IDENTIFICATION OF CONTRIBUTORY ASSETS AND …blackmer/images/Blackmer Images/Page 1... ·...

MAY 31, 2010

IDENTIFICATION OF CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS:

TOOLKIT

BEST PRACTICES FOR VALUATIONS IN FINANCIAL REPORTING - CONTRIBUTORY ASSETS - TOOLKIT

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THE APPRAISAL FOUNDATION « THE MADISON BUILDING « 1155 15TH STREET NW « SUITE 1111 « WASHINGTON, DC 20005

Working Group on Contributory Asset ChargesAnthony Aaron, Chair Gregory Forsythe Ernst & Young, LLP - Los Angeles, CA Deloitte Financial Advisory Services LLP - Pittsburgh, PA

Paul Barnes Mark Zyla, Vice ChairDuff & Phelps, LLC - Philadelphia, PA Acuitas, Inc. - Atlanta, GA

Jim Dondero Jay Fishman, Steering Committee Oversight & FacilitatorHuron Consulting Group - Boston, MA Financial Research Associates – Philadelphia, PA

Task Force (Steering Committee) on Best Practices for Valuations in Financial Reporting

Jay Fishman, Chair - Financial Research Associates Lee Hackett - American Appraisal AssociatesAnthony Aaron - Ernst & Young, LLP Steve Jones - Mesirow FinancialPaul Barnes - Duff & Phelps, LLC Gerald Mehm - American Appraisal AssociatesCarla Glass - Hill Schwartz Spilker Keller LLC Matt Pinson – PricewaterhouseCoopers LLPJohn Glynn - PricewaterhouseCoopers LLP

Contributors & Special ThanksDayton Nordin, Ernst & Young, LLPShawn Suttmiller, Deloitte Financial Advisory Services LLP Carla Glass, Hill Schwartz Spilker Keller LLCLee Hackett, American Appraisal Associates

Special Thanks to Gary Roland, Duff & Phelps, LLC, the Primary Author of the Analysis Underlying this Toolkit.

The Appraisal Foundation StaffDavid Bunton, PresidentJohn Brenan, Director of Research & Technical IssuesPaula Douglas Seidel, Executive Administrator

The Appraisal Foundation served as a sponsor and facilitator of this Working Group. The Foundation is a non-profit educational organization dedicated to the advancement of professional valuation and was established in 1987 by the appraisal profession in the United States. The Appraisal Foundation is not an individual membership organization, but rather, an organization that is made up of other organizations. Today, over 130 non-profit organizations, corporations and government agencies are affiliated with The Appraisal Foundation. The Appraisal Foundation is authorized by the U.S. Congress as the source of appraisal standards and appraiser qualifications.


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CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS – TOOLKIT

Supplemental Toolkit Introduction

This Toolkit was created as a companion piece to Best Practices in Valuations for Financial Reporting: The Identification of Contributory Assets and

Calculation of Economic Rents (“the CAC Monograph”), published under separate cover. The CAC Monograph was written to present best practices in

calculating contributory asset charges (“CACs”) when using the Multi-Period Excess Earnings Method (“MPEEM”) to value a subject intangible asset.

The CAC Monograph presents certain methods and techniques that the Working Group believes to be best practices in developing contributory asset

charges and includes a Comprehensive Example and Practical Expedient Example. This Toolkit is based on the same data used in the Comprehensive

Example but expands on that example by including additional detail. It is being provided as an example of a detailed framework to measure the

internal consistency of the various valuation analyses using these methods and a financial overlay. This Toolkit also provides examples of other specific

issues that were mentioned in the CAC Monograph but for which examples were not otherwise provided, allowing for comparison of alternative concepts

or simply providing more information.

It is important to note that this Toolkit is simply an illustrative example. These sample calculations are for demonstration purposes only and are

not intended as the only form of model or calculation, or final report exhibit, that is acceptable. In many cases, these calculations include details to

demonstrate a point and would not be expected in a typical analysis. It is NOT intended to represent the only (or best) way to perform a particular

analysis or to be used as a “how-to” formula. It is NOT intended as further advice on Best Practices but rather to provide examples. This Toolkit

example is based on the specific assumptions presented in the introduction or noted in the exhibits. A different set of facts and circumstances may

result in a modification of both judgment and/or application.

This Toolkit was developed by a Working Group comprising individuals from the valuation profession who regularly deal with this issue in the context

of valuations performed for financial reporting purposes (the same working group that developed the CAC Monograph). This Toolkit has no official or

authoritative standing for valuation or accounting.

This document was approved for publication by the Board of Trustees of The Appraisal Foundation on May 22, 2010. The reader is informed that the

Board of Trustees defers to the members of the contributory asset Working Group for expertise concerning the technical content of the document.

Questions on the development of this document can be addressed as follows:

Paula Douglas Seidel

The Appraisal Foundation

1155 15th Street NW, Suite 1111

Washington, DC 20005

202.624.3048 (phone); 202.347.7727 (Fax); [email protected] (email)

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Toolkit Example

This Toolkit Example demonstrates the concepts put forth in the CAC Monograph and applies them in a comprehensive manner to derive the Fair

Value of Customer Relationships based on the application of the MPEEM. In addition, this Toolkit provides a suggested process in the context of a

financial overlay to provide for internal consistency in a valuation analysis (as well as a potential alternative to the WARA analysis provided in the CAC

Monograph). The contributory assets included in this example are as follows:

• Working Capital

• Fixed Assets (Techniques A&B)

• Assembled Workforce

• Trade Name*

• Intellectual Property*

*These assets contribute to the revenue stream used in the valuation of the customer relationships. However, because they are valued by use of the relief from royalty method, this is considered a profit split and contributory asset charges are not applied.

Assumptions

• The transaction is assumed to be an acquisition of stock (rather than assets) with a purchase price of $4,746;

• The tax rate is assumed to be 40% based on the U.S. domiciled blended federal and state statutory rates;

• The fair value of the working capital is assumed to be $285;

• The fair value of the fixed assets is assumed to be $1,000 and there is no land;

• The WACC is assumed to be 10%;

• Long-term growth is assumed to be 3%;

• The Trade Name royalty rate is assumed to be a gross rate of 5%;

• The IP royalty rate is assumed to be a gross rate of 10%;

• This Toolkit is not intended to address the issues inherent in arriving at market participant projected financial information. The analysis assumes

that the PFI represents the assumptions of a market participant because, among other things, all entity-specific synergies have been removed from

the projections (e.g., specific revenue or expense synergies).

• Royalty rates presented in these exhibits are assumed to be gross rates wherein the licensor is responsible for the advertising and maintenance

R&D expenditures. This assumption was made to demonstrate the need to be consistent in the recognition of these expenses among the various

assets. Where the royalty rates are determined to be net of these expenses, such adjustments would not be required.

• To the extent this analysis was performed as part of Step 2 of a goodwill impairment test the fair value of the reporting unit would be considered

the purchase price and the hypothetical transaction structure also is assumed to be the sale of stock rather than assets.

• These examples assume that the purchase price (if a transaction has occurred) reflects the fair value of the subject entity. If and when it is

determined that the fair value of the entity differs from the purchase price, the analyses described in this Toolkit might be subject to adjustments

(see Section 4.3 of the CAC Monograph.)

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Process

All operating assets of a business contribute to the generation of the revenue and cash flow of that business. If the unit of valuation is viewed as the

entity as a whole with the maximum value of the group of assets derived through their continued use by the entity, the interrelationship of all assets

should be considered in a valuation analysis. CACs assist in properly apportioning the entity’s cash flows among the component assets in the context

of a MPEEM, however they do not alleviate the need for the valuation specialist to assess other critical aspects of this apportionment. This Toolkit does

not address these other elements of judgment and incorporates assumptions in this regard. The purpose of this Toolkit is to provide an example of the

application of CACs in the context of the entity as a whole. The following processes or points are demonstrated in the exhibits:

Step 1:

A transaction may reflect certain elements of entity-specific synergies. This example assumes that all such specific synergies have been removed from

the purchase price and the prospective financial information (“PFI”) to arrive at market participant assumptions.

Step 2:

The internal rate of return (“IRR”) of the transaction, based on the market participant assumptions, is estimated and compared to the entity’s weighted

average cost of capital (“WACC”). This Toolkit Example assumes that the transaction is a stock acquisition (Exhibit D-5 provides an example of the

calculation of the IRR in an asset acquisition) and that the IRR is equivalent to the WACC of 10%.

Step 3:

The PFI represents the prospective cash flows to be realized in the acquisition, including the tax benefits that would result from a restatement of the

tax basis of certain of the assets to fair value. The CACs are based on the fair value of the contributory assets which is inclusive of the tax benefit from

the basis restatement. Therefore, as the fair value of the contributory asset is inclusive of this tax benefit, the PFI also should be adjusted to include

it. These adjustments increase the Entity Value and result in an Adjusted Entity Value that is inclusive of these incremental tax benefits. In order to

maintain consistency between the PFI to be used in valuing the customer relationships and the fair value of the assets to which a CAC will be applied, the

PFI should be adjusted (if necessary) to include the cash flow benefits of the increase in the tax basis of the contributory assets. Such an adjustment also

might be addressed through the application of a deferred tax liability, however such an analysis adds significant complexities. A restatement of the tax

basis recognizes the need to value assets without reference to the tax structure of the transaction used to purchase the entity. For additional discussion

on the applicability of TABs see paragraphs 3.1.08 and 4.3.08 in the CAC Monograph and paragraphs 5.3.9 - 5.3.108 in the 2001 AICPA IPR&D Practice

Aid (2001 AICPA Practice Aid Series: Assets Acquired in a Business Combination to Be Used in Research and Development Activities: A Focus on Software,

Electronic Devices and Pharmaceutical Industries). It should be noted that an update of this IPR&D Practice Aid was underway as of the finalization of

this Toolkit.

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Step 4:

The analysis is performed using the same rate of return for all assets to assure that all cash flows have been allocated to the assets and that the CAC

calculations are mathematically correct. This interim step of maintaining a constant rate of return and discount rate for all assets (in this example 10%)

eliminates the effect that stratifying the rates has on the present value calculations. In order to accomplish this financial overlay and reconciliation

to the Adjusted Entity Value the present value of excess earnings not related to a separately identified asset (unidentified excess earnings) is also

calculated. This analysis is provided in the Section A exhibits.

Step 5:

The analysis is changed to reflect appropriate rates of return and discount rates for the respective assets and to calculate the implied discount rate for

the unidentified excess earnings (a component of goodwill). This analysis is provided in Section B of the exhibits.

Step 6:

The appropriate TAB is applied to the identifiable intangible assets to arrive at fair value.

Acronyms

The following acronyms are used in the Toolkit:

AWF Assembled Workforce

DFCF Debt Free Cash Flow

DFNI Debt Free Net Income

EBIT Earnings Before Interest and Taxes

EBITDA Earnings Before Interest, Taxes, Depreciation, and Amortization

FV Fair Value

IP Intellectual Property

IRR Implied Internal Rate of Return

IRS Internal Revenue Service

PFI Prospective Financial Information

PV Present Value

R&D Research and Development

TAB Tax Amortization Benefit

WACC Weighted Average Cost of Capital

WARA Weighted Average Return on Assets

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Section A: Financial Overlay and PFI Reconciliation 3

Exhibit A-1: Entity Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Exhibit A-2: Tax Depreciation: Carry-Over Tax Basis of Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Exhibit A-3: Tax Depreciation: 7-Year MACRS & Fair Value of Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Exhibit A-4: Adjusted PFI and Entity Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Exhibit A-4a: Reconciliation of Entity Value and Adjusted Entity Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Exhibit A-5: Working Capital: Incremental Needs and Contributory Asset Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Exhibit A-6: Fixed Assets: Contributory Asset Charge Based on Technique A - Average Annual Balance . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Exhibit A-7: Fixed Assets: Contributory Asset Charge Based on Technique B - Level Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Exhibit A-8: Assembled Workforce: Growth Investment and Contributory Asset Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Exhibit A-9: Revenue Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Exhibit A-10: Trade Name Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Exhibit A-11: Intellectual Property Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Exhibit A-12: Customer Relationships MPEEM: Fixed Asset Contributory Asset Charge Based on Technique A - Average Annual Balance . . . . . . . . . . . 14

Exhibit A-13: Customer Relationships MPEEM: Fixed Asset Contributory Asset Charge Based on Technique B - Level Payment . . . . . . . . . . . . . . . 15

Exhibit A-14: Unidentified Excess Earnings (MPEEM): Fixed Asset Contributory Asset Charge Based on Technique A - Average Annual Balance . . . . . . . 16

Exhibit A-15: Unidentified Excess Earnings (MPEEM): Fixed Asset Contributory Asset Charge Based on Technique B - Level Payment . . . . . . . . . . . . 17

Exhibit A-16: Income Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Exhibit A-17: Financial Overlay Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Section B: Stratified Rates 19

Exhibit B-1: Entity Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Exhibit B-2: Tax Depreciation: Carry-Over Tax Basis of Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Exhibit B-3: Tax Depreciation: 7-Year MACRS & Fair Value of Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Exhibit B-4: Adjusted PFI and Entity Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Exhibit B-4a: Reconciliation of Entity Value and Adjusted Entity Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Exhibit B-5: Working Capital: Incremental Needs and Contributory Asset Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Exhibit B-6: Fixed Assets: Contributory Asset Charge Based on Technique A - Average Annual Balance . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Exhibit B-7: Fixed Assets: Contributory Asset Charge Based on Technique B - Level Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Exhibit B-8: Assembled Workforce: Growth Investment and Contributory Asset Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Exhibit B-9: Revenue Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Exhibit B-10: Trade Name Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Exhibit B-11: Intellectual Property Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Exhibit B-12: Customer Relationships MPEEM: Fixed Asset Contributory Asset Charge Based on Technique A - Average Annual Balance . . . . . . . . . . . 30

TABLE OF CONTENTS

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Exhibit B-13: Customer Relationships MPEEM: Fixed Asset Contributory Asset Charge Based on Technique B - Level Payment . . . . . . . . . . . . . . . 31

Exhibit B-14: Unidentified Excess Earnings (MPEEM): Fixed Asset Contributory Asset Charge Based on Technique A - Average Annual Balance . . . . . . . 32

Exhibit B-15: Unidentified Excess Earnings (MPEEM): Fixed Asset Contributory Asset Charge Based on Technique B - Level Payment . . . . . . . . . . . . 33

Exhibit B-16: Income Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Exhibit B-17: Financial Overlay Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Exhibit B-18: Weighted Average Return on Assets (WARA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Section C: Individual Asset Reconciliations 37

Exhibit C-1: Working Capital CAC and Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Exhibit C-1a: Working Capital CAC and Reconciliation (Stratified Rates) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Exhibit C-2: Fixed Asset CAC Based on Technique A - Average Annual Balance and Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Exhibit C-2a: Fixed Asset CAC Based on Technique A - Average Annual Balance and Reconciliation (Stratified Rates) . . . . . . . . . . . . . . . . . . . 39

Exhibit C-3: Fixed Asset CAC Based on Technique B - Level Payment and Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Exhibit C-3a: Fixed Asset CAC Based on Technique B - Level Payment and Reconciliation (Stratified Rates) . . . . . . . . . . . . . . . . . . . . . . . . 40

Exhibit C-4: Assembled Workforce CAC and Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Exhibit C-5: Trade Name CAC and Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Exhibit C-6: Intellectual Property CAC and Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Section D: Miscellaneous Issues 45

Exhibit D-1: Non-Compete Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Exhibit D-1a: Non-Compete Agreements (Alternative Approach - Specific Asset Income Split) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Exhibit D-2: Favorable (Unfavorable) Leases or Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Exhibit D-3: EBITDA v. EBIT Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Exhibit D-3a: Fixed Asset CAC Based on Technique B - Level Payment and Reconciliation (Tax-effected EBITDA) . . . . . . . . . . . . . . . . . . . . . . 50

Exhibit D-4: Mid-Period Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Exhibit D-5: Adjusted Entity Value in an Asset Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Exhibit D-6: Negative Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Exhibit D-7: Gross Lease Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56



SECTION A: FINANCIAL OVERLAY AND PFI

RECONCILIATION

This section of the Toolkit provides an example of the financial overlay and PFI reconciliation performed at a

consistent discount rate. The intangible asset to which a MPEEM is applied is the customer relationships asset.

This analysis results in the calculation of the value of the following assets (prior to the application of the TAB as

noted by an asterisk) which reconciles to the Adjusted Entity Value. Included in the exhibits is the application of

Technique A (Average Annual Balance) and Technique B (Level Payment) to the fixed assets. An analysis of the

following separately identifiable assets and unidentified excess earnings* are provided in the reconciliation:

Identifiable Assets:

• Working Capital

• Fixed Assets (Techniques A&B)

• Assembled Workforce (component of goodwill)

• Trade Name - Acquired Company*

• Intellectual Property*

• Customer Relationships*

Unidentified Excess Earnings - Aggregation of the following:

• Trade Name - Acquiring Company

• Future Intellectual Property

• Future & Other Customers



Entity Value (1) Exhibit A-1

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue 1,000$ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ Gross Profit 90% 900 945 1,049 1,175 1,310 1,436 1,546 1,641 1,716 1,778 1,832

Operating Expenses: Maintenance R&D (2) 0.5% 5 5 6 7 7 8 9 9 10 10 10 R&D - Future IP (3) 2.5% 25 26 29 33 36 40 43 46 48 49 51

Trade name advertising (4) 0.5% 5 5 6 7 7 8 9 9 10 10 10 Current customer marketing (5) 3% 27 26 23 18 13 8 4 2 1 - - Future customer marketing (6) 18 22 29 40 53 64 73 80 84 89 92

%5gnitekram latoT 50 53 58 65 73 80 86 91 95 99 102

07%7A&G latoT 74 82 91 102 112 120 128 133 138 142

Total Operating Expenses 15% 150 158 175 196 218 240 258 274 286 296 305

057ADTIBE 787 874 979 1,092 1,196 1,288 1,367 1,430 1,482 1,527 682)7( noitaicerpeD 302 337 377 412 451 478 513 540 562 581

Amortization (8) - - - - - - - - - - - 464TIBE 485 537 602 680 745 810 854 890 920 946

Taxes 40% 186 194 215 241 272 298 324 342 356 368 378 872emocnI teN eerF tbeD 291 322 361 408 447 486 512 534 552 568

less: Incremental Working Capital (9) 30% 15 15 35 42 45 42 37 32 25 21 18 682)01( noitaicerpeD :dda 302 337 377 412 451 478 513 540 562 581

less: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627 362wolF hsaC eerF tbeD 178 174 196 250 315 370 419 458 484 504

Residual Value (11) 7,200

5359.0%01)21( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

152FCFD VP 154 137 140 163 186 199 205 204 196 2,911

647,4eulaV ytitnE

This example assumes that all potential entity-specific synergies and related value have been extracted from the PFI and the purchase price. Based on the market participant PFI and purchase price of $4,746, the IRR of the transaction is calculated to be 10%. In addition, a market-based WACC of 10% is estimated, which reconciles to the IRR. This example reflects a non-taxable transaction.

(1) Entity Value projections based on market participant assumptions Excludes entity-specific synergies.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Customer relationship revenue 900 855 770 616 431 259 130 65 33 -

(8) Tax basis of intangible assets is zero. (9) Represents 30% of incremental revenue. A beginning working capital balance of $285 is based on Year 0 revenue of $950. (10) The residual year difference in depreciation and capital expenditures recognizes the long term growth in the business and the depreciation lag relative to capital expenditures. The differential is dependent on the long term growth rate and the fixed asset depreciation rates. This "wedge" is calculated by extending the capital expenditure projection at the constant residual year growth rate and calculating the depreciation for each annual period until a stable relationship between capital expenditures and depreciation is achieved.(11) Based on constant growth model assuming a 3% long-term growth rate.(12) The market participant based IRR is equivalent to the WACC of 10%. The mid-period convention is applied.

