Barry Goodman
Basic ESOP Valuation
Arlene Ashcraft
Pamela Steverango
The ESOP Association Las Vegas Annual ConferenceNovember 8, 2012
Income ApproachBarry Goodman – Advanced Valuation Analytics, Ltd.
Market ApproachArlene Ashcraft – Columbia Financial Advisors Inc.
Employee CommunicationPamela Steverango – Chartwell Capital Solutions
Agenda
Barry Goodman – Advanced Valuation Analytics, Ltd.
Income Approach
Capitalization Of Cash Flow Method
Estimate the capitalization rate.Estimate the cash flow capacity.Divide the cash flow capacity by the
capitalization rate.
Factor, expressed in %, used to convert anticipated benefits into a current value
Considers interest rates, rates of return expected by the market, and risk of the anticipated benefits
Capitalization Rate
The company’s ability to produce profitLooks at historical profit – not anticipated future
profitEstimation Methods
Most recent yearMean or weighted averageAnother way to estimate cash flow capacity-
Projected Year
Cash Flow Capacity
Net Sales and EBIDTA
2006 2007 2008 2009 2010 2011$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
-$2,000,000
-$1,000,000
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
Net Sales EBITDA
Net
Sale
s EB
ITD
A
Gradual Increase
2006 2007 2008 2009 2010 2011 2012 2013 2014$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,000,000$1,050,000
$1,102,500$1,157,625
$1,215,506$1,276,281
$1,340,095$1,407,100
$1,477,455
CA
SH
FLO
W
Erratic History
2006 2007 2008 2009 2010 2011 2012 2013 2014$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$2,500,000
$500,000
$25,000
$1,500,000
$2,000,000
$1,000,000
$2,400,000$2,520,000
$2,646,000
CA
SH
FLO
W
Hockey Stick
2006 2007 2008 2009 2010 2011 2012 2013 2014$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$1,000,000$1,050,000$1,102,500$1,157,625$1,215,506$1,276,281
$2,500,000
$3,125,000
$3,906,250
CA
SH
FLO
W
Revenue Projections: Last Year and This Year
2011 2012E 2013E 2014E 2015E 2016E$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$17,120,487 $17,360,317$18,401,936
$19,874,091$21,464,018
$23,181,140
$20,086,500
$21,788,400
$23,466,107
$25,132,200
$26,388,810
Revenue Revenue-Last
Reven
ue
EBITDA Projections: Last Year and This Year
2011 2012E 2013E 2014E 2015E 2016E$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$1,449,470
$557,420
$432,701 $380,148
$568,053$662,549
$1,856,114
$2,141,260
$2,267,147$2,475,785
$2,461,763
EBITDA EBITDA-Last
EB
ITD
A
EBITDA Margin Projections: Last Year and This Year
2011 2012E 2013E 2014E 2015E 2016E0%
2%
4%
6%
8%
10%
12%
8.5%
3.2%
2.4%1.9%
2.6% 2.9%
9.2%9.8% 9.7% 9.9%
9.3%
EBITDA Margin EBITDA Margin-Last
EB
ITD
A M
arg
in
Historic Success At Forecasting Next Year’s EBITDA
2005 2006 2007 2008 2009 2010 2011$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
EBITDA EBITDA Forecasted for this Year
EB
ITD
A
Discounts/PremiumsDoes the interest
holder have control over the
entity?
Is there a public market for the
interest?
Is there a public market for the
interest?
