PUTTING A VALUE ON YOUR BUSINESSPeter Weinstein, MBA, CA, CBV

Partner, Business Valuation and Litigation Support

Stern Cohen LLP

T. 416-967-5100 F. 416-967-4372 www.sterncohen.com

pweinstein@sterncohen.com

Introduction

Introduction

Introduction

Based on a recent survey up to 70% of business owners will be in a position to retire before 2020.

50% of leaders surveyed are not prepared for succession.

Introduction

Putting a value on your business is one part of a succession plan.

Consider who will own the company, who will manage the company and when management will be transitioned.

Introduction

There are significant benefits to planning out a sale well in advance

Introduction

The value of a business is a function of:

1)The anticipated income of the business

2) The risk of achieving the anticipated income

3)The assets used in the business

Who to sell to

1) Competitors/synergistic buyers

2) Financial buyers

3) Employees/management

4) Relatives/family members

PricePaid For Business

Valuing Your Business

Three generally accepted approaches to valuing a business:

1)Assets

2)Market

3)Earnings or cash flow

Valuing Your Business – Assets Approach

Assets approach used when:

1) Value is directly related to the assets owned

2) Assets are not generating adequate income/returns

3) Can be considered a minimum value for an operating business

Valuing Your Business – Market Approach

Using the market approach the company is valued based on:

1) The price paid in comparable transactions

2) Trading multiples for public companies

Valuing Your Business – Market Approach

The market approach is used when:

1) There is reliable information regarding trading multiples and transactions

2) Can be difficult to use this approach for smaller private companies

Valuing Your Business – Earnings Approach

Earnings approach used when:

1) The business is profitable and earning a fair return on its capital

2) The purchaser wants to acquire the future earnings or cash flows

Valuing Your Business – Earnings Approach

Earnings or cash flow approaches include:

1) Multiple EBITDA

2) Multiple of net earnings (after income taxes)

3) Capitalized cash flows

4) Discounted cash flows (DCF)

Valuing Your Business – Earnings Approach

1) Identify maintainable earnings.

2) Select appropriate earnings multiple

= Value of operations

3) Add: redundant or non-operating

= Total value of company

Valuing Your Business – Earnings Approach

Maintainable earnings: adjust for unusual or non-economic items such as:

1) Salaries expense

2) Rent to related parties

3) Non-recurring expenses

4) Discretionary personal expenses

Valuing Your Business – Earnings Approach

Earnings Multiple / Capitalization Rate

• Many studies and sources of data

• Some information is market based

• Studies regarding returns on equity available

Valuing Your Business – Earnings Approach

• Multiple will differ depending on the valuation approach used (i.e. EBITDA vs. net income)

• Adjustment for positive and negative factors specific to the company

• Consider the industry in which it operates

Valuing Your Business – Earnings Approach

Public Company Valuation Parameters:

Price Earnings Ratios*

Dow Jones Industrial Average 14.6

S&P 500 Index 16.3

S&P/TSX Composite Index 15.8

Google 21.3

Apple 18.1

Public Software Companies (generally) 11 to 14 times EBITDA

* On or about March 31, 2012

Valuing Your Business – Earnings Approach

INCREASE VALUE DECREASE VALUE

1) INDUSTRY Growing (or stable).

Shrinking (or volatile).

2) SALES Increasing (or stable).

Decreasing.

3) EARNINGS Positive income and cash flows.

Losses.

Valuing Your Business – Earnings Approach

INCREASE VALUE DECREASE VALUE

4) CAPITAL STRUCTURE

Well capitalized. Significant debt and interest costs.

5) EMPLOYEES Stable and skilled.

Frequent turnover, poor morale.

6) MANAGEMENT Diverse skills. Limited personal goodwill.

Dependence on one or a few individuals.

Valuing Your Business – Earnings Approach

INCREASE VALUE DECREASE VALUE

7) CUSTOMERS Long term stable customers.

Dependence on a few customers.

8) SUPPLIERS Many potential suppliers.

Few potential suppliers for key inputs.

9) PRODUCT Increasing demand, proprietary protection.

The same or similar products are widely available.

Valuing Your Business – Earnings Approach

INCREASE VALUE DECREASE VALUE

10) BRAND AND NAME RECOGNITION.

Recognized brand.

Limited name recognition, or negative association.

11) INTANGIBLE ASSETS.

Some degree of protection.

Lack of proprietary products. Many potential substitutes.

Valuing Your Business – Earnings Approach

INCREASE VALUE DECREASE VALUE

12) BARRIERS TO ENTRY

Barriers to entry assist to maintain market position.

Few barriers to entry.

13) STRATEGIC IMPORTANCE OF COMPANY

Ability for a purchaser to generate synergies.

Few potential synergies

Valuing Your Business – Earnings Approach

INCREASE VALUE DECREASE VALUE

14) LEVEL OF COMPETITION

Company is able to differentiate itself.

Highly competitive, very price sensitive customers.

15) DOCUMENTS AND RECORDS

Well organized and current.

Records not well maintained. May include non-operating expenses.

Valuing Your Business – Earnings Approach – Redundant Assets

• Redundant assets are added or deducted separately

• Beneficial to remove these from the operating company prior to the sale

• The most common adjustment is real estate

• Can also include positive or negative adjustment for cash in the business or excessive leverage

Valuing Your Business – Earnings Approach – Sample Calculations

Low High

Indicated maintainable earnings 1,070,000

Multiples of: 5.00 5.50

Resultant value of operations 5,350,000 5,885,000

Add: Redundant assets (marketablesecurities), rounded 1,420,000 1,420,000

Total 6,770,000 7,305,000

Midpoint, rounded 7,038,000

About Stern Cohen Valuations Inc.

Peter Weinstein has assisted clients in numerous business valuation, litigation support and transfer pricing mandates. Valuations have been prepared to assist in planning for a potential sale, for estate and income tax planning, shareholder disputes and other litigation purposes.

Stern Cohen Valuations Inc. encompasses the business valuation, economic analysis and litigation support practice of Stern Cohen LLP. Stern Cohen LLP was founded in 1963 and operates as a full service accounting firm. Clients include a diversified mix of owner managed businesses as well as subsidiaries of foreign companies.

Contact Information:Peter Weinstein MBA, CAIFA, CBVStern Cohen Valuations Inc.45 St. Clair Avenue West Suite 1400 Toronto ON M4V 1L3T. 416-967-5100 F. 416-967-4372 www.sterncohen.compweinstein@sterncohen.com