TheBusinessAnalyst.com Powered by The TASCON™Business Analyst Business Valuation, Financial Analysis, Profit Enhancement, Cash Management Software 1 BUSINESS ANALYSIS/VALUATION For Gift Gallery LTD North Towne Mall Madison WI, 53710 Valuation as of: December 31 2005 PREPARED BY Robert Smith CVA Business Valuations Services LLC 636 Maple Rd. Suite 100 Middleton, WI 53562 608 555-1234 [email protected]www.bvs.com Report Date: September 27 2006
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Mr. Steven Wilson, PresidentGift Gallery LTD1258 Collectibles PlaceWaunakee, WI 53597
Dear: Mr. Wilson:
Thank you for contacting us. The following is the information that you requested on Gift GalleryLTD located at North Towne Mall, Madison, WI. Enclosed herein you will find our completemarket valuation for this business.
Our evaluation is based on the premise that any going business MUST meet the following threecriteria: 1) A business is worth that price at which it will support its structured debt service atcurrent market rates, terms and conditions. 2) It must pay a fair market salary to the owner(s),commensurate with other similar size and type of businesses located in the same market area asthe subject business. 3) It must also pay a fair market rate of return, commensurate with risk, onthe owner’s total investment. As you will see in the following analysis, by using the inputtedmarket variables listed herein, there is only ONE price at which this business can accomplishthese three criteria! This evaluation is a study that has determined that price.
Because of this fact, this analysis can be used by you as a powerful business tool and a completebusiness plan to help guarantee that the calculated profits can be maintained and possibly evenenhanced. This can be accomplished by regularly scheduled comparisons (and if necessary, themaking of adjustments) of the business’ expense to the sales ratios contained herein to those ofindustry standards. Your guiding point to this comparison will be the percentage columnscontained on each expense line-item of the proforma 1st year financial statement. Each of thesecritical percentages should be looked at by management as the specific performance goalobjective for each expense item to help assure a minimum performance level that is show here.This is a critical component of one element of your short term financial planning. By properlymanaging the specific policies, procedures and systems that control each expense line-item to aperformance standard better than the standard shown here, you could expect that it would result inan even better financial performance than is represented here.
We have determined the market value of this business on the basis of a personal inspection of thesubject business and the use of good, commonly accepted business and accounting practices. We
Gift Gallery LTD 3AcquisitionDecember 31 2005
also used the information contained in the business tax forms and the business financialstatements and other readily available company financial information and industry standardinformation for similar companies of size, type and market location.
Additionally, we analyzed the current financial market variables affecting the business’ currentmarket value. We have determined that a 100% ownership interest of Gift Gallery LTD is$330,349.
An anticipated investment of $82,587 would be required as a down payment to purchase thisbusiness.
This evaluation is an accurate mathematical analysis that has determined the value necessary forthis business to be properly structured in order to meet the three criteria previously explained.
This is a sample insert for the evaluator cover letter to show the location of the insert in thissample business analysis/valuation report.