Controlling, as if freely
traded value
Controlling, non freely
traded value
Non-controlling, as
if freely traded value
Non-controlling, non freely
traded value
Yes No
Yes YesNo No
Appendix A: Balance Sheet
2006 2007 2008 2009 2010 2011Current Assets- Cash and Equivalents $500,000 $550,000 $600,000 $450,000 $300,000 $125,000Trade Receivables 4,000,000 4,500,000 5,000,000 5,500,000 4,200,000 3,100,000Inventory 2,400,000 2,600,000 2,750,000 2,850,000 3,000,000 2,600,000Other Current Assets 200,000 200,000 200,000 200,000 200,000 200,000Total Current Assets 7,100,000 7,850,000 8,550,000 9,000,000 7,700,000 6,025,000Property & Equipment 8,085,885 8,085,885 8,085,885 8,085,885 8,085,885 8,085,885Other Assets 933,346 933,346 933,346 933,346 933,346 933,346Total Assets $16,119,231 $16,869,231 $17,569,231 $18,019,231 $16,719,231 $15,044,231
Current Liabilities $3,000,000 $3,500,000 $4,500,000 $6,000,000 $7,000,000 $6,500,000Long-Term Liabilities 5,000,000 4,500,000 4,000,000 3,500,000 3,500,000 3,500,000Other Liabilities 0 0 0 0 0 0Total Liabilities $8,000,000 $8,000,000 $8,500,000 $9,500,000 $10,500,000 $10,000,000Equity $8,119,231 $8,869,231 $9,069,231 $8,519,231 $6,219,231 $5,044,231Total Liabilities & Equity $16,119,231 $16,869,231 $17,569,231 $18,019,231 $16,719,231 $15,044,231
Unadjusted Equity $8,119,231 $8,869,231 $9,069,231 $8,519,231 $6,219,231 $5,044,231
Total Adjustments to Equity $0 $0 $0 $0 $0 $0
Appendix B: Income Statement2006 2007 2008 2009 2010 2011
Net Sales $30,000,000 $33,000,000 $32,000,000 $30,000,000 $26,500,000 $23,000,000Cost of Sales 21,500,000 24,500,000 24,000,000 20,000,000 20,000,000 20,000,000Gross Margin 8,500,000 8,500,000 8,000,000 10,000,000 6,500,000 3,000,000Operating Expenses 4,900,000 4,950,000 3,600,000 4,000,000 4,500,000 4,300,000Depreciation 1,100,000 1,350,000 1,900,000 1,900,000 2,000,000 1,900,000Other- 0 0 0 0 0 0Operating Profit 2,500,000 2,200,000 2,500,000 4,100,000 0 (3,200,000)Interest Expense 770,000 930,000 1,050,000 1,030,000 600,000 450,000Other Income (Loss) 25,000 25,000 25,000 25,000 25,000 25,000Income Before Taxes 1,755,000 1,295,000 1,475,000 3,095,000 (575,000) (3,625,000)Income Taxes 737,100 543,900 619,500 1,299,900 (241,500) (1,522,500)Net Income $1,017,900 $751,100 $855,500 $1,795,100 ($333,500) ($2,102,500)
EBI $1,450,000 $1,276,000 $1,450,000 $2,378,000 $0 ($1,856,000)
EBIT $2,500,000 $2,200,000 $2,500,000 $4,100,000 $0 ($3,200,000)
EBITDA $3,600,000 $3,550,000 $4,400,000 $6,000,000 $2,000,000 ($1,300,000)
Net Income (Unadj) $959,306 $775,000 $865,000 $4,021,100 $926,500 ($3,625,000) Depreciation/Amort. 1,100,000 1,350,000 1,900,000 1,900,000 2,000,000 1,900,000 Changes Work Cap 908,330 181,816 (293,408) (3,972,523) (807,008) 4,027,840 Investing Act (1,604,564) (7,918,481) (801,652) (785,937) (1,098,795) (1,767,503) Financing Act (1,967,445) 6,331,404 (2,005,511) (764,264) (1,020,697) (535,337) Dividends 0 0 0 0 0 0Cash Flow ($604,373) $719,739 ($335,571) $398,376 $0 $0
Arlene Ashcraft– Columbia Financial Advisors, Inc.
Market Approach
Also called the “Sales Comparison Approach”Based on the theory of substitution
In real estate, appraisers look at data on sales of comparable properties. In business valuation, the theory is the same.
A business appraiser interprets transaction data to help guide the determination of appropriate multiples of various measures (cash flow, earnings, book value, etc.) to derive indications of value for the subject company
Market Approach
The market approach consists of any/all of the following:
An analysis of previous sales or offers for the subject company’s stock
Sales of entire public or privately held companies similar to the subject company
And/or sales of stock of publicly traded companies similar to the subject company
Market Approach
These are the same as in the income approach:Cash FlowRiskGrowth
All of the above influence the price paid for a whole company or a single share in a company
Market Approach-Value Drivers
What drives value?Macroeconomic factors Industry factorsCompany specific factors
Prices can change rapidly for publicly traded companies, as perceived changes in the above drivers become incorporated quickly into the share price
Market Approach-Value Drivers
The chart below shows the variation in the S&P 500 Index over time. The horizontal line is the starting value for the S&P 500 in January 2002.
