ValuTrax™ User`s Manual - ValuTrax™
Contents
1. m a on N s 2 z A 2 2 5 3 FIXED ASSET VALUE SDE 422. i Un deposited cash from prior year ii Prepayment of Expenses at the end of a year iii Understated Inventory Increases Cost of Goods Sold iv Annual payments made in the first part of the year v Payments or expense adjustments normally only made in the second half of the year or at year end c Items a through c may be a wash after the end of the fiscal year if the owner does the same thing each year For example if the business has cash basis financial statements and the owner holds un deposited cash of around 100 000 at every year end that is deposited in the following year it would be a wash after the fiscal year is closed out However at the beginning of the year the subject s revenue and profit are over stated by 100 000 If six month financial statements are annualized the revenue and net profit will be over stated by 200 000 32 ValuTrax Opinion of Value User s Manual d Ifthe amount of un deposited cash varies from year to year it won t be a wash at the end of the year For example if the subject purchased some new asset at the end of 2008 with the result that there was no un deposited cash for the first time in many years but the business had un deposited cash of 100 000 at the end of 2009 the year end revenue and profit for 2009 would be overstated by 100 000 However interim statements for 2009 would be accurate i e they would not be overstated due to un deposited cash
3. 10 ValuTrax Opinion of Value User s Manual b The expense accounts included by default in this step include those expense accounts that typically appear on the front page of Tax Returns As needed select additional expense account names from the Add Other Expense Accounts drop down list c The last selection on the bottom of the drop down list is Add Custom Expense By choosing this option the User can add an account name that does not appear on the Add Other Expense Accounts drop down list NOTE Any expense accounts added in b amp c above may be deleted by clicking on Delete near the right margin in the same row as the expense account that you want to delete However be sure to click Save Calculate before you delete any expense account If you do not you will lose any data you have entered in other accounts subsequent to your last save E In the Add Backs column enter any identified add backs for the appropriate expense accounts a Positive add backs will reduce the sales cost of goods sold and or expense b Negative add backs will increase revenue cost of goods sold and or expense e g adjusting rent to fair market rent F Click Save Calculate amp Next to proceed to the next step TIP As indicated earlier Total Expense is a required input and Other Expense is calculated as the difference between Total Expense and the sum of the individual expenses already entere
4. Total Real Estate Other Asset Deposits Deposits Loans To Officers Shareholders Other Intangible Assets Accumulated Amortization Total Other Assets Total Assets LIABILITIES Current Liabilities Accounts Payable A P 15 349 15 349 Other 34 051 34 051 Current Portion LT Debt 0 Total Current Liabilities 49 400 Long Term Liabilities Notes Payable 162 015 Loans from Officers Shareholders 0 0 LTD Less Current Portion 0 0 Total Long Term Liabilities Mos EEG E Total Liabilities D samas sof saras Equity 44 423 101 604 146 027 Liabilities Equity 255 838 101 604 357 442 Value of Excess Assets 0 Description of Excess Assets Cancel Save Calculate Save Calculate amp Next gt gt 18 ValuTrax Opinion of Value User s Manual Make the following entries on the Balance Sheet screen displayed on the previous page A Enter the Balance Sheet Data Source using the Data Source drop down list B Enter the Balance Sheet Period Ending using the Period Ending Calendar function C Enter the Balance Sheet data in the Book Value per B S column a Consolidate data for individual balance sheet accounts as required J Enter the Estimated Fair Mark
5. D Do I have to normalize income statements in every year for which I enter data in the pricing report a Yes For consistency you want to show the subject s financial performance as it would be with income and expenses normalized In addition if you only make adjustments in the most recent year and then weight more than one year to determine the average weighted SDE you are combining apples and oranges i e adjusted and unadjusted income statements E Should I add back all depreciation or just some of it a The answer to this question can vary from business to business depending on the how asset intensive the business is and how often the subject s assets have to be replaced In general add back all depreciation since SDE is defined as earnings before owner compensation amortization depreciation interest and taxes However if the subject is a business with relatively high annual capital expense you need to compare annual capital expense capex with annual depreciation expense and make the appropriate adjustments If they are roughly equal maybe you don t add back any depreciation If you handle annual capex in this manner adjust the annual capex expense in the Buyer s Test so you aren t double counting It F If there are two owners that will be leaving the business do you add back both salaries a SDE is defined as having one owner s salary added back There are two ways to deal with multiple owners
6. the expense accounts chosen from the Add Other Expense Accounts drop down list are listed next in alphabetical order and and custom accounts added by the user are listed last Step 6 Income Statement Summary A When would you use the estimated increase in next year s SDE a Many business brokers and some appraisers weigh historical earnings rather than attempting to forecast the future earnings of small businesses e g businesses with under 10 million or so in revenue If you use the estimated increase in next year s SDE ensure that it is not speculative ie probably not much over 10 Buyers typically don t want to pay for earnings increases that they will generate This feature can also be used for a what if analysis as discussed in Step 6 of this User s Manual B How do I determine a reasonable owner manager salary a Probably the easiest way is to ask the owner what he she would have to pay a qualified employee to run the company Other options include on line databases such as www salary com C Can I set Reasonable Owner Manager Compensation to Zero if the Business Doesn t Have Sufficient SDE a No Setting reasonable owner manger salary to zero is the same as saying that a typical manager of a company like the subject would work for nothing VPS FCG Straight Talk Webinar Series Valuation of Small Businesses and Professional Practices A Practical Presentation Moderator David Smith
7. two owners in this example and they both give the same answer i Add back the salary of the principal owner and make an adjustment for the difference between the second owner s compensation and what the new owner will have to pay a qualified employee s to replace the second owner Or ii Add back salaries of both owners positive add backs and add the expense negative add back of replacing the second owner with a qualified employee s 33 ValuTrax Opinion of Value User s Manual G The blank Current Year Income Statement appears in my report How can I get rid of it a In the Step 4 Year drop down list select the year you want to delete and then click on Delete next to the selected year Use the Step drop down box to go to Step 12 Generate Report and then generate the desired report Once you delete the desired year in Step 4 do not click on Save Calculate or Save Calculate amp Next as this will cause the application to think that you have saved the data in the year you wanted to delete and it will not be deleted Step 5 Recast Income Statements A Why do the income statement expense accounts appear in a different order in Step 5 then when I entered them in Step 4 a The reason for this is that the pricing model allows the user to specify different expense accounts in each year In the recast income statements of Step 5 the default expense accounts are listed first
8. 2 588 0 2 20 668 1 3 1 252 0 1 5 990 0 4 40 900 2 5 5 880 0 4 1 136 0 1 17 960 1 1 24 202 1 5 7 154 0 4 756 044 46 3 254 284 15 6 4 641 0 3 428 0 441 0 19 037 1 3 4 368 0 3 18 576 1 2 158 0 3 029 0 2 41 0 437 0 852 0 1 21 181 1 7 8 543 0 7 10 076 0 8 416 0 2 424 0 2 208 0 389 0 174 0 20 214 1 7 14 042 1 296 21 555 1 8 728 0 1 2 458 0 2 30 269 2 1 778 0 1 9 075 0 6 5 249 0 4 17 684 1 2 1 059 0 1 5 210 0 4 47 146 3 1 4 599 0 3 2 687 0 2 15 531 1 17 968 1 2 2 375 0 2 698 696 46 5 244 876 16 3 34 731 2 8 5 029 0 4 9 389 0 7 7 842 0 6 13 111 1 819 0 196 3 163 0 3 49 851 4 5 028 0 4 5 828 0 5 13 416 1 1 11 131 0 9 4 974 0 4 641 375 50 8 176 374 14 23 795 2 1 876 0 2 8 500 0 7 3 327 0 3 261 0 482 0 2 673 0 2 54 550 4 6 3 332 0 3 2 369 0 2 13 005 1 1 10 118 0 9 5 067 0 4 575 692 48 7 203 121 17 2 13 ValuTrax Opinion of Value User s Manual No User input is required on the Recast Income Statement screen of Step 5 The User should review the side by side recast income statements to determine if there are any trends or potential add backs that should be discussed with the Owner Ask the Owner if the annualized revenue cost of goods sold and general amp admini