(2) Maintenance R&D applicable to both current and future IP. (3) R&D expense for the development of future IP. (4) Advertising expense related to the trade name. (5) Maintenance marketing expenses specific to current separately identified customer relationships with following revenue (Exhibit A-8 footnote 1):

(6) Marketing expenses related to creating and maintaining unidentified and future customer relationships. (7) 7-MACRS tax depreciation based on carry-over tax basis of $745 and projected capital expenditures. For a detailed calculation see Exhibit A-2 of the Toolkit.

(1) Entity Value projections based on market participant assumptions. Excludes entity-



Tax Depreciation: Carry-Over Tax Basis of Fixed Assets (1) Exhibit A-2

Existing/Depreciation Of: CapEx Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Acquired or Current Fixed Assets (2) 745$ 245$ 175$ 125$ 90$ 60$ 40$ 10$

Capital Expenditures (3)6821 raeY 41 70 50 36 26 26 26 13 0042 raeY 75 98 70 50 36 36 36 18 0543 raeY 64 110 79 56 40 40 40 20 0054 raeY 17 122 87 62 45 45 45 22

5255 raeY 57 129 92 66 47 47 47

1456 raeY 77 132 95 68 48 48

7557 raeY 80 136 97 70 50

4758 raeY 82 141 100 72

1959 raeY 84 145 103

90601 raeY 87 149

726laudiseR 90

Total Depreciation - CapEx 41 127 212 287 352 411 468 513 540 562 581

Total MACRS Depreciation 286 302 337 377 412 451 478 513 540 562 581

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

MACRS Percentages 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%

(2) Based on carry-over tax basis of $745. The annual depreciation amounts are stipulated and are not explicitely calculated.

(3) Capital expenditures as per the Entity Value projections (Exhibit A-1).

This exhibit summarizes the tax depreciation calculations based on the $745 carry-over tax basis of the fixed assets and 7-year MACRS depreciation. These projected depreciation amounts are reflected in Exhibit A-1.

(1) 7-Year MACRS applied to the projected capital expenditures.



Tax Depreciation: 7-Year MACRS & Fair Value of Fixed Assets (1) Exhibit A-3

Depreciation Of Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

FV of Acquired or Current Fixed Assets (1) 143$ 245$ 175$ 125$ 89$ 89$ 89$ 45$

Capital Expenditures (2) 41 127 212 287 352 411 468 513 540 562 581

481noitaicerpeD xaT latoT 372 387 412 441 500 557 558 540 562 581

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 MACRS Percentages 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%

(2) Exhibit A-2.

Summary of the tax depreciation calculations based on the $1,000 fair value of the fixed assets and 7-year MACRS depreciation. CACs related to fixed assets are based on their fair value, as such, the depreciation reflected in the PFI is restated to reflect the fair value of the fixed assets. These projected depreciation amounts are reflected in Exhibit A-3.

(1) 7-Year MACRS applied to the fair value of the fixed assets and projected capital expenditures.



Adjusted PFI and Entity Value Exhibit A-4



Operating Expenses:%5.0D&R ecnanetniaM 5 5 6 7 7 8 9 9 10 10 10 %5.2PI erutuF - D&R 25 26 29 33 36 40 43 46 48 49 51

Trade name advertising 0.5% 5 5 6 7 7 8 9 9 10 10 10 Current customer marketing 3% 27 26 23 18 13 8 4 2 1 - - Future customer marketing 18 22 29 40 53 64 73 80 84 89 92

05%5gnitekram latoT 53 58 65 73 80 86 91 95 99 102

07%7A&G latoT 74 82 91 102 112 120 128 133 138 142



Amortization - AWF (2) 20 20 20 20 20 20 20 20 20 20 -645TIBE 395 467 547 631 676 711 789 870 900 946


less: Incremental Working Capital 30% 15 15 35 42 45 42 37 32 25 21 18 add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581

The PFI in this Exhibit is adjusted to reflect the tax benefits that would result from a restatement of the tax basis of certain of the assets to fair value. The tax benefit inherent in the fair value of an asset is not reflected in the PFI of a non-taxable transaction. For example, the step-up in fixed assets or the fair value of an assembled workforce are not reflected in the entity’s tax basis and the PFI for the transaction excludes this benefit. In order to maintain consistency between the PFI to be used in valuing the customer relationships and the fair value of the assets to which a CAC will be applied, the PFI should be adjusted to include the cash flow benefits of the increase in the tax basis of the contributory assets. The Working Group believes that the fair value of an intangible asset should not differ depending on the tax structure of a particular transaction. For additional discussion on the applicability of TABs see paragraphs 3.1.08 and 4.3.08 in the CAC Monograph and paragraphs 5.3.9 - 5.3.108 in the 2001 AICPA IPR&D Practice Aid.

When the PFI is adjusted to include the additional cash flow benefit embedded in the fair value of the contributory assets, this results in an Adjusted Entity Value that is greater than the Entity Value by an amount equal to the present value of the tax benefits related to the increase in tax basis. The Entity Value is recalculated at the WACC/IRR of 10% to arrive at the Adjusted Entity Value of $4,855. This increase of $109 is equivalent to the present value of the incremental tax benefit related to the step-up in the fixed assets and the assembled workforce. This Adjusted Entity Value is used only for reconciliation at this phase of the analysis.

The Working Group recognizes that these adjustments might not be significant to the analysis and may be excluded based on the judgment of the valuation specialist.

add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 58102)2( FWA - noitazitromA 20 20 20 20 20 20 20 20 20

less: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627 132wolF hsaC eerF tbeD 214 202 218 270 343 410 445 466 492 504

Residual Value 7,200

5359.0%01)3( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

022FCFD VP 185 159 156 176 203 221 218 207 199 2,911

558,4)4( eulaV ytitnE detsujdA

(2) Reflects the amortization of the AWF. For purposes of this example the amortization period for the AWF is assumed to be 10 years rather than 15 years as is required in the U.S. under IRS Code Section 197. 10 years is applied for demonstration purposes as the projections presented are 10 years in length. Tax benefits related to the future replacement of, or increase in, the AWF are reflected in the operating expenses and no adjustment is required other than for the initial fair value.

(3) The WACC remains at 10%. (4) The Adjusted Entity Value increase over the Entity Value is due solely to the incremental tax benefits. The Adjusted Entity Value is used only for reconciliation purposes.

(1) Tax depreciation pursuant to Exhibit A-3 to reflect the fair value of the fixed assets.



Reconciliation of Entity Value and Adjusted Entity Value Exhibit A-4a


Depreciation of: Fair Value of Fixed Assets (1) 184$ 372$ 387$ 412$ 441$ 500$ 557$ 558$ 540$ 562$ 581$ Carry-Over Tax Basis (2) 286 302 337 377 412 451 478 513 540 562 581

)201(noitaicerpeD latnemercnI 70 50 35 29 49 79 45 - - -

Amortization of: Assembled Workforce (3) 20 20 20 20 20 20 20 20 20 20 - Carry-Over Tax Basis - - - - - - - - - - -

02noitazitromA latnemercnI 20 20 20 20 20 20 20 20 20 -

Total Incremental D&A (82) 90 70 55 49 69 99 65 20 20 -

)33(%04sgnivaS xaT 36 28 22 20 28 40 26 8 8 - 5359.0%01rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

)13(sgnivaS xaT fo VP 31 22 16 13 16 21 13 4 3 -

801)4( latoT

(1) Exhibit A-3.(2) Exhibit A-2.(3) Exhibit A-4.(4) Difference from $109 due to rounding.

The purpose of this calculation is to highlight and identify the difference between Entity Value and Adjusted Entity Value. This is provided for clarification purposes and would not be considered a specific step in this reconciliation process.



Working Capital: Incremental Needs and Contributory Asset Charge Exhibit A-5


059euneveR $ 1,000$ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ Beginning Balance Working Capital 285 300 315 350 392 437 479 516 548 573 594 add: Incremental Working Capital 30% 15 15 35 42 45 42 37 32 25 21 18 Ending Balance Working Capital 300 315 350 392 437 479 516 548 573 594 612

392ecnalaB egarevA 308 333 371 415 458 498 532 561 584 603

Mid-period Adjustment Factor (1) 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535

82%01)2( nO nruteR 29 32 35 40 44 47 51 53 56 57

%38.2%28.2%08.2%87.2%67.2%47.2%17.2%17.2%27.2%97.2%97.2euneveR fo tnecreP

The annual average balance of working capital, consistent with assumptions reflected in Exhibits A-1 and A-4, is calculated and an assumed 3% rate of return on working capitalis applied to arrive at the annual CAC (see Section 3 in the CAC Monograph). Working capital used in this analysis excludes non-operating cash and all interest-bearing debt.

The Working Group recognizes that under circumstances where working capital correlates directly with revenue (as is the case below), discrete annual calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the relationship between working capital and revenue is projected to change significantly (e.g., reduced days receivable), the discrete annual analysis would be considered a best practice (as stated in the CAC Monograph). The need to calculate discrete annual working capital CAC assumptions would be based on the judgment of the valuation specialist.

(1) The mid-period adjustment is a simplifying adjustment applied to the return on to reflect the timing of the contributory assets charges over the year. A further discussion of this adjustment is provided in Exhibit D-4. Note: This calculation does not affect the mid-period discounting convention applied to derive present value elsewhere.

(2) The 10% after-tax return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.



6-A tibihxEecnalaB launnA egarevA - A euqinhceT no desaB egrahC tessA yrotubirtnoC :stessA dexiF

Return Of: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

FV of Acquired or Current Fixed Assets (1) 250$ 214$ 179$ 143$ 107$ 71$ 36$ - - - -

Capital Expenditures (2):631 raeY 36 36 36 36 36 36 36 - - -

052 raeY 50 50 50 50 50 50 50 - - 65 3 raeY 56 56 56 56 56 56 56 -

Year 4 63 63 63 63 63 63 63 63 Year 5 66 66 66 66 66 66 66 Year 6 68 68 68 68 68 68 Year 7 70 70 70 70 70 Year 8 72 72 72 72 Year 9 74 74 74 Year 10 76 76 Residual 78

Total Return Of 286 300 321 348 378 410 445 481 519 545 567


Return On:

000,1ecnalaB gninnigeB 1,000 1,100 1,229 1,381 1,528 1,659 1,771 1,864 1,936 2,000 add: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627 less: Return Of 286 300 321 348 378 410 445 481 519 545 567

000,1ecnalaB gnidnE 1,100 1,229 1,381 1,528 1,659 1,771 1,864 1,936 2,000 2,060

Averag 1stessA dexiF e ,000 1,050 1,165 1,305 1,455 1,594 1,715 1,818 1,900 1,968 2,030

The annual average balance of the fixed assets, consistent with the Adjusted Entity Value projections and the fair value of the fixed assets, is calculated and an after-tax rate of return (equal to the IRR/WACC) on fixed assets is applied to arrive at the annual CAC for the purpose of the financial overly and PFI reconciliation. In the final analysis, the required rate of return on tangible assets should be commensurate with the relative risk associated with investment in the fixed assets. See Exhibit B-6 for further discussion. In this Exhibit A-6, the rate of return is based on the 10% after-tax rate of return consistent with the IRR/WACC. The return of and on the acquired or current and future fixed assets is based on an 8-year straight-line remaining economic useful life in accordance with Technique A “Average Annual Balance”.

The Working Group recognizes that under circumstances where the fixed asset CAC as a percent of revenue would remain relatively stable (as is the case below) discrete annual calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the fixed asset CAC as a percent of revenue is projected to change (e.g., increasing asset utilization) then the discrete annual analysis would be considered a best practice. The significance of this assumption would be based on the judgment of the valuation specialist.

Average Fixed Assets 1,000 1,050 1,165 1,305 1,455 1,594 1,715 1,818 1,900 1,968 2,030

Mid-period Adjustment Factor 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535

Return On (3) 10% 95 100 111 124 139 152 164 173 181 188 194


183fO & nO nruteR latoT 400 432 472 517 562 609 654 700 733 761 Total Return On & Of as Percent of Revenue 38% 38% 37% 36% 36% 35% 35% 36% 37% 37% 37%

Remaining Economic Life (Years) FV Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 71 35.7 35.7

2 71.4 35.7 35.7

3 107.1 35.7 35.7 35.7

4 142.9 35.7 35.7 35.7 35.7

5 178.6 35.7 35.7 35.7 35.7 35.7

6 214.3 35.7 35.7 35.7 35.7 35.7 35.7

7 250.0 35.7 35.7 35.7 35.7 35.7 35.7 35.7

Total (rounded) 1,000 250 214 179 143 107 71 36

(1) The economic depreciation (return of) of the acquired or current fixed assets is based on the fair value of the fixed assets of $1,000 as follows:

(3) The 10% after-tax return on is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.

(2) Based on an 8 year economic life with the first year's return on occurring in the year of purchase.



Fixed Assets: Contributory Asset Charge Based on Technique B - Level Payment Exhibit A-7

Return On and Of Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Acquired FV of Fixed Assets (1)73raey-1 93sraey-2 39 14sraey-3 41 41 34)2( sraey-4 43 43 43 54sraey-5 45 45 45 45 74sraey-6 47 47 47 47 47 94sraey-7 49 49 49 49 49 49

-sraey-8 - - - - - - -

Capital Expenditures (3):94)4( 1 raeY 49 49 49 49 49 49 49 - - -

862 raeY 68 68 68 68 68 68 68 - - 773 raeY 77 77 77 77 77 77 77 -


053fO & nO nruteR latoT 381 418 463 509 556 604 653 705 741 771

%83%73%73%63%53%53%53%53%63%63%53euneveR fo %

(2) Sample calculation of the level payment for the acquired fixed assets with a remaining useful life of 4 years is as follows

In Technique B, the CAC reflects both the return of and on and is calculated as a series of level annual payments. The CAC should be calculated as a "loan payment" at the after-tax rate of return, or interest rate (with the loan payment conceptually including both principle and interest). See Exhibit B-7 for further discussion. In thisExhibit A-7, the rate of return is based on the 10% after-tax rate of return consistent with the IRR/WACC for the purpose of the financial overlay and PFI reconciliation. The calculation incorporates the fair value of the fixed assets and the remaining useful life for each asset group (waterfall payment) and assumes an 8-year remaining useful life for capital expenditures in each year, consistent with the Adjusted Entity Value projections and the fair value of the fixed assets.

The Working Group recognizes that under circumstances where the fixed asset CAC as a percent of revenue would remain relatively stable (as is the case below) discrete annual calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the fixed asset CAC as a percent of revenue is projected to change (e.g., increasing asset utilization) then the discrete annual analysis would be appropriate. The materiality of this assumption would be based on the judgment of the valuation specialist.

(1) The level payment related to the acquired Fixed Assets is based on the fair value of the fixed assets of $1,000 with an equal distribution of original cost over the prior 8 years, similar to Exhibit A-6. This waterfall calculation reflects individual level payment calculations for each asset life group.

CAC = -PMT(After-Tax Rate of Return,RUL,Fair Value,Future Value,Type = beginning of period) x (1+Discount Rate)^.5

= -PMT(10%,4,143,0,1) x (1 + 10%)^.5 = 43

CAC = -PMT(After-Tax Rate of Return,RUL,Fair Value,Future Value,Type = beginning of period)

= -PMT(10%,8,286,0,1) = 49

(2) Sample calculation of the level payment for the acquired fixed assets with a remaining useful life of 4 years is as follows

(3) Individual level payment calculations for annual capital expenditures.

(4) Sample calculation of the level payment for the $286 of capital expenditures occurring in Year 1 with a remaining useful life of 8 years is as follows:



Assembled Workforce: Growth Investment and Contributory Asset Charge Exhibit A-8


000,1euneveR $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ %3%4%5%6%8%01%11%21%11%5%5htworG

002ecnalaB gninnigeB 211 222 246 276 308 338 364 386 404 419 add: Pre-Tax Investment in AWF Growth (1) 11 11 24 30 32 30 26 22 18 15 13

112ecnalaB gnidnE 222 246 276 308 338 364 386 404 419 432

602ecnalaB egarevA 217 234 261 292 323 351 375 395 412 426

Mid-period Adjustment Factor 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535

02%01nO nruteR 21 22 25 28 31 33 36 38 39 41


This exhibit calculates the growth investment in AWF and the return on the AWF (the CAC). The fair value of the acquired or current AWF of $200 is estimated based on the pre-tax replacement cost.

Future operating expenses include the cost to both grow and maintain the AWF. The initial investment to increase the AWF should be excluded to avoid double counting the initial investment and the future maintenance expenses. In other words, the return on the AWF would increase due to its growth and future operating expenses provide for maintaining the increase in the AWF (see CAC Monograph). The Working Group recognizes that this adjustment is generally minor and may be excluded in practice. However, such an adjustment provides for a complete reconciliation of value in the context of this financial overlay.

The Working Group recognizes that under circumstances where the relationship between AWF and revenue (e.g., the revenue per employee) remains relatively stable, discrete annual calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those cir cumstances where the relationship is projected to significantly change (e.g., increasing revenue per employee), the discrete annual analysis would be considered a best practi ce. The need for discrete AWF calculations (and the resulting AWF CAC) would be based on the judgment of the valuation specialist.

(1) Growth investment correlates to the annual increase in revenue. For example in Year 2 revenue increases by 5% and the AWF grows by $11 (5% x $211).

Revenue Analysis Exhibit A-9


000,1ytitnE deriuqcA - emaN edarT $ 1,050$ 583$ -$ -$ -$ -$ -$ -$ -$ -$ Trade Name - Acquiring Entity - - 583 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

Total Revenue 1,000 1,050 1,165 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

000,1PI tnerruC 900 700 400 200 50 - - - - - Future IP - 150 465 906 1,256 1,546 1,718 1,823 1,907 1,976 2,035

Total Revenue 1,000 1,050 1,165 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

009spihsnoitaleR sremotsuC 855 770 616 431 259 130 65 33 - - %0%0%05%05%05%06%07%08%09%59)raey roirp fo %( noitirttA

Future & Other Customers 100 195 395 690 1,025 1,337 1,588 1,758 1,874 1,976 2,035

Total Revenue 1,000 1,050 1,165 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

This exhibit provides the revenue attrition assumptions for the Trade Name, IP, and Customer Relationships for use in their respective valuations. The revenue projections for the Trade Name of the acquiring entity, Future IP, and Future and Other Customers are provided for use in the financial overlay and reconciliation to the Adjusted Entity Value. The derivation of these assumptions is outside of the scope of this Toolkit.



Trade Name Analysis Exhibit A-10


000,1)1( euneveR $ 1,050$ 583$ - - - - - - - -

05%5)2( dediovA ytlayoR 53 29 - - - - - - - - less: Trade Name Advertising 0.5% 5 5 3 - - - - - - - -

54TIBE 48 26 - - - - - - - - 81%04@ sexaT 19 10 - - - - - - - -

72emocnI teN eerF-tbeD 29 16 - - - - - - - - Residual Value -

Present Value Factor (3) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

62dediovA ytlayoR VP 25 12 - - - - - - - - Total PV Trade Name Income (4) 63

(2) The pre-tax royalty avoided is based on royalty rates that market participants would have to pay to license comparable intangible assets. The royalty rate is assumed to be gross (e.g., inclusive of advertising expenses).

This exhibit provides the assumed valuation of the Trade Names based on the relief from royalty method. This example assumes that the royalty of 5% is stated at a gross amount and is reduced for the requisite advertising of 0.5%. The present value of this asset is provided for use in the financial overlay reconciliation. The tax amortization benefit would not be included at this stage because the Adjusted Entity Value to which the reconciliation takes place, has not been revised to include this tax benefit. The tax amortization benefit is added after the reconciliation and the application of the appropriate discount rate to arrive at fair value.

The trade name may also provide defensive value. While the determination of defensive value is outside of the scope of this Toolkit, the same principles related to CACs would apply.

(1) Exhibit A-9.

(3) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.