Sincerely,
Robert Smith CVAPresident
Enclosures
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TABLE OF CONTENTS
GIFT GALLERY LTD VALUATION
BUSINESS VALUATION SUMMARY ........................................................................... 5FINAL DETERMINATION OF VALUE.......................................................................... 7TEST OF REASONABLENESS........................................................................................ 8SELLER PRETAX CASH POSITION ............................................................................ 10BUYER BALANCE SHEET POSITION ........................................................................ 11OWNER INFORMATION............................................................................................... 13EVALUATOR DATA...................................................................................................... 14BUSINESS PROFILE ...................................................................................................... 15MARKET VARIABLES USED IN ANALYSIS............................................................. 16INCOME STATEMENT ADJUSTMENTS SUMMARY ............................................... 18INCOME STATEMENT ADJUSTMENTS DETAIL ..................................................... 19COMMENTS – ADJUSTMENTS TO INCOME STATEMENT.................................... 20STRUCTURED FINANCING SUMMARY.................................................................... 21BALANCE SHEET ADJUSTMENTS SUMMARY ....................................................... 22BALANCE SHEET ADJUSTMENTS DETAIL ............................................................. 23COMMENTS – ADJUSTMENTS TO BALANCE SHEET............................................ 24PROFORMA FIRST YEAR FINANCIAL BUDGET SUMMARY ............................... 25PROFORMA FIRST YEAR FINANCIAL BUDGET DETAIL...................................... 26COMMENTS – ADJUSTMENTS TO BUDGET............................................................ 27PROFORMA FIRST YEAR FINANCIAL BUDGET DETAIL Q1................................ 28PROFORMA FIRST YEAR FINANCIAL BUDGET DETAIL Q2................................ 29PROFORMA FIRST YEAR FINANCIAL BUDGET DETAIL Q3................................ 30PROFORMA FIRST YEAR FINANCIAL BUDGET DETAIL Q4................................ 31DEFINITION OF MARKET VALUE ............................................................................. 32STATEMENT OF LIMITING CONDITIONS................................................................ 33VALUATION TECHNIQUES (METHODOLOGIES) ................................................... 35EVALUATOR’S COMMENTS....................................................................................... 38APPENDICES .................................................................................................................. 40TAX FORMS.................................................................................................................... 41FINANCIAL STATEMENTS ......................................................................................... 42MISCELLANEOUS SUPPORTING DOCUMENTATION ........................................... 43
Gift Gallery LTD 5AcquisitionDecember 31 2005
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BUSINESS VALUATION SUMMARY
Robert Smith, CVA has been asked by Mr. Steven Wilson, to render the business valuationdescribed below. The following information details our assignment:
Client Name: Steven Wilson
Business Name: Gift Gallery LTD
Business Address: North Towne Mall
Madison, WI53710
Type of Entity : S Corporation
State of Incorporation: WI
In Business Since: 1992
Valuation Prepared by: Robert Smith
Business Interest Valued: 100
Effective Date of Appraisal: December 31 2005
Date of Valuation: September 27 2006
Purpose of Evaluation: Acquisition
Standard of Value: Fair Market Value
Business Value: $330,349
Down Payment Required: $82,587
Additional Investment Required: $0
Total Investment Anticipated: $82,587
Summary of Value:
We have determined that a 100% ownership interest of Gift Gallery LTD is $330,349.
An anticipated investment of $82,587 would be required as a down payment to purchase thisbusiness.
The opinion of value is rendered given the variables listed above for the period listed above only.The value is offered on the basis of a 100% marketable interest as noted above.
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Scope and Limitations:
In the review of all data, we have relied upon all of the referenced information withoutindependent verification and therefore it is totally dependant upon the information provided byGift Gallery LTD. Any change in the critical information that was relied upon as part of theprocess of this valuation would certainly justify a reassessment of the final conclusion of the fairmarket value.
Standard of Value:
The fair market value is defined as follows: The fair market value of a business is the value atwhich the business would change hands between a willing seller and a willing buyer when neitheris under a compulsion and when both have reasonable knowledge of the relevant facts.
A fair market transaction must be a “win-win” for all parties concerned. The fair market value ofa going business is that value at which the normalized spendable income stream of the businesscan accomplish three critical criteria: 1) It must be able to support the structured market debtservice that would be created from a hypothetical business sale in the business’ market area. 2) Itmust be able to pay the owner a market rate salary as determined by the size, type and location ofthe business to current industry standards of a similar business within the same market area. 3) Itmust be able to pay the owner a market rate of return on his/her investment as determined by thecurrent market standards.
Summary Comments:This is a sample insert for the evaluator summary comments to show the location of the insert inthis sample business analysis/valuation report.
