weighted harmonic mean SP/SDE multiplier is higher. The reason for thedifferences in the average revenue and average seller’s discretionary earnings is that the analysisbased on the unadjusted selling prices resulted in different z scores which in turn resulted in adifferent number of statistical outliers. Note that the count in Figure 38 is 104 comparables andit is 109 in Figure 39.

Given this revised BIZCOMPS analysis, Figure 41 presents the resulting revised calculation ofthe pre-tax weighted average cost of capital and Figure 42 presents the revised valuation of the

subject company (with the average Rules of Thumb values employed).

Figure 41


109 $575.972 $126.615 1.740 0.758 1.533

$575,972

$126,615

1.533

Average Revenue



BizComps Data

41.72%

4.20%

3.83%

37.87%

Year # 0 0.5 1.5


$40,241 $29,588








$580,789

$129,481

1.111

Average Revenue



BizComps Data

28

Figure 42

Based on the non-adjusted BIZCOMPS comparables’ reported selling prices once again, asexpected, we get a higher calculated value of invested capital, enterprise value and owner’sequity as reflected in Figure 42 and the implied after-tax cost of equity capital is now 17.05%;down from the previously calculated value of 26.36% (Figure 32). This is a significant differenceand illustrates the importance for considering the distorting effects of seller financing and annualvolatility on selling prices.

SUBJECTIVE ADJUSTMENTS

As with any business valuation model, the analyst is always entitled to get the last word andmake a subjective adjustment to a model’s final value indication if desired. This model is nodifferent in that respect.

Therefore, if the final value indication does not quite pass the smell test, it’s okay to make asubjective adjustment. In my view the best way to make a final subjective adjustment is tosimply make a percentage adjustment to the final value indication as opposed to tweaking theCompany Specific Risk Adjustment percentage. This is because the Company Specific RiskAdjustment in this model is a calculated value that forces the optimum balance in the differencesbetween the subject company’s value multipliers and those indicated via the rules of thumb andthe BIZCOMPS data. Similarly, it is my view that you should generally stick to the averagevalues for the rules of thumb and make a subjective adjustment to the value indication thuscomputed rather than employ the lowest or highest rule of thumb pricing multiples for a subject

31-Dec-13











Valuation of



Implied after-tax weighted average cost of capital for the subject company 18.90%

Sum of present values of the estimated after-tax return on invested capital $89,851.73

Implied after-tax cost of equity capital for the subject company 17.05%

Sum of present values of the estimated after-tax return on owner's equity $76,264.72

29

company that you believe is below or above average. But here again, that is a subjective decisionfor the user.

Additionally, when the final value indication does not pass the smell test, I think it best to firstrevisit the values input for the average life in years for the subject company’s FF&E, the fairmarket value salary for the owner/operator and the near-term and long-term growth rates. This is

because you will be working with very small businesses and the subject’s sales revenue and cashflow will be small numbers and as such, over-stated or under-stated values for the life of theFF&E and the FMV owner/operator salary will impart significant distortion to the final valueindication. Moreover, keep in mind that the fixed asset replacement cost or annual reserve forfixed asset replacements in small businesses should be a fairly small percentage of the fixedassets’ original cost and almost certainly much lower than reported depreciation expense. Forexample, when valuing a single restaurant that can seat 100 patrons, keep in mind that thismaximum production capacity can never increase. As such, most of the fixtures in the diningroom for example, except for the carpeting, can probably last 20 years and all of the back-of-thehouse operating equipment fabricated from stainless steel can easily last for over 50 years.

I realize that the matter of adjusting your BIZCOMPS comparables’ reported selling prices toreflect the volatility in small business selling prices as the economy vacillates from boom to bustand back again and the seller financing premium is problematic. But, as inconvenient as thesefacts may be, they are real. Recall my brief demonstration of the seller financing premiumpresented as Figure 10 reproduced here as Figure 43 (but this time based on data through April,2014).

Figure 43

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Frequency Distribution of Seller Financed Transactions Compared to All

Cash At Closing Transactions

100% Down Pymt Seller Financed

Weighted Harmonic Mean for 100% DownTransactions = 2.054. Count =5,277

Weighted Harmonic Mean for SellerFinancedTransactions = 2.244. Count = 7,558

% Seller Financed =58.89%

% All Cash at COE = 41.11%

30

Virtually all of the leading business valuation texts validate the proposition that, on average,seller financed transactions generate a price premium over all-cash-to-the-seller-at-close-of-escrow transactions. As is evident in Figure 43, this proposition is validated as a fact based on ananalysis of the BIZCOMPS data. Therefore it is appropriate to reduce the reported selling pricesof seller financed transactions in order to comport with the definition of fair market value.