(4) Excludes the TAB, for now, in the reconciliation process.

Intellectual Property Analysis Exhibit A-11


000,1)1( euneveR $ 900$ 700$ 400$ 200$ 50$ - - - - - 001%01)2( dediovA ytlayoR 90 70 40 20 5 - - - - -

less: Maintenance R&D 0.5% 5 5 4 2 1 - - - - - -

59TIBE 85 66 38 19 5 - - - - - 83%04@ sexaT 34 26 15 8 2 - - - - -

75emocnI teN eerF-tbeD 51 40 23 11 3 - - - - - Residual Value -


45dediovA ytlayoR VP 44 31 16 7 2 - - - - - 451)4( emocnI PI tnerruC VP latoT

(2) The pre-tax royalty avoided is based upon royalty rates that market participants would have to pay to license comparable intangible assets. The royalty rate is assumed to be gross (e.g., inclusive of R&D expenses).

This exhibit provides the assumed valuation of the IP based on the relief from royalty method. This example assumes that the royalty of 10% is stated at a gross amount and is reduced for the requisite maintenance R&D of 0.5%. The present value of this asset is provided for use in the financial overlay reconciliation. The tax amortization benefit would not be included at this stage because the Adjusted Entity Value to which the reconciliation takes place, has not been revised to include this tax benefit. The tax amortization benefit is added after the reconciliation and the application of the appropriate discount rate to arrive at fair value.

(1) Exhibit A-9.


(4) Excludes the TAB in the reconciliation process.

The IP may also provide defensive value. While the determination of defensive value is outside of the scope of this Toolkit, the same principles related to CACs would apply.



21-A tibihxEecnalaB launnA egarevA - A euqinhceT no desaB egrahC tessA yrotubirtnoC tessA dexiF :MEEPM spihsnoitaleR remotsuC


000,1euneveR latoT $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$

Customer Relationship Revenue (1) 900 855 770 616 431 259 130 65 33 - - Gross Profit 90% 810 770 693 554 388 233 117 59 30 - - Operating Expenses: Maintenance R&D (2) 0.0% - - - - - - - - - - - R&D - Future IP (2) 0.0% - - - - - - - - - - - Trade name advertising (3) 0.0% - - - - - - - - - - - Current customer marketing (4) 3% 27 26 23 18 13 8 4 2 1 - - Future customer marketing (5) - - - - - - - - - - -

72gnitekram latoT 26 23 18 13 8 4 2 1 - - Total G&A 7% 63 60 54 43 30 18 9 5 2 - -

09sesnepxE gnitarepO latoT 86 77 61 43 26 13 7 3 - - 027ADTIBE 684 616 493 345 207 104 52 27 - - 661)6( noitaicerpeD 303 256 194 131 81 42 20 9 - -

Amortization - AWF (8) 18 16 13 9 6 3 2 1 - - - 635TIBE 365 347 290 208 123 60 31 18 - -

less: Trade Name Royalty (7) 5% 45 43 39 31 22 13 7 3 2 - - %01)7( ytlayoR PI 90 86 77 62 43 26 13 7 3 - -

104TIBE detsujdA 236 231 197 143 84 40 21 13 - - Taxes 40% 160 94 92 79 57 34 16 8 5 - -

142emocnI teN eerF tbeD 142 139 118 86 50 24 13 8 - - 661)6( noitaicerpeD :dda 303 256 194 131 81 42 20 9 - - 81)8( FWA - noitazitromA 16 13 9 6 3 2 1 - - 01)9( tnemtsevnI htworG FWA 9 16 14 9 5 2 1 - - -

less: Return On Working Capital (10) 25 24 21 17 12 7 4 2 1 - -

Aggregate CACs were estimated in the prior exhibits. An analysis of the subject intangible asset should be performed to assess the required levels of contributory assets. The aggregate CACs on those assets are then allocated appropriately to the subject intangible asset. For the purposes of this example all contributory assets have been assumed to benefit all customers equally and the CACs are allocated in proportion to revenue. The allocation of CACs is based on facts an d circumstances. For example, in other circumstances a disproportionate amount of the fixed assets may be used to manufacture the products sold to the separately identified customer relationships ($900 in revenue in Year 1) versus the unidentified customers ($100 in Year 1). In a similar manner, the IP may be disproportionately allocable to the separately identified customer relationships rather than the unidentified customers.

In addition to the CACs related to working capital, fixed assets and AWF, profit splits in the form of royalty rates were also applied for the use of the trade name and IP. This example assumes that certain expense items (e.g., advertising and R&D) are included in the royalty rate and have been eliminated from the excess earnings to avoid double counting the expense.

This exhibit uses the Average Annual Balance technique (Technique A) for the calculation of fixed asset CACs in the valuation of customer relationships using an MPEEM.

g p ( ) Return Of Fixed Assets (11) 257 244 212 164 112 67 34 17 9 - - Return On Fixed Assets (11) 86 81 73 58 41 25 12 6 3 - - Return On AWF (9) 18 17 15 12 8 5 2 1 1 - -

94sgninraE ssecxE 104 103 84 59 35 18 9 3 - - Residual Value -

5359.0%01)21( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

74sgninraE ssecxE VP 90 81 60 38 21 10 4 1 - -

253)31( sgninraE ssecxE VP latoT

(12) Discount rate assumed to be equivalent to the IRR/WACC and a mid-period convention.

(9) Exhibit A-8 amounts allocated in proportion to revenue.(10) Exhibit A-5 amounts allocated in proportion to revenue.(11) Exhibit A-6 amounts allocated in proportion to revenue.


(3) Advertising expenses removed under the same assumptions provided in footnote 2. (4) Maintenance marketing expenses specific to current separately identified customer relationships. (5) Marketing expenses related to creating and maintaining unidentified and future customer relationships are excluded. (6) Exhibit A-3 amounts allocated in proportion to revenue. (7) Royalty rates assumed to be gross (e.g., inclusive of advertising and R&D expenses). The same rates would be incorporated in the valuation of the trade name and IP. Note that the royalty charge is applicable to both current and future contributory assets. (8) Exhibit A-4 amounts allocated in proportion to revenue.

(1) Exhibit A-9. (2) Maintenance and future R&D is assumed to be included in the 10% IP royalty rate (licensor responsible for all R&D in the future) and is therefore removed in the excess earnings. The R&D expenses would be reflected as a reduction to the royalty in the valuation of the IP. Alternately, it may be determined that the royalty rate is stated net of the R&D expenses in which case the R&D expenses would remain in the excess earnings.



31-A tibihxEtnemyaP leveL - B euqinhceT no desaB egrahC tessA yrotubirtnoC tessA dexiF :MEEPM spihsnoitaleR remotsuC


000,1euneveR latoT $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$

Customer Relationship Revenue 900 855 770 616 431 259 130 65 33 - - Gross Profit 90% 810 770 693 554 388 233 117 59 30 - - Operating Expenses:

%0.0D&R ecnanetniaM - - - - - - - - - - - %0.0PI erutuF - D&R - - - - - - - - - - -

Trade name advertising 0.0% - - - - - - - - - - - Current customer marketing 3% 27 26 23 18 13 8 4 2 1 - -

Future customer marketing - - - - - - - - - - -


09sesnepxE gnitarepO latoT 86 77 61 43 26 13 7 3 - - 027ADTIBE 684 616 493 345 207 104 52 27 - - 661noitaicerpeD 303 256 194 131 81 42 20 9 - -

Amortization - AWF 18 16 13 9 6 3 2 1 - - -

635TIBE 365 347 290 208 123 60 31 18 - - less: Trade Name Royalty 5% 45 43 39 31 22 13 7 3 2 - -

%01ytlayoR PI 90 86 77 62 43 26 13 7 3 - -


142emocnI teN eerF tbeD 142 139 118 86 50 24 13 8 - - 661noitaicerpeD :dda 303 256 194 131 81 42 20 9 - - 81FWA - noitazitromA 16 13 9 6 3 2 1 - - 01tnemtsevnI htworG FWA 9 16 14 9 5 2 1 - - - 52latipaC gnikroW nO nruteR :ssel 24 21 17 12 7 4 2 1 - -

Return On & Of Fixed Assets (1) 315 310 277 218 151 90 46 23 12 - - Return On AWF 18 17 15 12 8 5 2 1 1 - -


5359.0%01rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044


304sgninraE ssecxE VP latoT

This exhibit uses the Level Payment technique (Technique B) for the calculation of fixed asset CACs in the valuation of customer relationships using an MPEEM. All other CACs and adjustments discussed in Exhibit A-12 remain the same.

(1) Exhibit A-7 amounts allocated in proportion to revenue.



ibihxEecnalaB launnA egarevA - A euqinhceT no desaB egrahC tessA yrotubirtnoC tessA dexiF :)MEEPM( sgninraE ssecxE deifitnedinU t A-14


000,1euneveR latoT $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$

001)1( euneveR 195 395 690 1,025 1,337 1,588 1,758 1,874 1,976 2,035 09tiforP ssorG 175 356 621 922 1,203 1,429 1,582 1,686 1,778 1,832

Operating Expenses: Maintenance R&D (2) - - 2 5 6 8 9 9 10 10 10 R&D - Future IP (2) 25 26 29 33 36 40 43 46 48 49 51

-)3( gnisitrevda eman edarT - 3 7 7 8 9 9 10 10 10 Current customer marketing (4) - - - - - - - - - - -

Future customer marketing (5) 18 22 29 40 53 64 73 80 84 89 92

81gnitekram latoT 22 32 47 60 72 82 89 94 99 102 7)6( A&G latoT 14 28 48 72 94 111 123 131 138 142

05sesnepxE gnitarepO latoT 62 91 133 174 214 245 267 283 296 305 04ADTIBE 113 265 488 748 989 1,184 1,315 1,403 1,482 1,527 81)6( noitaicerpeD 69 131 218 310 419 515 538 531 562 581

Amortization - AWF (6) 2 4 7 11 14 17 18 19 20 20 -

02TIBE 40 127 259 424 553 651 758 852 900 946 5)7( ytlayoR emaN edarT :ssel 10 (10) (31) (22) (13) (7) (3) (2) - -

IP Royalty (7) 10 4 (7) (22) (23) (21) (13) (7) (3) - -

5TIBE detsujdA 26 144 312 469 587 671 768 857 900 946 Taxes 40% 2 10 58 125 188 235 268 307 343 360 378

3emocnI teN eerF tbeD 16 86 187 281 352 403 461 514 540 568 81noitaicerpeD :dda 69 131 218 310 419 515 538 531 562 581 2FWA - noitazitromA 4 7 11 14 17 18 19 20 20 1)8( tnemtsevnI htworG FWA 2 8 16 23 25 24 21 18 15 13

less: Return On Working Capital (9) 3 5 11 18 28 37 43 49 52 56 57 92)01( stessA dexiF fO nruteR 56 109 184 266 343 411 464 510 545 567 9)01( stessA dexiF nO nruteR 19 38 66 98 127 152 167 178 188 194

Return On AWF (8) 2 4 7 13 20 26 31 35 37 39 41

)91(sgninraE ssecxE 7 67 151 216 280 323 324 306 309 303 Residual Value 4,322

5359.0%01)11( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

)81(sgninraE ssecxE VP 6 53 108 141 166 174 159 136 125 1,748

Total PV Excess Earnings (12) 2,798

This exhibit applies the Average Annual Balance technique (Technique A) to separate the unidentified excess earnings (consisting of the acquiring entity trade name; future IP; and future and other customers) for reconciliation purposes in the context of a financial overlay.

Total PV Excess Earnings (12) 2,798





(11) Discount rate assumed to be equivalent to the IRR/WACC, based on a mid-period convention.

(1) Exhibit A-9.

(2) Maintenance and future R&D.

(3) Advertising related to the acquiring entity trade name.

(4) Maintenance marketing expenses specific to and absorbed by the current separately identified customer relationships.

(5) Marketing expenses related to creating and maintaining unidentified and future customer relationships.


(7) The royalty applied to the customer relationships revenue reflects the use of both current and future trade name and IP assets (see CAC Monograph). Therefore the royalty reflected in the unidentified excess earnings becomes negative (or is added back) to recognize the royalties that were deducted from the customer relationship excess earnings calculation. Royalty rates assumed to be gross (e.g., inclusive of advertising and R&D expenses). The trade name royalty is calculated by deducting the royalty per Exhibit A-12 (or A-13) from that on Exhibit A-10. The IP royalty is calculated by deducting the royalty per Exhibit A-12 (or A-13) from that on Exhibit A-11.



51-A tibihxEtnemyaP leveL - B euqinhceT no desaB egrahC tessA yrotubirtnoC tessA dexiF :)MEEPM( sgninraE ssecxE deifitnedinU


000,1euneveR latoT $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$

Future & Other Customer Revenue 100 195 395 690 1,025 1,337 1,588 1,758 1,874 1,976 2,035 09tiforP ssorG 175 356 621 922 1,203 1,429 1,582 1,686 1,778 1,832

Operating Expenses: Maintenance R&D - - 2 5 6 8 9 9 10 10 10 R&D - Future IP 25 26 29 33 36 40 43 46 48 49 51

-gnisitrevda eman edarT - 3 7 7 8 9 9 10 10 10 Current customer marketing - - - - - - - - - - -

Future customer marketing 18 22 29 40 53 64 73 80 84 89 92

81gnitekram latoT 22 32 47 60 72 82 89 94 99 102 Total G&A 7 14 28 48 72 94 111 123 131 138 142

05sesnepxE gnitarepO latoT 62 91 133 174 214 245 267 283 296 305 04ADTIBE 113 265 488 748 989 1,184 1,315 1,403 1,482 1,527 81noitaicerpeD 69 131 218 310 419 515 538 531 562 581

Amortization - AWF 2 4 7 11 14 17 18 19 20 20 -

02TIBE 40 127 259 424 553 651 758 852 900 946 5ytlayoR emaN edarT :ssel 10 (10) (31) (22) (13) (7) (3) (2) - -

IP Royalty 10 4 (7) (22) (23) (21) (13) (7) (3) - -


3emocnI teN eerF tbeD 16 86 187 281 352 403 461 514 540 568 81noitaicerpeD :dda 69 131 218 310 419 515 538 531 562 581 2FWA - noitazitromA 4 7 11 14 17 18 19 20 20 1tnemtsevnI htworG FWA 2 8 16 23 25 24 21 18 15 13 3latipaC gnikroW nO nruteR :ssel 5 11 18 28 37 43 49 52 56 57

Return On & Of Fixed Assets (1) 35 71 141 245 358 466 558 630 693 741 771 Return On AWF 2 4 7 13 20 26 31 35 37 39 41


5359.0%01rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044


757,2sgninraE ssecxE VP latoT

This exhibit applies the Level Payment technique (Technique B) to separate the unidentified excess earnings (consisting of the acquiring entity trade name; future IP; and future and other customers) for reconciliation purposes in the context of a financial overlay. All other CACs and adjustments discussed in Exhibit A-14 remain the same.




Income Reconciliation Exhibit A-16


Trade Name Royalty - Acquired Co. (1) 50$ 53$ 29$ -$ -$ -$ -$ -$ -$ -$ -$

Current IP Royalty (2) 100 90 70 40 20 5 - - - - -

Total Royalty 150 143 99 40 20 5 - - - - -

Expense Adjustments Trade Name Advertising - Acquired Co. (1) 5 5 3 - - - - - - - - Maintenance R&D - Current IP (2) 5 5 4 2 1 - - - - - -

01stnemtsujdA esnepxE latoT 10 7 2 1 - - - - - -

Total Pre-tax income adjustments 140 133 92 38 19 5 - - - - -

Taxes 40% 56 53 37 15 8 2 - - - - -

Total After-tax income adjustments 84 80 55 23 11 3 - - - - -

Customer Relationships DFNI (3) 241 142 139 118 86 50 24 13 8 - -

Unidentified DFNI (4) 3 16 86 187 281 352 403 461 514 540 568

823noitailicnoceR INFD latoT 238 280 328 378 405 427 474 522 540 568

DFNI from Adjusted Entity Value (5) 328 237 280 328 379 406 427 473 522 540 568

-ecnereffiD (1) - - 1 1 - (1) - - -

Provides an income reconciliation for the intangible assets valued using an income approach to reconcile the debt free net income inherent in the respective assets to the Adjusted Entity Value debt free net income. This is a complimentary analysis to the value reconciliation. This also provides support for the income allocation in the context of a financial overlay.

(1) Exhibit A-10.

(2) Exhibit A-11.

(3) Exhibits A-12 and A-13.

(4) Exhibits A-14 and A-15.

(5) Exhibit A-4.

Financial Overlay Summary Exhibit A-17

Rate ofReturn A B

582%01latipaC gnikroW $ 285$ Fixed Assets 10% 1,000 1,000 Trade Name - Acquired Co. (1) 10% 63 63 IP (Current) (2) 10% 154 154 Customer Relationships (3) 10% 352 403

458,1stessA deifitnedI yletarapeS latoT 1,905

AWF 10% 200 200 Excess Purchase Price (4) 10% 2,798 2,757

899,2latoT 2,957

258,4stessA teN latoT 4,862

Adjusted Entity Value (5) 10%

(2) Exhibit A-11.

(4) Technique A: Exhibit A-14; Technique B: Exhibit A-15. (5) Exhibit A-4.

The financial overlay is a diagnostic analysis to provide for a reconciliation to the Adjusted Entity Value. Such an analysis provides stability to the valuation model by confirming the apportionment of earnings and value among all of the assets. The inclusion of an analysis of the unidentified excess earni ngs provides an alternative and direct means of calculating the implied rate of return on the excess purchase price (goodwill) which is generally performed in the context of a WARA. With such a diagnostic analysis completed, the valuation specialist would then proceed to an assessment of the respective rates of return applicable to the various assets and arrive at estimates of fair value. This next step of stratifying the rates is demonstrated in the Section B exhibits. A summary of the two techniques applied to the fixed assets are provided in columns A (Average Annual Balance) and B (Level Payment).

4,855

(1) Exhibit A-10.

(3) Technique A: Exhibit A-12; Technique B: Exhibit A-13.



SECTION B: STRATIFIED RATES

This section of the Toolkit repeats analysis provided in Section A, however asset-specific discount rates are

applied to the respective assets. In addition, a weighted average return on assets (“WARA”) calculation is

provided and compared to the implied discount rate derived from an explicit analysis of the unidentified excess

earnings.

The required rate of return on each asset should be commensurate with the relative risk associated with

investment in that particular asset. For additional discussion, refer to Section 4 of the Monograph.



Entity Value (1) Exhibit B-1(Exhibit A-1)



Operating Expenses: Maintenance R&D (2) 0.5% 5 5 6 7 7 8 9 9 10 10 10

%5.2)3( PI erutuF - D&R 25 26 29 33 36 40 43 46 48 49 51

Trade name advertising (4) 0.5% 5 5 6 7 7 8 9 9 10 10 10 Current customer marketing (5) 3% 27 26 23 18 13 8 4 2 1 - - Future customer marketing (6) 18 22 29 40 53 64 73 80 84 89 92

%5gnitekram latoT 50 53 58 65 73 80 86 91 95 99 102

07%7A&G latoT 74 82 91 102 112 120 128 133 138 142



Amortization (8) - - - - - - - - - - - 464TIBE 485 537 602 680 745 810 854 890 920 946


less: Incremental Working Capital (9) 30% 15 15 35 42 45 42 37 32 25 21 18 add: 682)01( noitaicerpeD 302 337 377 412 451 478 513 540 562 581 less: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627

362wolF hsaC eerF tbeD 178 174 196 250 315 370 419 458 484 504 Residual Value (11) 7,200

5359.0%01)21( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

152FCFD VP 154 137 140 163 186 199 205 204 196 2,911

Entity Value 4,746

This section of the Toolkit uses the same analysis provided in Section A with the application of stratified discount rates to the respective assets. In addition, a WARA calculation is also provided and compared to the implied discount rate derived from an explicit analysis of the unidentified excess earnings.