9. OF ANY KIND BBP INC AND BIZ BROKER TOOLZ SPECIFICALLY DISCLAIM ALL OTHER WARRANTIES EXPRESS OR IMPLIED INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY FITNESS FOR A PARTICULAR PURPOSE QUIET ENJOYMENT QUALITY OF INFORMATION AND TITLE NON INFRINGEMENT SPECIFICALLY BBP INC AND BIZ BROKER TOOLZ MAKE NO REPRESENTATION OR WARRANTY THAT THE APPLICATION IS FIT FOR ANY PARTICULAR PURPOSE OR THAT THE OPERATION OF THE APPLICATION WILL BE UNINTERRUPTED OR ERROR FREE OR THAT DEFECTS IN THE APPLICATION WILL BE CORRECTED Limitation of Liability BBP INC AND BIZ BROKER TOOLZ SHALL NOT BE LIABLE TO YOU THE USER OR TO ANY THIRD PARTY FOR ANY SPECIAL INCIDENTAL EXEMPLARY PUNITIVE OR CONSEQUENTIAL DAMAGES OR OTHER SIMILAR CLAIMS INCLUDING BUT NOT LIMITED TO LOSS OF PROFITS LOSS OF DATA OR ValuTrax Opinion of Value User s Manual LOSS OF USE OF THE APPLICATION EVEN IF BBP INC OR BIZ BROKER TOOLZ HAS BEEN SPECIFICALLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES IN NO EVENT SHALL BBP INC AND OR BIZ BROKER TOOLZ LIABILITY FOR ANY DAMAGES TO YOU OR ANY OTHER PERSON EVER EXCEED IN THE AGGREGATE THE ACTUAL LICENSE FEES YOU PAID FOR USE OF THE APPLICATION REGARDLESS OF ANY FORM OF THE CLAIM THIS LIMITATION OF LIABILITY SHALL APPLY EVEN IF THE EXPRESS WARRANTY SET FORTH ABOVE FAILS OF ITS ESSENTIAL PURPOSE Some states do not allow the exclusion of incidental or consequential damages or a limitation on how long
10. Panelists Nancy Gault and Mark Hanson 34 ValuTrax Opinion of Value User s Manual Owner manager compensation needs to reasonable not at a starvation level and not exorbitant Step 7 Balance Sheets A How does the pricing model handle excess assets a Excess assets are entered on the bottom of the Balance Sheet screen These excess assets e g excess inventory unused equipment etc should not be included on the balance sheet itself The program treats excess assets as assets that are not included in the sale Therefore they do not impact the indicated sale price determined using the pricing model They do directly affect Owner Equity The assumption is that the Owner could sell the excess assets outside the sale of the Company or they could negotiate to include the excess assets in the sale of the Company B If the subject is a small company that doesn t have a balance sheet what do I do in Step 77 a Balance sheet data are used in two ways 1 the value of fixed assets at cost in the Book Value Per B S column is used in the Buyer s Test of Step 6 to estimate the annual capital expense as a percent of fixed asset value at cost and 2 the account balances in the Seller s Estimate of Fair Market Value column are use to estimate Net Owner Equity in the pricing report Therefore at a minimum you should have the client provide his her best estimates of the fixed asset value at cost in the Book Value Per B S colum
11. SDE multiples and the ratio Fixed Asset Value SDE i e the estimated fair market value of the fixed assets SDE Figure 1 shows the upper quartile median and lower quartile values of Price SDE vs Fixed Asset Value SDE for businesses with revenues of less than or equal to 750 000 Figure 2 provides the same information for businesses with revenues greater than 750 000 The data point at Fixed Asset Value SDE 4 5 is the same on each chart Because there were fewer data points at this high value of assets to SDE and since this Price SDE multiple is influenced more by the value of the fixed assets then by revenue the appraiser used data for all revenues to calculate this data point for both figures If the subject business is of average desirability risk use a median multiple If the subject business is highly desirable less risky compared to other businesses use an upper quartile multiple or a multiple between the median and the upper quartile values etc Note When you ate using data from all Bizcomps comparables as is the case for the data of Figures 1 and 2 you are comparing the subject to all other businesses i e not just businesses in the same SIC As alluded to above the data presented in the figures can be used in the market method if comparables sold data cannot be found for the SIC NAICS of interest and or an industry rule of thumb is not available It is the author s opinion that the data provided in the figures is prefer
12. Therefore inventory must be added back when using the Bizcomps database None of the other databases require adding back inventory 20 ValuTrax Opinion of Value User s Manual b Do not add back fixed asset values unless you are using an industry rule of thumb that specifically requires it D Enter Weightings for the market methods used The total weightings should equal 100 100 a Unless you are valuing a type of business that typically sells based on revenue e g CPA and accounting firms pool service routes and landscaping companies with revenues under around 750 000 most of the weight should be given to multiples of earnings methods E Click on Save Calculate to review your inputs and the resulting calculations Click Save Calculate amp Next to proceed to the next step Note Calculations in this step are not executed until the User clicks on either Save Calculate or Save Calculate amp Next TIP As noted above do not add back inventory unless you are using the Bizcomps database or an industry rule of thumb that specifically requires adding back inventory TIP Do not add back fixed assets unless you are using an industry rule of thumb that specifically requires adding back fixed assets 21 ValuTrax Opinion of Value User s Manual Step 9 Multiple of SDE Method Client Gulfview Grille Market Method 742 711 Valuation Gulfview Grille Valuation M
13. client in the list To add a client click the Add Client link If you wish to update a client s information or delete a client click the Edit or Delete link next to the desired client in the list Select Client Name OwnerName Legal Structure O AB Johnson Heating amp Airconditioning Robert Smith S Corporation Edit Delete Oo Gulfview Grille John Smith S Corporation Edit Delete Add Client B If you already have clients listed as shown on the above screen in this step you can a Edit client information click on Edit toward right of row for applicable client b Delete a client click on Delete far right of row for applicable client c Add another client click on Add Client at the bottom left of the window C Select a client by clicking the Select button next to the desired client to proceed to the next step ValuTrax Opinion of Value User s Manual Step 3 Manage Valuations Client Gulfview Grille Market Method Valuation lt none selected gt Multiple SDE Method Step 3 Manage Valuations Estimated lt need more info gt Buyer s Test Method Value Manage Valuations Please complete the following information to create a new valuation Required Valuation Name Effective Evaluation Date S Calendar Copy From Valuation lt Create new valuation Cancel Save Save amp Next gt gt A On the Man
14. drop down list B Select the Number of Months for the income statement for the year selected in A above from the No of Months drop down list Note If you copied data from another year the No of Months will be the same as that for the Year copied a The annualized income statement for this year will be presented in the Recast Income Statement Summary of Step 5 b This annualization function can be used for any year for which data is entered Annualization is useful in case the first year is the start up year for the company and the company was in operation for less than 12 months in its first year or if the subject converted from a C Corp to an S Corp resulting in a partial year tax return for one of the years of interest C Select the Data Source from the Data Source drop down list D Enter Data from the selected income statement and the identified add backs in the non shaded cells white background a In the Statement column enter the data from the selected income statement i The only required entries in the Statement column are 1 Gross Sales 2 Other Income 3 Cost of Goods Sold 4 Total Expenses From these four values the program calculates Gross Profit and Pre tax Net Income No other inputs other than add backs are required to calculate SDE See TIPS below ii Other Expenses is calculated as the difference between Total Expenses and the sum of the individual expenses entered above
15. 1 503 532 1 263 389 1 181 747 100 0 100 0 100 0 100 0 Cost of Goods Sold 621 792 859 960 445 640 402 934 38 1 37 2 35 3 34 1 Gross Profit 1 010 328 943 572 817 749 778 813 61 9 62 8 64 7 65 9 Total Expenses 756 044 698 696 641 375 575 692 46 3 46 5 50 8 48 7 Seller s Discretionary Earnings SDE M5254254 Sae A IUSTI 15 6 16 3 14 0 17 2 Weighting 100 0 0 0 Expected SDE Growth in Next Year 0 In Percent Weighted Averages Revenue SDE Reasonable Owner Salary EBITDA EBIT Cancel Save Calculate Save Calculate amp Next gt gt 15 ValuTrax Opinion of Value User s Manual Enter the following on the Income Statement Summary screen displayed on the previous page A The appropriate Weighting for each year see hints immediately below a Ifthe next year is expected to be the same as the most recent year weight the most recent year 100 b Ifthe historical data does not indicate a trend weight each year the same simple average c If the historical data does indicate a trend use a weighted average with most weight given to the most recent year B Enter the Expected Increase in SDE if desired If you do use this feature give a 100 weight to the most recent year and enter the expected increase in SDE based on the most recent year Many brokers and business appraisers only use the