S&P 500 Index from January 2002 through September 2012
Jan-
02
May-0
2
Aug-0
2
Dec-0
2
Apr-0
3
Aug-0
3
Dec-0
3
Apr-0
4
Aug-0
4
Dec-0
4
Apr-0
5
Aug-0
5
Dec-0
5
Mar-0
6
Jul-0
6
Nov-0
6
Mar-0
7
Jul-0
7
Nov-0
7
Mar-0
8
Jul-0
8
Nov-0
8
Mar-0
9
Jul-0
9
Oct-0
9
Feb-
10
Jun-
10
Oct-1
0
Feb-
11
Jun-
11
Oct-1
1
Feb-
12
Jun-
120
200
400
600
800
1000
1200
1400
1600
1800
Snapshot: S&P 500 Index from Sept. 26, 2008 to Oct. 15, 2008
9/26
/08
9/27
/08
9/28
/08
9/29
/08
9/30
/08
10/1
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10/2
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10/3
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10/4
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10/5
/08
10/6
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10/7
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10/8
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10/9
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10/1
0/08
10/1
1/08
10/1
2/08
10/1
3/08
10/1
4/08
10/1
5/08
800
850
900
950
1000
1050
1100
1150
1200
S&P 500 Index
S&P 500 Index
S&
P 5
00 V
alu
e
Issues with the market approach Comparability – determination and availability of data
Each subject company is different and unique, but companies that have similar growth and risk drivers can still be appropriate to use as comparables
Volatility-Public Companies Timely Data & Completeness of Data-Merged and Acquired
Companies
Positive features of the market approach Timely data
Incorporates up-to-date perceptions of risks/benefits of investment
“Real world” transactions
Market Data
Assessment of relative risk and returnSelection and application of multiplesWeighting of indications of value derived
May change from year to year Usefulness of underlying data
Indicated Value Minority Marketable
Market Approach – Public Companies
Relatively similar approach as in the public company market method
Assessment of relative risk and return Selection and application of multiples Weighting of indications of value derived
May change from year to year Usefulness of underlying data
Indicated Value Control Marketable or Control non-Marketable
Market Approach – M & A
Historical M&A Transaction Volume
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201210.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
0
2000
4000
6000
8000
10000
12000
14000
Transactions
Avg. EBITDA Multiple, Excl. Multiples over 100
EB
ITD
A M
ult
iple
Tra
nsacti
ons
Reasonable given value basisStrengths and weaknesses of eachFinal weighting of concluded valuesImplied multiples
Concluded Value
Pamela Steverango – Chartwell Capital Solutions
Employee Communication
ESOP companies must share certain information with participants
Annual participant statementSummary Plan Description (SPD)Summary annual report on the activity in the planAdditional disclosure for public companies
Why?
Some ESOP companies choose to share more financial information and communicate more with participants
Value is determined on an annual basis by an independent appraiser and is not arbitrarily set by management
There are a number of ways of looking at valueThere are external factors and internal factors
that affect value, some of which are beyond your Company’s control
Each Employee can impact value
What?
Influencing Factors
External General & Regional
Economic Condition Regulatory
Considerations Specific Industry
Condition Capital Markets
Condition
Internal Operational Factors Financial Performance
and Outlook Vendor Relationships Customer Relationships Management Capabilities Personnel
Company Operational FactorsOther• Technology• Administration• Business Development • Activity
Risk• Relative Size• Industry Position• Quality of Earnings• Customer
Concentration• Product Diversity• Geographic Diversity• Leverage• Off B/S Liabilities
Personnel• Depth and strength of
management team• Longevity and
expertise of key personnel
• Ability to attract key personnel
• Strong HR department
Profitability• Margins• Fixed Cost Leverage• Volatility
Growth• Diversification of end
markets• Breadth and depth of
service specialties• Geographic
diversification• Corporate growth
strategy and vision• Reputation in
marketplace
Clarify expectationsWhat does it mean to think and act like an owner
in your company?How does this differ from perceptions people
have about ownership?Initial Communication
Start from the participant point of viewMake it understandableSeemingly “ungrateful” or probing questions could
be a good signNo questions could be a bad sign
How?