This example assumes that all potential entity-specific synergies and related value have been extracted from the PFI and the purchase price. Based on the market participant PFI and purchase price of $4,746, the IRR of the transaction is calculated to be 10%. In addition, a market-based WACC of 10% is estimated, which reconciles to the IRR. This example reflects a non-taxable transaction.

Entity Value 4,746

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Customer relationship revenue 900 855 770 616 431 259 130 65 33 -

(7) 7-MACRS tax depreciation based on carry-over tax basis of $745 and projected capital expenditures. For a detailed calculation see Exhibit A-2 of the Toolkit.

(9) Represents 30% of incremental revenue. A beginning working capital balance of $285 is based on Year 0 revenue of $950. (10) The residual year difference in depreciation and capital expenditures recognizes the long term growth in the business and the depreciation lag relative to capital expenditures. The differential is dependent on the long term growth rate and the fixed asset depreciation rates. This "wedge" is calculated by extending the capital expenditure projection at the constant residual year growth rate and calculating the depreciation for each annual period until a stable relationship between capital expenditures and depreciation is achieved.

(11) Based on constant growth model assuming a 3% long-term growth rate.(12) The market participant based IRR is equivalent to the WACC of 10%. The mid-period convention is applied.

(8) Tax basis of intangible assets is zero.

(1) Entity Value projections based on market participant assumptions. Excludes entity-specific synergies. (2) Maintenance R&D applicable to both current and future IP. (3) R&D expense for the development of future IP. (4) Advertising expense related to the trade name. (5) Maintenance marketing expenses specific to current separately identified customer relationships with following revenue (Exhibit A-8 footnote 1):




Tax Depreciation: Carry-Over Tax Basis of Fixed Assets Exhibit B-2(Exhibit A-2)

Total Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Carry-Over Tax Basis (2) 745$ 245$ 175$ 125$ 90$ 60$ 40$ 10$

Capital Expenditures (3)6821 raeY 41 70 50 36 26 26 26 13 0042 raeY 75 98 70 50 36 36 36 18 0543 raeY 64 110 79 56 40 40 40 20 0054 raeY 17 122 87 62 45 45 45 22 5255 raeY 57 129 92 66 47 47 47 1456 raeY 77 132 95 68 48 48 7557 raeY 80 136 97 70 50 4758 raeY 82 141 100 72 1959 raeY 84 145 103 90601 raeY 87 149 726laudiseR 90

Total Depreciation - CapEx 41 127 212 287 352 411 468 513 540 562 581

Total MACRS Depreciation 286 302 337 377 412 451 478 513 540 562 581

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

MACRS Percentages 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%


(2) Based on carry-over tax basis of $745. (3) Capital expenditures as per the Entity Value projections (Exhibit B-1), annual depreciation amounts rounded.

Summary of the tax depreciation calculation based on the carry-over tax basis and 7-year MACRS depreciation. These projected depreciation amounts are reflected in Exhibit B-1.



Tax Depreciation: 7-Year MACRS & Fair Value of Fixed Assets (1) Exhibit B-3(Exhibit A-3)

Depreciation Of: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

341stessA dexiF fo VF deriuqcA $ 245$ 175$ 125$ 89$ 89$ 89$ 45$

Capital Expenditures (2) 41 127 212 287 352 411 468 513 540 562 581

481noitaicerpeD xaT latoT 372 387 412 441 500 557 558 540 562 581

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 MACRS Percentages 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%

(2) Exhibit B-2.


Summary of the tax depreciation calculations based on the $1,000 fair value of the fixed assets and 7-year MACRS depreciation. CACs related to fixed assets are based on their fair value, as such, the depreciation reflected in the PFI is restated to reflect the fair value of the fixed assets . These projected depreciation amounts are reflected in Exhibit B-3.



Adjusted PFI and Entity Value Exhibit B-4(Exhibit A-4)



Operating Expenses:%5.0D&R ecnanetniaM 5 5 6 7 7 8 9 9 10 10 10 %5.2PI erutuF - D&R 25 26 29 33 36 40 43 46 48 49 51

Trade name advertising 0.5% 5 5 6 7 7 8 9 9 10 10 10 Current customer marketing 3% 27 26 23 18 13 8 4 2 1 - - Future customer marketing 18 22 29 40 53 64 73 80 84 89 92

05%5gnitekram latoT 53 58 65 73 80 86 91 95 99 102

07%7A&G latoT 74 82 91 102 112 120 128 133 138 142





less: Incremental Working Capital 30% 15 15 35 42 45 42 37 32 25 21 18 481)1( noitaicerpeD :dda 372 387 412 441 500 557 558 540 562 581

A ti ti AWF (2) 20 20 20 20 20 20 20 20 20 20

The PFI in this Exhibit is adjusted to reflect the tax benefits that would result from a restatement of the tax basis of certain of the assets to fair value. The tax benefit inherent in the fair value of an asset is not reflected in the PFI of a non-taxable transaction. For example, the step-up in fixed assets or t he fair value of an assembled workforce are not reflected in the entity’s tax basis and the PFI for the transaction excludes this benefit. In order to maintain consistency between the PFI to be used in valuing the customer relationships and the fair value of the assets to which a CAC will be applied, the PFI should be adjusted to include the cash flow benefits of the in crease in the tax basis of the contributory assets. The Working Group believes that the fair value of an intangible asset should not differ depending on the tax structure of a particu lar transaction. For additional discussion on the applicability of TABs see paragraphs 3.1.08 and 4.3.08 in the CAC Monograph and paragraphs 5.3.9 - 5.3.108 in the 2001 AICPA IPR&D Practice Aid.

When the PFI is adjusted to include the additional cash flow benefit embedded in the fair value of the contributory assets, this results in an Adjusted Entity Value that is greater than the Entity Value by an amount equal to the present value of the tax benefits related to the increase in tax basis. The Entity Value is recalculated at the WACC/IRR of 10% to arrive at the Adjusted Entity Value of $4,855. This increase of $109 is equivalent to the present value of the incremental tax benefit r elated to the step-up in the fixed assets and the assembled workforce. This Adjusted Entity Value is used only for reconciliation at this phase of the analysis.

The Working Group recognizes that these adjustments might not be significant to the analysis and may be excluded based on the judgment of the valuation specialist.

02)2( FWA - noitazitromA 20 20 20 20 20 20 20 20 20less: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627

132wolF hsaC eerF tbeD 214 202 218 270 343 410 445 466 492 504 Residual Value 7,200

5359.0%01)3( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

022FCFD VP 185 159 156 176 203 221 218 207 199 2,911


(1) Tax depreciation pursuant to Exhibit B-3 to reflect the fair value of the fixed assets.

(2) Reflects the amortization of the AWF. For purposes of this example the amortization period for the AWF is assumed to be 10 years rather than 15 years as is required in the U.S. under IRS Code Section 197. 10 years is applied for demonstration purposes as the projections presented are 10 years in length. Tax benefits related to the future replacement of, or increase in, the AWF are reflected in the operating expenses and no adjustment is required other than for the initial fair value.

(3) The WACC remains at 10%. (4) The Adjusted Entity Value increase over the Entity Value is due solely to the incremental tax benefits. The Adjusted Entity Value is used only for reconciliation purposes.



Reconciliation of Entity Value and Adjusted Entity Value Exhibit B-4a(Exhibit A-4a)


Depreciation of: Fair Value of Fixed Assets (1) 184$ 372$ 387$ 412$ 441$ 500$ 557$ 558$ 540$ 562$ 581$ Carry-Over Tax Basis (2) 286 302 337 377 412 451 478 513 540 562 581

)201(noitaicerpeD latnemercnI 70 50 35 29 49 79 45 - - -

Amortization of: Assembled Workforce (2) 20 20 20 20 20 20 20 20 20 20 - Carry-Over Tax Basis - - - - - - - - - - -

02noitazitromA latnemercnI 20 20 20 20 20 20 20 20 20 -

Total Incremental D&A (82) 90 70 55 49 69 99 65 20 20 -

)33(%04sgnivaS xaT 36 28 22 20 28 40 26 8 8 - 5359.0%01rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

)13(sgnivaS xaT fo VP 31 22 16 13 16 21 13 4 3 -

801)3( latoT

(1) Exhibit B-3.(2) Exhibit B-2.(3) Exhibit B-4.(4) Difference from $109 due to rounding.

The purpose of this calculation is to highlight and identify the difference between Entity Value and Adjusted Entity Value. This is provided for clarification purposes and would not be considered a specific step in this reconciliation process.



Working Capital: Incremental Needs and Contributory Asset Charge Exhibit B-5


059euneveR $ 1,000$ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ Beginning Balance Working Capital 285 300 315 350 392 437 479 516 548 573 594 add: Incremental Working Capital 30% 15 15 35 42 45 42 37 32 25 21 18

003latipaC gnikroW ecnalaB gnidnE 315 350 392 437 479 516 548 573 594 612

392ecnalaB egarevA 308 333 371 415 458 498 532 561 584 603


8%3)2( nO nruteR 9 10 11 12 13 14 15 16 17 17


The Working Group recognizes that under circumstances where working capital correlates directly with revenue (as is the case below), discrete annual calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the relationship between working capital and revenue is projected to change significantly (e.g., reduced days receivable), the discrete annual analysis would be considered a best practice (as stated in the CAC Monograph). The need to calculate discrete annual working capital CAC assumptions would be based on the judgment of the valuation specialist.

(1) The mid-period adjustment is a simplifying adjustment applied to the return on to reflect the timing of the contributory assets charges over the year. A further discussion of this adjustment is provided in Exhibit D-4. Note: This calculation does not affect the mid-period discounting convention applied to derive present value elsewhere.

(2) The 3% after-tax return (CAC) is based on market participant assumptions.

The annual average balance of working capital, consistent with assumptions reflected in Exhibits B-1 and B-4, is calculated and an assumed 3% rate of return on working capital is applied to arrive at the annual CAC (see Section 3 in the CAC Monograph). Working capital used in this analysis excludes non-operating cash and all interest-bearing debt.



6-B tibihxEecnalaB launnA egarevA - A euqinhceT no desaB egrahC tessA yrotubirtnoC :stessA dexiF

Return Of Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

052)1( stessA dexiF fo VF deriuqcA $ 214$ 179$ 143$ 107$ 71$ 36$ - - - -

Capital Expenditures (2):631 raeY 36 36 36 36 36 36 36 - - -

052 raeY 50 50 50 50 50 50 50 - - 65 3 raeY 56 56 56 56 56 56 56 -


Total Return Of 286 300 321 348 378 410 445 481 519 545 567


Return On

000,1ecnalaB gninnigeB 1,000 1,100 1,229 1,381 1,528 1,659 1,771 1,864 1,936 2,000 add: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627 less: Return Of 286 300 321 348 378 410 445 481 519 545 567

000,1ecnalaB gnidnE 1,100 1,229 1,381 1,528 1,659 1,771 1,864 1,936 2,000 2,060

A Fi d A t 1 000 1 050 1 165 1 305 1 455 1 594 1 715 1 818 1 900 1 968 2 030

The Working Group recognizes that under circumstances where the fixed asset CAC as a percent of revenue would remain relatively stable (as is the case below) discrete annual calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the fixed asset CAC as a percent of revenue is projected to change (e.g., increasing asset utilization) then the discrete annual analysis would be considered a best practice. The significance of this assumption would be based on the judgment of the valuation specialist.

The annual average balance of the fixed assets, consistent with the Adjusted Entity Value projections and the fair value of the fixed assets, is calculated and an assumed 5% after-tax rate of return on fixed assets is applied to arrive at the annual CAC (see CAC Monograph). The return of and on the acquired or current and future fixed assets is based on an 8-year straight-line remaining economic useful life in accordance with Technique A “Average Annual Balance”. The required rate of return on tangible assets should be commensurate with the relative risk associated with investment in the fixed assets. The rate of return on tangible assets may be the calculated after-tax interest rate based on such indicators as (a) observed rates charged by vendor financing, or (b) the weighted average returns for the level of debt and equity financing that could be secured for the tangible assets (see Section 4of the CAC Monograph for further discussion).

A 000,1stessA dexiF egarev 1,050 1,165 1,305 1,455 1,594 1,715 1,818 1,900 1,968 2,030

5359.0rotcaF tnemtsujdA doirep-diM 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535

84%5)3( nO nruteR 50 56 62 69 76 82 87 91 94 97


433fO & nO nruteR latoT 350 377 410 447 486 527 568 610 639 664 Total Return On & Of as Percent of Revenue 33% 33% 32% 31% 31% 30% 31% 31% 32% 32% 33%

Remaining Economic Life (Years) FV Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 71 35.7 35.7

2 71.4 35.7 35.7

3 107.1 35.7 35.7 35.7

4 142.9 35.7 35.7 35.7 35.7

5 178.6 35.7 35.7 35.7 35.7 35.7

6 214.3 35.7 35.7 35.7 35.7 35.7 35.7

7 250.0 35.7 35.7 35.7 35.7 35.7 35.7 35.7

Total (rounded) 1,000 250 214 179 143 107 71 36

(1) The economic depreciation (return of) of the acquired or current fixed assets is based on the fair value of the fixed assets of $1,000 as follows:

(3) The 5% after-tax return on is discussed in Section 4 of the CAC Monograph. (2) Based on an 8 year economic life with the first year's return on occurring in the year of purchase.



Fixed Assets: Contributory Asset Charge Based on Technique B - Level Payment Exhibit B-7



-sraey-8 - - - - - - -


952 raeY 59 59 59 59 59 59 59 - - 663 raeY 66 66 66 66 66 66 66 -


423fO & nO nruteR latoT 346 373 408 445 483 523 565 610 641 667

%33%23%23%13%03%03%13%13%23%33%23euneveR fo %

(1) The level payment related to the acquired Fixed Assets is based on the fair value of the fixed assets of $1,000 with an equal distribution of original cost over the prior 8 years, similar to Exhibit B-6. This waterfall calculation reflects individual level payment calculations for each asset life group.

(2) Sample calculation of the level payment for the acquired fixed assets with a remaining useful life of 4 years is as follows:

In Technique B, the CAC reflects both the return of and on and is calculated as a series of level annual payments based on an assumed 5% after-tax rate of return on fixed assets (see CAC Monograph). In this exhibit, the CAC is calculated as a "loan payment" at the after-tax rate of return, or interest rate (with the loan payment conceptually including both principle and interest). The calculation incorporates the fair value of the fixed assets and the remaining useful life for each asset group (waterfall payment) and assumes an 8-year remaining useful life for capital expenditures in each year, consistent with the Adjusted Entity Value projections and the fair value of the fixed assets.

The Working Group recognizes that under circumstances where the fixed asset CAC as a percent of revenue would remain relatively stable (as is the case below) discrete annual calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the fixed asset CAC as a percent of revenue is projected to change (e.g., increasing asset utilization) then the discrete annual analysis would be considered a best practice. The significance of this assumption wouldbe based on the judgment of the valuation specialist.

CAC = -PMT(After-Tax Rate of Return,RUL,Fair Value,Future Value,Type = beginning of period) x (1+Discount Rate)^.5 = -PMT(5%,4,143,0,1) x (1 + 10%)^.5 = 40

CAC = -PMT(After-Tax Rate of Return,RUL,Fair Value,Future Value,Type = beginning of period) = -PMT(5%,8,286,0,1) = 42





Assembled Workforce: Growth Investment and Contributory Asset Charge Exhibit B-8(Exhibit A-8)


000,1euneveR $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ %3%4%5%6%8%01%11%21%11%5%5htworG

002ecnalaB gninnigeB 211 222 246 276 308 338 364 386 404 419 add: Pre-Tax Investment in AWF Growth (1) 11 11 24 30 32 30 26 22 18 15 13

112ecnalaB gnidnE 222 246 276 308 338 364 386 404 419 432

602ecnalaB egarevA 217 234 261 292 323 351 375 395 412 426

5359.0rotcaF tnemtsujdA doirep-diM 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535

02%01)2( nO nruteR 21 22 25 28 31 33 36 38 39 41


The Working Group recognizes that under circumstances where the relationship between AWF and revenue (e.g., the revenue per employee) remains relatively stable, discrete annual calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the relationship is projected to significantly change (e.g., increasing revenue per employee), the discrete annual analysis would be considered a best practice. The need for discrete AWF calculations (and the resulting AWF CAC) would be based on the judgment of the valuation specialist.

(1) Growth investment correlates to the annual increase in revenue. For example in Year 2 revenue increases by 5% and the AWF grows by $11 (5% x $211).

(2) The required rate of return on separately identified intangible assets such as the AWF may be estimated through the relative risk of the intangible asset compared to the entity’s overall WACC.

This exhibit calculates the growth investment in AWF and the return on the AWF (the CAC). The fair value of the acquired or current AWF of $200 is estimated based on the pre-tax replacement cost.

Future operating expenses include the cost to both grow and maintain the AWF. The initial investment to increase the AWF should be excluded to avoid double counting the initial investment and the future maintenance expenses. In other words, the return on the AWF would increase due to its growth and future operating expenses provide for maintaining the increase in the AWF (see CAC Monograph). The Working Group recognizes that this adjustment is generally minor and may be excluded in practice. However, such an adjustment provides for a complete reconciliation of value in the context of this financial overlay.

Revenue Analysis Exhibit B-9(Exhibit A-9)


000,1ytitnE deriuqcA - emaN edarT $ 1,050$ 583$ -$ -$ -$ -$ -$ -$ -$ -$ Trade Name - Acquiring Entity - - 583 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035 Total Revenue 1,000 1,050 1,165 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

000,1PI tnerruC 900 700 400 200 50 - - - - - Future IP - 150 465 906 1,256 1,546 1,718 1,823 1,907 1,976 2,035 Total Revenue 1,000 1,050 1,165 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

009spihsnoitaleR sremotsuC 855 770 616 431 259 130 65 33 - - %0%0%05%05%05%06%07%08%09%59)raey roirp fo %( noitirttA

Future & Other Customers 100 195 395 690 1,025 1,337 1,588 1,758 1,874 1,976 2,035 Total Revenue 1,000 1,050 1,165 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

This exhibit provides the revenue attrition assumptions for the Trade Name, IP, and Customer Relationships for use in their respective valuations. The revenue projections for the Trade Name of the acquiring entity, Future IP, and Future and Other Customers are provided for use in the financial overlay and reconciliation to the Adjusted Entity Value. The derivation of these assumptions is outside of the scope of this Toolkit.



Trade Name Analysis Exhibit B-10


000,1)1( euneveR $ 1,050$ 583$ - - - - - - - -

05%5)2( dediovA ytlayoR 53 29 - - - - - - - - less: Trade Name Advertising 0.5% 5 5 3 - - - - - - - -

54TIBE 48 26 - - - - - - - - 81%04@ sexaT 19 10 - - - - - - - -

72emocnI teN eerF-tbeD 29 16 - - - - - - - - Residual Value -


62dediovA ytlayoR VP 25 12 - - - - - - - - 36emocnI emaN edarT VP latoT

Tax Amortization Benefit (4) 17

08emaN edarT - eulaV riaF

The trade name may also provide defensive value. While the determination of defensive value is outside of the scope of this Toolkit, the same principles related to CACs would apply.

(1) Exhibit B-9.

(2) The pre-tax royalty avoided is based on royalty rates that market participants would have to pay to license comparable intangible assets. The royalty rate is assumed to be gross (e.g., inclusive of advertising expenses).

(3) A rate of return of 10% was assumed commensurate with the relative risk of investment in this asset (see Section 4 of CAC Monograph).

(4) Based on a 15 year straight-line amortization period, 40% tax rate and a 10% discount rate using a mid-period convention.