16. Before Tax plus Interest and Taxes 31 ValuTrax Opinion of Value User s Manual Step 4 Income Statements A I entered all the data and saved it per the instructions but the calculated SDE value doesn t make any sense What s wrong a This usually means that you have not entered Total Expenses in the Statement column As noted at the top of the Step 4 screen Total Expense is a required input and Other Expenses is calculated B When I delete an expense account name that I previously entered most of the data I entered disappears why does this happen a Prior to deleting any user defined account names click on Calculate Save at the bottom of the screen If you neglect to do so any data you have entered since your last save will be deleted C How many months of income statement data is needed to get accurate results when annualizing a In general the more months the better However even if you are annualizing an income statement for a nine or ten month period the results can still contain significant errors b There are many ways that errors can be introduced into annualized income statements Each of these errors can significantly impact the subject s pre tax net income and SDE Always review the annualized statement with the client to ensure that the annualized revenue cost of goods sold and general amp administrative expenses are reasonable Some of the most obvious problem areas are listed below
17. HNESZE 500 ValuationDate ClientOwner ClientCompany have performed a calculation engagement as that term is defined in the Professional Standards of the Institute of Business Appraisers IBA performed certain calculation procedures on the Company as of the date shown above The Specific calculation procedures are detailed in this report The calculation procedures were performed solely to assist in he potential sale or purchase of the Company the resulting calculations of value should not be used for any other purpose or by any other party for any purpose This calculation engagement was conducted in accordance with the Professional Standards of the IBA The estimate of value that results from a calculation engagement is expressed as a Calculated Value In a calculation engagement the valuation analyst and the client agree on the specific valuation approaches and methods to be used and the extent of the valuation procedures to be performed This calculation engagement did not E Custom Assumptions amp Limiting Conditions If at any time you desire to return to the default custom cover letter click on the Icon on the upper right corner of the menu bar in the custom cover letter window C Repeat B above to edit the custom Assumptions amp Limiting Conditions page D Click on Save amp Next to proceed to the next step Tips 1 Only your firm s name is required in order to proceed to the next step however yo
18. Statement Summary EBIT EBITDA Depreciation Amortization Expense is calculated using the weighted average sum of depreciation and amortization expense for the year or years weighted in Step 6 If the User weighted the two most recent years equally for example and there was no depreciation expense in the most recent year in the preliminary year end income statement used the weighted average depreciation amortization expense will be half of the value in the year prior to the most recent year If the depreciation amortization expense in the most recent year should have been equal to that in the prior year the weighted average depreciation expense is half of what it should be and the calculated value of EBIT is significantly in error If the user applied weighting to only the most recent year EBIT would equal EBITDA since there was no depreciation amortization expense in the most recent year Again the calculated value of EBIT would be in error If used in the BOV EBIT is only used in the Market Method if a 16 ValuTrax Opinion of Value User s Manual Price EBIT multiple is used The likelihood of this happening is low however if you want the value of EBIT to be reasonably correct enter the expected depreciation amortization expense in the statement column for in this example the most recent year and then add these expenses back in the Add Back column This will not change SDE since you increased expense s and then added back th
19. ValuTrax User s Manual 2010 Biz Broker Toolz All Rights Reserved Used By Permission ValuTrax is a Trademark of Business Brokerage Press Inc 032311 ValuTrax Opinion of Value User s Manual Table of Contents Table of Contents 2 Introduction 3 Limited Warranty 3 Warranty Disclaimer 3 Limitation of Liability 3 General Comments 4 Step 1 User Preferences 5 Step 2 Manage Clients 7 Step 3 Manage Valuations 8 Step 4 Income Statements 9 Step 5 Recast Income Statements 13 Step 6 Income Statement Summary 15 Step 7 Balance Sheet 18 Step 8 Market Method 20 Step 9 Multiple of SDE Method 22 Step 10 Buyer s Test Method 24 Step 11 Valuation Summary 27 Step 12 Valuation Report 28 Step 13 Valuation Notes 30 Frequently Asked Questions 31 Appendix 39 ValuTrax Opinion of Value User s Manual Introduction This User s Manual provides step by step instructions on how to use the on line ValuTrax business pricing model It is not intended to instruct users on the proper recasting of financial statements If required Users should obtain such instruction from third parties USE OF THE VALUTRAX PRICING MODEL The ValuTrax M Pricing Model is intended for use by business brokers and other professionals as a service related to their core businesses and not as a professional appraisal service Therefore ValuTrax is not required to comply with the business valuation standards of the variou
20. abase s or industry rules of thumb Add Inventory only when using the Bizcomps database or if you are using an industry rule of thumb that specfically requires adding inventory Do not add fixed assets unless you are using a rule of thumb that specifically requires adding fixed assets 43 430 Estimated FMV of Inventory from Balance Sheet 276 338 Estimated FMV of FF amp E from Balance Sheet Data Sources Bizcomps lt None gt bd Price SDE Price Revenue Price EBIT Price EBITDA Multiple 2 75 0 35 0 0 0 0 SDE Revenue EBITDA Product EBIT Adjustments Add Inventory 43 430 0 0 Add Fixed Assets 0 0 0 0 Estimated Selling Price Sil a NE Weightings 100 0 0 0 0 0 Estimated Selling Price Market Method Cancel Save Calculate Save Calculate amp Next gt gt On the Market Method screen displayed above A Select the Data Source s used to determine price revenue and price earnings multiples for the Market Method from the Data Sources drop down list B Enter the selected Price SDE Price Revenue Price EBIT or Price EBITDA Multiples from the selected database s C Enter Inventory and Fixed Asset values if and only if you are using a comparables sold database or an industry rule of thumb that specifically requires it a BizcompsQ does not include inventory in the Selling Price
21. able to rules of thumb particularly rules of thumb based on revenue being applied to businesses that typically sell based on earnings The data provided in the figures may be particularly useful in estimating the value of asset intensive businesses Note If the Fixed Asset Value SDE is 4 0 or greater the subject may be a candidate for liquidation The data of figures 1 and 2 are applicable in general to businesses that are normally valued based on earnings The data in the figures may not be applicable to businesses such as accounting CPA firms pool service routes security monitoring companies etc that are often valued based on revenue gt Reference Direct Market Data Method tutorials on the Institute of Business Appraisers web site www go iba org Coefficient of Variance Standard Deviation Average 40 ion of Value User s Manual In Op ValuTrax Figure 1 750 000 1 lt SDE lt 5 0 lt a on P Q Q gt ea 2 REVENUE lt ea Upper Quartile TT Median Note Based on Bizcomps 2009 Price Does Not Include Inventory Lower Quartile HH ads HOnHd FIXED ASSET VALUE SDE ValuTrax Opinion of Value User s Manual Figure 2 ALL BIZCOMPS DATA REVENUE 750 000 1 lt SDE gt 5 0 Note Based on Bizcomps 2009 Price Does Not Include Inventory
22. age Valuations screen enter a Valuation Name The program will automatically name the first valuation as Client Company Name Valuation which you can edit b Effective Evaluation Date Enter the effective date using the Calendar function or by typing the date in the cell c From the Copy From Valuation drop down list select either 1 Create new valuation or ii Select the name of any other existing valuations to copy the data from the existing valuation into the new valuation this option is not available when performing the first valuation for the selected client B Click Save amp Next to proceed to the next part of Step 3 C Select a valuation on the screen shown below by clicking the Select button next to the desired valuation to proceed to the next step Client Gulfview Grille Market Method lt need more info gt Valuation lt none selected gt Multiple SDE Method lt need more info gt Estimated lt need more info gt Buyer s Test Method need Value more info Manage Valuations Following is a list of valuations for the selected client To select a valuation just click the Select button next to the desired valuation in the list To add a valuation click the Add Valuation link If you wish to update the valuation information or delete a valuation click the Edit or Delete link next to the desired valuation in the list Select Valuation Name Effective Evalua
