BUSINESS VALUATION SELLING YOUR BUSINESS Alina Niculita CFA

BUSINESS VALUATION & SELLING YOUR BUSINESS Alina Niculita, CFA, ASA, MBA 1

Purpose of Valuation Buying or selling a business Buying or selling a partial interest Obtaining or providing financing Initial public offering Leveraged buyout ESOP Estate, gift and income tax Buy/sell agreements Divorce settlements Damage cases Mergers and acquisitions Dissenting shareholder actions Determining life insurance needs 2

Controlling Interest v. Minority Interest Control Marketability Controlling Interest > Minority Interest 3

Controlling Interest v. Minority Interest HYPOTHETICAL EXAMPLE Controlling Interest Value per Share: $1, 000 Less: Discount for Lack of Control: 0 -20% Less: Discount for Lack of Marketability: 0 -30% Total discounts: 0 -50% Minority Interest Value per Share: $500 -$1, 000 4

Standard (Definition) of Value Fair Market Value Tax Purposes 5

Standard (Definition) of Value Fair Value Shareholder Disputes Purposes Divorce Purposes 6

Standard (Definition) of Value • Fair Market Value. Usually assumes discounts for lack of control and lack of marketability • Fair Value (Control Value). Usually without any discounts 7

Standard (Definition) of Value • Strategic (Acquisition) Value. Mergers and acquisitions purposes • Investment Value. Divorce purposes. • Intrinsic or Fundamental Value. 8

Premise of Value Going concern value Liquidation value 9

Valuation Date (“As of” Date) • Internal Factors • External factors 10

Understanding the engagement Purpose of our valuation? Standard of Value? Controlling/Minority Interest? Premise of Value? Valuation date? 11

Overview of the Valuation Process. Step 6: Value & Delivery Step 5: Sanity Checks Step 4: Discounts & Premiums Step 3: Valuation Approaches Step 2: Financial, Economic & Industry Analysis Step 1: Understanding the Engagement 12

Summary of business valuation approaches and methods Income Approach Market Approach Asset Approach Based on the present value theory Based on the economic principle of substitution Current value of all assets (tangible and intangible) less current value of all liabilities. Methods: ØDiscounted Cash Flow Method Primary Methods: ØTransaction method ØPublic guideline company method ØCapitalization method Other methods: ØPast transactions ØBuy-sell agreement ØRules of thumb Methods: ØAdjusted net asset value ØExcess earnings method 13

Planning for business exit • 5 years good rule of thumb • 3 -7 years • 10 years (significant tax planning) 14

Business value enhancements Financial statement clean up - CPA Improve key operating metrics - Industry Consultant Employment/confidentiality agreements signed Attorney Proper ownership of all intellectual property. Attorney 15

Who are Potential Buyers for my Business? Internal Transition Options • • External Transition Options • Outside third party interested in acquiring a business. • Strategic buyer in the company’s industry or related industry. • Private equity group or other passive investor group. Family Other existing owners Key management Employees 16

Buy-Sell Agreements • Contracts between companies (corporations, LLCs, or partnerships) and their owners. • What will happen with the owner’s interest when certain events (called “trigger events”) occur. 17

Appraiser’s Qualifications • American Society of Appraisers: FASA, Fellow of the ASA; ASA, Accredited Senior Appraiser; AM, Accredited Member. • AICPA: ABV, Accredited in Business Valuation • National Association of Certified Valuation Analysts: CVA, Certified Valuation Analyst; AVA, Accredited Valuation Analyst. • Institute of Business Appraisers: MCBA, Master Certified Business Appraiser; CBA, Certified Business Appraiser 18

Build Advisory Team • Business Transition Advisor/Exit Planner • CPA (tax) • Attorney(s) of various specialties (tax) • Business Appraiser/Valuation Analyst • Business Intermediary/Business Broker • Industry Consultant • Financial Planner 19

Maximizing my Sales Proceeds 20

Best Case and the Nightmare Tax Description Fed Individual Cap Gain Best Case – All Cap Gains Worst Case – C-Corp Double Taxation 20% Fed Invest Income 3. 8 Fed Deduction Phase Out 1. 2 Fed Corp Rate NA 34 10 10 NA 7 35% 71% Oregon Corp Rate Total There are planning strategies that exist to minimize the C-Corp worst case taxation rate. 20% Fed Dividend Rate Oregon Individual Rate • 21

THANK YOU Alina. niculita@outlook. com Linked in: Alina Niculita 22