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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

V

PRESENTED BY:

w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

PRESENTED BY:

w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

VALUATION

Presented by:Kevin W. Smith, CPA, CIC

Mystic Capital Advisors Group, LLCwww.mysticcapital.com

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

VALUATION

What is a Firm Really Worth?

IRS Revenue Ruling 59‐60 

The price a willing buyer might pay a willing seller for a property, when neither is under compulsion to carry out the transaction and when both parties are able to trade and are reasonably informed about both the property in question and the business in which it operates.

Rules of Thumb are Worthless!!!

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

COMPONENTS OF VALUE

Earnings Value (Book of Business Value)

Balance Sheet / Tangible Net Worth (Liquidation Value)

Working Capital

Earnings Value + Balance Sheet –Working Capital = Fair Market Value

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

METHODOLOGIES OR MYSTERIES?

Asset Approach (Tangible Basis)

Income Approach (Net Present Value of Discounted Future Cash Flows)

Market Approach (Comparable Transactions)

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

KEY FACTORS AFFECTING VALUE EBITDA, EBITDA, EBITDA

Business Structure

Employment Agreements

Concentration Risks

Key Personnel

Market, Competitors & Trends

Tangible Balance Sheet

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

EBITDA, EBITDA, EBITDA PRIMARY DRIVER of Valuation

Earnings Before Interest, Taxes, Depreciation & Amortization

Gross or Net (i.e. Revenues or Earnings?)

Normalization of Pro Forma EBITDA (i.e. elimination of non‐recurring items & extraordinary items, as well as adjustment to reflect operations under a third party’s business model)

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

Annual % of Pro Forma Pro Forma % of Results Rev Adjustments Statement Rev Explanation

REVENUESCommission & Consulting Income 2,000,000 87.0% 30,000 2,030,000 88.1% New Account Total Commissions 2,000,000 87.0% 30,000 2,030,000 88.1%Contingency Income 250,000 10.9% (25,000) 225,000 9.8% Known ReductionMiscellaneous & Other Income 10,000 0.4% - 10,000 0.4% Total Revenues 2,260,000 98.3% 5,000 2,265,000 98.3%External Broker Commission Expense (40,000) -1.7% - (40,000) -1.7% Net Retained Revenues 2,300,000 100.0% 5,000 2,305,000 100.0%

EXPENSES Personnel Expense

Compensation 1,200,000 52.2% (100,000) 1,100,000 47.7% Reduction & Comp. ChangeBenefits & Taxes 144,000 6.3% 43,000 187,000 8.1% Buyers' Benefits Total Personnel 1,344,000 58.4% (57,000) 1,287,000 55.8%

Non-Personnel ExpenseOther Operating Expenses 550,000 23.9% (75,000) 475,000 20.6% Non-recurringDepreciation & Amortization 100,000 4.3% (100,000) - 0.0% By definitionInterest Expense 25,000 1.1% (25,000) - 0.0% By definition Total Other Operating 675,000 29.3% (200,000) 475,000 20.6%

Total Expenses 2,019,000 87.8% (257,000) 1,762,000 76.4%0.0%

Net Pre-Tax Profit (Loss) 281,000 12.2% 262,000 543,000 23.6%

EBITDA Margin 23.6%

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

IMPACT OF EBITDA vs. REVENUES

Comm. Rev’s $400,000 $400,000Profit Margin 30% 20%

EBITDA $120,000 $80,000Multiple 6 6

Value $720,000 $480,000

Value/Revenues 1.8 1.2

Revenue Multiple = Value ExpressionEBITDA Multiple = Value Calculation

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

BUSINESS STRUCTURE “C” Corporation vs. “S” Corporation

Are Capital Gains “Passing” you by?

Tax Benefits Equate to REAL dollars for BOTHparties

Structure can not only impeded Valuation, but can also impede the ability to get a “deal done”

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

EMPLOYMENT AGREEMENTS

Can NOT sell what is not YOURS

Non‐solicitation & non‐piracy provisions

Non‐Competition

Vesting &/or other Deferred Compensation

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

CONCENTRATION RISKS

Lines of Business or Products

Customer Base

Markets

Geographic Region

Production Staff

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

KEY PERSONNEL

Who “runs” the Agency? Sales? Operations?

How deep is the “bench”?

Should I stay or should I go?

Method of Compensation

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

MARKET, COMPETITORS & TRENDS

Trend Analysis‐Market‐ Products‐ Historical Performance

Competitor Analysis

Niche / Strategic Benefits

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

TANGIBLE BALANCE SHEET

Net Tangible Worth (Deficit)

Stock deals assume the Balance Sheet – both Stated & Unstated Obligations

Work Capital – Pay attention to the language!!!!

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

SUMMATION & QUESTIONS

Earnings Value + Tangible Balance – Working Capital = Fair Market Value

Intangible nature of the Industry makes EBITDA the Key Driver of Valuation

Final Questions?