23. an implied warranty lasts so some of the above may not apply to you General Comments Screen shots are provided for each Step in the ValuTrax pricing model on the following pages to help familiarize the User with the on line application In the screen shots input cells are un shaded white background and calculated cells are shaded blue If viewing the User s Manual on your computer select View and Zoom then set the required magnification to improve readability In general the calculations in each step of the pricing model are not executed until the User selects Save Save Calculate or Save Calculate amp Next as appropriate for a given step The exception to this rule is found in Step 4 Calculations in Step 4 Income Statements are made in real time However in each Step including Step 4 it is necessary to save your inputs before moving to the next step Once data has been entered and saved the User can move from step to step in the evaluation using the Step drop down list at the top of each window Calculation of Value Report ValuTrax provides an option See Steps 1 amp 12 for business appraisers to prepare a Calculation of Value Report for small businesses with a custom editable cover letter and a custom editable Assumptions and Limiting Conditions page These custom pages replace the cover letter and Disclaimer page used in the standard Pricing Report The appraiser can generate the Calculatio
24. and the resulting calculations Click Save Calculate amp Next to proceed to the next step NOTE Calculations in this step are not executed until the User clicks on either Save Calculate or Save Calculate amp Next 23 ValuTrax Opinion of Value User s Manual Step 10 Buyer s Test Method Client Gulfview Grille Market Method 742 711 10 Buyer s Test Method i 7 Valuation Gulfview Grille Valuation Multiple SDE Method 726 212 Estimated 750 000 Buyer s Test Method 758 141 Value Method 3 Buyer s Test Method Please complete the fields below to calculate the Buyer s Test Method estimate Reasonable Owner Manager Salary See Recasted Income Statement Summary Req d Rate of Return on Down Payment 96 Downpayment as of Price 96 Enter Estimated Annual Capital Expense as a Percent of Fixed Asset Value at Cost 96 Estimated Annual Capital Expense Loan Interest Rate 96 Loan Period Number of Months Debt Coverage Ratio Estimated Selling Price Price which satifies above conditions Calculated Rate of Return 96 a8 El Enable User Supplied Rate of Return 96 Cancel Save Calculate Save Calculate amp Next gt gt The Estimated Rate of Return on Down Payment and the Estimated Annual Capital Expense given above are set at default values These defaults and the other defaults in cells with white backgroun
25. anual NOTE When valuing such a business i e one with relatively low SDE the Required Rate of Return may have to be set to zero as discussed above The User may also have to set the down payment and other terms to those related to Seller financing e g shorter term larger down payment and possibly higher interest The Debt Coverage ratio may also be set to 1 0 with Seller financing If the Buyer s Test Method still gives a significantly lower value than the other two methods the income approach i e the Buyer s Test Method is likely not applicable to the subject 26 ValuTrax Opinion of Value User s Manual Step 11 Valuation Summary Client Gulfview Grille Market Method 742 711 Valuation Gulfview Grille Valuation Multiple SDE Method 726 212 Estimated 750 000 Buyer s Test Method 758 141 Value Step 11 Valuation Summary Price Evaluation Summary amp Conclusions Enter weights for each valuation method based on the methods applicability to the subject and or the User s confidence in the method 726 212 742 711 Buyer Test Estimated Price Price Evaluation Results Estimates Weight 15 0 Estimated Price Multiple of Earnings Estimated Price Buyer s Test 35 0 Estimated Price Market Multiples 50 0 Estimated Price of Business Weighted Average gt Accounts Receivable Account Payable o Estimated Price Including A R A P Other Assets L
26. ate if desired by using the calendar function or by entering the date in the cell B Prepared By Enter the name of the person who prepared the pricing report and whose name you wish to appear on the report cover sheet C Report Type The Report Type drop down menu has two options Pricing Report and Calculation of Value Report Select Pricing Report to generate a standard business pricing report or select Calculation of Value Report if you are an appraiser and desire to generate a calculation of value report using the custom cover letter and custom assumptions and limiting conditions pages from Step 1 D File Type Once you have selected the Report Type in C you can select to either generate the report in Adobe PDF or MS Word format by selecting the appropriate file type from the File Type drop down list If you select the MS Word format after generating the report you will be able to edit the report and if desired change formatting and or include additional sections such as Description of the Company etc If you select the MS Word file type you will actually generate an HTML document that will be opened in Word You will need to save the report as a MS Word document which you will then be able to edit e g Save As type Word Document doc Once you have selected the Report Type and the File Type click on Generate Report at the bottom of the Valuation Report screen to generate the report 28 ValuTrax Opi
27. d If all individual expense account values are entered correctly Other Expense will equal zero If the User doesn t enter any individual expense account values Other Expense will equal Total Expense This feature allows the User to get a quick estimate of value without entering any expense account names or values if desired After entering the REQUIRED INPUTS Gross Sales Other Income enter other expense as a negative number if applicable Cost of Goods Sold and Total Expense the User can enter the add backs in the Add Backs column in any row to calculate SDE NOTE If the report will be provided to a prospective Client it is desirable to enter all or most expense accounts and expense account values and enter add backs in the Add Backs column in the cell adjacent to the applicable expense account NOTE If more than approximately thirty one 31 expense accounts are used including the ten fixed default accounts the income statements and or the Recast Income Statement Summary will print on more than one page Restrict the total account names to around thirty one or less for the best looking report 11 ValuTrax Opinion of Value User s Manual TIP Partial year income statements are automatically annualized on the Recast Income Statements of Step 5 and the Income Statement Summary of Step 6 If you know the projected year end value for a given expense account and this year end value is d
28. d can be modified by the User as required Loan terms should be based on available seller or lender terms for the type of business being valued The default rate of return on down payment is calculated from the market and or the multiple of SDE methods The required rate of return on downpayment will typically be in the range of 20 2096 ROI to 40 4096 ROI lower for larger lower risk businesses and higher for smaller higher risk businesses May be zero for very small businesses where buyer is buying a job not making an investment The Buyer s Test Method is based on the business having enough cash flow to provide the owner with a reasonable salary provide a reasonable rate of return on the buyer s investment provide for annual capital expense and cover debt service with a reasonable debt coverage ratio The following Table shows how the subject s discretionary earnings are allocated based on the terms set above Buyer s Test Check SDE Less Owner Manager Salary Equals EBITDA Less Return on Downpayment Less CAPEX Less Debt Service Less Excess Debt Service Coverage Remaining SDE All entries in the Table should be positive Remaining SDE should be zero as this method calculates the maximum value with the User specified terms Cancel Save Calculate Save Calculate amp Next gt gt 24 ValuTrax Opinion of Value User s Manual On the Buyer s Test Method screen displayed on the previous page ent