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FINAL DETERMINATION OF VALUEVS
BOOK VALUE AND ADJUSTED BOOK VALUE METHODS
Business Value: $330,349
Book Value Method: ($40,001)Less: Adjusted Book Value Method: ($33,628)
Intangibles (Good Will) Value: $363,977
Book Value Method:
The book value as of December 31 2005 was ($40,001). Book value is an accounting valuethat is calculated by subtracting total liabilities from total assets. Book value wasselected because it will give us more of a well rounded look at the state of the companyand it will give us one more comparison to determine the reasonableness of the finaldetermination of value. It was rejected because balance sheets are prepared on ahistorical cost basis, in accordance with Generally Accepted Accounting Principals; thebook value of a business does not necessarily consider the fair market value of theunderlying assets. We are more concerned with the income producing ability of theassets than their book value.
Adjusted Book Value – Going Concern Method:
The adjusted book value as of December 31 2005 was ($33,628). The adjusted bookvalue of this going concern method develops a valuation indicated by adjusting thereported book values of a subject company’s assets to its actual or estimated fair marketvalues and subtracting its liabilities (adjusted to fair market value, if appropriate). Thismethod was considered in the valuation of Gift Gallery LTD because it would benecessary to compare the estimated fair market value of the assets to the finaldetermination of value. If the fair market value of the assets is worth more than thedetermined value of the business, it would be better to sell the assets outright, not thebusiness as a going concern. This method was rejected because the estimated fair marketvalue of the assets individually is not an indicator of the income producing ability of theassemblage of all of the assets.
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TEST OF REASONABLENESS
To test the reasonableness of our opinion as to the fair market value of Gift Gallery LTD, we performed aproof of valuation analysis. This analysis includes assumptions regarding the cash down payment, the termsof the purchase notes, and the Company’s projected cash flows. This analysis looks at the final opinion ofthe fair market value and determines the functionality of the ensuing projected cash flows and anticipatedfinancing conclusions. The assumptions regarding the terms of the hypothetical purchase are presented inthe following schedule and represents the findings from our analysis.
Final determination of market value: $330,349
From normalized income statement:
Net operating income (NPBT): $101,300
Balance available to retire monthly debt service: $7,608
Buyer return on investment $ (ROI) : $10,009
Source of Purchase Funds Amount Terms (yrs) Interest Mo. Payment
Based upon the hypothetical terms presented above, the Company’s projected cash flows were estimated toascertain whether or not they cover the hypothetical interest and principal payments. The buyer post-salecash flow was calculated in the following manner:
1. The projected before-tax income was reduced by interest payments on hypothetical purchasenotes.
2. The projected post-sale pre-tax income was reduced by an income tax factor of 0.0%.3. All non-cash expenses were added back.4. The principal portion of all debt instruments (re-sale and post-sale) was deducted.
Test #1:Opinion of business value: $330,349Total Down payment + Debt: $330,349
Variance (Should be “0”): $0
Test #2:Balance available to retire monthly debt plus ROI: $8,442Structured monthly debt service payments: - $7,608Monthly Cash Flow Before Taxes (ROI) - $834
Variance (Should be “0”): $0
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TEST OF REASONABLENESS (CONTINUED)
Test #3:Net operating income (NPBT): $101,300Less: Balance available to retire debt service: $91,291
Amount available for buyer ROI: $10,009
Buyer required return on investment $ (ROI) : $10,009Amount available for buyer ROI: $10,009Variance (Should be “0”): $0
Test Conclusion:
The final opinion of value for Gift Gallery LTD of $330,349 passes the “test of reasonableness” because: 1)The total of all of the purchase funds created from the down payment and structured financing, equals thefinal opinion of value. 2) The total monthly payments of all structured financing at the hypothetical saleprice, equals the total amount of the spendable cash flow available to make such payments. 3) The totalamount of cash flow needed to give the buyer a fair market return on their investment equals the balance ofthe spendable cash flow that is made available to make such a payment. 4) The integrity of the buyer’s ROIis maintained because a fair market salary was used in the normalization of income streams process andtherefore does not dilute the total cash flow stream structured for the buyer.