The differences in the frequency distributions of seller financed and all-cash transactionsreflected in Figure 43 are based on the entire BIZCOMPS database as of April, 2014 whichincludes the data from 1999 through 2013. In this comparison study, all records where seller’sdiscretionary earnings were equal to or less than zero were eliminated. Also, 170 records wherethe selling price ÷ seller’s discretionary earnings (SP/SDE) were equal to or greater than 11.00were eliminated. This left 12,835 usable records. From experience I can say that if you want tocalculate your own adjustment percentage, first of all, employ a very large sample size (at least1,000 records and ideally the entire data base) and do not assume that there is a materialdifference in this seller financed premium based on the size of the business in terms of sales

revenue or in different industries. If you follow this protocol you should come up with anadjustment percentage somewhere between 6% and 12%. If you want to use a subjectivelyselected adjustment percentage I suggest defaulting to 90%--i.e., multiply the reported sellerfinanced selling price by .90.

In the 3rd Quarter 2013 edition of the IBA’s quarterly journal Business Appraisal Practiceappeared my article titled Analysis of the BIZCOMPS Database: Past and Present. The purposeof this article was to share my analysis of the changes in weighted harmonic average SP/SDEratios reported in the BIZCOMPS data base from year-to-year for 1999 through 2012. Thereason for this article was to show the dramatic decline in the prices that small businesses fetchedon average in 2012 relative to the recent past and challenge the long-held belief that there is littleannual volatility in the average SP/SDE ratios for small businesses. This discussion was basedon the outcome of my analysis of the BIZCOMPS data as presented in Figures 44 and 45.

31

Figure 44

Figure 45

Figure 46 presents the same analysis as Figure 42 but this figure is based on the BIZCOMPSdata as of April 2014 which includes the data from 1999 through 2013. The data in Figure 46 isthe basis for the development of Figure 9.

32

Figure 46

There are noticeable differences between the annual weighted harmonic mean values in Figures44 and 46. The reasons for the differences are first that a significant number of additionalrecords for prior years have been added to the most recent BIZCOMPS update in addition to the2013 records plus I have changed my analytical protocol. In Figure 46 the same 170 recordswhere the SP/SDE ratios were equal to or greater than 11.00 were eliminated. Figure 47 reflects

the number of records for each year appearing in Figure 46.

Figure 47

I am not able to suggest some rule of thumb to adjust the selling prices of older transactions toreflect the current phase of the economic cycle. Nevertheless, although there is no logical patternevident in Figures 44 and 45, a clear pattern is evident in Figure 46 which seems to offer somereassurance that small business selling prices were depressed because of the Great Recession and

2.27 2.28

2.35

2.01

2.17

1.99

2.27

2.07

2.29

1.93

1.861.83

1.87

2.08

2.23

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Wei

ghte

dH

arm

on

icM

ean

Year

Selling Price/Seller's Discretionary Earnings Weighted Harmonic Mean

33

that a recovery to pre-recession historical averages seems to be taking place. Here again, if youwant to develop your own version of Figures 44 it is essential to employ a very large samplesize—ideally the entire BIZCOMPS data (sans statistical outliers).16 On the other hand, asmentioned previously, based on research by Fred Hall and published in the first quarter, 2014issue of Business Appraisal Practice, it appears that the dramatic drop in the SP/SDE ratios in2008 through 2012 is concentrated for the most part in businesses with sales revenue below $1

million and approximately 80% of the BIZCOMPS records are for businesses in this salesrevenue range.

16I suggest first performing an initial scrubbing of all SP/SDE ratios in the entire BIZCOMPS data base equal to or

greater than two standard deviations from the average before developing your own versions of Figures 41, 42 and43. To accomplish this task, follow the procedures previously explained on how to do this for the sample dataselected to value your subject company only do so for the entire BIZCOMPS data base.

35

DEAL STRUCTURE WORKSHEET

The Deal Structure Worksheethas been provided primarily forbusiness brokers. However Iroutinely present the value

conclusion’s implied selling pricefor the business and the mostlikely deal structure in theExecutive Summary section ofmy valuation reports as an aid tohelp clients see exactly how thefair market value calculation forowner’s equity connects with thatimplied selling price.

Section 1There are five sections to thisworksheet. In Section 1 the usermust enter the subject company’sactual balance sheet data as of thedate of the valuation and make allnecessary adjustment thereto.

For small businesses the mostcommon adjustments will be toadjust the original cost of thecompany’s fixed assets to anestimate of their current fairmarket value.

Also, if the owner’s personalautomobile is a company asset orif there are any other tangibleassets that would not be includedin the sale of the company their

entire value should be removed.

Often the balance sheet will showa loan from the owner. Thisshould be eliminated because

upon the sale of the company this debt will evaporate.