29. e 0 Total Income Revenue 815 060 Cost of Goods Sold 310 896 0 Expenses Officer s Salary 46 626 46 626 Salaries amp Wages 144 598 11 626 Manager s Salary Note 1 Repairs amp Maintenance 26 196 0 Bad Debts 0 0 Rents 23 060 Adjust to Market Note 2 Taxes amp Licenses 25 946 0 Interest Expense 782 Depreciation 7 151 Advertising 11 404 Amortization 0 Auto amp Truck Expense 0 Delete Bank Charges and Fees 212 Delete Cash Over Short 2 444 Delete Contract Services 3 674 Delete Cleaning Expense 9 702 Delete Credit Card Fees 13 494 Delete Dues amp Subscriptions 42 Delete Utilities Electricity 8 980 Delete Utilities Gas 12 101 Delete Garbage Collection 1 951 Delete Landscaping amp Lawn Service 1 733 Delete Legal amp Professional 4 612 Delete Miscellaneous Expense 1 294 Delete J Office Expense 10 334 Delete Pest Control 626 Delete Postage 2 995 Delete Supplies 20 450 Delete Utilities Water 3 577 Delete Uniforms 568 Delete Telephone 2 940 Delete Insurance General 19 276 Delete Add Other Expense Account
30. e in the Valuation Report on the Valuation Notes screen After typing each separate note click Save to save your work before printing the report as discussed in Step 12 Once you have added and saved all necessary notes select Step 12 from the step drop down menu at the top left and follow the directions for Step 12 to generate the valuation report 30 ValuTrax Opinion of Value User s Manual Frequently Asked Questions General A What is the least intuitive feature of the pricing model a Probably the least intuitive feature of the pricing model and one of the most useful is the fact that on the Step 4 income statements Total Expense is a required input Intuitively one would expect that total expense would be calculated In the pricing model it is a required input Other Expense which is normally a user input is a calculated value in the pricing model The pricing model was programmed this way as described in Step 4 of this User s manual to allow the user to create a quick pricing calculation without entering every expense on the subject s income statement The user can enter as many or as few individual expenses as desired Other Expense is then calculated as the difference between Total Expense and the sum of the individual expense entered If all individual expenses are accurately entered for a pricing report that will be provided to a client Other Expense will be zero B What does it mean when I can t se
31. e same amount However this approach will give a reasonable value for calculated EBIT 17 ValuTrax Opinion of Value User s Manual Step 7 Balance Sheet Client Gulfview Grille Market Method 742 711 Valuation Gulfview Grille Valuation Multiple SDE Method 726 212 Estimated 750 000 Buyer s Test Method 758 141 Value 7 Balance Sheet Balance Sheet Recasting Please complete the following entries for the client s balance sheet If real estate is included in the sale and is on the balance sheet make sure that any mortgage balance as of valuation date is included in the fairmarket value of long term debt on the balance sheet If the mortgage balance is not included the calculation of Owner Equity will be wrong Included in typical asset sale Data Source CPA Financials Period Ending 6 30 2010 3H Calendar Book Seller s Est ASSETS Value Fair Market Per B S Adjustments Value Current Assets Cash amp Equivalents 29 341 29 341 Accounts Receivable A R 1 383 1 383 Inventory 43 430 43 430 0 0 Prepaid Expenses 0 Other 0 Total Current Assets Fixed Assets Fixed Assets 377 942 276 338 Book Value 5 x Depr 0 Accumulated Depreciation 203 208 Total Fixed Assets Real Estate Land amp Buildings Accumulated Depreciation
32. ect is a small business that would not qualify for SBA guaranteed financing but the user has input SBA type financing terms the value indication will typically be high If the business will likely be financed by the Seller the down payment will usually be higher the term shorter and the interest rate could also be different than a typical SBA deal Step 12 Valuation Report A What is Owner s Equity a As stated in the valuation report owner equity is the amount the owner s would receive if their business sold at the price indicated by the pricing model after collecting selling all assets not included in the sale including excess assets discussed above under Step 7 and paying off all business liabilities This does not take into account tax liabilities broker s fees closing costs and any other costs associated with the business sale Note The estimated owner s equity is dependent on the data entered in the Balance Sheet of Step 7 The actual Owner s equity will vary dependent on the balance sheet as of the specific sale date B I am using a MAC computer and I can t generate the report in MS Word Why a The Word report is actually first generated in XHTML and then is saved as a Word document with the doc extension before being opened and then edited in Word This approach does not work with MAC computers We are searching for a solution to this problem 38 ValuTrax Opinion of Value User s Manual Appe
33. er and or Assumptions amp Limiting Conditions that will be used when generating a Calculation of Value report C Custom Cover Letter C Custom Assumptions amp Limiting Conditions Cancel Save Save amp Next gt gt Note The Calculation of Value Templates at the bottom of the window of Step 1 are intended for use by business appraisers who want to prepare Calculation of Value Reports for their small business clients By generating the Calculation of Value Report in MS Word Step 12 appraisers can then insert sections and or edit other pages of the report as required to comply with applicable standards Non business appraisers in general should ignore this option which is explained in more detail on the following page A On the User Preferences screen enter the following information for Your Firm a Name Required b Street address c City d State Province Select from the drop down list e Zip or Postal Code f Phone number g Fax number ValuTrax Opinion of Value User s Manual B Calculation of Value Templates If you are an appraiser and desire to prepare a Calculation of Value Report you can create a custom cover letter and a custom assumptions amp limiting conditions page by clicking on the appropriate boxes For example if you click on the Custom Cover Letter box the following window will open where you can edit the default cover letter text as desired See Tip 2 below Custom Cover Letter CE
34. er the data listed below if the default values are not applicable to the subject business A Required Rate of Return on Down Payment represents the Buyer s required return on investment The default rate of return is calculated from the Market and Multiple of SDE Methods a In general use the default rate of return unless you are valuing a business with low SDE where the Buyer is buying a job and not looking for a return on his her investment This is typically the situation when the Buyer s Test Method gives a significantly lower value indication than the other two methods In such cases click on the Enable User Supplied Rate of Return check box and set the required rate of return to zero i e the default value Down Payment as a Percent of Price a The default is set to 25 a typical value for an SBA guaranteed loan Adjust this down payment percent of price as required for Seller financing etc Estimated Annual Capital Expense as a Percent of Fixed Asset Value at Cost 46 a This input requires that the User has entered the fixed asset value at cost on the Balance Sheet of Step 7 If this data is not entered on the Balance Sheet annual capital expense will be zero in the analysis The default value of estimated annual capital expense is 10 of the value of the subject s fixed assets at cost The User can adjust this value based on the average or projected annual capital expense for the subject Loan Interest Ra
35. ess Other Current Liabilities o Long Term Liabilities Excess Assets Estimated Value of Real Estate a m m Net Owner Equity Including Real Estate H C D E F G Typical asset sale only goodwill fixed assets amp inventory transfer to buyer Cancel Save Calculate Save Calculate amp Next gt gt The Valuation Summary screen displayed above presents the results of the price evaluation Enter the appropriate Weight for each valuation method based on the applicability of the methods to the subject and the User s confidence in the methods 27 ValuTrax Opinion of Value User s Manual Step 12 Valuation Report Client Gulfview Grille Market Method 1 179 140 Step 12 Valuation Report Valuation Gulfview Grille Valuation Multiple SDE Method 1 184 029 Estimated Value 1 240 000 Buyer s Test Method 1 352 958 Valuation Report To generate a report click the Generate link You may change the information below to customize the report as desired Required Report Date 11 4 20 10 Si Calendar Prepared By wayne Quilitz Report Type Pricing Report x File Type Adobe PDF v Generate Report requires Adobe Reader Get ADOBE READER Get Adobe Reader Enter the following data on the Valuation Report screen displayed above A Report Date By default the current date will be displayed Modify the default d
