Salt Evaporation Plant
Reason for
Damages
Analysis:
On January 17, 2001, there was a natural gas leak from a
natural gas storage facility. Gas was found at the subject’s
facility within days of the leak. The level of gas detected was
sufficient to cause the Hutchinson Fire Chief to order evacuation
Dennis Bingham
of the facility.
2007 IBA National Conference
Summary Description of Business
• Our client was a salt evaporation plant that
produced food and feed grade,
mechanically evaporated salt from
injection mining. It also owned hundreds
of acres of land under which the salt is
found.
• Over many years of salt mining, huge
caverns remain from which the natural gas
would seep.
Problem
•
As of the date of valuation, according to
independent experts, there was no
method to determine
1. How much gas remained in the ground
under the facility and
2. There was no method to totally cure or
remediate the presence of the natural gas in
the foreseeable future.
How We Attempted to Solve the
Valuation
• We set out to find resources that
would help us to quantify a loss in
value.
• Approach the loss of value from
the perspective of what a willing
buyer or seller would do.
When a Detrimental Condition Exists
• When there is evidence of environmental
contamination, or structural damage, or
issues of safety to public health, a
detrimental condition is said to exist.
• The main driver of a loss of value when a
detrimental condition exists, is an
uncertainty for the buyer.
Valuation of Subject with Consideration
of Detrimental Condition
Valuation Methods
Methodology for Economic Damages
•
In arriving at an estimate of economic
damages we prepared two analyses:
1. “but-for” or the unimpaired situation and
2. “after” or the impaired situation
•
The difference between these two
estimates represents our estimate of
economic damages.
Valuation Methods Selected
1. Multiple-period discounting.
2. Adjusted book value.
3. Merger and acquisition
methods.
Multiple-Period Discounting Method
•
The factors impacting the negative effect on
value included the following:
1. Increased risk to the subject’s economic income and,
2. The potential that buyers may be unable to obtain financing
and that buyers would require a reduced price for the
enterprise due to the risk of future explosion.
•
•
We prepared the “but-for” analysis using a
standard valuation methodology (including the
build-up method to determine the cost of
capital).
We prepared two “after” the environmental
accident forecasts. The forecasts utilized
CAPM methodology.
Forecast 1
• We assumed that as a result of the
potential interruption in the subject’s
economic income stream a willing buyer
would require a higher rate of return on the
investment to compensate for the higher
risk.
Forecast 2
• We assumed that as a result of the potential
interruption in the subject’s income stream that
lenders would be unwilling to finance the
business risk. Therefore, buyers would need
more equity invested, which would increase the
discount rate.
• We estimated the increased discount rate by
calculating a WACC for the subject assuming
10% equity financing.
Adjusted Book Value Method
(Excess Earning)
•
The factors impacting the negative effect on value included the
following:
1.
2.
•
•
•
The value of the subject’s real estate would be lower in the “after” scenario
because the subject would have an additional risk characteristic that is
greater than the companies analyzed in the “but-for” analysis and,
Increased risk to the subject’s economic income.
Over the years Shenehon has been involved in numerous
assignments regarding the impact of contamination on real estate
values. We compiled a database of 25 such environmental-affected
transactions (majority in the MSP area).
We determined the diminution from “unimpaired” value by
environmental issues (for example: hydrocarbon contamination,
natural gas/methane contamination, chemical contamination, and toxic
metal contamination).
We identified discounts from unimpaired value for natural gas/methane
contamination ranging from 12% to 61% with a median of 14%. After
further analysis, we estimated a 15% adjustment was appropriate in
this case. This discount was applied to the subject’s fixed assets
(land, building, plant equipment and office equipment).
Merger and Acquisition Methods
• The value of the subject’s business would be lower in the “after” scenario
because the subject would have an additional risk characteristic that is
greater than the companies analyzed in the “but-for” analysis.
• We calculated the “but-for” value using transaction data that was publicly
reported on four salt producers. In addition, we used eight private
transactions that were reported in Done Deal States (SIC 2899).
• In arriving at an “after” value we relied on the data base of 25 such
environmental-affected transactions (majority in the MSP area) discussed
earlier.
• We determined the diminution from “unimpaired” value by environmental
issued (for example: hydrocarbon contamination, natural gas/methane
contamination, chemical contamination, and toxic metal contamination).
