VALUATION OF THE COMMON STOCK OF:
Peachtree Plumbing, Inc
5529 Red Bluff Blvd
Valuation Date: June 30, 2009
Report Dated: June 30, 2009
OPINION LETTER
June 30, 2006
Peachtree Plumbing, Inc
Attention: Mr. Mike Jones
Atlanta, Georgia 30329
Dear Peachtree Plumbing, Inc,
I have performed a valuation engagement, as that term is defined in the Statement on
Standards for Valuation Services (SSVS) of the American Institute of Certified Public
Accountants, of Peachtree Plumbing, Inc. This valuation was performed solely to assist in
the matter of Federal Estate Tax Return; the resulting estimate of value should not be
used for any other purpose or by any other party for any purpose. This valuation
engagement was conducted in accordance with the SSVS. The estimate of value that
results from a valuation engagement is expressed as a conclusion of value.
We were restricted or limited in the scope of our work or data available for analysis as
follows:


There were no audited financial statements so we relied on the accuracy of the
financial that management gave us.
The data basis chosen for comparable sales were limited in the size and year
for which they sold. Also the data base for the discounts and premiums which
were applied was several years old.
Based on our analysis, as described in this valuation report, the estimate of value of
minority bases (20,000 shares of 55,000) non-marketable basis of Plumbing, Inc as of
June 30, 2006 was $1,679,000. This conclusion is subject to the Statement of
Assumptions and Limiting Condition found in Appendix B and to the Valuation
Analyst’s Representation found in Appendix A. We have no obligation to update this
report or our conclusion of value for information that comes to our attention after the date
of this report.
Viking Valuations or its affiliates has no financial interest or contemplated financial
interest in the property that is the subject of this report.
June 30, 2006
Jason Allred
Viking Valuations, llc
TABLE OF CONTENTS
INTRODUCTION ............................................................................................... 3
Specifics ................................................................................................................. 3
Definitions .............................................................................................................. 3
Standard of Value .................................................................................................... 3
Premise of Value ...................................................................................................... 4
Control Characteristics.............................................................................................. 4
Marketability Characteristics ...................................................................................... 4
APPROACH ...................................................................................................... 5
Assumptions ........................................................................................................... 6
Scope Limitation ...................................................................................................... 6
COMPANY ........................................................................................................ 6
History ................................................................................................................... 6
Capital Structure...................................................................................................... 8
Sales Records and Management................................................................................. 8
APPRAISAL OF ECONOMIC CONDITIONS ........................................................... 10
National Economy .................................................................................................. 10
Regional/Local Economy ......................................................................................... 19
Industry Outlook.................................................................................................... 30
COMPANY HISTORICAL BALANCE SHEETS ......................................................... 47
COMPANY COMMON SIZE BALANCE SHEET ............................................................... 48
COMPANY HISTORICAL PROFIT & LOSS ............................................................ 50
COMPANY COMMON SIZE INCOME STATEMENT ......................................................... 51
RMA PEER COMPARISONS ............................................................................... 52
NORMALIZATION ADJUSTMENTS ...................................................................... 56
Balance Sheet Adjustments ..................................................................................... 56
Income Statement Adjustments ............................................................................... 57
ESTIMATE OF VALUE ...................................................................................... 59
Adjusted Book Value Method – Going Concern ........................................................... 59
Capitalization of Cash Flow Method .......................................................................... 60
Direct Market Data Method: .................................................................................... 66
CONCLUSION OF VALUE .................................................................................. 69
APPENDIX A: VALUATION ANALYST’S REPRESENTATIONS ................................... 72
APPENDIX B: LIMITING CONDITIONS ............................................................... 73
APPENDIX C: QUALIFICATIONS OF APPRAISER .................................................. 76
RECENT PROFESSIONAL EXPERIENCE ............................................................... 76
APPENDIX D: SOURCES OF INFORMATION ........................................................ 77
Introduction
Page 1 of 98
APPENDIX E: MARKETABILITY DISCOUNT ......................................................... 78
Empirical Studies ................................................................................................... 79
Court Decisions ..................................................................................................... 80
APPENDIX F: GLOSSARY ................................................................................. 82
International Glossary of Business Valuation Terms* .................................................. 82
EXHIBITS ...................................................................................................... 90
EXECUTIVE SUMMARY:
Governing Standard:
Revenue Ruling 59-60
Purpose:
Estate or Gift Tax
Standard of Value:
Fair Market Value
Premise of Value:
value as a going concern
Client Name:
Peachtree Plumbing, Inc
Business Name:
Peachtree Plumbing, Inc
Type of Entity:
corporation
Business Interest Valued:
36%
Valuation Date:
June 30, 2006
Report Date:
June 30, 2006
Appraiser Name:
Jason Allred
Appraiser Firm:
Viking Valuations, llc
Conclusion of Value:
$1,679,000
Introduction
Page 2 of 98
INTRODUCTION
Specifics
We have performed a valuation engagement, as that term is defined in the Statement on
Standards for Valuation Services (SSVS) of the American Institute of Certified Public
Accountants, of Peachtree Plumbing, Inc. This summary report will provide sufficient
information to permit the intended users to understand the data, reasoning, and analyses
underlying the valuation analyst’s conclusion of value.