36. et Value SDE Step 10 Buyer s Test A What does it mean when the Buyer s Test Method gives a much lower value than the other two methods or a zero value a The Buyer s Test is the only method used in the pricing model that is based on the business being able to pay a reasonable owner manager salary pay a reasonable return on the buyer s investment ie down payment cover annual capital expense and cover debt service with a reasonable debt coverage ratio For businesses with relatively low SDE compared to fixed expenses such as reasonable owner manager compensation and annual capital expense etc there may not be enough cash flow left to pay the buyer a return on his her investment and or to finance the deal For very small businesses where the buyer is buying a job rather than looking for a return on investment the required return on investment can be set to zero Eventually as the amount of earnings available to finance the deal drop the indicated value will drop and will reach a point where the Buyer s Test will not be applicable Obtaining Maximum Knowledge from the Bizcomps Database Toby Tatum 2000 37 ValuTrax Opinion of Value User s Manual B What does it mean when the Buyer s Test Method gives a significantly higher value than the other two methods a The Buyer s Test Method gives the highest value that a Buyer could afford to pay given the terms of the deal as specified by the user If the subj
37. et Value of individual assets and liabilities in the Seller s Estimate of Fair market Value column a If necessary ask the business Owner to estimate the market value of inventory and fixed assets b Identify any excess fixed assets and or inventory Do not list the excess assets in the Seller s Estimate of Fair market Value column Enter the estimated value of such assets at the bottom of the page in the Value of Excess Assets cell Provide a description of the excess assets in the Description of Excess Assets cell In this pricing model these excess assets will not be included in the estimated Selling Price They are included in the calculation of Owner s Equity c Liabilities are normally entered at face value i e the value listed on the balance sheet E Click on Save Calculate to review your inputs and the resulting calculations Click Save Calculate amp Next to proceed to the next step Note Calculations in this step are not executed until the User clicks on either Save Calculate or Save Calculate amp Next 19 ValuTrax Opinion of Value User s Manual Step 8 Market Method Client Gulfview Grille Market Method 742 711 Step 8 Market Method Valuation Gulfview Grille Valuation Multiple SDE Method 5726 212 Estimated 750 000 Buyer s Test Method 758 141 Value Method 1 Market Method Provide Price SDE Price Revenue Multiples etc from comparables sold dat
38. f accumulated depreciation c 50 60 of asset value at cost v Accounts Payable A P 1 If balance sheets are on a cash basis add A P vi Shareholder Loans 1 Set to zero Pricing model calculates total owner equity vii All Other Liabilities 1 No adjustment typically same as book value Step 8 Market Method A When should I add back inventory and or the value of fixed assets in the Market Method a Inventory should be added back if and only if you are using the Bizcomps database or an industry rule of thumb that specifies adding back inventory b Fixed assets should be added back if and only if you are using an industry rule of thumb that specifies adding back fixed assets B Which comps database do you recommend for valuing small businesses using the ValuTrax pricing model a The Bizcomps database is probably the best database to use for valuing small businesses This is especially true for business brokers as the definition for discretionary earnings is the same as the definition generally used by business brokers In addition all sales are reported as asset sales only fixed assets and intangibles such as goodwill are included in the sale and all multiples in the Bizcomps database are based on adjusted income statements The Bizcomps database does not include inventory in the selling price therefore it is necessary to add a normal level of inventory to the value indication obtai
39. historical data when valuing small companies In this case leave the expected percent increase in SDE set equal to the default value of zero This feature can also be used for what if analyses If an Owner indicates that he she wants to sell the business for a selling price higher than indicated by the ValuTrax pricing model you can increase the SDE by the percentage required to obtain the owner s desired selling price and then show him her how much the subject s SDE has to increase to justify their desired selling price C Enter a reasonable owner manager salary This should be a reasonable market salary e g what an Owner would have to pay a qualified employee to run the company D Click Save Calculate to review your inputs and the resulting calculations Note calculations in this step are not executed until the User clicks on either Save Calculate or Save Calculate amp Next E Click Save Calculate amp Next to proceed to the next step TIP Financial statements are automatically annualized if the income statement used for the Discretionary Earnings analysis of Step 4 was for less than 12 months The annualization factor is equal to 12 No of Months See TIPS in Step 4 for a method of calculating the appropriate add back to obtain a projected year end value for sales cost of goods sold or individual expenses if different than the values that would result from straight annualization TIP In Step 6 Income
40. iers Cancel Save Calculate Save Calculate amp Next gt gt 22 ValuTrax Opinion of Value User s Manual On the Multiple of SDE Method screen displayed on the previous page A Enter the appropriate value between zero 0 and three 3 for each of the ten factors listed to calculate a multiple of SDE for the subject business This method is the most subjective method however it will give reasonable results if careful consideration is given to each factor a Low ratings result in a low multiple of earnings b High ratings result in a high multiple of earnings B Modify the default Weight for each of the ten factors if required based on the criteria and the specific characteristics of the business being valued C Enter the appropriate Size Premium for the subject The default size premium is set at 1 00 This is in general appropriate for businesses with revenue less than or equal to 750 000 For businesses with revenue greater than 750 000 select an appropriate Size Premium from the Size Premium Table or use an average size premium of 1 33 Note a size premium of 1 33 is equivalent to increasing the maximum factor value from three 3 to 4 a For businesses with revenues a little above or a little below the breakpoint of 750 000 the User will need to determine whether to use a size premium of 1 00 or 1 33 or something in between D Click on Save Calculate to review your inputs
41. ifferent than the annualized value would be you can calculate the Add Back that will give you the desired year end value using the following equation Add Back Months 12 x AV IV Where Months months of the interim financial statement AV the projected annualized expense account value i e the projected year end value IV the expense account value on the interim financial statement For example if insurance expense was 10 000 on the 6 month income statements and the forecast year end insurance expense is 15 000 the add back would be Add Back 6 12 x 15 000 10 000 0 5 x 15 000 10 000 2 500 Check Annualized Value IV Add Back x 12 Months 10 000 2 500 x 12 6 7 500 x 2 15 000 NOTE This same equation works for adjusting revenue and cost of goods sold 12 ValuTrax Opinion of Value User s Manual Step 5 Recast Income Statements Step 5 Recast Income Statements Client Gulfview Grille Valuation Gulfview Grille Valuation Estimated 750 000 Market Method 742 711 Multiple SDE Method 726 212 Buyer s Test Method 758 141 Value Recast Income Statement Please review the following recast income statements to ensure they are accurate and complete The amounts will be annualized for any years which have less than 12 months worth of data Year Data Source Income Revenues Other Income Loss Total Income Revenue Cost
42. ights if required based upon the criteria and the specific characteristics of the business being valued For businesses with Revenue lt the Revenue Breakpoint set the Size Premium equal to 1 00 For businesses with Revenue gt the Revenue Breakpoint set the Size Premium equal to 1 33 equivalent to the maximum value of factors above set 4 or select an appropriate size premium from the table below The Default Revenue Breakpoint is 750 000 The User can adjust the Revenue Breakpoint and Size Premium by analyzing BizComps Data for the specific type of business of interest The Table provides Size Premia for general business categories BIZCOMPS SIZE PREMIA REVENUE BREAKPOINT 750 000 BUSINESS SERVICES CONSTRUCTION MANUFACTURING AUTO REPAIR SERVICES FINANCE INSURANCE amp REAL ESTATE RETAIL WHOLESALE DURABLE GOODS WHOLESALE NON DURABLE GOODS PERSONAL SERVICES 1 The Multiple of Discretionary Earnings Method was first presented by Thomas L West and Jeffrey D Jones in the Handbook of Business Valuation 1992 John Wiley amp Sons Inc 2 Size Premium Ratio of Median SP SDE multiple for companies in category with revenues greater than 750 000 Numerator to Median SP SDE multiple for companies with revenues of 750 000 or less Denominator Includes all Bizcomps transactions with both positive revenue and positive SDE as well as SDE multiples lt 6 transactions with Price SDE gt 6 are considered to be outl