Benefits of an ESOP How an ESOP WorksHow the ESOP Buys StockRequired Players and RolesBenefits and Risks of OwnershipSub S Corporation Status
Initial Communication Sample Outline
Who is Eligible to Participate in the ESOP?Who gets Allocations of Contributions?When Will I Receive my Benefit and How is it
Paid?Value of Company Stock and My AccountVestingSummary Plan Description
Initial Communication Sample Outline
Questions?
?
Barry GoodmanAdvanced Valuation Analytics, Ltd.
1901 L Street NW | Suite 605Washington, DC 20036
Arlene Ashcraft, CFA, ASAColumbia Financial Advisors, Inc.
720 SW Washington Street | Suite 650Portland, OR 97205
Pamela Steverango, CFAChartwell Capital Solutions
One Market | Spear Tower | 36th FloorSan Francisco, CA 94105
Speaker Information
Barry R. Goodman, CFA, ASA, CPA/ABV, CBA, CFP
Barry has the following professional designations that require an
examination: Chartered Financial Analyst Certified Business Appraiser Certified Public Accountant Accredited in Business Valuation Accredited Senior Appraiser - American Society of Appraisers Fellow - Financial Analysts Federation Certified Financial Planner
In addition, he is active in the following organizations: American Society of Appraisers (Business Valuation Specialty) American Institute of Certified Public Accountants Greater Washington Institute of Certified Public Accountants (Valuation Committee) Employee Stock Ownership Association (Business Valuation Advisory Committee/Chairman of Leverage Buyout Sub-
Committee) National Economists Club Washington Society of Investment Analysts
Barry R. GoodmanAdvanced Valuation Analytics, Inc.
1901 L Street, NWSuite 605
Washington DC 20036202-296-2777
Arlene L. Ashcraft, CFA, ASA
Principal and Shareholder
Arlene Ashcraft has been engaged in business appraisals since
2005. She specializes in ESOP valuation and financial advisory
services and appraisal assignments for litigation support purposes.
Ms. Ashcraft is an Accredited Senior Appraiser of the American
Society of Appraisers designated in Business Valuation, and a
Chartered Financial Analyst. She is the current Treasurer of the
American Society of Appraisers Portland, Oregon Chapter and
Editor of the American Society of Appraisers Business Valuation E-
Letter. Ms. Ashcraft earned her Masters of Business Administration
from Portland State University in 2004. She is a member of the
ESOP Association and an associate member of the ESOP
Association’s Valuation Advisory Committee. Ms. Ashcraft has been
a speaker on ESOP valuation issues at conferences and webinars
sponsored by the National Center for Employee Ownership.
Arlene L. AshcraftColumbia Financial Advisors, Inc.
720 SW WashingtonSuite 650
Portland OR 97205503-222-0562
Managing Director
Pamela has provided financial advisory services to privately held companies since
1986. She is recognized as a leading authority on business valuation, particularly
with respect to Employee Stock Ownership Plans and other qualified ERISA plans.
Pamela is a nationally recognized speaker on ESOP business valuations. She has
been a featured speaker for The ESOP Association, the National Center for
Employee Ownership, The ESOP Association - California/Western States Chapter,
the AICPA, and for individual organizations on ESOP valuations and fiduciary issues
as they relate to ESOP valuations.
Pamela is an active member of The ESOP Association’s Ownership Culture
Committee, the National Center for Employee Ownership, The ESOP Association -
California/Western States Chapter, the CFA Institute and Security Analysts of San
Francisco.
Pamela is a Chartered Financial Analyst charter holder. She earned a Bachelor of
Science degree in psychology from Oregon State University. Pamela also holds a
Master of Business Administration degree, with an emphasis in finance, from
Golden Gate University.
Pamela D. Steverango, CFA
Pamela SteverangoChartwell Capital Solutions
One Market Street, Spear TowerSuite 3600
San Francisco CA 94105415-293-8200
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