Business Valuation

Summary

Business
Valuation
Sample Company LLC
as of
December XX, 2010
TABLE OF CONTENTS
Conclusion of Value ......................................................................................................................1
Valuation Summary ......................................................................................................................2
Analysis of the Company ............................................................................................................3
DESCRIPTION AND HISTORY OF BUSINESS .................................................................................................................. 3
OPERATIONS ....................................................................................................................................................... 3
MANAGEMENT.................................................................................................................................................... 3
WORKFORCE....................................................................................................................................................... 3
SALES & MARKETING............................................................................................................................................ 3
FACILITIES & LOCATION ......................................................................................................................................... 3
OWNERSHIP AND PREVIOUS SALES OF STOCK ............................................................................................................. 3
ENTITY TYPE ....................................................................................................................................................... 3
FINANCIAL ANALYSIS............................................................................................................................................. 4
DIVIDEND PAYING CAPACITY ................................................................................................................................. 12
INDUSTRY & COMPETITIVE ENVIRONMENT .............................................................................................................. 13
ECONOMIC ENVIRONMENT .................................................................................................................................. 14
Valuation Approaches & Methods ....................................................................................... 18
HYPOTHETICAL SALE ........................................................................................................................................... 18
Hypothetical Buyer .................................................................................................................................... 18
Hypothetical Seller..................................................................................................................................... 19
Fractional Interests .................................................................................................................................... 19
Summary ................................................................................................................................................... 20
MARKET BASED METHODS .................................................................................................................................. 20
Guideline Public Company Method ............................................................................................................ 20
Guideline Private Company Transactions Methods ..................................................................................... 20
INCOME BASED METHODS ................................................................................................................................... 21
Discounting & Capitalizing ......................................................................................................................... 22
Discounted Future Benefits ........................................................................................................................ 23
Capitalization of Benefits ........................................................................................................................... 24
ASSET BASED METHODS...................................................................................................................................... 24
Book Value ................................................................................................................................................ 25
Adjusted Net Assets ................................................................................................................................... 25
OTHER METHODS .............................................................................................................................................. 25
Excess Earnings ......................................................................................................................................... 25
Industry Rules of Thumb ............................................................................................................................ 26
VALUATION ADJUSTMENTS ................................................................................................................................... 26
Lack of Marketability Discount ................................................................................................................... 26
Control Premium and Minority Interest Discount........................................................................................ 26
SUMMARY & CONCLUSIONS ................................................................................................................................. 28
Engagement Exhibits ................................................................................................................ 29
E1 – STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS .................................................................................. 30
E2 – SOURCES OF INFORMATION ........................................................................................................................... 32
E3 – CERTIFICATIONS AND REPRESENTATIONS OF DAVID E. COFFMAN ........................................................................... 33
E4 – PROFESSIONAL QUALIFICATIONS OF DAVID E. COFFMAN...................................................................................... 34
Financial Exhibits ...................................................................................................................... 35
F1 – BALANCE SHEETS -- HISTORICAL & COMMON-SIZE ............................................................................................. 36
F2 – INCOME STATEMENTS -- HISTORICAL & COMMON-SIZE ....................................................................................... 37
F3 – CASH FLOW STATEMENTS – COMPARATIVE HISTORICAL ....................................................................................... 38
F4 – RATIO ANALYSIS.......................................................................................................................................... 39
F5 – ADJUSTMENTS TO EARNINGS ......................................................................................................................... 41
Valuation Exhibits ...................................................................................................................... 42
V1 – PRIVATE COMPANY TRANSACTIONS................................................................................................................. 43
V2 – CAPITALIZATION RATE .................................................................................................................................. 44
V3 – CAPITALIZATION OF BENEFITS (CASH FLOW) ..................................................................................................... 45
V4 – ADJUSTED NET ASSETS ................................................................................................................................ 46
V5 – EXCESS EARNINGS....................................................................................................................................... 47
V6 – INDUSTRY DATA.......................................................................................................................................... 48
Conclusion of Value
December XX, 2011
Susan Sample, Executrix
Estate of Samuel Sample
123 Anywhere Road
Anytown, PA 12345
Re: Sample Company LLC (“the Company”)
We have performed a valuation engagement, as that term is defined in the Statement on Standards for Valuation
Services (SSVS) of the American Institute of Certified Public Accountants, of a 100% equity interest in Sample
Company LLC (“the Company”), excluding real estate, as of December XX, 2010. This valuation was performed
solely to assist in determining the value of the Company for estate and inheritance tax purposes; the resulting
estimate of value should not be used for any other purpose or by any other party for any purpose. This valuation
engagement was conducted in accordance with the SSVS. The estimate of value that results from a valuation
engagement is expressed as a conclusion of value