43. lect some of the steps from the Step drop down list a In general if the steps are disabled and grayed out they cannot be selected If the Market Method of Step 8 or any other step is grayed out on the Step drop down list it means that you have not entered all of the required data on the previous step For the Market Method of Step 8 this usually means that the Period Ending date has not been entered on the Balance Sheet of Step 7 Note Internet Explorer 7 may allow the User to select the disabled steps However if you click on a disabled step the program will take you back to the step you were on prior to clicking on the disabled step The easiest way to avoid any confusion related to Internet Explorer 7 is to download Internet Explorer 8 from the Microsoft website at www microsoft com windows internet explorer default aspx C What are SDE EBITDA and EBIT a SDE Seller s Discretionary Earnings is equal to Net Income Before Tax plus one owner s salary plus interest expense unless the interest expense is a normal cost of doing business in the industry e g floor planning interest for auto dealers plus non cash expense like amortization and depreciation plus discretionary personal expense plus non recurring expense etc EBITDA Earnings Before Interest Tax Depreciation and Amortization is equal to SDE less one owner s salary EBIT Earnings Before Interest and Tax is equal to Net Income
44. n and the actual or typical account balances in the Seller s Estimate of Fair Market Value column b The value of fixed assets at cost is the only input that affects the actual value indication from the pricing model If the owner can t provide an estimate of the value of company assets at cost obtain an estimate of annual capital expense and enter a value of 10 times the annual capital expense as the value of fixed assets at cost Then use the default for annual capital expense of 10 of fixed asset value at cost This will give you the correct estimated annual capital expense C What are the most common balance sheet adjustments a The following adjustments should be made if applicable i Accounts Receivable A R 1 Adjust A R to eliminate uncollectible accounts based on Owner estimates or balances over 90 days past due 2 If balance sheets are on a cash basis add A R and adjust as described above ii Inventory 1 Adjust to replacement value 2 Adjust if understated or overstated 35 ValuTrax Opinion of Value User s Manual 3 Adjust for slow moving or obsolete inventory 4 Adjust for excess inventory subtract any excess inventory and enter it at bottom of balance sheet screen iii Loans to Shareholders 1 Set to zero Pricing model calculates total owner equity iv Fixed Assets 1 Adjust to Fair Market Value set accumulated depreciation to zero based on a Owner Estimate b Book Value plus half o
45. n of Value Report in MS Word if they desire to insert an additional section s edit standard text etc The custom editable pages described above are only included in the report if the Calculation of Value Report is selected from the Report Type drop down menu in Step 12 The custom cover letter and Assumptions and Limiting Conditions page when saved by the User are available for all subsequent reports i e they don t have to be edited for each report IMPORTANT When entering historical income statement data in Step 4 TOTAL EXPENSE IS A REQUIRED INPUT Intuitively one would expect total expense to be calculated However there is a valid reason why it is a User input in ValuTrax See Step 4 Income Statements on page 11 of this user s manual ValuTrax Opinion of Value User s Manual Step 1 User Preferences Client lt none selected gt Market Method need more info Step 1 User Preferences Valuation noneselected Multiple SDE Method need more info Estimated Value need more info Buyer s Test Method need more info User Preferences Please update your personal preferences Required Firm Name E American Brokers Address 1234 Easy Street x Anytown State Province Florida Zip Postal Code 39999 Phone 999 999 9998 Fax 999 999 9999 Calculation of Value Templates You may optionally use the templates below to create your own custom Cover Lett
46. ndix Page No What Can I Do When There Are No Comps for the Subject Company 40 39 What Can I Do When There are No Comps for the Subject Company When using small business pricing models to value a unique business one often runs into the situation where suitable comparables sold data cannot be found in databases such as Bizcomps and a suitable industry rule of thumb can t be found in the Business Reference Guide The number of comparable transactions sample size in the database is important as discussed below e Less than 5 transactions data does not provide statistically significant information e 5 or 6 samples provide a reasonable definition of median mean multiples median is less affected by outliers e 10 or more samples provide a reasonable definition of the mean and dispersion of the distribution standard deviation amp coefficient of variance e 20 or more samples provide a reasonable definition of upper and lower quartile 25 values of the multiple distribution and dispersion standard deviation amp coefficient of variance e 50 or more samples provide reasonable definition of upper and lower decile 10 multiples A common rule of thumb used by business brokers is some multiple of SDE often 1 times SDE plus the value of the operating assets This type of rule of thumb is of questionable value However the data of Figures 1 amp 2 show that for Bizcomps data there is a relationship between Price
47. ned using Bizcomps multiples 36 ValuTrax Opinion of Value User s Manual C How do you handle excess inventory in the market approach a Excess inventory should be handled as discussed above in Step 7 Only normal levels of inventory should be added back in the market method if you are using Bizcomps or an Industry Rule of Thumb that requires adding back inventory as in 1 above b If you are using Bizcomps and the market method gives a significantly higher value than the other methods when inventory is added back you may need to calculate the Bizcomps selling prices price revenue and price SDE multiples including inventory Often there is less dispersion in the Bizcomps multiples data if inventory is included in the selling price D Is ValuTrax linked to the Business Reference Guide or Bizcomps a No E If I subscribe to ValuTrax do I also have to buy Bizcomps or some other comparables sold database a While it preferable to subscribe to a database like Bizcomps ValuTrax users can use sources of rules of thumb like the Business Reference Guide You can also use for sale comparables with an appropriate discount Toby Tatum indicates that the average excess of asking price over selling price is 32 8 and the median differential is 15 9 In addition ValuTrax users can use the article in the Appendix of this user s manual to estimate price SDE multiples for companies based on the ratio of Fixed Ass
48. nion of Value User s Manual NOTES If you wish to include any additional notes in the report first select Step 13 from the step drop down menu at the top left of this screen and follow the directions for Step 13 before returning to Step 12 to generate your report You will not be able to view the resulting PDF report if you do not have Adobe Reader downloaded on your computer To download Adobe Reader click Get Adobe Reader on the bottom right of the Valuation Report screen 29 ValuTrax Opinion of Value User s Manual Step 13 Valuation Notes Client Gulfview Grille Market Method 742 711 ion f r e i il Step 13 Valuation Notes Valuation Gulfview Grille Valuation Multiple SDE Method 726 212 Estimated 750 000 Buyer s Test Method 758 141 Value Valuation Notes Here you may enter notes and comments related to this valuation These notes will be displayed on the last page of the valuation report Note Comment Last Modified 1 Add Back Manager salary Current mamager is part time 6 13 2010 12 46 18 PM Save Delete Full time owner manager would make an additonal part time manager unecessary 2 Market Rent Based on estimates of real estate 6 13 2010 12 47 56 PM Save Delete appraiser who appraised the real estate Real estate is owned by the owner s of the subject in a separate corporation Enter any applicable valuation notes you wish to includ
49. of Goods Sold Gross Profit Expenses Officer s Salary Salaries amp Wages Repairs amp Maintenance Bad Debts Rents Taxes amp Licenses Interest Expense Depreciation Advertising Amortization Auto amp Truck Expense Bank Charges and Fees Cash Over Short Cleaning Expense Contract Services Credit Card Fees Dues amp Subscriptions Garbage Collection Insurance General Landscaping amp Lawn Service Legal amp Professional Miscellaneous Expense Office Expense Pest Control Postage Supplies Telephone Uniforms Utilities Electricity Utilities Gas Utilities Water Other Expenses Total Expenses Seller s Discretionary Earnings Next gt gt 2010 Annualized 1 632 120 100 1 632 120 100 621 792 38 1 505 164 31 265 944 16 3 52 392 3 2 120 998 7 4 51 892 3 2 22 808 1 4 2009 Tax Return 1 503 532 100 1 503 532 100 559 960 37 2 943 572 62 8 248 160 16 5 49 959 3 3 108 900 7 2 49 102 3 3 31 267 2 1 2008 Tax Return _ 1 263 389 100 1 263 389 100 445 640 35 3 817 749 64 7 229 912 18 2 41 876 3 3 98 010 7 8 40 947 3 2 22 348 1 8 2007 Tax Return 1 181 747 100 1 181 747 100 402 934 34 1 778 813 65 9 204 265 17 3 42 537 3 6 88 209 7 5 37 255 3 2 14 303 1 2 424 0 4 888 0 3 19 404 1 2 7 348 0 5 26 988 1 7 84 0 3 902 0 2 38 552 2 4 3 466 0 2 9 224 0 6