• We identified discounts from unimpaired value for natural gas/methane
contamination ranged from 12% t0 61% with a median of 14%. After
further analysis, we estimated a 15% adjustment was appropriate in this
case. This discount was applied to the subject’s fixed assets.
• We separately adjusted the salt reserves and goodwill multiples by 22%
and 10% respectively.
Summary
UN-Fairness Opinion
Consulting firm (David) v. Big
(Bad?) Investment Bank (Goliath)
Peter Butler
2007 IBA National Conference
Fujitsu’s acquisition of Amdahl

Valuation problem




12.00/share = fair price?
Yes – Big (Bad?) Investment bank
No – Small consulting firm
Amdahl


Conversion from hardware/equipment (40% of
revenue) distributor to provider of computer
information services and software (60%)
IT – faster growth; larger multiples
Why unfair? Financial analysis

Relative valuation (Historical)



Relative valuation (forward-looking)



Blended 60/40 mix: $16.95
Price/earning (future)
Acquisition premium



Blended 60/40 mix: $19.97 - $22.41
Price/sales; price/book
18.5% (5-days out) v. 45.61% (60/40 mix)
1.6% (day before) v. 45.61%
Amdahl recently traded as high as $13.375
Undue influence - “Googlewack” facts









Fujitsu already 42% shareholder in Amdahl
Fujitsu – major supplier to Amdahl
Two companies shared research & development
Fujitsu controlled at least 3 seats on Amdahl’s board of directors
Fujitsu had access to non-public information
None of the other large Amdahl shareholders was even
consulted regarding the transaction before the announcement
Prior to offer, Fujitsu acknowledged that it would not sell its
shares in the event of a competing bid
Assurances from Fujitsu that current Amdahl management
would keep jobs
Amdahl agreed to inform Fujitsu if there were other interested
parties
Analysts’ responses



The $12 offer did not take into account the future
value of Amdahl’s growing software and services
business.
When it looked like the company was on the brink of
doing a lot better, it’s going to be Fujitsu that ends up
making the real money.
Being in a position of major supplier and 42%
shareholder allows Fujitsu to buy the company for
$850 million, of which nearly half could be paid from
Amdahl’s balance sheet.
Big (Bad?) Investment Bank “Un-Fairness
Opinion”


Choice of comparable companies – suspect
Low future growth expectations relative to
transformation of company and industry




Used adjusted and worst case scenarios that were
between 20% - 80% below earning projections of
Amdahl management
Amdahl management’s projections conservative
based on street’s consensus
Only spoke with Fujitsu’s investment bankers
Fujitsu is also a client
Conclusions



UNFAIR fairness opinion
If you come up against big (Bad?)
investment bank – do not be
intimidated
Chances are the shareholders’ best
interests have not been accounted for
The Case of the Disappearing Debt
Valuation or Lost Profits with Changing Assumptions
Engagement Type:
Business Valuation
Client:
100% Shareholder of Company
Valuation Method:
Discounted Cash Flow Model (DCF)
Numerator:
Cash Flows to Total Invested Capital (TIC)
Denominator:
Weighted Average Cost of Capital (WACC)
Capital Structure:
Actual (calculated by iteration)
Value of Equity:
TIC minus actual debt
Keith Pinkerton
2007 IBA National Conference
The Case of the Disappearing Debt
Engagement Type: Business Valuation
Client:
100% Shareholder of Company
Valuation Method:
DCF
Numerator:
Cash Flows to TIC
Denominator:
WACC
Capital Structure:
Hypothetical
Value of Equity:
