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Valuation Essay

1294 words - 6 pages

(All Valuations MUST BE based on Historical Data)
I. Adjusted Book Value Take the Book Value of net worth -assets not acquired +liabilities not assumed +fair market value of assets acquired +any net worth adjustments =Adjusted Book Value

II. Capitalized Adjusted Earnings First Step: Adjust Historical Earnings Seller’s Discretionary Cash Flow Net Profit +Officer’s salary +Discretionary expenses -New Owner salary Adjusted Profit Last Year 50.0 +70.0 +30.0 -60.0 90.0

Second Step: Get the adjusted profits for 5 years then do a Weighted Average of the Adjusting Earnings Year 95 96 97 98 99 Totals Average ...view middle of the document...

0% 12.0%

6.0% 25.0%

Fourth Step: Estimate growth, both real and inflationary (for this example, we are estimating a 5% growth rate). Fifth Step: Multiply the estimated earnings for each year by the estimated growth rate until estimated earnings for the next ten years are determined. Sixth Step: Multiply the adjusted, weighted earnings by the estimated growth (1 plus the growth rate) to determine the estimated earnings for the first year. Seventh Step: Using the net present value table, multiply the estimated earnings for each year by the factor for the discount rate for each respective year to determine the discounted value of future earnings. Eighth Step: Total the discounted earnings. Ninth Step: Determine the residual value by subtracting the growth rate from the discount rate and dividing the difference into the discounted earnings for year ten. Tenth Step: Add the residual value to the total discounted earnings.
1 2 3 4 5 6 7 8 9 10 Net Total Residual Total

Previous Year Earnings

Growth (1+5%)

Adjusted Earnings
1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 70.4 73.9 77.6 81.5 85.6 89.9 94.4 99.1 104.1 109.3

Factor (25%)
0.80000 0.64000 0.51200 0.40960 0.32768 0.26214 0.20972 0.16777 0.13422 0.10737

Net Present Value
56.3 47.3 39.7 33.4 28.0 23.6 19.8 16.6 14.0 11.7 290.4 58.5 348.9

67.0 70.4 73.9 77.6 81.5 85.6 89.9 94.4 99.1 104.1

IV. Cash Flow Method
First Step: Identify Available cash for debt service via rule of thumb, sources/uses, or any other acceptable method.

Net Profit + Depreciation Adjusted Profit

Last Year 10.0 5.0 15.0

Second Step: Choose a reasonable maturity and market interest rate for the financing requested.

Fixed Asset Purchases Working Capital Average Maturity Interest Rate

Years 10 7 8.5 12%

Third Step: Reverse-compute the amount of total funds that the cash flow can support given the maturity and interest rate chosen (using an amortization table or calculator). Cash flow of $15,000 annually at 12% for 8.5 years is an annual debt service for the total amount of $ 79,696.69 (computed on a monthly payment basis) or $77,295.78 (computed on an annual payment basis). Cash flow valuation establishes a range of $77,000 to $80,000.


Gross Revenue Multiplier Please use the attached table (Top 30 Business by SIC Code) and the following: • SDC or SDCF = Seller’s discretionary cash flow [same as Method II, step 1] • EBIT = Earning before Interest and Taxes • EBITDA = Earning before Interest, Taxes, Depreciation and Amortization Example: Last Year’s Sales * Multiplier

Top 30 Type of Business by SIC Code
(Counted from 10/98...

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