50. s Add Accounting 0 Other Expenses D s Total Expenses 406 768 Net Income Before Tax 98 396 Seller s Discretionary Earnings Cancel Save Calculate Save Calculate amp Next gt gt ValuTrax Opinion of Value User s Manual On the Income Statement screen on the previous page A Select the Year for which you will be entering or editing income statement data using the Year drop down list near the top of the screen The User may enter data for one year to a maximum of four years When Step 4 is opened the default year is the current year However the User may choose years from the range current year 1 if the user wants to price the business based on a proforma to current year 5 for current year 2010 the years that can selected are 2005 through 201 1 a A Year presented as 2010 Exists indicates that data has been entered for that year b A Year presented as 2010 None indicates that data has not been entered for that year c If data has already been entered for a given year it may be copied to another year using the Copy From Year function i Select the year to which you want to copy the data from the Year drop down list e g if you want to do a pro forma for the current year ii Select the year from the Copy From Year drop down list that you want to copy from only years for which data have been entered will appear in the
51. s appraisal associations and or the Uniform Standards for Appraisal Professional Practice USPAP developed by The Appraisal Foundation ValuTrax should not be used for engagements that require compliance with the aforementioned standards The User is solely responsible for the proper application of the ValuTrax pricing model The ValuTrax pricing model uses traditional business brokerage valuation methods It is intended for use in establishing reasonable listing selling prices for small businesses i e businesses with revenues up to several million dollars Limited Warranty For a period of thirty 30 days from the date of purchase Business Brokerage Press Inc BBP Inc and Biz Broker Toolz warrant that ValuTrax hereinafter referred to as the Application will materially conform to its then current operational format All warranty claims not made in writing within such period shall be deemed waived As your sole and exclusive remedy for breach of the foregoing warranty BBP Inc and Biz Broker Toolz shall at their sole option either correct the nonconformity or refund the license fees paid for the applicable Application The warranty provided in this Section is solely for your benefit and you shall have no authority to extend the warranty to any third party Warranty Disclaimer EXCEPT AS PROVIDED IN THE LIMITED WARRANTY ABOVE THE APPLICATION IS PROVIDED AS IS AND AS AVAILABLE WITH ALL FAULTS AND WITHOUT WARRANTY
52. strative expenses are in line with his her projections for year end Make adjustments as discussed in Step 4 Click Next to proceed to the next step 14 ValuTrax Opinion of Value User s Manual Step 6 Income Statement Summary Client Gulfview Grille Market Method 742 711 Valuation Gulfview Grille Valuation Multiple SDE Method 726 212 Estimated 750 000 Buyer s Test Method 758 141 Value Step 6 Income Statement Summary Income Statement Summary Please enter the following below 1 Weighting for each Year a If next year is expected to be the same as or within a nominal percentage of the most recent year weight the most recent year 100 b If the historical data does not indicate a trend weight each year the same simple average c If the historical data does indicate a trend use a weighted average with most weight given to the most recent year 2 The expected increase in SDE for the following year weight the current year 100 3 A fair market reasonable owner manager salary What would owner have to pay a qualified employee to run the business for him Financial figures are automatically annualized if an interim statement was used for the seller s discretionary earnings analysis on income statement i e number of months 12 Most Two Three Recent Year Prior Year Years Prior Years Prior Fiscal Year 2030 209 208 20 Annualized Revenue 1 632 120
53. te Input the appropriate interest rate depending on the most likely financing source for acquisition of the subject SBA Lender Seller etc Loan Period Number of Months Input the appropriate loan period depending on the most likely financing source for acquisition of the subject SBA Lender Seller etc Debt Coverage Ratio If acquisition of the subject will most likely be financed by a lender input the lender s required debt coverage ratio Click on Save Calculate to review your inputs and the resulting calculations Click Save Calculate amp Next to proceed to the next step NOTE Calculations in this step are not executed until the User clicks on either Save Calculate or Save Calculate amp Next TIP The chart at the bottom of the Buyer s Test Method screen shows how the subject s earnings are allocated to Owner Manager Salary Return on Down Payment etc All entries in the table should be positive The required rate of return should also be positive If any of these numbers are negative the Buyer s Test may not be applicable to the subject If the calculated Required Rate of Return is negative click on the Enable User Supplied Rate of Return check box and set the required rate of return to zero i e the default value As indicated above this may occur in such cases where the Buyer may be buying a job and not looking for a return on investment 25 ValuTrax Opinion of Value User s M
54. tion Date O Gulfview Grille Valuation Wednesday June 30 2010 Edit Delete o Gulfview Grille 2 Monday November 30 2009 Edit Delete Add Valuation ValuTrax Opinion of Value User s Manual Step 4 Income Statements Client Gulfview Grille Market Method 742 711 Valuation Gulfview Grille Valuation Multiple SDE Method 726 212 Estimated 750 000 Buyer s Test Method 758 141 Value 4 Income Statements Income Statement Please enter up to the last four years of income statements below In the Statement Column required inputs include Gross Sales Other Income Loss if applicable Gross Profit and Total Expense Other expenses is calculated If you need to annualize this income statement because you do not have a full year s worth of data select the number of months below for which you have data Please select the year that you would like to edit below If you wish to delete a particular year select the year below and click the Delete link If you would like to copy values from a previously entered year to this year select the desired year below and click the Copy link Year 2010 Exists v Delete Copy From Year 2009 v Copy Please enter the appropriate income and expenses below for year 2010 No of Months 6 i Data Source CPA Financials Income Statement Add Backs Adjusted Gross Sales 816 060 0 so Other Incom
55. u should enter all of the requested information so it will appear on the cover of ValuTrax report that you provide to your client 2 The custom cover letter and the custom Assumptions amp Limiting Conditions pages will appear in the report only if the Calculation of Value Report option is selected in Step 12 Valuation Report ValuTrax Opinion of Value User s Manual Step 2 Manage Clients Client none selected Market Method need more info Valuation lt none selected Multiple SDE Method need more info Estimated need more info Buyer s Test Method lt need Value more info gt Step 2 Manage Clients Manage Clients Please complete the following information to create a new client Required Client Name Owner Name Legal Structure C Corporation Cancel Save Save amp Next gt gt A On the Manage Clients screen enter your client s a Company Name b Owner Name c Legal Structure Select from drop down list Client lt none selected gt Market Method lt need more info gt Valuation lt none selected gt Multiple SDE Method lt need more info gt Estimated lt need more info gt Buyer s Test Method lt need Value more info gt a Manage Clients Step 2 Manage Clients Following is a list of your clients To select a client just click the Select button next to the desired
56. ultiple SDE Method 726 212 Estimated 750 000 Buyer s Test Method 758 141 Value Step 9 Multiple of SDE Method Method 2 Multiple of SDE Method To determine the Multiple of Discretionary Earnings value please rank each factor from 0 to 3 Selected Weighted Multiplier Weight Value 1 Historical Profits 0 Negative 3 Above Industry Norm 2 5 2 Income Risk 0 Startup Risky 3 Well Established Low Risk 2 5 3 Deal Financing Seller SBA 0 All Cash 3 Excellent Terms 2 5 4 Business Type 0 Service Biz few assets 3 Biz w High Assets 2 0 5 Business Growth 0 Declining 3 Rapid Growth 2 5 6 Location Facilities 0 Undesirable 3 Superior 2 0 7 Marketability 0 Low Special Skills Reqd 3 High Many Buyers 2 5 8 Desirability 0 No Status 3 Challenging amp Attractive Environ 2 5 9 Competition 0 High 3 Little Competiton 1 5 10 industry Trend 0 Declining 3 Dynamic Growth 1 75 Total m mI Earnings Multiple Weighted Ave Weight Values Total Weight Total t N N Size Premium Est Selling Price Earnings Mult Ave X SDE X Size Premium Cancel Save Calculate Save Calculate amp Next gt gt The Weights in the above table are set at typical default values ranging from 10 to 1 as shown However it is up to the User to adjust these we
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