This exhibit provides the assumed valuation of the Trade Names based on the relief from royalty method. This example assumes that the royalty of 5% is stated at a gross amount and is reduced for the requisite advertising of 0.5%. The present value of this asset is provided for use in the financial overlay reconciliation. The tax amortization benefit would not be included at this stage because the Adjusted Entity Value to which the reconciliation takes place, has not been revised to include this tax benefit. The tax amortization benefit is added after the reconciliation and the application of the appropriate discount rate to arrive at fair value.

Intellectual Property Analysis Exhibit B-11


000,1)1( euneveR $ 900$ 700$ 400$ 200$ 50$ - - - - - 001%01)2( dediovA ytlayoR 90 70 40 20 5 - - - - -

less: Maintenance R&D 0.5% 5 5 4 2 1 - - - - - - 59TIBE 85 66 38 19 5 - - - - - 83%04@ sexaT 34 26 15 8 2 - - - - - 75emocnI teN eerF-tbeD 51 40 23 11 3 - - - - -

Residual Value - Present Value Factor (3) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

45dediovA ytlayoR VP 44 31 16 7 2 - - - - - 451emocnI PI tnerruC VP latoT

Tax Amortization Benefit (4) 42 691PI - eulaV riaF

This exhibit provides the assumed valuation of the IP based on the relief from royalty method. This example assumes that the royalty of 10% is stated at a gross amount and is reduced for the requisite maintenance R&D of 0.5%. The present value of this asset is provided for use in the financial overlay reconciliation. The tax amortization benefit would not be included at this stage because the Adjusted Entity Value to which the reconciliation takes place, has not been revised to in clude this tax benefit. The tax amortization benefitis added after the reconciliation and the application of the appropriate discount rate to arrive at fair value.

The IP may also provide defensive value. While the determination of defensive value is outside of the scope of this Toolkit, the same principles related to CACs would apply.

(1) Exhibit B-9. (2) The pre-tax royalty avoided is based upon royalty rates that market participants would have to pay to license comparable intangible assets. The royalty rate is assumed to be gross (e.g., inclusive of R&D expenses). (3) A rate of return of 10% was assumed commensurate with the relative risk of investment in this asset (see Section 4 of CAC Monograph). (4) Based on a 15 year straight-line amortization period, 40% tax rate and a 10% discount rate using a mid-period convention.



21-B tibihxEecnalaB launnA egarevA - A euqinhceT no desaB egrahC tessA yrotubirtnoC tessA dexiF :MEEPM spihsnoitaleR remotsuC


000,1euneveR latoT $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$

Customer Relationship Revenue (1) 900 855 770 616 431 259 130 65 33 - - Gross Profit 90% 810 770 693 554 388 233 117 59 30 - - Operating Expenses: Maintenance R&D (2) 0.0% - - - - - - - - - - -

%0.0)2( PI erutuF - D&R - - - - - - - - - - - Trade name advertising (3) 0.0% - - - - - - - - - - - Current customer marketing (4) 3% 27 26 23 18 13 8 4 2 1 - - Future customer marketing (5) - - - - - - - - - - -


09sesnepxE gnitarepO latoT 86 77 61 43 26 13 7 3 - - 027ADTIBE 684 616 493 345 207 104 52 27 - - 661)6( noitaicerpeD 303 256 194 131 81 42 20 9 - -

Amortization - AWF (8) 18 16 13 9 6 3 2 1 - - - 635TIBE 365 347 290 208 123 60 31 18 - -

less: Trade Name Royalty (7) 5% 45 43 39 31 22 13 7 3 2 - - %01)7( ytlayoR PI 90 86 77 62 43 26 13 7 3 - -


142emocnI teN eerF tbeD 142 139 118 86 50 24 13 8 - - 661)6( noitaicerpeD :dda 303 256 194 131 81 42 20 9 - - 81)8( FWA - noitazitromA 16 13 9 6 3 2 1 - - 01)9( tnemtsevnI htworG FWA 9 16 14 9 5 2 1 - - -

less: Return On Working Capital (10) 8 7 6 5 4 2 1 1 - - -

This exhibit uses the Average Annual Balance technique (Technique A) for the calculation of fixed asset CACs in the valuation of customer relationships using an MPEEM.

Aggregate CACs were estimated in the prior exhibits. An analysis of the subject intangible asset should be performed to assess the required levels of contributory assets. The aggregate CACs on those assets are then allocated appropriately to the subject intangible asset. For the purposes of this example all contributory assets have been assumed to benefit all customers equally and the CACs are allocated in proportion to revenue. The allocation of CACs is based on facts and circumstances. For example, in other circumstances a disproportionate amount of the fixed assets may be used to manufacture the products sold to the separately identified customer relationships ($900 in revenue in Year 1) versus the unidentified customers ($100 in Year 1). In a similar manner, the IP may be disproportionately allocable to the separately identified customer relationships rather than the unidentified customers.

In addition to the CACs related to working capital, fixed assets and AWF, profit splits in the form of royalty rates were also applied for the use of the trade name and IP. This example assumes that certain expense items (e.g., advertising and R&D) are included in the royalty rate and have been eliminated from the excess earnings to avoid double counting the expense.

less: Return On Working Capital (10) 8 7 6 5 4 2 1 1 752)11( stessA dexiF fO nruteR 244 212 164 112 67 34 17 9 - - 34)11( stessA dexiF nO nruteR 41 37 29 20 12 6 3 2 - -

Return On AWF (9) 18 17 15 12 8 5 2 1 1 - - 901sgninraE ssecxE 161 154 125 88 53 27 13 5 - -

Residual Value -

5359.0%01)21( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044


665sgninraE ssecxE VP latoT Tax Amortization Benefit (13) 153 Fair Value - Customer Relationships 719

(10) Exhibit B-5 amounts allocated in proportion to revenue.(11) Exhibit B-6 amounts allocated in proportion to revenue.(12) A rate of return of 10% was assumed commensurate with the relative risk of investment in this asset (see Section 4 of CAC Monograph). A mid-period convention was used.

(13) Based on a 15 year straight-line amortization period, 40% tax rate and a 10% discount rate utilizing a mid-period convention.

(4) Maintenance marketing expenses specific to current separately identified customer relationships. (5) Marketing expenses related to creating and maintaining unidentified and future customer relationships are excluded. (6) Exhibit B-3 amounts allocated in proportion to revenue. (7) Royalty rates assumed to be gross (e.g., inclusive of advertising and R&D expenses). The same rates would be incorporated in the valuation of the trade name and IP. Note that the royalty charge is applicable to both current and future contributory assets. (8) Exhibit B-4 amounts allocated in proportion to revenue. (9) Exhibit B-8 amounts allocated in proportion to revenue.

(1) Exhibit B-9. (2) Maintenance and future R&D is assumed to be included in the 10% IP royalty rate (licensor responsible for all R&D in the future) and is therefore removed in the excess earnings. The R&D expenses would be reflected as a reduction to the royalty in the valuation of the IP. Alternately, it may be determined that the royalty rate is stated net of the R&D expenses in which case the R&D expenses would remain in the excess earnings.

(3) Advertising expenses removed under the same assumptions provided in footnote 2.



31-B tibihxEtnemyaP leveL - B euqinhceT no desaB egrahC tessA yrotubirtnoC tessA dexiF :MEEPM spihsnoitaleR remotsuC


000,1euneveR latoT $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$

009euneveR pihsnoitaleR remotsuC 855 770 616 431 259 130 65 33 - - Gross Profit 90% 810 770 693 554 388 233 117 59 30 - - Operating Expenses:

%0.0D&R ecnanetniaM - - - - - - - - - - - %0.0PI erutuF - D&R - - - - - - - - - - -

Trade name advertising 0.0% - - - - - - - - - - - Current customer marketing 3% 27 26 23 18 13 8 4 2 1 - - Future customer marketing - - - - - - - - - - -


09sesnepxE gnitarepO latoT 86 77 61 43 26 13 7 3 - - 027ADTIBE 684 616 493 345 207 104 52 27 - - 661noitaicerpeD 303 256 194 131 81 42 20 9 - -

Amortization - AWF 18 16 13 9 6 3 2 1 - - - 635TIBE 365 347 290 208 123 60 31 18 - -

less: Trade Name Royalty 5% 45 43 39 31 22 13 7 3 2 - - %01ytlayoR PI 90 86 77 62 43 26 13 7 3 - -


142emocnI teN eerF tbeD 142 139 118 86 50 24 13 8 - - 661noitaicerpeD :dda 303 256 194 131 81 42 20 9 - - 81FWA - noitazitromA 16 13 9 6 3 2 1 - - 01tnemtsevnI htworG FWA 9 16 14 9 5 2 1 - - - 8latipaC gnikroW nO nruteR :ssel 7 6 5 4 2 1 1 - - -

Return On & Of Fixed Assets (1) 292 281 247 192 132 78 40 20 11 - - Return On AWF 18 17 15 12 8 5 2 1 1 - -


5359.0%01rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044


085sgninraE ssecxE VP latoT Tax Amortization Benefit 157

This exhibit uses the Level Payment technique (Technique B) for the calculation of fixed asset CACs in the valuation of customer relationships using an MPEEM. All other CACs and adjustments discussed in Exhibit B-12 remain the same.

Tax Amortization Benefit 157 Fair Value - Customer Relationships 737

(1) Exhibit B-7 amounts allocated in proportion to revenue.



ibihxEecnalaB launnA egarevA - A euqinhceT no desaB egrahC tessA yrotubirtnoC tessA dexiF :)MEEPM( sgninraE ssecxE deifitnedinU t B-14


000,1euneveR latoT $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$

001)1( euneveR 195 395 690 1,025 1,337 1,588 1,758 1,874 1,976 2,035 09tiforP ssorG 175 356 621 922 1,203 1,429 1,582 1,686 1,778 1,832

Operating Expenses: Maintenance R&D (2) - - 2 5 6 8 9 9 10 10 10 R&D - Future IP (2) 25 26 29 33 36 40 43 46 48 49 51

-)3( gnisitrevda eman edarT - 3 7 7 8 9 9 10 10 10 Current customer marketing (4) - - - - - - - - - - -


81gnitekram latoT 22 32 47 60 72 82 89 94 99 102 7)6( A&G latoT 14 28 48 72 94 111 123 131 138 142

05sesnepxE gnitarepO latoT 62 91 133 174 214 245 267 283 296 305 04ADTIBE 113 265 488 748 989 1,184 1,315 1,403 1,482 1,527 81)6( noitaicerpeD 69 131 218 310 419 515 538 531 562 581


02TIBE 40 127 259 424 553 651 758 852 900 946 5)7( ytlayoR emaN edarT :ssel 10 (10) (31) (22) (13) (7) (3) (2) - -

IP Royalty (7) 10 4 (7) (22) (23) (21) (13) (7) (3) - -


3emocnI teN eerF tbeD 16 86 187 281 352 403 461 514 540 568 81noitaicerpeD :dda 69 131 218 310 419 515 538 531 562 581 2FWA - noitazitromA 4 7 11 14 17 18 19 20 20 1)8( tnemtsevnI htworG FWA 2 8 16 23 25 24 21 18 15 13 0)9( latipaC gnikroW nO nruteR :ssel 2 4 6 8 11 13 14 16 17 17 92)01( stessA dexiF fO nruteR 56 109 184 266 343 411 464 510 545 567 5)01( stessA dexiF nO nruteR 9 19 33 49 64 76 84 89 94 97

Return On AWF (8) 2 4 7 13 20 26 31 35 37 39 41


5049.0%50.31)11( rotcaF VP 0.8319 0.7359 0.6510 0.5758 0.5093 0.4505 0.3985 0.3525 0.3118 0.3118


Total PV Excess Earnings 2,578

This exhibit applies the Average Annual Balance technique (Technique A) to separate the unidentified excess earnings (consisting of the acquiring entity trade name; future IP; and future and other customers) for reconciliation purposes in the context of a financial overlay.

Total PV Excess Earnings 2,578 Tax Amortization Benefit (12) 567

541,3BAT gnidulcnI latoT

(12) Based on a 15 year straight-line amortization period, 40% tax rate and a 13.05% discount rate utilizing a mid-period convention.


(11) Implied rate of return that reconciles the total asset values to the Adjusted Entity Value (Exhibit B-17, column headers A & B), based on a mid-period convention.

(1) Exhibit B-9.

(2) Maintenance and future R&D.

(3) Advertising related to the acquiring entity trade name.

(4) Maintenance marketing expenses specific to and absorbed by the current separately identified customer relationships.


(7) The royalty applied to the customer relationships revenue reflects the use of both current and future trade name and IP assets (see CAC Monograph). Therefore the royalty reflected in the unidentified excess earnings becomes negative (or is added back) to recognize the royalties that were deducted from the customer relationship excess earnings calculation. Royalty rates assumed to be gross (e.g., inclusive of advertising and R&D expenses). The trade name royalty is calculated by deducting the royalty per Exhibit BA-12 (or B-13) from that on Exhibit B-10. The IP royalty is calculated by deducting the royalty per Exhibit B-12 (or B-13) from that on Exhibit B-11.






51-B tibihxEtnemyaP leveL - B euqinhceT no desaB egrahC tessA yrotubirtnoC tessA dexiF :)MEEPM( sgninraE ssecxE deifitnedinU


000,1euneveR latoT $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$

Future & Other Customer Revenue 100 195 395 690 1,025 1,337 1,588 1,758 1,874 1,976 2,035 09tiforP ssorG 175 356 621 922 1,203 1,429 1,582 1,686 1,778 1,832

Operating Expenses: Maintenance R&D - - 2 5 6 8 9 9 10 10 10 R&D - Future IP 25 26 29 33 36 40 43 46 48 49 51

-gnisitrevda eman edarT - 3 7 7 8 9 9 10 10 10 Current customer marketing - - - - - - - - - - - Future customer marketing 18 22 29 40 53 64 73 80 84 89 92

81gnitekram latoT 22 32 47 60 72 82 89 94 99 102 Total G&A 7 14 28 48 72 94 111 123 131 138 142

05sesnepxE gnitarepO latoT 62 91 133 174 214 245 267 283 296 305 04ADTIBE 113 265 488 748 989 1,184 1,315 1,403 1,482 1,527 81noitaicerpeD 69 131 218 310 419 515 538 531 562 581

Amortization - AWF 2 4 7 11 14 17 18 19 20 20 - 02TIBE 40 127 259 424 553 651 758 852 900 946 5ytlayoR emaN edarT :ssel 10 (10) (31) (22) (13) (7) (3) (2) - -

IP Royalty 10 4 (7) (22) (23) (21) (13) (7) (3) - - 5TIBE detsujdA 26 144 312 469 587 671 768 857 900 946

Taxes 40% 2 10 58 125 188 235 268 307 343 360 378 3emocnI teN eerF tbeD 16 86 187 281 352 403 461 514 540 568 81noitaicerpeD :dda 69 131 218 310 419 515 538 531 562 581 2FWA - noitazitromA 4 7 11 14 17 18 19 20 20 1tnemtsevnI htworG FWA 2 8 16 23 25 24 21 18 15 13 0latipaC gnikroW nO nruteR :ssel 2 4 6 8 11 13 14 16 17 17

Return On & Of Fixed Assets (1) 32 65 126 216 313 405 483 545 599 641 667 Return On AWF 2 4 7 13 20 26 31 35 37 39 41


5049.0%50.31rotcaF VP 0.8319 0.7359 0.6510 0.5758 0.5093 0.4505 0.3985 0.3525 0.3118 0.3118


775,2sgninraE ssecxE VP latoT Tax Amortization Benefit 567

This exhibit applies the Level Payment technique (Technique B) to separate the unidentified excess earnings (consisting of the acquiring entity trade name; future IP; and future and other customers) for reconciliation purposes in the context of a financial overlay. All other CACs and adjustments discussed in Exhibit B-14 remain the same.

Tax Amortization Benefit 567 441,3BAT gnidulcnI latoT




Income Reconciliation Exhibit B-16(Exhibit A-16)


Trade Name Royalty - Acquired Co. (1) 50$ 53$ 29$ -$ -$ -$ -$ -$ -$ -$ -$ Current IP Royalty (2) 100 90 70 40 20 5 - - - - -

Total Royalty 150 143 99 40 20 5 - - - - -

Expense Adjustments Trade Name Advertising - Acquired Co. (1) 5 5 3 - - - - - - - - Maintenance R&D - Current IP (2) 5 5 4 2 1 - - - - - -

01stnemtsujdA esnepxE latoT 10 7 2 1 - - - - - -

Total Pre-tax income adjustments 140 133 92 38 19 5 - - - - - Taxes 40% 56 53 37 15 8 2 - - - - -

48stnemtsujda emocni xat-retfA latoT 80 55 23 11 3 - - - - -

Customer Relationships DFNI (3) 241 142 139 118 86 50 24 13 8 - - Unidentified DFNI (4) 3 16 86 187 281 352 403 461 514 540 568

823noitailicnoceR INFD latoT 238 280 328 378 405 427 474 522 540 568

DFNI from Adjusted Entity Value (5) 328 237 280 328 379 406 427 473 522 540 568

-ecnereffiD (1) - - 1 1 - (1) - - -

Provides an income reconciliation for the income based intangible assets to reconcile the debt free net income inherent in the respective assets to the Adjusted Entity Value debt free net income. This is a complimentary analysis to the value reconciliation. This also provides support for the income allocation in the context of a financial overlay.

(1) Exhibit B-10. (2) Exhibit B-11. (3) Exhibits B-12 and B-13. (4) Exhibits B-14 and B-15. (5) Exhibit B-4.



Financial Overlay Summary Exhibit B-17

• •• • •

Rate of TAB %Return A B (6) FV A FV B

582%3latipaC gnikroW $ 285$ n/a 285$ 285$ Fixed Assets 5% 1,000 1,000 n/a 1,000 1,000 Trade Name - Acquired Co. (1) 10% 63 63 27% 80 80 IP (Current) (2) 10% 154 154 27% 196 196 Customer Relationships (3) 10% 566 580 27% 719 737

860,2stessA deifitnedI yletarapeS latoT 2,082 082,2 2,298

AWF 10% 200 200 n/a 200 200 Excess Purchase Price/Goodwill (4) 13.05% 2,578 2,577 22% 3,145 3,144

877,2latoT 2,777 543,3 3,344

648,4stessA teN latoT 4,859 526,5 5,642

A summary of the two techniques applied to the fixed assets are provided in columns A (Average Annual Balance) and B (Level Payment). These columns A&B provide the reconciliation to the Adjusted Entity Value excluding the tax depreciation/amortization benefit for all assets except the fixed assets and AWF (as these cash flow benefits are included in the Adjusted Entity Value). Columns FV A & FV B are inclusive of the TAB for all assets as indicated. This calculation is provided as it serves as the basis for the WARA calculation in Exhibit B-18.

This assessment of relative values should give specific consideration to the tax benefit of depreciation or amortization that has been incorporated into the respective asset values and not for those assets to which the value of this tax benefit has not yet been added (such as those assets valued by the relief from royalty method, representing a profit split in the MPEEM rather than a CAC). This assessment is performed in the context of the Adjusted Entity Value, therefore the value reconciliation and calculation of the implied rate of return on the excess purchase price should be performed with assumptions consistent with those in the Adjusted Entity Value. For example, the Entity Value was adjusted for the tax benefit of depreciating the fair value of the fixed assets and amortizing the AWF, therefore the reconciliation should consider the fair value of these assets. The tax amortization benefit related to the other separately identified intangible assets (acquired entity trade name, IP, and customer relationships) should be applied after the reconciliation is performed as this benefit has not been included in the PFI.

An alternative approach would be to include the tax amortization benefit of all the intangible assets to arrive at the Adjusted Entity Value and the assets in the reconciliation. However, such an approach creates additional complexities and should result in the same outcome as demonstrated in this example.