Via Alloro RistoranteDecember 31, 2013

ASSETS

Current Assets Adjustments Footnotes

Cash in bank and on Premisis $8,004.48

Inventory $1,631.00

Prepaid Insurance $546.19

Other current assets $1,026.33

.


Fixed Assets

Lease deposit $2,500.00 1

Food service operating equipment $40,633.75 -$21,789.36 2

Office equipment $958.25 -$256.64 2

Less Accumulated Depreciation -$29,645.82 $29,645.82 3

Net Value of Operating Equipment $14,446.18

$44,092.00

Non Operating Assets

Owner's automobile $25,000.00 -$25,000.00 4

Net Value of non-operating assets $25,000.00

-$17,400.18

Owner's Goodwill $0.00 33,852.44

Total Fixed Assets @ Net Value $39,446.18 -$17,400.18

Total Assets $50,654.18

LIABILITIES

Current Liabilities

Wages payable $1,236.66

Accounts payable $3,734.45

Sales tax payable $1,258.64

Unredeemed gift certificates $175.00

Other current liabilities $697.25

Wells Fargo atuo loan for ownr's car $9,854.33 -$9,854.33 5

.

.


Long Term Liabilities

Bank of America equipment loan $13,587.00

Loan from owner $10,000.00 -$10,000.00 6

Total Long Term Liabilities $23,587.00

Total Liabilities $40,543.33 -$19,854.33

OWNERS NET WORTH

Paid in capital $35,000.00

Retained earnings prior years -$22,874.66

Retained earnings this year $1,564.88

Owner draws (dividends) -$3,579.37

Total Net Worth $10,110.85

Total Liabilities & Owner's Net Worth $50,654.18

36

Section 2These are the footnotes. I recommend taking as much space as necessary to provide a reasonablydetailed explanation for the adjustments.

Section 3Any excess assets that will not be included in the saleof the business should be logged in here. Speakingfrom experience, I find it fairly common to have tomake excess asset adjustments. (I once valued abowling alley which included bulldozer as one of itsfixed assets and it’s unlikely a buyer would want topurchase it).

Similarly if there are any excess liabilities that shouldnot be carried over to the adjusted balance sheet theyshould be entered here.

6. The loan from owner is money the owner owes himself and has been reclassified as additonal paid in capital.

1. The seller's landlord will return the seller's lease deposit upon assingment of the lease to the buyer. The buyer will

then have to give the landlord a replacement deposit.

2. The fixed operating equipment has been adjused to its current fair market value.

3. Accumulated Depreciation expense is added back because it has been replaced by the fair market value adjustment.

4. The owner's personal automobile is not a necessary piece of operating equipment. Therefore it has been removed

from the balance sheet in order that it will refelect only the equipment necessary for business operations

5. This is the balance due on the loan for the owner's personal automoble. The owner will keep this car after the sale of

the business and does not intend to pay off the balance due at close of escrow.

Excess Assets

Owner's Automobile $25,000.00

Total excess assets $25,000.00

Excess Liabilities

Wells Fargo Auto Loan balance due $9,854.33

Total excess liabilities $9,854.33

Net amount $15,145.67

Holding place for adjustments for excess assets & liabilities held in supense

37

Section 4Section 4 is the adjusted balance sheet. Thisadjusted or “true value” balance sheetautomatically adds the value of the company’sgoodwill that was calculated in the ValueSubject worksheet.

Here is an enlargement of the equity section ofthe adjusted balance sheet. This shows theowner as the seller what his net proceeds fromthe sale of the business would be excludingexcess assets or liabilities. Note that the TotalReal Net Worth is the same value calculatedin the Value Subject worksheet (Figure 29).

