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ANALYSING AND RECASTING FINANCIAL … #3...The greater the loan you can get ... behind the decision...
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Valued
Representation
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REPRESENTATION
Welcome to Volume #6 Course # 3
ANALYZING AND RECASTING
“RECASTING EXAMPLE”
ANALYZING AND RECASTING
OUR GOAL
FOR THIS COURSE IS TO:
PRACTICE RECASTING AN INCOME STATEMENT AND
REVIEW OF THE BALANCE SHEET
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Course 2: Class exercise
In this section you will:
Recast a financial
statement for a
Typical Company
Typical Company Income Statement __________________________________________________________ 2007 %_____________ Revenue Net Sales $1,500,000 100.00% Cost of Goods Sold Purchases 700,000 46.67% Gross Profit 800,000 53.33% Operating Expenses Officer’s Salary 150,000 10.00% Payroll 250,000 16.67% Payroll Taxes 27,500 1.83% Workman’s Compensation 4,000 0.26% Office Supplies 10,000 0.67% Auto Expenses 3,000 0.20% Freight 4,000 0.26% Auto Lease 8,000 0.53% Legal & Accounting 8,000 0.53% Charitable Contributions 2,000 0.13% Utilities 5,000 0.33% Telephone 7,000 0.46% Advertising 18,000 1.20% Travel 5,000 0.33% Meals & Entertainment 4,000 0.26% Dues and Subscriptions 2,000 0.13% Insurance-General 10,000 0.67% Insurance- Medical 6,000 0.40% Insurance-Officer’s Life 1,500 0.10% Interest Expense 15,000 1.00% Maintenance and Repairs 7,000 0.46% Rent 48,000 3.20% Equipment Rent 3,000 0.20% Security & Alarms 2,000 0.13% Licenses & Fees 2,000 0.13% Personal Property Taxes 500 0.03% Bank Service Charge 500 0.03% Depreciation 10,000 0.66% Miscellaneous 3,000 0.02% Total Operating Expenses $616,000 41.07% Ordinary Income $184,000 12.26%
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Seller Comments about Typical
Company’s Add Backs
Payroll taxes ran 11%
Auto expense was personal
Auto lease was personal
General insurance included $2,000 for Seller’s
auto insurance
Medical insurance was Seller’s
Life insurance was Seller’s
Equipment rental was a one-time non-recurring
expense for a fork lift they now own.
Lease will expire next year. New lease available
for $5,000 per month.
SDE RECAST SHEET
Name of Business: Typical Company
Year/Period 2007
1 Sales 1,500,000
2 Cost of Sales 700,000
3 Payroll 250,000
4 Rent 48,000
5 Remaining Opt. Expenses 345,000
6 Total Operating Expenses 643,000
7 Operating Income/Pre-Tax Profit 157,000
8 Depreciation & Amortization 10,000
9 Interest 15,000
10 Officer’s/Owner’s Salary 150,000
11 Adjusted Income for SBA 332,000
Discretionary Expenses (Define Miscellaneous)
12 Auto for owner’s personal use 3,000
13 Insurance for owner’s personal use 9,500
14 Travel not required by business 5,000
15 Entertainment 4,000
16 Meals
17 Profit Sharing/Retirement for owner
18 Miscellaneous: (Charitable Contrib.) 2,000
19 Miscellaneous:
20 Miscellaneous:
Non-Recurring Expenses (Define)
21 Rented fork lift – now own it. 3,000
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23
Expenses not included on P&L (To be subtracted from Earnings)
24 New Rent adjustment (12,000)
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26 Total Adjustments 14,500
27 Seller’s Discretionary Earnings $346,500
The undersigned hereby warrant(s): 1) He/They is/are the owner(s) of the business, 2) the above is a true representation of
the discretionary earnings of the business, 3) the information is furnished to broker pursuant to the Representation/Listing
Agreement between owner and broker, 3) broker is authorize to share with potential purchasers of the business, 4) Owner
hereby indemnifies Broker for any liability arising from Broker’s use of this information. All parties receiving this
information are hereby notified that Broker has not made any investigation into the accuracy of the information
contained on this sheet and those parties are to make their own independent investigation as to the accuracy of this
information and to look solely to the Seller for any loses or damages caused by the inaccuracy of this information.
_____________________________________ _____________________________________
Owner: Date: Owner: Date:
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Module 3: Recasting a Balance Sheet
In this section you will:
Review a typical balance sheet
Learn why we recast a balance sheet
Compare what items we typically recast:
For an asset sale
For a stock sale
Review a Sample Balance Sheet Recast form
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What is a Balance Sheet?
A Balance Sheet is a financial statement that
expresses the financial status of a business on a
given date.
It is a listing of all the assets and liabilities of a
company on that date and can be used to identify
the assets and liabilities of the company.
A balance sheet can also help an associate or
buyer determine the financial health of the
business.
It is referred to as a Balance Sheet because Total
Assets equal (are in balance with) Total Liabilities
+ Shareholder Equity
Sample Company Inc. Balance Sheet SAMPLE COMPANY, INC.
STATEMENT OF ASSETS, LIABILITIES AND STOCKHOLDER’S EQUITY – INCOME TAX BASIS
(BALANCE SHEET)
April 30, 2003 (Unaudited)
ASSETS Current Assets
Cash $ 7,937 Accounts Receivable 78,520 Inventory 52,853 Prepaid Expenses 53,614
Total Current Assets $192,924 Fixed Assets
Office Furniture & Equipment 10,363 Machinery & Equipment 143,857 Vehicles 42,377
Less: Accumulated Depreciation (96,858) 99,739
TOTAL ASSETS $292,663 LIABILITIES AND STOCKHOLDER’S EQUITY Current Liabilities
Trade Accounts Payable $189,388 Payroll and Sales Taxes Payable 9,478 Accrued Expenses Payable 740
Total Current Liabilities $199,606 Stockholder’s Equity
Common Stock 1000 Retained Earnings 92,057 93,057
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY $292,663
See accountants’ compilation report.