The comprehensive nature of this diagnostic financial overlay provides assurance that the entity's PFI has been fully apportioned among the assets (Section A) and detailed insight into the implied rate of return for the excess purchase price (goodwill). With such a framework, the relative value of all assets (both separately identified assets and the excess purchase price/goodwill) should be assessed for reasonableness and assumptions modified as appropriate. Such an assessment could include a reassessment or consideration of issues such as the following:

Relative rates of return and discount rates, both derived and implied;Magnitude of the residual value (excess purchase price or goodwill);Royalty rates and other revenue or profit split assumptions;Allocation of the respective CACs to the current and future assets; andOther assumptions based on the facts and circumstances specific to the analysis.

Adjusted Entity Value (5) 10%

(6) Based on a 15 year straight-line amortization period, 40% tax rate and the respective 10% discount rates for the assets using a mid-period convention.

4,855

(1) Exhibit B-10. (2) Exhibit B-11. (3) Technique A: Exhibit B-12; Technique B: Exhibit B-13. (4) Technique A: Exhibit B-14; Technique B: Exhibit B-15. 13.05% is the implied rate of return calculated based on the specific identification of the cash flows. This calculation is similar to that included in the WARA analysis. However, this analysis results in an implied rate of return that is slightly greater than that calculated in the WARA (12.2%, Exhibit B-18).

(5) Exhibit B-4.



Weighted Average Return on Assets (WARA) Exhibit B-18

Fair Rate of Weighted Fair Rate of WeightedValue Return Return Value Return Return

582)1( latipaC gnikroW $ 3% 8.6$ 285$ 3% 8.6$ Fixed Assets (2) 1,000 5% 50.0 1,000 5% 50.0 Trade Name (3) 80 10% 8.0 08 10% 8.0 IP (4) 196 10% 19.6 691 10% 19.6 Customer Relationships (5) 719 10% 71.9 737 10% 73.7 AWF (6) 200 10% 20.0 002 10% 20.0 Excess Purchase Price/Goodwill (7) 3,145 12.2% 383.7 3,144 12.2% 383.6

Total (8) 5,625 10.0% 561.7 246,5 10.0% 563.4

(7) Other than AWF. Actual recorded goodwill will differ from the excess purchase price/goodwill shown here due to other purchase accounting adjustments. (8) Includes the TAB assuming an asset transaction (Exhibit B-17).

(4) Exhibit B-11.

(1) Exhibit B-5. (2) Exhibit B-6. (3) Exhibit B-10.

Average Annual Balance (FV A) Level Payment (FV B)

The WARA analysis is applied to the fair value of the assets and the implied rate of return on goodwill (excess purchase price) is calculated. The purpose of the WARA is the assessment of the reasonableness of the asset-specific returns for separately identified intangible assets and the implied (or calculated) return on the goodwill (excess purchase price). The WARA then should be compared to the derived market-based WACC (see CAC Monograph).

Note: the implied rate of return on the goodwill (excess purchase price) in this WARA calculation is 12.2% compared to the explicit calculation of 13.05% in Exhibit A-17. This differential is due to the embedded rounding nature of the WARA calculation and the impact of the timing of the cash flows.

(5) Exhibits B-12 and B-13. The Working Group believes that both of these values are within an acceptable range of results as the difference is the result of timing differences inherent in the CAC calculations. (6) Exhibit B-8.



SECTION C: INDIVIDUAL ASSET

RECONCILIATIONS

This section of the Toolkit provides an analysis of the respective assets individually to demonstrate the

application of the CAC methodology to the various contributory assets. These calculations are the same as those

performed in Section A and provide a reconciliation to the Adjusted Entity Value for each of the contributory

assets. Stratified rates of return also have been applied to the working capital and fixed asset examples to

demonstrate their individual calculations. The purpose of these individual examples is to provide the user with

examples of the respective calculations on a stand-alone basis to isolate the specific calculations.

Each of these examples applies the CAC calculations in the context of the Adjusted Entity Value and does not

provide for the next step of apportioning the excess income among other assets. The intent of the reconciliation

process is to demonstrate that the aggregate MPEEM adjusted for each of the respective contributory assets

results in the following relationship:

Aggregate present value of the Multi-Period Excess Earnings after consideration of a given

contributory asset in isolation (as if it were the only contributory asset)

+ fair value of the assumed sole contributory asset = Adjusted Entity Value



Working Capital CAC and Reconciliation Exhibit C-1


Revenue (1) 1,000$ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ 823)1( emocnI teN eerF tbeD 237 280 328 379 406 427 473 522 540 568

less: Incremental Working Capital (2) - - - - - - - - - - - add: 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581

02)1( FWA - noitazitromA 20 20 20 20 20 20 20 20 20 - less: 682)1( serutidnepxE latipaC 400 450 500 525 541 557 574 591 609 627 Return On Working Capital (3) 28 29 32 35 40 44 47 51 53 56 57

812)4( sgninraE ssecxE 200 205 225 275 341 400 426 438 457 465 Residual Value (5) 6,636

5359.0%01)3( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

802sgninraE ssecxE VP 173 162 161 179 202 215 209 195 185 2,683

275,4sgninraE ssecxE VP latoT 582)6( latipaC gnikroW

Total 4,857

Adjusted Entity Value (1) 4,855

This analysis isolates the working capital CAC in the financial overlay provided in Section A. As in Section A, this analysis is performed in aggregate and applied in the context of an aggregate MPEEM (e.g., Adjusted Entity Value projections and the working capital CAC only). The annual average balance of the working capital, consistent with the Adjusted Entity Value projections, is calculated and the IRR/WACC 10% rate of return is applied to arrive at the annual CAC.

The outcome of this analysis demonstrates that when the CACs are applied to working capital in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.

(1) From Adjusted Entity Value Exhibit A-4. (2) Incremental working capital is removed as it is captured in the average annual balance of the working capital. Therefore, the return on working capital also captures future increases in working capital. (3) Based on a 10% rate of return on the average annual working capital balance and a 10% discount rate applied to the excess earnings (Exhibit A-5). The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process. (4) As stated, this is a limited-use excess earnings calculation to demonstrate the CAC calculations for working capital. All other adjustments have been excluded to isolate the calculation of the working capital CAC within the financial overlay process provided in Section A. (5) Based on constant growth model assuming a 3% long-term growth rate. (6) Beginning working capital balance (Exhibit A-5).

Working Capital CAC and Reconciliation (Stratified Rates) Exhibit C-1a



less: Incremental Working Capital (2) - - - - - - - - - - - add: 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581

02)1( FWA - noitazitromA 20 20 20 20 20 20 20 20 20 - less: 682)1( serutidnepxE latipaC 400 450 500 525 541 557 574 591 609 627 Return On Working Capital (3) 8 9 10 11 12 13 14 15 16 17 17


0159.0%6.01)6( rotcaF VP 0.8600 0.7777 0.7033 0.6360 0.5751 0.5201 0.4703 0.4253 0.3846 0.3846


075,4sgninraE ssecxE VP latoT 582)7( latipaC gnikroW

Total 4,855


This analysis modifies that in Exhibit C-1 to reflect the application of stratified rates. The outcome of this analysis demonstrates that when the CACs are applied to working capital in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.

(1) From Adjusted Entity Value Exhibit B-4. (2) Incremental working capital is removed as it is captured in the average annual balance of the working capital. Therefore, the return on working capital also captures future increases in working capital. (3) Based on a 3% after-tax rate of return on the average annual working capital balance (Exhibit B-5).

(4) As stated, this is a limited-use excess earnings calculation to demonstrate the CAC calculations for working capital. All other adjustments have been excluded to isolate the calculation of the working capital CAC within the financial overlay process provided in Section B.

(5) Based on constant growth model assuming a 3% long-term growth rate. (6) Implied rate of return required to reconcile to the Adjusted Entity Value, based on a mid-period convention. (7) Beginning working capital balance (Exhibit B-5).



Fixed Asset CAC Based on Technique A - Average Annual Balance and Reconciliation Exhibit C-2



less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18 add: 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581 02)1( FWA - noitazitromA 20 20 20 20 20 20 20 20 20 - less: Capital Expenditures (2) - - - - - - - - - - - Return Of Fixed Assets (3) 286 300 321 348 378 410 445 481 519 545 567 Return On Fixed Assets (3) 95 100 111 124 139 152 164 173 181 188 194


5359.0%01)6( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044


358,3sgninraE ssecxE VP latoT Fair Value of Fixed Assets (3) 1,000Total 4,853


(1) From Adjusted Entity Value Exhibit A-4. (2) Capital expenditures are removed as they are captured in the average annual balance of the fixed assets. Therefore, the return on and of fixed assets also captures future increases in fixed assets.

This analysis isolates the Average Annual Balance fixed asset CAC in the financial overlay provided in Section A. As in Section A, this analysis is performed in aggregate and applied in the context of an aggregate MPEEM (e.g., Adjusted Entity Value projections and the fixed asset CAC based on the Average Annual Balance technique only). The annual average balance of the fixed assets, consistent with the Adjusted Entity Value projections, is calculated and the IRR/WACC 10% rate of return is applied to arrive at the annual CAC.

The outcome of this analysis demonstrates that when the CACs are applied to the Average Annual Balance fixed assets in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.

(5) Based on constant growth model assuming a 3% long-term growth rate. (6) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.

(3) Exhibit A-6. (4) As stated, this is a limited-use excess earnings calculation to demonstrate the CAC calculations for fixed assets. All other adjustments have been excluded to isolate the calculation of the fixed asset CAC within the financial overlay process provided in Section A.

a2-C tibihxE)setaR deifitartS( noitailicnoceR dna ecnalaB launnA egarevA - A euqinhceT no desaB CAC tessA dexiF



less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18 add: 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581 02)1( FWA - noitazitromA 20 20 20 20 20 20 20 20 20 - less: Capital Expenditures (2) - - - - - - - - - - - Return Of Fixed Assets (3) 286 300 321 348 378 410 445 481 519 545 567 Return On Fixed Assets (3) 48 50 56 62 69 76 82 87 91 94 97


1649.0%7.11)6( rotcaF VP 0.8468 0.7580 0.6785 0.6073 0.5436 0.4866 0.4355 0.3898 0.3489 0.3489




(3) Exhibit B-6. Return on is based on a 5% after-tax rate of return on the average annual fixed asset balance.

This analysis modifies that in Exhibit C-2 to reflect the application of stratified rates. The outcome of this analysis demonstrates that when the CACs are applied to the Average Annual Balance fixed assets in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.

(1) From Adjusted Entity Value Exhibit B-4. (2) Capital expenditures are removed as they are captured in the average annual balance of the fixed assets. Therefore, the return on and of fixed assets also captures future increases in fixed assets.

(5) Based on constant growth model assuming a 3% long-term growth rate.

(4) As stated, this is a limited-use excess earnings calculation to demonstrate the CAC calculations for fixed assets. All other adjustments have been excluded to isolate the calculation of the fixed asset CAC within the financial overlay process provided in Section B.

(6) Implied rate of return required to reconcile to the Adjusted Entity Value, based on a mid-period convention. (7) Beginning fixed asset balance (Exhibit B-6).



Fixed Asset CAC Based on Technique B - Level Payment and Reconciliation Exhibit C-3



less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18 add: 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581 02)1( FWA - noitazitromA 20 20 20 20 20 20 20 20 20 - less: Capital Expenditures (2) - - - - - - - - - - - Return On and Of Fixed Assets (3) 350 381 418 463 509 556 604 653 705 741 771


5359.0%01)6( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044




(3) Exhibit A-7.

The outcome of this analysis demonstrates that when the CACs are applied to the Level Payment fixed assets in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.

(7) Exhibit A-6.

(1) From Adjusted Entity Value Exhibit A-4. (2) Capital expenditures are removed as they are captured in the average annual balance of the fixed assets. Therefore, the return on and of fixed assets also captures future increases in fixed assets.

(5) Based on constant growth model assuming a 3% long-term growth rate. (6) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.


This analysis isolates the Level Payment fixed asset CAC in the financial overlay provided in Section A. As in Section A, this analysis is performed in aggregate and applied in the context of an aggregate MPEEM (e.g., Adjusted Entity Value projections and the fixed asset CAC based on the Level Payment techn ique only). The annual average balance of the fixed assets, consistent with the Adjusted Entity Value projections, is calculated and the IRR/WACC 10% rate of return is applied to arrive at the annual CAC.

a3-C tibihxE)setaR deifitartS( noitailicnoceR dna tnemyaP leveL - B euqinhceT no desaB CAC tessA dexiF



less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18 add: 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581 02)1( FWA - noitazitromA 20 20 20 20 20 20 20 20 20 - less: Capital Expenditures (2) - - - - - - - - - - - Return On and Of Fixed Assets (3) 324 346 373 408 445 483 523 565 610 641 667


0649.0%7.11)6( rotcaF VP 0.8465 0.7576 0.6779 0.6067 0.5429 0.4858 0.4347 0.3890 0.3481 0.3481





(7) Exhibit B-6.

(5) Based on constant growth model assuming a 3% long-term growth rate. (6) Implied rate of return required to reconcile to the Adjusted Entity Value, based on a mid-period convention.

(3) Exhibit B-7. Return on based on a 5% after-tax rate of return.

This analysis modifies that in Exhibit C-3 to reflect the application of stratified rates. The outcome of this analysis demonstrates that when the CACs are applied to the Level Payment fixed assets in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.

(1) From Adjusted Entity Value Exhibit B-4. (2) Capital expenditures are removed as they are captured in the average annual balance of the fixed assets. Therefore, the return on and of fixed assets also captures future increases in fixed assets.



Assembled Workforce CAC and Reconciliation Exhibit C-4


Revenue (1) 1,000$ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ 057)1( ADTIBE 787 874 979 1,092 1,196 1,288 1,367 1,430 1,482 1,527 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581


Taxes 40% 218 158 187 219 252 270 284 316 348 360 378

823emocnI teN eerF tbeD 237 280 328 379 406 427 473 522 540 568 less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18 add: 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581

Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20AWF Growth Investment (2) 11 11 24 30 32 30 26 22 18 15 13

682)1( serutidnepxE latipaC :ssel 400 450 500 525 541 557 574 591 609 627 Return On AWF (2) 20 21 22 25 28 31 33 36 38 39 41


5359.0%01)5( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044


156,4sgninraE ssecxE VP latoT Fair Value AWF (2) 200Total 4,851


(2) Exhibit A-8.

The outcome of this analysis demonstrates that when the CACs are applied to the assembled workforce in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.

(1) From Adjusted Entity Value Exhibit A-4.

(5) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process. (4) Based on constant growth model assuming a 3% long-term growth rate.

(3) As stated, this is a limited-use excess earnings calculation to demonstrate the CAC calculations for the AWF. All other adjustments have been excluded to isolate the calculation of the AWF CAC within the financial overlay process provided in Section A.

This analysis isolates the assembled workforce CAC in the financial overlay provided in Section A. As in Section A, the analysis is performed in aggregate and applied in the context of an aggregate MPEEM (e.g., Adjusted Entity Value projections and the assembled workforce CAC only). The annual average balance of the assembled workforce, consistent with the Adjusted Entity Value projections, is calculated and the IRR/WACC 10% rate of return is applied to arrive at the annual CAC.



Trade Name CAC and Reconciliation Exhibit C-5


Revenue (1) 1,000$ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ Gross Profit (1) 90% 900 945 1,049 1,175 1,310 1,436 1,546 1,641 1,716 1,778 1,832 Operating Expenses: Maintenance R&D (1) 0.5% 5 5 6 7 7 8 9 9 10 10 10 R&D - Future IP (1) 2.5% 25 26 29 33 36 40 43 46 48 49 51 Trade name advertising (2) 0.5% - - - - - - - - - - - Current customer marketing (1) 3% 27 26 23 18 13 8 4 2 1 - -


54gnitekram latoT 48 52 58 66 72 77 82 85 89 92 07%7)1( A&G latoT 74 82 91 102 112 120 128 133 138 142

541sesnepxE gnitarepO latoT 153 169 189 211 232 249 265 276 286 295 557ADTIBE 792 880 986 1,099 1,204 1,297 1,376 1,440 1,492 1,537 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581


155TIBE 400 473 554 638 684 720 798 880 910 956 less: Trade Name Royalty (3) 5% 50 53 58 65 73 80 86 91 95 99 102


103emocnI teN eerF tbeD 208 249 293 339 362 380 424 471 487 512 less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18 add: 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581 02)1( FWA - noitazitromA 20 20 20 20 20 20 20 20 20 - less: Capital Expenditures (1) 286 400 450 500 525 541 557 574 591 609 627

402)4( emocnI ssecxE 185 171 183 230 299 363 396 415 439 448 Residual Value (5) 6,406

5359.0%01)6( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044


092,4sgninraE ssecxE VP latoT PV Acquired Trade Name (7) 63 PV Acquiring Co. Trade Name (8) 502Total 4,855


(7) Exhibit A-10.

Acquiring Entity Trade Name Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

-)a( euneveR $ -$ 583$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ -%5dediovA ytlayoR - 29 65 73 80 86 91 95 99 102

less: Trade Name Advertising 0.5% - - 3 7 7 8 9 9 10 10 10

-TIBE - 26 58 66 72 77 82 85 89 92 -%04@ sexaT - 10 23 26 29 31 33 34 36 37

-emocnI teN eerF-tbeD - 16 35 40 43 46 49 51 53 55 Residual Value 789 Present Value Factor (6) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

-dediovA ytlayoR VP - 12 25 26 26 25 24 23 22 319 205emocnI emaN edarT VP latoT

(a) Exhibit A-9

(2) The advertising expense was applied to the trade name, therefore it is eliminated here to avoid double counting the expense. Advertising is assumed to be included in the 5% trade name royalty rate (licensor responsible for all advertising in the future) and is therefore removed from the excess earnings. The advertising expenses are reflected as a reduction to the royalty in the valuation of the trade name. Alternately, it may be determined that the royalty rate is stated net of the advertising expenses in which case the advertising expenses would remain in the excess earnings.



(8) The following is a calculation of the present value of the trade name of the acquiring entity (using relief from royalty method) to demonstrate the reconciliation to the Adjusted Entity Value. It is provided to be consistent with the application of the trade name royalty beyond the RUL of the acquired entity trade name. These cash flows are included in the unidentified excess earnings used in the financial overlay (Exhibits A-14 & A-15) and are a component of goodwill.

(3) The royalty is applied to total revenue to reflect the use of the trade names of both the acquired entity as well as the acquiring entity. The royalty rate is assumed to be gross (e.g., inclusive of advertising expenses).

(4) As stated, this is a limited-use excess earnings calculation to demonstrate the royalty calculations for the trade name. All other adjustments have been excluded to isolate the calculation of the trade name royalties within the financial overlay process provided in Section A. (5) Based on a constant growth model assuming a 3% long-term growth rate.

This analysis isolates the trade name royalty in the financial overlay provided in Section A. As in Section A, the analysis is performed in aggregate and applied in the context ofan aggregate MPEEM (e.g., Adjusted Entity Value projections and the trade name royalty only). The royalty rate and related adjus tments are applied to the Adjusted EntityValue projections and the IRR/WACC 10% rate of return is applied.

The outcome of this analysis demonstrates that when the royalty rate (profit split) related to the trade name is shown in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.