TIC minus hypothesized debt
The Case of the Disappearing Debt
Engagement Type: Calculation of Lost Profits (Into Perpetuity)
Client:
100% Shareholder of Company
Valuation Method:
DCF
Numerator:
Cash Flows to TIC
Denominator:
WACC
Capital Structure:
Actual (calculated by iteration)
Value of Equity:
TIC minus actual debt
The Case of the Disappearing Debt
Engagement Type: Calculation of Lost Profits (Into Perpetuity)
Client:
100% Shareholder of Company
Valuation Method:
DCF
Numerator:
Cash Flows TIC
Denominator:
WACC
Capital Structure:
Hypothetical
Value of Equity:
TIC minus hypothesized debt
The Case of the Disappearing Debt
Key Points
 Start-up company. VC Funding 8/1/03, Val Date 1/1/04
 Technology-based (Internet) company
 Gross revenues from inception less than $500K
 Litigated matter, opposing expert uses DCF to TIC
 10-year DCF with imbedded Gordon Growth model
 Employs a hypothetical 60/40 (d/e) capital structure
 CoE = 22%, CoD = 4.2%, WACC = 14.9%
 Initially subtracts no debt b/c “there is no debt” @ t=0
 Later claims no debt subtract b/c it’s a lost profits calculation, not
a valuation
The Case of the Disappearing Debt
CASH FLOWS TO
TIC AND WACC
CASH FLOWS TO EQUITY
& EQUITY DISCOUNT RATE
EBIT
Less Interest Expense
EBT
Less Income tax @ 40%
Net Income
Adjustments for Cash Flow
Plus Depreciation
Less CAPEX
Less W/C
Plus Interest, net of tax
Plus Inc. in Long Term Debt
Cash Flow
2000
2001
2002
$19,000
$4,000
$15,000
$6,000
$9,000
$19,950
$4,200
$15,750
$6,300
$9,450
$20,948
$4,410
$16,538
$6,615
$9,923
$9,000
($11,000)
($1,000)
$0
$2,000
$8,000
$9,450
($11,550)
($1,050)
$0
$2,100
$8,400
$9,923
($12,128)
($1,103)
$0
$2,205
$8,820
Discount rate
Equity
Debt (after tax)
Applicable Discount Rate
25.0%
6.0%
25.0%
Sustainable Growth Rate
Capitalization Rate
5.0%
20.0%
2000
2001
2002
$21,995
$4,631
$17,364
$6,946
$10,419
$19,000
$4,000
$15,000
$6,000
$9,000
$19,950
$4,200
$15,750
$6,300
$9,450
$20,948
$4,410
$16,538
$6,615
$9,923
$21,995
$4,631
$17,364
$6,946
$10,419
$10,419
($12,734)
($1,158)
$0
$2,315
$9,261
$9,000
($11,000)
($1,000)
$2,400
$0
$8,400
$9,450
($11,550)
($1,050)
$2,520
$0
$8,820
$9,923
($12,128)
($1,103)
$2,646
$0
$9,261
$10,419
($12,734)
($1,158)
$2,778
$0
$9,724
Difference:
Difference:
$873
$1,236
5.0%
10.5%
$46,305
$6,400
Terminal
25.0%
6.0%
15.5%
Undiscounted Terminal Value
Present Value of Cash Flows
Terminal
$5,376
$4,516
$23,708
$92,610
$7,273
Sum of Present Values
Less Debt
$40,000
$0
$80,000
$40,000
Value of Equity
$40,000
$40,000
This example is a partial re-production from Valuing A Business , by Pratt, et al, 4th Edition, pages 189-195
$6,612
$6,011
$60,105
Go
The Case of the Disappearing Debt
Application to Finite Cash Flow Stream
Difference in PV of Cash Flows
Percent of Total Difference
2000
2001
2002
Terminal
Total
$873
2.2%
$1,236
3.1%
$1,495
3.7%
$36,397
91.0%
$40,000
100.0%
Should some amount of debt be subtracted even in finite period of
lost profits. . .
 when cash flow to total invested capital is the measure of damages…
 and when the plaintiff group does not include creditors?
Appraising
the“Googlewacks”
2007 IBA National Symposium
Masterminds Track II
June 22, 2007
KC Conrad
C o n r a d B u s in e s s A p p r a is e r s
2007 IBA National Conference
Unique Business
Valuations:
Reining in that Final
Value
C o n r a d B u s in e s s A p p r a is e r s
2007 IBA National Conference
Valuation Problem:
Customer Base Substantially – U.S. Government
Intelligence Community 39%
Department of Defense 61%
Subject produced “things” which are deployed or sent into the field.
