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CEPA Term - Session 2 Questions and Answers
What is a Triggering Event? o :## A Personal, Financial, Business assessment correlated to the business Range Of Value. What are benefits of a Triggering Event? o :## •Establishes the present & best in class business values o •Predicts the probability of succeeding with growth and transition strategies o •Identifies the PROFIT GAP o •Identifies the VALUE GAP o •Identifies ACTIONS needed to protect, build and harvest value What is the equation behind Strategic (Present) Value = Simple Math o :## R/EBITTDA x Market Multiple = Value or R/Sales x Market Multiple = Value What is a businesses Tax Number when it comes to valuation? o :## •This is the number that displays on the financial statements
- It is the number presented to tax authorities •Usually, the objective is to minimize this number for tax purposes
•Assets are written down to book value What is a business Real Number when it comes to valuation? o :## •This number is calculated by adjusting the financial statements; called Financial Recasting
- It reflects the most likely earnings and balance sheet of an ongoing concern
- Tangible assets adjusted to market value upon transfer (NOTE: does not include intangibles)
- The objective is to maximize this number for wealth creation What does EBITDA stand for? o :## EBITDA: Earnings Before Interest Taxes Depreciation Amortization What is Recasted EBITDA? o :## Market's measure of earnings being generated from ongoing, normalized operations. Needs to be normalized. Balance Sheet adjustments may include inventory write offs, A/R write offs, asset write offs, debt payoffs (inter-company or owner/employee). The Range of Value Market Multiple is determined by ______________.
What is the rule of 4 when it comes to computing a business owner's ideal wealth goal? o :## We should assume 4% of wealth goal will suffice annually until end of life. What is the Profit Gap? o :## Best In Class recasted EBITDA less business present recasted EBITDA. What is the Value Gap? o :## Best In Class Strategic Value less business present Strategic Value. Remember: Strategic Value = Simple Math! R/EBITDA x Multiple = Value What is the definition of overall Business Value? o :## The Economic Benefit Stream of a Whole Business. Includes Tangibles and Intangibles (the 4 Cs). What are some examples of "Deal Terms" when selling a business? o :## •Hold-Back of Proceeds (escrow) •Seller Financing •Performance Payments / Earn-Out Provision •Non-Competition Agreement •Employment Agreement and/or Consulting Agreement •Contingent and Unknown Liabilities
Why might Price and Value be different when assessing the sale of a business? How is that difference resolved? o :## Buyer and seller may not see eye to eye in terms of what is being bought/sold (includes assessments of intangibles, future outlook, etc). Differences are reconciled using "deal terms" to satisfy each party adequately. Why are there varying Standards of Business Value? o :## The proper Standard of Value to be considered in a valuation depends on its purpose. What are the 5 Standards of Business Value (FIIFE)? o :## 1. Fair Market Value
- Investment Value
- Intrinsic or Fundamental Value
- Fair Value
- Emotional Value What is the definition of Fair Market Value?
LITIGATION DEFINITION
With respect to dissenter's shares, means "restore me to equity" with the valuation on an enterprise level (no minority position discount and no lack of marketability discount). What is the definition of ""Emotional Value"? o :## What a buyer and seller perceive. Most commonly an unrealistic seller expectation. What are the 4 different types of Buyers? o :## Hypothetical Buyer Financial Buyer - Mainly concerned with ROI Strategic Buyer - May pay premium for tech or market access Family Members What are common elements of control position within the context of owning a business? o :## • Establish company policy and strategy.
- Appoint the Board of Directors and correspondingly appoint management.
- Determine compensation for management and employees. •Declare and pay dividends.
- Acquire or divest assets. •Establish strategic business relationships. • Issue or redeem stock.
- Liquidate, Sell or Recapitalize the company.
- Change bylaws or articles of incorporation.
What are the three approaches to determining Business Value? o :## Income, Market, Asset What are the two methods to determining Business Value on an Income basis? o :## 1. Discounted Cash Flow (DCF) Method (good for growing or volatile earnings)
- Capitalized Earnings Method (good for steady and predictable earnings) What is the Discounted Cash Flow (DCF) method of determining Business Value on an Income basis? o :## More complex to assemble. Predicated on a specific future look at economic benefits (i.e., over a 3-5 year period.) A financial projection is "Prospective financial statements that present, to the best of the responsible party's knowledge and belief, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows" using EBIT or EBITDA.
Provides flexibility in valuing companies with uneven or cyclical growth expectations. What are the cons of using the Income approach to Business Valuation? o :## Depends heavily on forecasted future financial performance, results are subject to who prepares the forecast. Hinges on the discount rate and the subjectivity of perceived risks. More complex and time consuming. What are 2 cons to the Public Company Guideline Method to Business Valuation? o :## Suitability of Comparable Guideline Companies due to size, scope of operations and stage of business. Does not account for the future performance of the company. What are 3 pros to the Public Company Guideline Method to Business Valuation? o :## Sales of Stock in Public Markets - sufficient data points. Observable operating metrics/performance. Transparency and financial integrity. What are 3 pros to the Guideline Transaction Method to Business Valuation?
o :## Based on actual sales data. Target companies are typically smaller and therefore more comparable (relative to the publicly-traded comps). Easy to understand. What are 3 cons to the Guideline Transaction Method to Business Valuation? o :## - Lack of transparency in regard to the Target company's financial performance.
- Lack of sufficient transactions and/or dated transactions.
- Lack of transparency in regard to deal structure.
- Often driven by synergistic benefits to the specific buyers. What are two Pros to the Asset Approach to Valuation? o :## Can be appropriate for asset-intensive businesses. Conceptually easy to understand. What are three Cons to the Asset Approach to Valuation?
Disadvantages of Stock Sale for Buyer o :## •Liability concerns, lawsuits, warranties, taxes, other •No step up in cost basis (unless Code Sec. 338) •Unwanted assets or contracts part of the transaction •Possible loss of NOL carryover or other favorable tax attributes Advantages of Asset Sale for Seller o :## •Only sell assets desired •Retain corporate structure •Utilize tax attributes •Reduces reps and warranties Disadvantages of Asset Sale for Seller o :## •Cost of liquidating entity •Retain contingent liabilities •Potential double tax •Depreciation recapture When assessing Risk, what does the acronym VUCA stand for? o :## Volatility, Uncertainty, Complexity and Ambiguity In the context of Value Enhancement, what are three top Revenue Drivers?
o :## Recurring revenue, Niches in a growing market, Owner Independence In the context of Value Enhancement, what are three top Revenue Killers? o :## Concentration of customers (whales who eat into your margins due to pricing power), Lack of Management Succession Planning, Poor Financial Systems and Reporting Value Acceleration must deliver at least two of the three crucial benefits: o :## Clarity, Liquidity, Legacy What are the Value Domains? o :## Culture, Risk, Strategy, Productivity, Sales and Marketing, Financial, Leadership/People Value Acceleration must deliver at least 2 of these 3 crucial benefits: o :## Clarity, Liquidity, Legacy What are the three key stages in the business transition journey (EPT)? o :## Exploring, Pivoting (getting ready), Triggering (ready to make decision) What are the 3 strategies for increasing Enterprise Value?