The standard of value used in this valuation is Fair Market Value. Fair market value is the price, in terms of cash
equivalents, at which property would change hands between a hypothetical willing and able buyer and a
hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is
under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts

The Company is valued as a stand-alone business entity (presuming its current status of capital, management,
and employees), and under the premise that it is an ongoing operating business enterprise and is expected to
continue to operate into the future. Although our valuation is intended to estimate fair market value, we assume
no responsibility for the inability of a seller or buyer to obtain a sale or purchase contract at that price

Based on our analysis, as described in this valuation report, the estimate of value of a 100% equity interest in
Sample Company LLC (excluding real estate) as of December XX, 2010:
$ 888,000
This conclusion is subject to the Statement of Assumptions and Limiting Conditions found in Exhibit E1. We have
no obligation to update this report or our conclusion of value for information that comes to our attention after
the date of this report

David E. Coffman CPA/ABV/CFF, CVA
President & CEO
Business Valuations & Strategies PC
1
Valuation Summary
Date of valuation: December XX, 2010
Date of report: December XX, 2011
Company: Sample Company LLC
Ownership interest valued: 100% equity interest (excluding real estate)
Purpose of valuation: Estate and inheritance tax
Standard of value: Fair market value
Premise of value: Going concern
Type of report: Detailed
Scope limitations: None
Significant assumptions and limitations: See Exhibit E1
Valuation methods considered: Private company transactions, capitalization of cash flow, adjusted net assets,
and excess earnings
Selected valuation method: Adjusted net assets
Valuation conclusion: $ 888,000
2
Analysis of the Company
Description and History of Business
The Company was founded in 19XX by Samuel Sample as a used car dealership. The Company acquired 61 acres
of adjacent land and started an auto salvage business

Operations
The Company salvages used vehicles for parts and scrap, and also sells used vehicles. The Company buys used
vehicles primarily from the nearby locations of a national used vehicle clearing house, Copart. Copart contracts
with a number of insurance companies to sell vehicles that have been “totaled” in accidents. The Company
transports the vehicles to its site using its own trucks. Upon arrival, each vehicle is evaluated to determine if it
has greater value in parts or as scrap. Scrapped vehicles are crushed on site and sold to scrap dealers that make
regular pickups. Vehicles retained for parts are stored on site. Used parts are removed from the vehicles as
orders are received. The Company also buys used vehicles from several local car dealers for resale

Management
Samuel Sample is responsible for overall management. John Doe is COO and manages the daily operations. He
has worked for the Company for over 30 years

Workforce
In addition to the COO, the Company employs approximately 12 people including: an office manager, several
vehicle dismantlers, several truck drivers, a mechanic, a sales person, and a delivery person

Sales & Marketing
The Company’s primary market area is a 10 to 15 mile radius of the Company. It sells used parts to local auto
repair shops and walk-in customers. It sells used vehicles locally. It spends little on advertising and relies
primarily on existing relationships and its well established reputation

Facilities & Location
The Company operates from approximately 66 acres of land in Any Township, northern Anywhere County. The
buildings contain about 2,700 square feet of office, parts counter, garage, and storage space. The real estate is
owned by Samuel Sample. The value of the real estate has been excluded from the total entity value of the
Company for valuation purposes

Ownership and Previous Sales of Stock
The equity of the Company is held 100% by Samuel Sample. There have been no transfers of the Company’s
equity since its formation

Entity Type
The Company operates as a limited liability company (LLC) and is taxed as a sole proprietorship. Most small,
closely-held companies are sold as asset sales. Asset sales are where the primary operating assets (inventory,
fixed assets, and intangible assets) are sold by the company to the buyer. The buyer is free to choose the type of
business entity for the new company. Under these circumstances, the existing entity type of a company has no
value to the buyer. Upon the sale, an LLC receives the proceeds of the sale and is taxed as a sole proprietorship

Since a hypothetical buyer would not buy the LLC, as an entity, the Company’s status as a LLC was considered to
have no value