Therefore:
Based on the above analysis, the priced cash flows are sufficient to pay the assumed interest and principledue on the hypothetical purchase notes and existing notes.
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SELLER PRETAX CASH POSITION
HYPOTHETICAL TERMS OF ASSET SALE AT CALCULATED MARKET VALUE
Cash received from sale:Down payment from Buyer: $82,587
Other Cash/Credit:Existing Cash from Business: $39,775Accounts Receivable Trade: $8,263Accounts Receivable Other: $0Costs in Excess of Billings: $0Prepaid Expenses: $0Deposits: $0Notes Receivable: $0
Total Cash Received: $232,693
Less cash/credit paid out from sale:Accounts Payable Trade: $18,720Accounts Payable Other: $12,004Notes Payable Other: $264,626Accrued Expenses: $4,502Notes Payable Current/Long Term: $0Billings in Excess of Costs: $0Other Current Liabilities: $7,021Deferred Liabilities: $0Other Long Term Liabilities: $0
Total Cash Paid Out: $306,873
Net Cash/Credit Received from Sale: ($74,180)
*The following unlisted balance sheet line-items are considered to be contributing assets and are assumedto stay in the business with the hypothetical buyer: Other Current Assets, Other Fixed Assets, Other Assets.Note: The actual seller proceeds received from a sale is totally dependent upon the final purchase terms.
Plus the seller will receive the following cash payments from the buyer:
Principal balance of seller loan: $145,694Monthly Payments: $4,499For a term period of: 3@ Interest Rate: 7.00
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BUYER BALANCE SHEET POSITION
HYPOTHETICAL TERMS OF ASSET SALE AT CALCULATED MARKET VALUE
Period BeginningDate of Sale
CURRENT ASSETSCash $0Accounts Receivable – Trade $0Accounts Receivable – Other $0Costs in Excess of Billings $0Inventory $125,898Prepaid Expenses $0Other $0
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CURRENT LIABILITIESAccounts Payable – Trade $0Accounts Payable – Other $0Notes payable $0Notes Payable – Current of LTD $76,279Billings in Excess of Costs $0Accrued Expenses $0Other Current Liabilities $0
Total Current Liabilities $76,279==============
LONG TERM LIABILITIESNotes Payable – LT of LTD $247,762Less: Notes Payable Current $76,279Deferred Liabilities $0Other Long Term Liabilities $0
Total Long Term Liabilities $171,483==============
TOTAL LIABILITIES $247,762==============
NETWORTHCapital stock $0Paid in Capital / Treasury Stock $82,587
Other Equities ($70,766)Retained Earnings $0Profit and Losses – YTD $0
Total Net worth $11,821==============
TOTAL LIABILITIES $259,583AND NETWORTH ==============
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OWNER INFORMATION
Company Name: Gift Gallery LTD
Located: Madison WI, 53710
Number of shares issued: 500
Total number of shares outstanding: 1000
Owner Name # Shares Owned % OwnershipSteven Wilson 500 50.00
Totals 500 50
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EVALUATOR DATA
APPRAISER’S INFORMATION
Name: Robert Smith
Title: President
Designation: (If entered) CVA
Company: Business Valuations Services LLC
Address: 636 Maple Rd.Suite 100Middleton, WI 53562
signage, trade names, business records, leases, licenses, franchise rights and so on.
This is a sample insert for the evaluator comments to show the location of the insert in this
sample business analysis/valuation report.
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APPENDICES
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TAX FORMS
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FINANCIALSTATEMENTS
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MISCELLANEOUSSUPPORTING
DOCUMENTATION
Gift Gallery LTDAcquisitionDecember 31 2005
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OFFERED AT: $330,349
Type of Business: Gift Novelty and Souvenir Stores
Business Profile:
This successful gift shop is located in the heart of a very high foot traffic shopping mallthat is known to be the best in the area. You may add additional text here to better detailthe attributes of this business.
Gift Gallery LTDAcquisitionDecember 31 2005
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