C o n r a d B u s in e s s A p p r a is e r s
2007 IBA National Conference
Description of Business:
The Company’s Three Main Products:
-
Software Engineering
- Electro-Mechanical Integration
- Prototyping Services
(Commonly known as bending metal & writing code)
C o n r a d B u s in e s s A p p r a is e r s
2007 IBA National Conference
Description of Business:
The Company provided critical system engineering and
software engineering expertise for the development of
advanced systems for the:
Intelligence Community
Department of Defense
Homeland Security
C o n r a d B u s in e s s A p p r a is e r s
2007 IBA National Conference
Description of Business:
These services where used for:
• Space Systems
• C4ISR
• Intelligence & Defense Community
Command, Control, Communications, Computer, Intelligence,
Surveillance and Reconnaissance (C4ISR)
C o n r a d B u s in e s s A p p r a is e r s
2007 IBA National Conference
Obstacle:
Conrad Business Appraisers
did not hold the required
U.S. Government
Security Clearance
C o n r a d B u s in e s s A p p r a is e r s
2007 IBA National Conference
Problems to Solve:
- What
information would Subject provide (security issues) ?
- What economic factors affect the company?
- Who are their competitors?
- Availability of industry data?
- Potential pool of buyers?
C o n r a d B u s in e s s A p p r a is e r s
2007 IBA National Conference
Approach to Value 1:
I formed negative questions during management’s interview:
• You probably do not provide services on a sub-contracting basis?
• The economy doesn’t affect the business you do for the government?
• All of your competitors a larger than you?
• They don’t do exactly what you do?
• You never had a problem getting employees through security clearance?
• Hypothetically speaking…?
C o n r a d B u s in e s s A p p r a is e r s
2007 IBA National Conference
Approach to Value 2:
Searched :
Lockheed Martin; Boeing; Raytheon; Honeywell; Northrop Grumman
Reviewed 10k’s:
For similar type of services offered and outlook
Examined likely pool of potential buyers
C o n r a d B u s in e s s A p p r a is e r s
2007 IBA National Conference
Value Conclusion:
Income Approach – MPDM
Market Approach – Guideline Company
23,600,000.00
$$ 23,600,000.00
C o n r a d B u s in e s s A p p r a is e r s
2007 IBA National Conference
Appraising the Googlewacks
Brent McDade
2007 IBA National Symposium
Masterminds Track II
June 22, 2007
Appraising the Googlewacks
Beefy Brisket Chop Shop
• Valuation Date 10/31/2004
• Controlling Interest Basis
• Divorce
Appraising the Googlewacks
Historical Industry Conditions
• Recent history very attractive
• Low carb diets and realization that fat
not all bad increasing domestic demand
• Lots of production along the Canadian
border
• Canada a net exporter of cattle to be
processed in the United States
Appraising the Googlewacks
Looming Concern: BSE
• Bovine Spongiform Encephalopathy
• Outbreak in UK in 1986
• Related to:
– Scrapie in sheep and goats
– Chronic Wasting Disease in deer and elk
– FSE in cats
– Variant Creutzfeldt-Jakob Disease (vCJD)
in humans
Appraising the Googlewacks
Mad Cow Disease
• Cause not known
• Believed to be transmitted by eating infected
protein (prion)
• Resistant to heat, UV light, radiation, normal
sterilization processes
• Not destroyed by cooking
• Transmitted by eating material infected with
prions
• Back of mind concern until …
Appraising the Googlewacks
May 20, 2003
• BSE discovered in Alberta, Canada
• United States almost immediately bans importation of
Canadian cattle and beef products
• Supply of cattle moves sharply to the left, increasing costs
• Company suffers from short supply of Canadian beef, but not
nearly as much as plants further north
• Company in fixed price contracts, so profitability suffers a little
• Company begins selling some spot market cuts domestically
• U.S. beef product prices increase somewhat, as supply from
Canadian processors eliminated
Appraising the Googlewacks
Fiscal Year Ending October 31, 2003
•
Industry rocked by BSE
•
Cattle prices in the US skyrocket, particularly near the Canadian border
•
Tyson, Smithfield, and other big players close plants
•
The Company benefits from all this and has its most profitable year ever,
driven by a large upswing in inventory valuation
•
Location near Omaha allows the Company to access US cattle at prices lower
than more distant plants
•
Company successful in maximizing revenue per carcass with sales to Japan
and Mexico
•
By this time, oversupply of cattle in Canada has resulted in incentives to build
processing capacity there – moves quickly, since age of cattle is a significant
factor in quality (value) of cuts