3
Financial Analysis
This analysis includes an evaluation of the Company's common-size financial information from the 2010, 2009 &
2008 compiled financial statements. We assumed that the financial condition and earning capacity of the
Company as of December 31, 2010 reasonably reflected the status of these factors as of December XX, 2010

In order to portray the relative size of financial statement items for comparison over time, each line item in the
common-size financial statements is expressed as a percentage of total assets or total revenue. The historical
and common-size financial statements are summarized in Exhibits F1 through F3

Our analysis also includes an evaluation of commonly used financial ratios. These ratios fall within the following
categories:
• Liquidity ratios measure the ability to meet short-term obligations,
• Leverage ratios (borrowing) measure reliance on debt and overall vulnerability to business downturns,
• Activity or operating ratios (assets) measure how effectively assets are used to produce revenue, and
• Profitability ratios measure overall performance

The Company's common-size financial statements and ratios have been compared to composite, industry
common-size financial statements and ratios from the Motor Vehicle Parts (Used) Merchant Wholesalers
industry (NAICS 42314).The ratio comparisons are presented in Exhibit F4. Each section of the ratio analysis
(Liquidity, Profits & Profit Margin, etc.) contains a numerical score/grade, which is a rough measure of overall
performance in the area. Each grade represents a score from 1 to 100, with 1 being the lowest score and 100
being the highest. Generally, a score above 50 would be a "good" score and a score below 50 would be a "poor"
score. The scores are derived by evaluating the company's trends, either positive or negative, over time and by
comparing the company to industry averages for different metrics

Although industry statistics are a useful source of general analytical data, there can be significant variation in the
reporting practices and operational methods of companies within a given industry. Therefore, industry statistics
as used throughout this report should not be regarded as absolute norms or standards

SALES
A measure of how sales are growing and whether the 86 OUT OF 100
sales are satisfactory for the company

The company's sales have risen significantly this period, even relative to the sales growth of other similar
companies. Even better, the company has increased sales without changing its fixed asset base very much

The company has simply found a way to increase sales without making long-term capital expenditures. If the
company can continue to increase sales over the long run, it should be able to improve profitability if
expenses are managed correctly. The challenge now is to determine what factor is responsible for the
sales increase and to leverage it. For example, asset levels did not need to change much to drive in
higher sales. Managers should determine which resources are helping to achieve company objectives (such as
increased sales or profitability) and then employ those resources in the right way

4
PROFITS & PROFIT MARGIN
A measure of whether the trends in profit are 89 OUT OF 100
favorable for the company

A stronger net profit margin and higher sales have combined to improve this company's overall net
profitability position significantly this period. Specifically, net profit margins have improved by 790.91% while
sales have increased by 22.01%. The company is generating significantly more revenue than last period and
managing it better by improving net margins -- an excellent combination. It looks like the company is
pushing itself nicely within its "relevant range" -- the company's operating range for its current cost structure

This situation could also imply that the company may be able to push sales and profits higher concurrently in
the future, which is not always easy to achieve

Overall net profitability here is excellent. This means that the net profit margin is good even compared to
what similar companies are earning. This puts the challenge on managers to make sure that they are moving
money back into the company to improve future profitability. As long as net margins don't slide too much, it
is important to invest in the company to take advantage of this excellent strategic position. Managers should
also make sure to put money aside to pay taxes on the extra earnings

This number indicates the percentage of sales revenue that is not paid out in direct costs (costs of sales)

It is an important statistic that can be used in business planning because it indicates how many cents of
gross profit can be generated by each dollar of future sales. Higher is normally better (the company is
more efficient)

5
This is an important metric. In fact, over time, it is one of the more important barometers that we look at

It measures how many cents of profit the company is generating for every dollar it sells. Track it carefully
against industry competitors. This is a very important number in preparing forecasts. The higher the
better

This metric shows advertising expense for the company as a percentage of sales

This metric shows G & A payroll expense for the company as a percentage of sales

6
This metric shows total payroll expense for the company as a percentage of sales

LIQUIDITY
A measure of the company's ability to meet 92 OUT OF 100
obligations as they come due

Operating Cash Flow Results
Conditions in this area are strong, currently. The company is generating solid, positive cash flow from
operations. It is particularly nice to see this in combination with the overall liquidity results, which are also
very good (this will be discussed in more depth below). Ultimately, cash flow drives long-run liquidity for
almost every business, so it is good to see a strong relationship between cash flow and profits

General Liquidity Conditions
This company has had outstanding liquidity results, and has received the highest possible score in this area