Intellectual Property CAC and Reconciliation Exhibit C-6


Revenue (1) 1,000$ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ Gross Profit (1) 90% 900 945 1,049 1,175 1,310 1,436 1,546 1,641 1,716 1,778 1,832 Operating Expenses: Maintenance R&D (2) 0.5% - - - - - - - - - - - R&D - Future IP (2) 2.5% - - - - - - - - - - - Trade name advertising (1) 0.5% 5 5 6 7 7 8 9 9 10 10 10 Current customer marketing (1) 3% 27 26 23 18 13 8 4 2 1 - -


05%5gnitekram latoT 53 58 65 73 80 86 91 95 99 102 07%7)1( A&G latoT 74 82 91 102 112 120 128 133 138 142

021sesnepxE gnitarepO latoT 127 140 156 175 192 206 219 228 237 244 087ADTIBE 818 909 1,019 1,135 1,244 1,340 1,422 1,488 1,541 1,588 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581 02)1( FWA - noitazitromA 20 20 20 20 20 20 20 20 20 - 675TIBE 426 502 587 674 724 763 844 928 959 1,007

less: IP Royalty (3) 10% 100 105 117 131 146 160 172 182 191 198 204674TIBE detsujdA 321 385 456 528 564 591 662 737 761 803

Taxes 40% 190 128 154 182 211 226 236 265 295 304 321

682emocnI teN eerF tbeD 193 231 274 317 338 355 397 442 457 482 less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18 add: 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581

02)1( FWA - noitazitromA 20 20 20 20 20 20 20 20 20 - less: Capital Expenditures (1) 286 400 450 500 525 541 557 574 591 609 627

981)4( emocnI ssecxE 170 153 164 208 275 338 369 386 409 418 Residual Value (5) 5,969

5359.0%01)6( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044


779,3sgninraE ssecxE VP latoT PV Current IP (7) 154 PV Future IP (8) 723Total 4,854


1 raeYPI erutuF Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

-)a( euneveR $ 150$ 465$ 906$ 1,256$ 1,546$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ -%01dediovA ytlayoR 15 47 91 126 155 172 182 191 198 204

less: Maintenance R&D 0.5% - 1 2 5 6 8 9 9 10 10 10 52)1( PI erutuF - D&R 26 29 33 36 40 43 46 48 49 51

)52(TIBE (12) 16 53 84 107 120 127 133 139 143 )01(%04@ sexaT (5) 6 21 34 43 48 51 53 56 57

)51(emocnI teN eerF-tbeD (7) 10 32 50 64 72 76 80 83 86 Residual Value 1,226 Present Value Factor (6) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

)41(dediovA ytlayoR VP (6) 8 23 33 38 39 37 35 34 496 327emocnI PI erutuF VP latoT

(7) Exhibit A-11. (8) The following is a calculation of the present value of the future IP to demonstrate the reconciliation to the Adjusted Entity Value. It is provided to be consistent with the application of the IP royalty beyond the RUL of the current IP. These cash flows are included in the unidentified excess earnings used in the financial overlay (Exhibits A-14 & A-15) and are a component of goodwill.

(a) Exhibit A-9

(5) Based on a constant growth model assuming a 3% long-term growth rate. (6) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.

(4) As stated, this is a limited-use excess earnings calculation to demonstrate the royalty calculations for the IP. All other adjustments have been excluded to isolate the calculation of the IP royalties within the financial overlay process provided in Section A.

The outcome of this analysis demonstrates that when the royalty rate (profit split) related to the IP is shown in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.

(1) From Adjusted Entity Value Exhibit A-4. (2) The R&D expense was applied to the IP, therefore it is eliminated here to avoid double counting the expense. Maintenance and future R&D is assumed to be included in the 10% IP royalty rate (licensor responsible for all R&D in the future) and is therefore removed in the excess earnings. The R&D expenses are reflected as a reduction to the royalty in the valuation of the IP. Alternately, it may be determined that the royalty rate is stated net of the R&D expenses in which case the R&D expenses would remain in the excess earnings.

(3) The royalty is applied to total revenue to reflect the use of the current and future IP. The royalty rate is assumed to be gross (e.g., inclusive of R&D expenses).

This analysis isolates the IP royalty in the financial overlay provided in Section A. As in Section A, the analysis is performed in aggregate and applied in the context of an aggregate MPEEM (e.g., Adjusted Entity Value projections and the IP royalty only). The royalty rate and related adjustments are applied to the Adjusted Entity Value projections and the IRR/WACC 10% rate of return is applied.



SECTION D: MISCELLANEOUS ISSUES

This section of the Toolkit provides a discussion and analysis of other types of contributory assets and

additional issues.



Non-Compete Agreements Exhibit D-1

•

• •


008euneveR $ 840$ 932$ 1,045$ 1,165$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ 027%09tiforP ssorG 756 839 940 1,048 1,436 1,546 1,641 1,716 1,778 1,832

Operating Expenses:5%5.0D&R ecnanetniaM 5 6 7 7 8 9 9 10 10 10 52%5.2PI erutuF - D&R 26 29 33 36 40 43 46 48 49 51

Trade name advertising 0.5% 5 5 6 7 7 8 9 9 10 10 10 13gnitekram remotsuc tnerruC 30 26 21 15 8 4 2 1 - -

Future customer marketing 18 22 29 40 53 64 73 80 84 89 92

45gnitekram latoT 57 61 68 75 80 86 91 95 99 102 07%7A&G latoT 74 82 91 102 112 120 128 133 138 142

451sesnepxE gnitarepO latoT 162 178 199 220 240 258 274 286 296 305 665ADTIBE 594 661 741 828 1,196 1,288 1,367 1,430 1,482 1,527 481noitaicerpeD 372 387 412 441 500 557 558 540 562 581

Amortization - AWF 20 20 20 20 20 20 20 20 20 20 -

263TIBE 202 254 309 367 676 711 789 870 900 946 Taxes 40% 145 81 101 124 147 270 284 316 348 360 378

712emocnI teN eerF tbeD 121 153 185 220 406 427 473 522 540 568 less: Incremental Working Capital 30% (45) 12 28 34 36 129 37 32 25 21 18 add: 481noitaicerpeD 372 387 412 441 500 557 558 540 562 581 02FWA - noitazitromA 20 20 20 20 20 20 20 20 20 less: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627


5359.0%01rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

271FCFD VP 88 64 60 78 152 221 218 207 199 2,911

Adjusted Entity Value

Revenue is 80% of the Adjusted Entity Value projection for years 1 - 5 (the contractual period of the non-compete);

Non-compete valuations vary widely based on the facts and circumstances of each case and the impact they have on the component assets of an entity. This sample analysis assumes that a non-compete agreement affects all of the entity's intangible assets. The issue arises in the application of CACs to the various intangible assets for the value of the non-compete agreement. This example assumes that the non-compete agreement's value is determined through a "with and without competition" analysis.

For the purposes of this example, the following changes in the Exhibit A-4 Adjusted Entity Value assumptions (which reflect the appropriate probability adjustments) were made for the scenario where the non-compete was not in place:

Alternatively, where the non-compete provides for the protection of specific subject assets, an alternative form of an income split may be appropriate. Exhibit D-1a provides a sample of this approach.

Current customer marketing increased by 15% for years 1 - 5 to respond to the increased competition; andIncremental working capital is reduced to correlate with the revenue reduction.

Based on the following example, the Adjusted Entity Value is reduced to $4,366. Applying the analysis provided in Sections A and B to this reduced Adjusted Entity Value will provide for an application of the CAC for the non-compete to the analysis of the respective assets.

Adjusted Entity Value073,4)1( noititepmoC htiW


Diffential due to Non-Compete (3) 485

(1) Reflects the assumed expected impact of competition (adjusted for appropriate probability).

(3) This differential is assumed to be attributable to the non-compete agreement and would be adjusted for a TAB as appropriate.




Non-Compete Agreements (Alternative Approach - Specific Asset Income Split) Exhibit D-1a

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Debt Free Cash Flow:132)1( noititepmoc tuohtiW $ 214$ 202$ 218$ 270$ 343$ 410$

With compentition (2) 180 101 82 83 120 256 410 Incremental DFCF due to non-compete 51 113 120 135 150 87 -

72)3( INFD emaN edarT 29 16 - - - - 75)4( INFD PI 51 40 23 11 3 -

Customer Relationships Excess Earnings (5) 109 161 154 125 88 53 27

Allocation of non-compete incremental DFNI (6):7INFD emaN edarT 14 9 - - - - 51INFD PI 24 23 21 17 5 -

Customer Relationships Excess Income 29 75 88 114 133 82 - 15latoT 113 120 135 150 87 -

Note: these allocated amounts can be deducted directly from the respective asset projections. Alternatively, the present value of these allocated amounts can be deducted from the respective present values of the subject assets (prior to the application of the TAB).

The following specific income split calculations are NOT indended to be a best practice but are provided solely for demonstration purposes. The facts and circumstances, as well as the specific assumptions used in the valuation of the non-compete, must be considered in preparing such an analysis.

The facts and circumstances inherent in the non-compete valuation may require an income split specific to the respective assets. The following example assumes that the protection afforded by the non-compete is limited to the customer relationships, current trade name and the IP. The process of splitting the income is more direct than calculating the return on and of the non-compete and then in turn allocating the annual CAC, therefore such an approach is not provided herein.

(1) From Adjusted Entity Value Exhibit B-4.

(6) For demonstration purposes they have been allocated in proportion to the respective income projections. This specific calculation is not intended to be a best practice.

(2) Reflects the assumed expected impact of competition (adjusted for appropriate probability) - Exhibit D-1. (3) Exhibit B-10. (4) Exhibit B-11. (5) Exhibit B-12.



Favorable (Unfavorable) Leases or Contracts Exhibit D-2


000,1)1( euneveR $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$

EBITDA (2) 770 808 896 1,002 1,116 1,221 1,314 1,367 1,430 1,482 1,527.0

481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581.0 Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -

665TIBE 416 489 570 655 701 737 789 870 900 946.0 less: Favorable Lease Terms (3) 20 21 22 23 24 25 26 - - - -

645)4( TIBE detsujdA 395 467 547 631 676 711 789 870 900 946.0 Taxes 40% 218 158 187 219 252 270 284 316 348 360 378

823emocnI teN eerF tbeD 237 280 328 379 406 427 473 522 540 568.0 less: Incremental Working Capital (1) 15 15 35 42 45 42 37 32 25 21 18.0 add: 481)1( noitaicerpeD 372 387 412 441 500 557 558 540 562 581.0 02)1( FWA - noitazitromA 20 20 20 20 20 20 20 20 20 - less: Capital Expenditures (1) 286 400 450 500 525 541 557 574 591 609 627.0

132wolF hsaC eerF tbeD 214 202 218 270 343 410 445 466 492 504.0 Residual Value (5) 7,200

5359.0%01)6( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

022FCFD VP 185 159 156 176 203 221 218 207 199 2,911

558,4eulaV ytitnE detsujdA

1 raeYsesaeL elbarovaF Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

05)a( esnepxe esael tekraM $ 52$ 54$ 56$ 58$ 60$ 62$ 03esnepxe esael gnitsixE 31 32 33 34 35 36

02smret esael elbarovaF 21 22 23 24 25 26 8%04@ sexaT 8 9 9 10 10 10

Favorable and unfavorable leases or contracts represent contractual terms that are not stated at market rates. The differential in the after-tax income is typically attributable to such assetsor liabilities. The MPEEM should use market participant PFI that would reflect the market rates rather that the favorable or unfavorable rates. Therefore, the Working Group believes that it would be appropriate to remove the favorable or unfavorable terms from the Adjusted Entity Value projections to arrive at market participant PFI. The analysis in Section A would then beperformed based on the restated Adjusted Entity Value projections that exclude the impact of the favorable or unfavorable terms.

The fair value of the favorable or unfavorable aspect of the leases or contracts would, however, be included in the WARA analysis as they would be a component of the purchase price. The following demonstrates a beneficial lease adjustment that would be applied to arrive at an Adjusted Entity Value.


(2) Adjusted Entity Value amounts (Exhibit A-4), adjusted to reflect the favorable lease terms (see footnote 3). This exhibit assumes the PFI that the valuation specialist was provided reflected the favorable lease expense amounts, and this adjusted EBIT is intended to reflect PFI to be used in the valuation. An alternative presentation would be to adjust the EBITDA directly.

(3) The following is a calculation of the present value (before the TAB) of the favorable leases to demonstrate the reconciliation to the Adjusted Entity Value.

@

21emocnI teN eerF-tbeD 13 13 14 14 15 16

Present Value Factor (6) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382

11sesaeL elbarovaF VP 11 10 10 9 9 8 86sesaeL elbarovaF - VP latoT

(5) Based on a constant growth model assuming a 3% long-term growth rate. (6) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.

(a) Based on current market rates.

(4) Note that the adjusted EBIT is equivalent to the Adjusted Entity Value projections (Exhibit A-4).



EBITDA v. EBIT Comparison Exhibit D-3


FV of Current or Acquired Fixed Assets (1)32raey-1 52sraey-2 25 72sraey-3 27 27 92)2( sraey-4 29 29 29 13sraey-5 31 31 31 31 33sraey-6 33 33 33 33 33 53sraey-7 35 35 35 35 35 35

-sraey-8 - - - - - - -


842 raeY 48 48 48 48 48 48 48 - - Year 3 54 54 54 54 54 54 54 54 - Year 4 60 60 60 60 60 60 60 60 Year 5 64 64 64 64 64 64 64 Year 6 65 65 65 65 65 65 Year 7 67 67 67 67 67 Year 8 69 69 69 69 Year 9 71 71 71 Year 10 74 74 Residual 76

732fO & nO nruteR latoT 262 292 325 360 395 429 464 501 526 547 %72%72%62%52%52%52%52%52%52%52%42euneveR fo %

In this method, the CACs are incorporated in the MPEEM, in any given year, as follows:

EBITDALess: Taxes Debt free net incomeLess: Level Payment CAC (return of and on the fixed assets excluding tax depreciation benefit)

(1) The level payment related to the current or acquired fixed assets is based on the fair value of the fixed assets of $1,000 with an equal distribution of original cost over the prior8 Thi t f ll l l ti fl t i di id l l l t l l ti f h t lif N t th t th f t t f t h i f t t

Paragraph 3.4.03 in the CAC Monograph notes that there are methods that tax-effect EBITDA rather than EBIT in a CAC calculation. The following discussion addresses a method that tax-effects EBITDA in the context of Technique B “Level Payment.”

Equals: Excess earnings

Using a method that tax-effects EBITDA assumes that the subject entity does not have the right to the tax benefit of depreciating the fixed assets and the CAC is applied to tax-effected EBITDA. Because the tax benefit of depreciation is removed from the projections by tax-effecting EBITDA, it is necessary to calculate the CAC based on the fair value of the acquired fixed assets and projected capital expenditures excluding the tax benefit of depreciation in order to be consistent. The following ex ample demonstrates this reconciliation.

The “waterfall” payments used to represent the fixed asset CACs when applying Technique B are calculated below. Note that they are lower than those in Exhibit A-7 because the fixed asset value on which the CAC is being taken excludes the tax benefit of depreciation:

CAC = -PMT(Pre-Tax Rate of Return,RUL,Fair Value,Future Value,Type = beginning of period) x ( 1- Tax Rate) x (1+Pre-tax Discount Rate)^.592= 5.^)%7.61 + 1( x )%04 - 1( x )1,0,341,4,%7.61(TMP- =

CAC = -PMT(Pre-Tax Rate of Return,RUL,Fair Value,Future Value,Type = beginning of period) x (1 - Tax Rate)53= )%04 - 1( x )1,0,682,8,%7.61(TMP- =

(2) Sample calculation of the level payment for the acquired fixed assets with a remaining useful life of 4 years is as follows:



8 years. This waterfall calculation reflects individual level payment calculations for each asset life group. Note that the use of a pre-tax rate of return, as shown in footnotes 2 and 4, effectively removes the tax benefit from the fair value of the fixed assets. See the EBIT & EBITDA Reconciliation at the bottom of Exhibit D-3a for a demonstation of how the use of a pre-tax rate of return removes the tax benefit from the fair value of the fixed assets.



a3-D tibihxE)ADTIBE detceffe-xaT( noitailicnoceR dna tnemyaP leveL - B euqinhceT no desaB CAC tessA dexiF


000,1)1( euneveR $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ 057)1( ADTIBE 787 874 979 1,092 1,196 1,288 1,367 1,430 1,482 1,527

-noitaicerpeD - - - - - - - - - - Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -

037DTIBE 767 854 959 1,072 1,176 1,268 1,347 1,410 1,462 1,527 Taxes 40% 292 307 342 384 429 470 507 539 564 585 611

834emocnI teN eerF tbeD 460 512 575 643 706 761 808 846 877 916 less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18 add: -noitaicerpeD - - - - - - - - - - 02)1( FWA - noitazitromA 20 20 20 20 20 20 20 20 20 - less: Capital Expenditures (2) - - - - - - - - - - - Return On and Of Fixed Assets (3) 237 262 292 325 360 395 429 464 501 526 547


5359.0%01)6( rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044


886,3sgninraE ssecxE VP latoT Fair Value of Fixed Assets (7) 1,000

886,4)8( latoT

Adjusted Entity Value - Restated for Straight-Line Depreciation (9)

662emocnI teN eerF tbeD 280 320 367 416 460 494 520 535 550 576 51latipaC gnikroW latnemercnI :ssel 15 35 42 45 42 37 32 25 21 18

add: 682)eniL-thgiartS( noitaicerpeD 300 321 348 378 410 445 481 519 545 567 02FWA - noitazitromA 20 20 20 20 20 20 20 20 20 - less: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627

172wolF hsaC eerF tbeD 185 176 193 244 307 365 415 458 485 498

PV DFCF @ 10% 258 160 139 138 159 182 196 203 204 196 2,877

217,4L/S - eulaV ytitnE detsujdA

The outcome of this analysis demonstrates that when the CACs are applied to the Level Payment fixed assets in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.

This exhibit is similar to Exhibit C-3 except that it uses the revised level payments (excluding the tax benefit of depreciation). This analysis isolates the Level Payment fixed asset CAC in the financial overlay provided in Section A. As in Section A, this analysis is performed in aggregate and applied in the context of an aggregate MPEEM (e.g., Adjusted Entity Value projections and the fixed asset CAC based on the Level Payment technique only). The annual average balance of the fixed assets, consistent with the Adjusted Entity Value projections, iscalculated and the IRR/WACC 10% rate of return is applied to arrive at the annual CAC.

(1) From Adjusted Entity Value Exhibit A 4

(8) Reconciles to within $24 of the restated Adjusted Entity Value below.

(5) Based on constant growth model assuming a 3% long-term growth rate.


(2) Capital expenditures are removed as they are captured in the level payment charge for the fixed assets. Therefore, the return on and of fixed assets also capture future increases in fixed assets.

(7) Exhibit A-6.

(3) See calculation above.

(4) As stated this is a limited-use excess earnings to demonstrate the CAC calculations for fixed assets. All other adjustments have been excluded to isolate the calculation of the fixed asset CAC within the financial overlay process provided in Section A.


(9) The Adjusted Entity Value is restated to reflect straight-line depreciation to be consistent with the PMT function used in the CAC calculation. A comparison to the Adjusted Entity Value based on MACRS (Exhibit A-4) results in a difference of $167.



tibihxE)deunitnoC( )ADTIBE detceffe-xaT( noitailicnoceR dna tnemyaP leveL - B euqinhceT no desaB CAC tessA dexiF D-3a

EBIT & EBITDA Reconciliation Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

202stessA deriuqcA fO & nO nruteR $ 179$ 154$ 127$ 99$ 68$ 35$ - 5359.0rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893

391CAC fo VP 155 122 91 64 40 19 - 486CAC fo VP latoT

S/L Depr. of Current or Acquired Fixed Assets 250 214 179 143 107 71 36 - 001tifeneB noitaicerpeD xaT 86 72 57 43 28 14 -

59BDT fo VP 74 56 41 28 17 8 913BDT fo VP latoT

400,1)ecnereffid gnidnuor( VP latoT

000,1stessA dexiF deriuqcA fo VF

The Working Group recognizes that this approach results in equivalent outcomes as those derived from tax-effecting EBIT. However, in order to arrive at such an outcome the CACs are based on an adjusted fair value of the fixed assets. The Working Group believes that calculating the CACs on a measure other than fair value should not be considered a best practice.

Note that this analysis also results in a reasonable reconciliation to the Adjusted Entity Value. Therefore, in principle this alternative method provides the expected outcome. However, inherent in the application of this method is an adjustment to the fair value of the fixed assets equivalent to removing the tax depreciation benefit ("TDB").