OWNERS REAL NET WORTH

Adjusted Current Assets $11,208.00

Adjusted Fixed Assets $55,898.44

Adjusted Current Liabilities $7,102.00

Adjusted Long-Term Liabilities $13,587.00

Total Real Net Worth (excluding excess assets & debt) $46,417.44

The value of the goodwill has been

added automatically

Current Assets

Cash in bank and on Premisis $8,004.48

Inventory $1,631.00

Prepaid Insurance $546.19

Other current assets $1,026.33


Fixed Assets

Lease deposit $2,500.00

Food service operating equipment $18,844.39

Office equipment $701.61

Market Value of Fixed Assets $22,046.00

Non Operating Assets

Market Value of non-operating assets $0.00

Owner's Goodwill $33,852.44

Market Value of Fixed Assets $55,898.44

Total Assets $67,106.44

7

LIABILITIES

Current Liabilities

Wages payable $1,236.66

Accounts payable $3,734.45

Sales tax payable $1,258.64


Other current liabilities $697.25


Long Term Liabilities

Bank of America equipment loan $13,587.00

Total Long Term Liabilities $13,587.00

Total Liabilities $20,689.00

6

OWNERS REAL NET WORTH

Adjusted Current Assets $11,208.00

Adjusted Fixed Assets $55,898.44

Adjusted Current Liabilities $7,102.00

Adjusted Long-Term Liabilities $13,587.00

Total Real Net Worth (excluding excess assets & debt) $46,417.44

Total Liabilities & Owner's Net Worth $67,106.44

TRUE VALUE BALANCE SHEET

December 31, 2013


38

Cash in bank and on Premisis $8,004.48 x

Inventory $1,631.00

Prepaid Insurance $546.19 x

Other current assets $1,026.33 x

$0.00

Total Current Assets Seller Keeps $9,577.00 Total Current Assets Buyer Buys $1,631.00

Fixed Assets Fixed Assets

Lease deposit $2,500.00 x

Food service operating equipment $18,844.39

Office equipment $701.61

Market Value of Operating Equipment $2,500.00 Market Value of Operating Equipment $19,546.00

Non-Operating Assets Non-Operating Assets

Market Value of non-operating assets $0.00 Market Value of non-operating assets $0.00

Owner's Goodwill $33,852.44

Total Fixed Assets Seller Keeps $2,500.00 Total Fixed Assets Buyer Buys $53,398.44

Total Assets Seller Keeps $12,077.00 Total Assets Buyer Buys 55,029.44

Current Liabilities Current Liabilities

Wages payable $1,236.66 x

Accounts payable $3,734.45 x

Sales tax payable $1,258.64 x


Other current liabilities $697.25 x

$0.00

$0.00

$0.00

Total Current Liabilities Seller Pays Off $6,927.00 Total Current Liabilities Buyer Assumes $175.00

Long Term Liabilities Long Term Liabilities

Bank of America equipment loan $13,587.00 x

Total Long Term Liabilities Seller Pays Off $13,587.00 Total Long Term Liabilities Buyer Assumes $0.00

Total Liabilities Seller Pays Off $20,514.00 Total Liabilities Assumed by Buyer $175.00

Selling Price

Assets Purchased by Buyer $55,029.44

Deal Structure

Subtract Liabilities Assumed by Buyer -$175.00

Equals Amount Buyer Pays Seller in Cash & Notes $54,854.44

1. Amount Seller Receives in Cash and Long-Term Note at Close of Escrow from Buyer $54,854.44

2. Plus Assets Seller Keeps $12,077.00

3. Plus Total Excess Assets $25,000.00

4. Minus Excess Liabilities -$9,854.33

5. Minus Liabilities Seller Pays Off -$20,514.00

Seller's net in cash, notes & retained assets $61,563.11


Debts Seller Pays Off Debts Buyer Assumes

Assets Seller Keeps Assets Buyer Buys

Section 5Section 5 is the end result ofand the entire purpose formaking the entries in thepreceding four sections. Thisis the “Deal Structure”

worksheet. It is here wherethe assets the buyer will buy,the assets the seller will keep,the liabilities the buyer willassume and the liabilities theseller will pay off in escroware identified.

The selling price, highlightedhere in green, is the calculated

selling price for the business.The selling price is the sum ofthe assets the buyer will buyincluding the goodwill. Thisprice will vary depending onwhich assets the buyer buys.In fact, the number of possibleselling prices is 2 raised to thepower of the number of assets.In this example there are eightassets listed including thegoodwill. This means, thereare 28 or 256 differentallocation combinationspossible which means there are256 different selling pricespossible that will all yield anidentical net proceeds to theseller.

The bottom section of this part

of the worksheet summarizesthe selling price, the cash thebuyer gives the seller and theseller’s net proceeds includingretained assets.

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ACTIVATING EXCEL’S SOLVER UTILITY

The current and most prior versions of Microsoft Excel include the SOLVER utility. However,the user must activate this feature. To activate SOLVER, follow these steps. This also activatesthe What-If Analysis utility. Often, and for reasons I don’t understand, the Solver utility will notwork but the Goal Seek option in the What-If Analysis utility will. Either utility will produce thesame results.

Step 1

Step 2

Click “File”

From the drop down

menu, click “Options”

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Step 3

Step 4

Step 5

From this drop down

menu, click “Add Ins”

At the bottom of this menu,

select “Manage Excel Add Ins”

then click “Go”

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Step 6

Step 7

From the Add Ins menu, check

SOLVER, then click “Okay”

You will now have a new

selection on your tool bar named

“Data.” Click “Data”

After you click “Data.” Click

“Solver”

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The Solver utility is

now open and ready

to employ

the private enterprise pricing model - bizminer users guide_v3.0.pdf · the private enterprise...

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