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Assets
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid Expenses
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Assets (Continued)
Fixed Assets
Furniture
Equipment
Vehicles
Leasehold Improvements
Less Depreciation
Total Assets
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Liabilities
Current Liabilities (due within 12 months)
Accounts Payable
Payroll and Sales Taxes
Accrued Expenses
Current Portion of Long-Term Liabilities
Current Portion of Long-Term Leases
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Liabilities (Continued)
Long-Term Liabilities (exceed 12 months)
Equipment loans
Capital Leases
Loans from Shareholders
Total Liabilities
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Shareholder Equity
Stock (Shows # of Shares)
Preferred
Common
Retained Earnings
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The Two Sections of the Sheet Balance
Total Liabilities
+ Share HolderEquity
Total Assets
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Tax Return & Balance Sheet
Tax Returns include a balance sheet page
listing all assets and liabilities at the time the
tax return completion date.
Interim Balance Sheets give a more current
value of assets.
Offers are usually based on current balance
sheet information.
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Why Recast a Balance Sheet?
To determine a realistic picture of the value of the
assets included in a sale and what liabilities come
with the business.
Book value of assets and fair market value of
assets may differ significantly.
The greater the assets:
The greater the loan you can get
The more value the buyer sees in the deal
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Current Assets
Are these current assets included?
Cash
Receivables
Prepaid Expenses
Inventory
Are there any adjustments to current assets?
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Inventory
The value of the inventory often needs to be
adjusted for:
Obsolete merchandise
Surplus merchandise
Unsaleable merchandise
Physical inventory vs. book value
Sometimes inventory includes Works in
Progress
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Personal Story
Seller owned two liquor stores and sold one.
The one he sold had a substantial wine section
but the wine was stocked upright.
Buyer was concerned the wine might be spoiled
so the wine was excluded from the sale.
The night before the escrow closed the Seller
moved the wine to his second store.
Buyer had already arranged for new wine to be
delivered.
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Book Value vs. Market Value
Balance sheet shows the depreciated value of the
furniture, fixtures, and equipment.
Depreciation is usually taken at an accelerated
rate.
Thus market value can be significantly higher than
book value.
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Sample Co. Fixed Assets
Fixed Assets (from Balance Sheet)
Office Furniture $ 10,363
Machinery & Equipment $143,857
Vehicles $ 42,377
Less Accumulated Deprec. -$ 96,858
Current Book Value $ 99,739
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Potential Adjustments to Sample
Company’s Fixed Assets
Auto is not included in sale.
What is the Market Value of:
Office Furniture
Machinery & Equipment
When doing a formal valuation you may need to
appraise the equipment piece by piece.
In most transactions a reasonable estimate will
due. What would it cost to buy the equipment in its
current condition on the open market?
One tip is to adjust the amount of depreciation to
reflect the real life of the equipment.
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The following form was used to recast the
balance sheet for Sample Company.
RECASTED BALANCE SHEET FORM
BUSINESS NAME: _Sample Co________________ Date: ___05/01/2003______
RECASTED BALANCE SHEET FORM
BUSINESS NAME: Sample Co Date: 05/01/2003
ASSETS Book Value Adjustments Adj. Balance Comments
Current Assets
Cash 7,937 (7,937) 0 Not Included
Accounts Receivable 78,520 (78,520) 0 Not Included
Prepaid Expenses & Deposits 53,614 (53,614) 0 Not Included
Inventory 52,853 - 52,853 No Adjustment
Total Current Assets 192,914 (140,071) 52,853
Fixed Assets
Machinery & Equipment 143,857 0 143,857
Vehicles 42,377 (42,377) 0 Not included
Furniture 10,363 0 10,363
Leasehold Improvements
Less Accum. Depreciation (96,858) 50,000 (46,858) *Depreciation
was reduced by $50,000 to account for current value of F,F, & E
Net Fixed Assets 99,739 7,623 107,362
TOTAL ASSETS $160,195
LIABILITIES
Total Adjusted Assets Included in Sale = Adjusted Balance of Current Assets + Adjusted Balance of Fixed Assets)
Current Liabilities
Accounts Payable 189,388 (189,388) 0 *
Accrued Expense Liabilities 740 (740) 0 *
Accrued Tax Liabilities 9,478 (9,478) 0 *
Current Portion of L.T. Lease
Current portion of L.T. Notes
Total Current Liabilities
*Seller delivered business Free & Clear of any Liabilities!
Notes Payable - No long term
- liabilities
Capital Leases -
Loans from Shareholders -
Total Long Term Liabilities 0 0
Total Liabilities
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Asset Sale vs. Corporate Sale
There are many advantages and disadvantages
to selling or buying the assets vs. the
corporation.
That is not the scope of this class. A good
associate must learn the basic reasoning
behind the decision to buy or sell the assets vs.
the corporation.
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Asset Sales
Buyer buys most of the assets of the company but
not the stock of the company
The corporation is the seller
Typically the Cash is not included.
Receivables can be included or excluded
Except in cases where assuming a liability may
help make a deal, payables and other liabilities are
usually not included.
Some personal items may not be included
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Corporate Sales
Buyer actually buys the stock of the company and
thus becomes the corporation.
The Share Holders are the Sellers
Most balance sheet items are included
Sometimes personal items like the owner’s vehicle
are excluded.
Less than 10% of our sales are corporate sales
ANALYZING AND RECASTING
WHAT YOU HAVE LEARNED…
Recast a financial statement for a Typical
Company
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