•
US begins importing Canadian boxed beef – but not Canadian cattle – in 8/03
Appraising the Googlewacks
If anything can go wrong, it will…
• In December of 2003, BSE is found in the U.S. herd
• Almost immediately, 40 countries close their borders to US beef
products
• Ouch
• Company begins hurriedly refocusing its marketing efforts on domestic
sales
– Requires operational changes, as cuts are somewhat different
– Inventory of cuts preferred by Europeans not very valuable
– Inventory of “parts” valuable in Mexico and Asia less than worthless, as
brains go from product to hazardous waste
– New Canadian competitors ramping up production; Canadian cattle prices
about 70% of cattle prices in US
Appraising the Googlewacks
Fiscal Year Ending October 31, 2004
• Company has its worst year in recent history,
reflecting about 10 months of closed-border activity
• Margins down dramatically
• Despite record production and revenue, pretax
income down well over 50% from 2003
• Pretax income about 60% of historical norm
• Company struggling to reinvent itself as a supplier to
the US market
Appraising the Googlewacks
Valuation Date October 31, 2004
• October 21-23, 2004: Meetings between US and
Japanese officials result in tremendous uncertainty
about when, if ever, the Japanese border will reopen to
US beef
• Australia has become the world’s largest exporter of
beef products and the leading supplier to Japan
• Plants are continuing to close in the United States as
the public companies shift their operations to other
countries
Appraising the Googlewacks
Capitalization of Earnings
• Based ongoing earning power estimate on:
– Average 2004 adjusted pretax with historical
normal pretax (2000 – 2002)
– Pre-BSE level of production x 2004 level of gross
profit per head – assumes production rebounds
but profitability based on current
• Used relatively low multiple due to high risk
and little room for volume growth
Appraising the Googlewacks
Key Points Summary
• Admittedly simple valuation method despite
complex business
• It was important to focus on the fundamentals
of valuation throughout the process
– What cash flows would the business generate
going forward?
– How risky are those cash flows?
– By how much would a reasonable investor expect
them to grow?
Damages From an Alleged Wrongful
Lease Termination
Renaissance Investment, Inc.
V.
U.S. Army Corps of Engineers, Little Rock District
Bill Herber
2007 IBA National Conference
The Ugly Nature of Litigation
Were it not for judicial privilege and sovereign immunity, the
government would be held liable for defamation for its closing
argument. Its use of falsehoods, distortions, and exaggerations
mixed with precious little truth are designed for one purpose: To
generate unwarranted hatred and animosity towards Mr. Lehman
and Mr. Ginther. In effect, the government has artfully weaved
unreliable, inadmissable evidence with unwarranted inferences to
recast two honorable and successful men into criminals. The
challenge to the Board is to resist being seduced by the sophistic,
but grossly unsupportable government arguments and examine the
objective, uncontroverted facts of this case on the merits.
Renaissance v. United States
Appellant’s Opening Argument
Reply Brief, February 25, 1997
Case Summary
• Renaissance alleges the Corp of Engineers
twice wrongfully terminated a long term lease.
• The commercial concession lease was for
operation of an excursion boat and attendant
facilities located on 11 acres of land at Table
Rock Lake near Branson, Missouri.
– The questions before the court was did the Corp of
Engineers unjustly terminate a long term lease.
– If the lease was wrongfully terminated, what were the
damages or lost profits.
Lease Revocation
• November 2, 1997 – for non-payment of
rent.
• September 19, 1989 – failure to provide
minimum facilities.
• Renaissance Investment, Inc. sought
damages of $43,782,828 plus interest of
$5,980 per day from the date of breach.
Lease Summary
• Signed: September 1, 1987
• Landlord: Department of Army
• Lessee: Originally Steve Lehman – transferred to Renaissance
Investment, Inc.
• September 1, 1986 to September 31, 2011 25 Year term – no options.
• Rental: Fixed – $3,500 annually, paid quarterly.
• Graduated/%: 1.8% on all revenues.
• Minimal Facilities Due:
-
(1) 450 passenger Paddle Wheeler,$450,000;
(1) 15’ x 70’ Dock, $45,000;
(1) 200’ x 110’ Parking Area, $60,000
(1) 80’ x 30’ Building, $65,000;
Landscaping $20,000;
- Lighting – 4 lot, 40 walkway, $10,000; Road Sign $22,000; Info Signs
(6) $1,000;
- Utility Connections, $18,000
• After the second lease year, unless waived by the District Eng.