In the calculation below, the present value of the CACs ($684) incorporated in the analysis above is less than the fair value of the fixed assets ($1,000). This difference of $316 consists of (and approximates) the present value of the tax depreciation benefit of $319 (difference due to rounding). An alternative application of the Microsoft Excel PMT function may be based on the fair value of the fixed assets excluding the tax benefit of depreciation and an after-tax discount rate which results in the same outcome as the formulas above.



Mid-Period Adjustment Exhibit D-4

Year 1 Year 2 Year 3 Year 4 Year 5 Year 1 Year 2 Year 3 Year 4 Year 5

000,1)1( ecnalaB gninnigeB $ 800$ 600$ 400$ 200$ 1,000$ 800$ 600$ 400$ 200$ 002noitaicerpeD cimonocE 200 200 200 200 002 200 200 200 200 008ecnalaB gnidnE 600 400 200 - 008 600 400 200 - 009ecnalaB egarevA 700 500 300 100 009 700 500 300 100

531%51)2( nO nruteR 105 75 45 15 621 98 70 42 14 533)3( CAC latoT 305 275 245 215 623 298 270 242 214

5.45.35.25.15.05.45.35.25.15.0doireP VP5239.0%51)3( rotcaF VP 0.8109 0.7051 0.6131 0.5332 5239.0 0.8109 0.7051 0.6131 0.5332

4.213CAC fo VP 247.3 193.9 150.2 114.6 9.303 241.6 190.3 148.4 114.1

810,1)4( CAC fo VP latoT 998

Fair Value of Acquired Fixed Assets 1,000 1,000

1 2 3 4 5 ……….. 1,796 1,797 1,798 1,799 1,800

000,1)1( ecnalaB gninnigeB $ 999.4$ 998.9$ 998.3$ 997.8 8.2 $ $ 2.2$ 1.7$ 1.1$ 0.6$ 65.0noitaicerpeD cimonocE 0.56 0.56 0.56 0.56 65.0 0.56 0.56 0.56 0.56 4.999ecnalaB gnidnE 998.9 998.3 997.8 997.2 2.2 1.7 1.1 0.6 0.0

000,1ecnalaB egarevA 999 999 998 998 3 2 1 1 0

24.0%51)6( nO nruteR 0.42 0.42 0.42 0.42 00.0 0.00 0.00 0.00 0.00 79.0)3( CAC yliaD latoT 0.97 0.97 0.97 0.97 65.0 0.56 0.56 0.56 0.56

6999.0%51)7( rotcaF VP 0.9992 0.9988 0.9983 0.9979 2374.0 0.4730 0.4728 0.4726 0.4724

PV f CAC 0 97 0 97 0 97 0 97 0 97 0 26 0 26 0 26 0 26 0 26

tnemtsujdA doireP-diM a gnidulcnItnemtsujdA doireP-diM a gnidulcxE

Day (5)

The calculations below are applied to a single asset with a five year economic life. As discussed in the CAC Monograph, the PV of the CACs should equate to the FV of the contributory asset so that value is neither created nor destroyed in the context of the MPEEM. Three calculations are provided: (1) an annual calculation without the adjustment, (2) an annual calculation with the adjustment, and (3) a daily calculation without the adjustment. The daily adjustment reflects the changing nature of the contributory asset over the respective periods and results in a PV equal to the FV. The use of the mid-period adjustment in the annual analysis provides for a PV of charges more closely approximating the FV than that without the adjustment.

CACs that are calculated on an average balance make the simplifying assumption that the subject contributory asset remains constant at the average balance over each respective year. Where the beginning and ending balances are different this averaging assumption skews the present value impact of the CAC. Although a more precise calculation would recognize the change in the asset over the year, such calculations would add an excessive level of precision in the analysis and are not warranted. The mid-period adjustment is a reasonable alternative that adjusts for this effect.

A mid-period adjustment factor has been applied in the calculation of the return on contributory assets in this Toolkit. The Working Group recognizes that this adjustment is generally minor and its application is based on the judgment of the valuation specialist.

79.0CAC fo VP 0.97 0.97 0.97 0.97 62.0 0.26 0.26 0.26 0.26

000,1)8( CAC fo VP latoT

(8) Reconciles to the fair value of the fixed assets.

(5) The CACs are calculated based on a daily analysis (360 day year). Days 6-1795 are not displayed.

(1) In this exhibit, the assumed fair value of the fixed assets is $1,000 and declines linearly over its remaining 5 year economic life.

(7) Calculated on a daily basis. (6) A 15% rate of return applied on a daily basis.

(4) The present value of the CACs exceeds the fair value of the fixed assets absent a mid-period adjustment factor.

(2) A 15% rate of return is applied to the average annual balance and to discount the annual CACs. In the calculations on the right side, a mid-period adjustment factor of .9325 is applied to the annual return on charges, as indicated in the heading. (3) The CAC equals the sum of the economic depreciation (return of ) and return on the average balance.



Adjusted Entity Value in an Asset Transaction Exhibit D-5


582)2( latipaC gnikroW :ssel 000,1)3( stessa dexiF 002ecrofkroW delbmessA

073,3)4( eulav elbignatni rehto deilpmI 019)5( tifeneB noitazitromA xaT

Purchase Price (6) 5,765

Rate ofReturn A B TAB % FV A FV B

582%01latipaC gnikroW $ 285$ n/a 285$ 285$ 000,1%01stessA dexiF 1,000 000,1a/n 1,000 36%01)7( .oC deriuqcA - emaN edarT 63 27% 80 80 451%01)8( )tnerruC( PI 154 27% 196 196

Customer Relationships (9) 10% 352 403 27% 447 512458,1stessA deifitnedI yletarapeS latoT 1,905 800,2 2,073

002%01FWA 200 n/a 200 200 Goodwill/Excess Purchase Price (10) 10% 2,798 2,757 355,3%72 3,501

899,2PP ssecxE fo stnenopmoC - latoT 2,957 357,3 3,701

258,4latoT 4,862 167,5 5,774

Adjusted Entity Value (11) 10% 4,855

(3) Fair value (Exhibit A-6). (4) For the purposes of this example, it is assumed that the transaction is subject to U.S. tax law and Internal Revenue Code Section 197. As such, the separately identified intangible assets and goodwill will be amortized (for tax purposes) over a 15 year period.

(6) Purchase price assuming an asset acquisition.

Where the transaction is an asset acquisition, the tax benefit of amortization is applicable to all intangible value. The following example adds to the Adjusted Entity Value the additional tax benefit related to all separately identified intangible assets and goodwill in excess of the AWF as the structure of the transaction will allow the acquirer to avail itself of these tax benefits. As a result, in this exhibit's scenario, the purchase price is $5,765. The higher purchase price is justified by recognition of the TABs in the PFI.

5,765

( ) E hibi A 10

An alternative to the approach provided in Section A would be to incorporate these incremental tax benefits into the respective assets and allocate the tax benefit to the respective assets (including goodwill/excess purchase price). The outcome would be the same with a proper allocation of the tax amortization benefits as that resulting from the procedure provided in Section A. However, in that the allocation of the tax benefit adds complexity to the analysis the Working Group believes that the procedure provided in Section A would be appropriate.

(1) Entity Value and PFI per Exhibit A-4. (2) Beginning working capital balance (Exhibit A-5).

(5) Based on a 15 year period, 40% tax rate and a discount rate of 10%.

(8) Exhibit A-11.

(10) Technique A: Exhibit A-14; Technique B: Exhibit A-15. (11) Exhibit A-4 and purchase price above.

(9) Technique A: Exhibit A-12; Technique B: Exhibit A-13.

(7) Exhibit A-10.



Negative Working Capital Exhibit D-6

Entity Value Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

059)1( euneveR $ 1,000$ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ Debt Free Net Income (2) 5% 50 53 58 65 73 80 86 91 95 99 102 Incremental Working Capital (3) -50% (25) (25) (58) (71) (75) (70) (61) (53) (42) (35) (30)


5359.0%01rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

27FCFD VP 68 91 97 96 89 79 70 61 54 763

045,1eulaV ytitnE

Contributory Asset Charge Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

059)1( euneveR $ 1,000$ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ Beginning Balance Working Cap (4) (475) (500) (525) (583) (654) (729) (799) (860) (913) (955) (990) Incremental Working Capital (3) -50% (25) (25) (58) (71) (75) (70) (61) (53) (42) (35) (30)

)005(.paC gnikroW ecnalaB gnidnE (525) (583) (654) (729) (799) (860) (913) (955) (990) (1,020)

)884(latipaC gnikroW ecnalaB egarevA (513) (554) (619) (692) (764) (830) (887) (934) (973) (1,005)


)64(%01)6( nO nruteR (49) (53) (59) (66) (73) (79) (85) (89) (93) (96) )41(%3)7( nO nruteR (15) (16) (18) (20) (22) (24) (25) (27) (28) (29)

When negative working capital is the norm for an industry, the timing of the cash receipts increases an entity's value due to the present value impact. In the context of a financial overlay, the fair value of the assets should reconcile to the entity value. As such, the increase in the entity value due to the negative working capital must be reflected in the working capital CAC. Therefore, where negative working capital is included in the PFI, a negative CAC should be applied, increasing the cash flows attributable to the subject intangible asset.

Negative working capital CACs are applied to the aggregate Entity Value based first on a rate of return consistent with the IRR/WACC to provide a reconciliation to the Entity Value in a financial overlay (in the same manner as that presented in Exhibit C-1). A second calculation is then provided based on stratified rates. It is noteworthy here that when applying a lower rate of return to the negative working capital, the implied rate of return for the aggregate excess earnings is reduced from 10% to 7.7%. This results from the reduced benefit attributable to the negative CAC (return on declining from 10% to 3%) decreasing the aggregate prospective excess earnings, which must then be discounted at a lower rate to reconcile to the entity value. This is consistent with the findings in Exhibit C-1a (although in reverse because in this exhibit the working capital is negative). The implied rate of return based on stratified rates and a WARA are also calculated.

This analysis isolates the application of a CAC where there is negative working capital. For the purposes of this analysis, the margins were reduced and working capital is assumed to be -50% of revenue to emphasize the relative impact of negative working capital. The Entity Value has been recalculated to exclude any depreciation, amortization and capital expenditures for simplicity.



Negative Working Capital (Continued) Exhibit D-6

Excess Earnings - Consistent Rates Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

059)1( euneveR $ 1,000$ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ Debt Free Net Income (2) 5% 50 53 58 65 73 80 86 91 95 99 102 Incremental Working Capital (8) 0% - - - - - - - - - - - less: Return On Working Capital (6) 10% (46) (49) (53) (59) (66) (73) (79) (85) (89) (93) (96)

69sgninraE ssecxE 102 111 124 139 153 165 176 184 192 198 Residual Value 2,826

PV Factor 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044 29FCFD VP 88 87 89 90 90 89 86 82 78 1,143

410,2sgninraE ssecxE VP latoT Working Capital (4) (475) Total (consistent with Entity Value) 1,539

Excess Earnings - Stratified Rates Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

059)1( euneveR $ 1,000$ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$ Debt Free Net Income (2) 5% 50 53 58 65 73 80 86 91 95 99 102 Incremental Working Capital (8) 0% - - - - - - - - - - - less: Return On Working Capital (7) 3% (14) (15) (16) (18) (20) (22) (24) (25) (27) (28) (29)

46sgninraE ssecxE 68 74 83 93 102 110 116 122 127 131 Residual Value 2,775

PV Factor (9) 7.7% 0.9635 0.8946 0.8305 0.7710 0.7158 0.6646 0.6170 0.5728 0.5318 0.4938 0.4938

26FCFD VP 61 61 64 66 68 68 67 65 63 1,370

510,2sgninraE ssecxE VP latoT Working Capital (4) (475) Total (consistent with Entity Value) 1,540

WARA Present Fair Rate of WeightedValue TAB % Value Return Return

)574(latipaC gnikroW $ - (475)$ 3.0% (14.3)$ Goodwill/Excess Purchase Price (10) 2,015 29% 2,599 8.7% 227.4

045,1latoT 421,2 10.0% 213.1

(1) From Adjusted Entity Value Exhibit A-4. (2) Assumed to be 5% of revenue, margin reduced to emphasize the relative impact of the negative working capital.

(8) Incremental (or decreasing) working capital is removed as it is captured in the average annual balance of the working capital. Therefore, the return on working capital also captures future changes in working capital. (9) Implied rate of return that reconciles the total asset values to the Entity Value. (10) The TAB is calculated based on the weighted average rate of return of 8.7%.

(3) Assumed to be (50%) of revenue to emphasize the relative impact of the negative working capital (4) Prior year revenue of $950 x (50%) and decreased annually by incremental amounts. (5) See Exhibit D-4 for discussion. (6) Incorporated in consistent rates calculation (consistent with IRR/WACC). (7) Incorporated in stratified rates calculation.



Fixed Asset CAC Based on a Gross Lease Technique Exhibit D-7


000,1euneveR latoT $ 1,050$ 1,165$ 1,306$ 1,456$ 1,596$ 1,718$ 1,823$ 1,907$ 1,976$ 2,035$

009euneveR pihsnoitaleR remotsuC 855 770 616 431 259 130 65 33 - - 018%09tiforP ssorG 770 693 554 388 233 117 59 30 - -

Operating Expenses:-%0D&R ecnanetniaM - - - - - - - - - - -%0PI erutuF - D&R - - - - - - - - - -

Trade name advertising 0% - - - - - - - - - - - Current customer marketing 3% 27 26 23 18 13 8 4 2 1 - - Future customer marketing - - - - - - - - - - -

72gnitekram latoT 26 23 18 13 8 4 2 1 - - 36%7A&G latoT 60 54 43 30 18 9 5 2 - - 09sesnepxE gnitarepO latoT 86 77 61 43 26 13 7 3 - - 027ADTIBE 684 616 493 345 207 104 52 27 - -

-)1( noitaicerpeD - - - - - - - - - - Gross Lease CAC (2) 313 304 269 211 145 87 44 23 12 - - Amortization - AWF 18 16 13 9 6 3 2 1 - - -

983TIBE 364 334 273 194 117 58 28 15 - - less: Trade Name Royalty 5% 45 43 39 31 22 13 7 3 2 - -

%01ytlayoR PI 90 86 77 62 43 26 13 7 3 - - 452TIBE detsujdA 235 218 180 129 78 38 18 10 - -

Taxes 40% 102 94 87 72 52 31 15 7 4 - - 251emocnI teN eerF tbeD 141 131 108 77 47 23 11 6 - -

-)1( noitaicerpeD :dda - - - - - - - - - - 81FWA - noitazitromA 16 13 9 6 3 2 1 - -

01tnemtsevnI htworG FWA 9 16 14 9 5 2 1 - - - less: 8latipaC gnikroW nO nruteR 7 6 5 4 2 1 1 - - - Return On AWF 18 17 15 12 8 5 2 1 1 - -


Under this technique, the valuation specialist would solve for the lease payment that provides the lessor both a return of the principal invested in the contributory asset and a return on the investment for the opportunity cost of capital. In a manner similar to the Level Payment technique, the Gross Lease payments incorporate the annual beginning balance of the fixed assets and a weighted remaining useful life of each respective balance. The CACs reflect an amount for each equivalent remaining useful life asset group (waterfall payment) for the acquired fixed assets and capital expenditures. As such, the analysis requires the valuation specialist to solve for the lease payment for each of the respective age groups of the acquired fixed assets as well as for each annual amount of capital expenditures. This waterfall and a sample of two of the calculations are provided below. To demonstrate the application of the Gross Lease technique it has been applied to the customer relationship analysis. All other CACs and adjustments discussed in Exhibit B-12 remain the same. The outcome of this technique ($714) is consistent with that of the Average Annual Balance technique ($719, Exhibit B-12) and the Level Payment technique ($737, Exhibit B-13).

A technique that has been described as the Gross Lease technique has been proposed by certain respondents as an alternative to the Average Annual Balance and Level Payment techniques. The basis of the Gross Lease technique is that it provides for an arm's length economic rent for the hypothetical leasing of the contributory asset. It represents the lease payment that the lessee would have to pay to the lessor to rent the contributory asset in lieu of its outright ownership. The Gross Lease technique considers the economic value of the contributory asset, its economic life and both the return of and return on that a lessor would expect to receive to provide a market-based rate of return.

Residual Value -

5359.0%01rotcaF VP 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044


265sgninraE ssecxE VP latoT Tax Amortization Benefit 152 Fair Value - Customer Relationships 714

(1) Depreciation is incorporated in the calculation of the Gross Lease payment (see below), therefore it is removed from the excess income calculation. (2) The total Gross Lease payments calculated below are allocated to the customer relationships in proportion to revenue.



7-D tibihxE)deunitnoC( euqinhceT esaeL ssorG a no desaB CAC tessA dexiF



Capital Expenditures (3):74)4( 1 raeY 47 47 47 47 47 47 47

662 raeY 66 66 66 66 66 66 66 Year 3 74 74 74 74 74 74 74 74 Year 4 82 82 82 82 82 82 82 82 Year 5 87 87 87 87 87 87 87 Year 6 89 89 89 89 89 89 Year 7 92 92 92 92 92 Year 8 95 95 95 95 Year 9 97 97 97 Year 10 102 102

Residual 106

Total Gross Lease Payments 348 373 407 448 491 536 583 632 682 718 750

Acquired fixed assets with a RUL of 4 years Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

34)1( tnemyaP esaeL ssorG $ 43$ 43$ 43$

less: Tax Depreciation 20 35 25 18 13 13 13 6

32TIBE 8 18 25 (13) (13) (13) (6)

Taxes 40% 9 3 7 10 (5) (5) (5) (3)

41emocnI teN eerF tbeD 5 11 15 (8) (8) (8) (4)

add: Tax Depreciation 20 35 25 18 13 13 13 6

43wolf hsac eerf tbeD 40 36 33 5 5 5 3

5.75.65.55.45.35.25.15.0doirep VP

PV factor 5% 0.9759 0.9294 0.8852 0.8430 0.8029 0.7646 0.7282 0.6936 33swolf hsac fo VP 37 32 28 4 4 4 2

(4) See below for a sample calculation of the Gross Lease for the $286 of capital expenditures occurring in Year 1 with a remaining useful life of 8 years.

(1) The Gross Lease payments related to the current or acquired fixed assets are based on the fair value of the fixed assets of $1,000 with an equal distribution of original cost over the prior 8 years, similar to Exhibit B-7. This waterfall calculation reflects individual Gross Lease calculations for each asset life group.

(2) See below for a sample calculation of the Gross Lease payment for $143 of acquired (or current) fixed assets with a remaining useful life of 4 years. (3) Individual Gross Lease calculations for annual capital expenditures. Capital expenditures from Exhibit B-1.

Total PV of cash flows = Fair Value (2) 143

(1) Annual payment calculated such that the present value of the cash flows equals the fair value. (2) See Exhibit A-6, footnote 1, for the fair value of the asset group with a RUL of 4 years.

Capital Expenditures - Year 1 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

74)1( tnemyaP esaeL ssorG $ 47$ 47$ 47$ 47$ 47$ 47$ 47$

less: Tax Depreciation 41 70 50 36 26 26 26 13

6TIBE (23) (3) 11 22 22 22 34

Taxes 40% 3 (9) (1) 5 9 9 9 14

4emocnI teN eerF tbeD (14) (2) 7 13 13 13 21

add: Tax Depreciation 41 70 50 36 26 26 26 13

54wolf hsac eerf tbeD 56 48 43 38 38 38 33

5.75.65.55.45.35.25.15.0doirep VP

PV factor 5% 0.9759 0.9294 0.8852 0.8430 0.8029 0.7646 0.7282 0.6936 44swolf hsac fo VP 52 43 36 31 29 28 23

Total PV of cash flows = Year 1 CapEx. (2) 286

(1) Annual payment calculated such that the present value of the cash flows equals the Year 1 capital expenditure with an 8 year RUL.(2) See Exhibit A-1, for the Year 1 capital expenditure.

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