What exactly does this mean? Net income and net profit margins are up, and all areas of liquidity look strong
at this specific time. Even better, all liquidity indicators have risen from last period, as depicted in the graph
area of the report. For example, notice in the graphs that the company's current and quick ratios are strong
and have risen by 35.04% and 111.62%, respectively. This indicates that both the scope and composition of
the liquidity base are sound (as of this particular time). Basically, the company is doing well, even when
compared to the competition. When the company's profitability results are examined in a subsequent section
of this report, the benefits that a strong liquidity position can yield will be even more fully emphasized. If the
company can maintain its strong position over time, management may be able to invest in the expense items
that can help propel future profits. Present liquidity should help propel future net profitability

Before concluding the liquidity section, some analysis of liquidity days ratios should be made. It is positive to
see that the accounts receivable days ratio is low, even relative to competitors. Often, this means that the
company is collecting accounts receivables quickly. However, the company's inventory days ratio is high,
indicating that the company is taking a relatively long time to convert inventory to sales, which would not
have a positive effect on the cash account. Over time, we would typically want the inventory days ratio to float
downwards, even though the company's overall liquidity, as measured by the current ratio, is good

LIMITS TO LIQUIDITY ANALYSIS: Keep in mind that liquidity conditions are volatile, and this is a general
analysis looking at a snapshot in time. Review this section, but do not overly rely on it

7
Generally, this metric measures the overall liquidity position of a company. It is certainly not a perfect
barometer, but it is a good one. Watch for big decreases in this number over time. Make sure the
accounts listed in "current assets" are collectible. The higher the ratio, the more liquid the company is

This is another good indicator of liquidity, although by itself, it is not a perfect one. If there are receivable
accounts included in the numerator, they should be collectible. Look at the length of time the company
has to pay the amount listed in the denominator (current liabilities). The higher the number, the stronger
the company

This metric shows how much inventory (in days) is on hand. It indicates how quickly a company can
respond to market and/or product changes. Not all companies have inventory for this metric. The lower
the better

8
This number reflects the average length of time between credit sales and payment receipts. It is crucial
to maintaining positive liquidity. The lower the better

This ratio shows the average number of days that lapse between the purchase of material and labor, and
payment for them. It is a rough measure of how timely a company is in meeting payment obligations

Lower is normally better

ASSETS
A measure of how effectively the company is utilizing 70 OUT OF 100
its gross fixed assets

This period, profitability improved significantly but fixed asset levels stayed relatively flat. This means: 1)
profitability was able to improve without adding assets, and 2) the company may not need additional assets
to continue to improve profitability at this specific time. In other words, the company may be able to grow
profitability a bit more with the level of assets currently in place. This should also continue to help improve
net margins, which also improved this period. An improvement in net margins is an indication of improved
efficiency as the company has a relatively stable asset base

The company seems to be generating adequate returns on its assets and equity. However, it did a fairly poor
job generating sales relative to its fixed asset base for this period. It may be important to improve this area,
in order to sustain adequate returns on its asset base

Description and History of Business The Company was founded in 19XX by Samuel Sample as a used car dealership. The Company acquired 61 acres of adjacent land and started an auto …

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Frequently Asked Questions

How to calculate your business valuation?

• Business assets, including book value and liquidation value methods
• Historical earnings, including debt-paying ability, capitalization of earnings or cash flow, gross income multipliers, and dividend-paying ability methods
• A combination of assets and earnings, namely, the excess earnings method

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How to conduct a business valuation?

The process of valuing a company

1. The reasons why business value needs to be determined. Also, who needs to know what the business is worth. ...
2. Circumstances surrounding the business appraisal. It is one thing to determine the value of a business that you expect to continue operating. ...
3. Business financial and operational track record and future prospects. ...
4. Business ownership structure. ...

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What is the purpose of a business valuation?

What is Valuation?

• Reasons for Performing a Business Valuation. Business valuation to a company is an important exercise since it can help in improving the company.
• Key Takeaways. Market Value of Debt The Market Value of Debt refers to the market price investors would be willing to buy a company's debt at, which differs from the ...
• Additional Resources. ...

What goes into a business valuation?

What goes into determining the valuation of a business? There are many factors that determine the valuation of a business, including but not limited to: Cash Flow / Profitability. Predictability and Repeatability of Revenue. Industry Dynamics. Management Team Capabilities.