– 5% of yearly gross income to be reinvested in park.
• No exclusive right for excursion boat operations.
Purpose of the Analysis
• Determine the lost profits for the riverboat project
as envisioned by Renaissance Investments, Inc.
• Shenehon conducted a lost profit analysis
subtracting the initial construction costs.
• Explaining to the court the difference between
Evolutionary vs. Revolutionary Business Types.
• Why do Evolutionary Businesses have no
“goodwill” value at the onset, but must develop it
over time and therefore requires an operating
history.
Assumptions by Renaissance Which Were
Challenged in Court
• Had ability to complete project in a timely
manner.
• Had capital in place to proceed.
• Had competent management.
• Based on plans for a dinner riverboat of
340 seats (which was much greater than
originally planned.)
All of the above items were disputed at trial.
Outline of Project
•
•
•
•
Determine proper methodology.
Study industry competition.
Completed supply and demand study.
Completed very detailed study of anticipated
revenue and expenses based on what was to be
constructed.
• Completed detailed costs to build the anticipated
project.
• Arrived at value damages by using DCF and
subtracting costs to develop.
• Compared our Pro-forma to Renaissance Proforma, outline differences.
Renaissance Vision
Present Value – Shenehon Analysis
Case Results
• The appeal was denied in all aspects.
– Off the record, $600,000 was offered to
Renaissance in settlement of all claims.
Unique Aspects of Case
• Studied ability to perform financially. Looked at
individuals and corporation and whether they could get
money to build.
• Studied feasibility of project.
– Cost to build.
– Review Plans and documents.
• Additional Research
– Became an expert in tourism projections
•
•
•
•
•
How to secure funding.
Building a vessel.
Getting all approvals.
Assemble a management team.
Provide a factual foundation for the court.
• Learned how to build a case.
Institute of Business Appraisers
2007 National Symposium
Masterminds Track II
June 22, 2007
Appraising the “Googlewacks”
Daniel R. Van Vleet, ASA, CBA
Managing Director
Duff & Phelps, LLC
(312) 697-4670
dan.vanvleet@duffandphelps.com
Valuation Problem
• Executive Options Issued in 1998
• Executive Terminated in 1998 & Attempted
Exercise in 1999 3 Months Prior to IPO
– Company Refused and Executive Sued
– Right to Exercise Upheld in Proceedings
– Relatively Small Equity Position
• Issue: FMV of Stock as of 1999
– Determination of Damages
• FMV Minus Strike Price Equals Damages
Description of Subject Company
•
•
•
•
Dot-Com in Financial Services Sector
Started in 1997 with Minimal Capital
S-1 Registration Statement Filed as of VD
Several Rounds of Venture Capital Funding
– Convertible Preferred Voting Securities
• Significant Cash Burn Rate
• Valuation Date 3 Months Prior to IPO
– Several Hurdles Remained
• IPO or Die Trying
Financial Characteristics
• From Inception to Valuation Date
– $5 Million in Revenues
– $20 Million in Operational Losses
• As of Valuation Date
–
–
–
–
–
$50 Million in Cash and $45 Million in Equity
$75 Million in Convertible Preferred Equity
Multiple Pre S-1 Transactions with VC Firms
Complex Capital Structure - Options & Warrants
Three Years of Projections
• Cash Flow Positive in the Third Year
Guideline Public Company Method
• Identified 10 Guideline Public Companies
– Industry not an Important Characteristic
– Sales less than $50 million
– In Business as a Result of the Internet
• Developed Revenue Multiples
–
–
–
–
All Guideline Companies Reported Losses
Revenue Multiples Ranged from 20 to 120
Used Average and Median Multiples
Assumed Conversion of Preferred Stock
• Applied a DLOM
Guideline Transaction Method
• Identified 700 S-1 Filings During 1998
• Narrowed the List
–
–
–
–
–
–
–
Industry not a Prominent Concern
Less than $50 Million in Revenues
In Business as a Result of the Internet
Not Public as of the Valuation Date
Eliminated Pass-through’s and Banks
Focused on Service Companies
Availability of Pre-IPO Arms Length Transactions
• Transactions Occurred Within 5 Months of IPO
Guideline Transaction Method
• Identified Transactions
– Disclosed in “Recent Sales of Unregistered
Securities” Item No. 15 in S-1
• Developed Revenue Multiples
–
–
–
–
All Companies Reported Operating Losses
Multiples Ranged from 6 to 60
No Statistical Relationships
Used the Average and Median Multiples
• No DLOM Applied
– Transactions Involved Private Securities
Discounted Cash Flow Method
• Private Placement Memorandum Projections
–
–
–
–
–
2 Years of Losses and 1 Year of Profits
Extended Projections by 5 Years
Started at Terminal Year and Worked Backwards
Scaled Back PPM Revenue Growth Projections
Used Standard Equity Rate Analysis
• D&P and Ibbotson
• CF Adjustments for WC, Dep. and Cap. Ex.
• Applied a DLOM
Discount for Lack of Marketability
• Willamette Pre-IPO Studies
• John D. Emory Studies
– Dot-Com Studies for 1997 Through 2000
• 53 Transactions Averaged 54%
– Dated Transactions Prior to IPO
• 0-30 Days – 30%
91-120 Days – 49%
• IPO/VC Academic Studies – 1987-2000
–
–
–
–
50% Remain Private
20% are Acquired
9% Fail
21% go IPO
Key Points Summary
•
•
•
•
•
•
•
•
•
The “Dot-Com” Era
Historical Losses and Cash Burn Rates
Projected Financials
Shares Outstanding Used in the Analysis
FMV and Pre-IPO Transactions
Failed IPO’s and Post IPO Performance
Pre-IPO DLOM Studies
The SEC and “Cheap Stock” Issues
Rule 144 and 6 Month “Lock-up” Period
No Financial Statements
PRESENTED BY ERNEST E. DUTCHER, MCBA
NATIONAL BUSINESS APPRAISERS, LLC
2007 IBA National Symposium
Masterminds Track II
June 22, 2007
2007 IBA National Conference
No Financial Statements
Unique Business Valuations:
Reining in that Final Value
This Medical Practice case study is presented as
follows:
Valuation Problem
Description of the Subject Business
Approaches Used in the Valuation
Value Conclusion
No Financial Statements
Subject Business
29 DOCTOR “MEDICAL GROUP WITHOUT WALLS”
• Valuation problem – Individual practice financial data not
available for all practices or IPA due to 10-year time lapse.
• Description of the business – A 29 doctor multi-specialty
“group without walls” who’s practice area covered about
22 separate business locations in Davis (East Sacramento),
California. Doctors had formed an Independent Practice
Association (IPA) to handle billing, HMO contract negotiations, etc. The IPA negotiated a sale of the Group to a
503 (c) (3) not-for-profit medical foundation.
No Financial Statements
Subject Business
Tables Referenced Below From Actual Report
• Approach to Value #1 - Appraiser had appraised a multispecialty 29-doctor medical group in a nearby city in the
San Francisco to Sacramento corridor. These historical
income statements (Table B) were used to establish a
foundation for the average expense percentages as related
to net revenues and expenses (Table B-1) to apply to
certain known factors in the Subject Group (Table B),
resulting in an estimate of the various income and expense
items for a pro-forma income statement. (Table C).
No Financial Statements
Subject Business
Tables Referenced Below From Actual Report
• Approach to Value #2 – A series of tables were
prepared to evaluate the real and estimated production
expectation of each of the 29 physician partners plus 6
additional hired physicians in the IPA. Production
estimates were prepared from the data found in Medical
Group Management Study (Physician Compensation and
Production Survey: 1994 Report Based on 1993 Data.
• Tables D, D-1, D-2 and D-3 reflect the adjusted estimates
the 9 specialties represented in the IPA, used in Table C.
No Financial Statements
Subject Business
Tables Referenced Below From Actual Report
• Approach to Value #3 – The following methods
were used in this valuation: Income Approach (Table
E), Excess Earnings Approach ( Table G), Market
Approach (Table I) and Cost Approach (Table O). The
results of these approaches were weighted and the
Conclusion of Market Values are presented in Table J.
The value of the donated assets shown in Partners 1994
Tax Returns was $1,632,377. These assets were valued
at $2,515,255 by NBA, or about 54% higher that
claimed on Partners returns.
No Financial Statements
Subject Business
• Value Conclusion: Value of contributed “good-will” of
about $1.632 million claimed on tax returns but reduced to
$100,000 by the IRS. Interest and penalties on the over
$1.5 million disclaimed amount, reflected a growing tax
liability of over $3 million.
Value of contributed goodwill estimated at $2.5 million
by the NBA appraisal upheld in U.S. Tax Court with
the concession by the IRS on Value issues. Amendments
utilizing the higher values are contemplated by Partners, as
well as litigation expenses.
No Financial Statements
Key Points Summary
a. Lack of actual financial data will not
necessarily invalidate a report.
b. Identify all possible sources of data used. It
will be asked on cross-exam.
c. Keep final analysis as simple as possible. It
will be appreciated by the Court. (Table A)
d. Do not be intimidated by the IRS. They are as
human as we are.
e. The pay is good.
ASSIGNMENT:
Partial Fee Simple
Interest in a
Rail Corridor
Bob Strachota
2007 IBA National Conference
NorthStar Corridor in Minneapolis, Minnesota
Value of 12
Train Trips
per Day of
43 minutes
each through
this primary
Burlington
Northern
Two Rail
Corridor
Corridor appraisers, mainly working for
major railroads, articulated four possible
methods for Valuation of Corridors:
•Across-the-Fence value (ATF)
•Liquidation Value (discounted ATF)
•Subjective Percentage Replacement Methods
Replacement Cost)
•Value as a Linear Corridor (Income Approach)
Problem #1:
No Established Method for Income Approach
Appraisal of a fee simple partial interest
Answer: Use Applicable Business Valuation AND Real
Estate Valuation Principles
Problem #2:
Neither Burlington Northern nor the
Northstar Committee could provide us with Information
Answer:
Use Available Data - Burlington Northern is a
Public Company and Department of Transportation Provides
Detailed Data pertaining to Cargo Hauled on Rail Corridors.
Example: Weight
of Carloads from the
DOT
How We Did It
Ste p 1: Co rrido r Capacity Calculatio n
Length of the Corridor (40 miles x two rails)
80 Miles
Capacity of Freight Trains per Day Two Rails
82 Trains
Rail Cars per day*
Annual rail Cars Capacity
Average Weight of Rail Car Haul
Ton Mile Capacity Calculation (annual)
Tons per Rail Car X Rail Cars X Miles
8,200 Rail Cars
2,993,000 Rail Cars
70 Tons
16,868,778,231 Ton-Miles
How We Did It
Ste p 2: Pro je ctio n o f Re v e nue s and EB IT D A including pe r T o n-Mile
Sourc
Total Revenues - 2006
$14,515,047,500
Revenue Ton Miles*
Revenue per Ton Mile
626,403,750,000 Ton/Miles
$0.0232
Projected EBITDA Margin
30.6%
Average Length of a Haul
Total Annual Cars Delivered
Revenues per Car Delivered
EBITDA per Car Delivered
1,068 Miles
BNSF
10,400,000 Cars
$1,396
$427
Ton Miles per Rail Car (Annual)
60,231 Ton/Miles per Car
Route Miles
24,000 Miles
* Defined as loaded miles traveled times weight of contents
BNSF
How We Did It
Ste p 3: Estimate the Po te ntial Re v e nue s and EBITD A fo r the Subje ct
Ton Mile Capacity Calculation (annual)
Tons per Rail Car X Rail Cars X miles
16,868,778,231 TonMiles
Re v e nue s pe r To n-Mile
$0.0232
Revenue Potential at Capacity
for Subject Rail Corridor
$390,883,863
Pe rce nt EBITD A
30.6%
EBITDA Potential at Capacity Utilization
for the Northstar Corridor
$119,545,860
Ste p 4 - D e v e lo p a Price to Earning s Ratio fro m the Public Marke t
EBITDA Potential at Capacity Utilization
for the Northstar Corridor
Market Value of BNSF as of Valuation Date
$119,545,860
$26,739,174,000
2006 EBITD A fo r BN SF Railro ad
Price to EBITD A (fro m marke t sto ck price )
Market Value of 100% North Star Corridor
$4,439,205,622
6.02
$719,886,421
How We Did It
Ste p 5 - Estimate the To tal U tiliz atio n o f the Co rrido r by the Ease me nt Acquisitio n
Market Value of 100% Corridor
Allo catio n o f Co rrido r to Co mmute r Rail
$719,886,421
15.4%
$110,553,986
Rounded To
$110,600,000