Viking Valuations, llc has been retained by Peachtree Plumbing, Inc to estimate the fair
market value of Peachtree Plumbing, Inc. Peachtree Plumbing, Inc is a corporation
located at 5529 Red Bluff Blvd in Georgia. Furthermore, an interest of 36% is being
valued as of June 30, 2006.
The appraisal will be used by Peachtree Plumbing, Inc for the sole purpose of the
settlement of the estate. The distribution of this report is restricted to the Peachtree
Plumbing, Inc, legal and tax professionals advising Peachtree Plumbing, Inc and any
regulatory agencies whereby reporting is required. Any other use of this report is
unauthorized and the information included in the report should not be relied upon.
Definitions
Appendix F has a glossary of terms that is applicable to this engagement.
Standard of Value
For estate reasons and in accordance to pertaining statues the most appropriate standard
of value choosen for this report is the “fair market value”:
Revenue Ruling 59-60 defines fair market value as:
The amount at which property would change hands between a willing seller
and a willing buyer when neither is under compulsion and when both have
reasonable knowledge of the relevant facts.
In addition, the hypothetical seller and the hypothetical buyer must be in a pool that has
the ability to exercise the right.
Introduction
Page 3 of 98
Premise of Value
This report is prepared using the premise that the subject company is a going concern.
This means that it is presumed that in the future the assemblage of assets, resources and
income producing items will continue in use to produce income and cash flow. The
subject company is a going concern business enterprise.
Control Characteristics
The business interest valued in this report was a minority interest (36%) owned by
Shirley Jones who was the wife of Mike Jones. Because Shirley was the wife she
probably had more control over capital structure, payroll and other aspects than if another
person owned her interest. If her interest was owned by someone outside the immediate
family there would be very limited control characteristics, however a 36% interest (over
1/3 of company) in a company does have greater control characteristics than someone
who owns less than a quarter of the company. Someone who owns over 1/3 of a
company is going to want to play a big role in the direction of the company including the
capital structure. It would be wise for the controlling interest holder to work with the
owner of this minority interest, therefore creating some control out of the politics of how
big of stake 36% interest is despite it being a minority interest. See section “application
of minority interest discount” under the “Estimated of Value” chapter for further details.
Marketability Characteristics
The marketability characteristics of the subject interest are non-liquid and had very little
marketability characteristics. Some of the marketable characteristics would include good
management and a 17 year track record. What really limited the marketability of the
company is a no dividend policy now or in the future, transfer restrictions (Right of first
refusal), not a public company, and the actual transference of good-will that goes with
Mike Jones reputation and associations. See section “application of lack of marketability
discount” under the “Estimate of Value” chapter for further detail.
Sources of Information
The primary sources of information were research on the economy, industry and
company, analysis of financial statement and interviews with key people. Please see
Appendix D for a complete listing.
Introduction
Page 4 of 98
APPROACH
Revenue Ruling 59-60 states:
.01 It is advisable to emphasize that in the valuation of the stock of closely
held corporations or the stock of corporations where market quotations are
either lacking or too scarce to be recognized, all available financial data, as
well as all relevant factors affecting the fair market value, should be
considered. The following factors, although not all- inclusive are fundamental
and require careful analysis in each case:
(a) The nature of the business and the history of the enterprise from its
inception.
(b) The economic outlook in general and the condition and outlook of the
specific industry in particular.
(c) The book value of the stock and the financial condition of the business.
(d) The earning capacity of the company.
(e) The dividend-paying capacity.
(f) Whether or not the enterprise has goodwill or other intangible value.
(g) Sales of the stock and the size of the block of stock to be valued.
(h) The market price of stocks of corporations engaged in the same or a
similar line of business having their stocks actively traded in a free and
open market, either on an exchange or over-the-counter.
My approach gives careful consideration to all these factors.
There are three basic approaches to value.
A general way of determining a value indication of a business’s
assets and/or equity using one or more methods based directly on the value of the assets
of the business less liabilities.
Asset Based Approach:
A general way of determining a value indication of a business’s
assets and/or equity using one or more methods wherein a value is determined by
converting anticipated benefits.
Income Approach:
A general way of determining a value indication of a business’s assets
and/or equity using one or more methods that compare the subject to similar investments
that have been sold.
Market Approach:
The various methods of valuation that appraisers use in practice are typically considered
as subdivisions of these broad approaches. Valuation methods under the Market and
Income approaches generally contain common characteristics such as measures of
earning power, discount rates and/or capitalization rates and multiples.
Page 5 of 98
Assumptions
There are several key assumptions that this report relies on. Some of these include that
the key personnel especially, Mr. Jones remains with the company. Other assumptions
include no adverse changes in government regulation with respect to budgets for
government contracts as well as no pending liabilities.
This valuation report has been prepared in accordance with the Statement on Standards
for Valuation Services (SSVS) of the American Institute of Certified Public Accountants.
In accordance with these standards, Assumptions and Limiting Conditions are provided
as Appendix B and a Statement of Appraiser Qualifications is included in Appendix C.
Scope Limitation
The scope of this valuation engagement report was limited. I was engaged to perform a
valuation for Peachtree Plumbing, Inc with the intent of ascertaining an opinion of value.
However, I was limited to the information that was provided as of June 30, 2006
regarding updated data basis for discounts and premiums for control interest, and there
was no independent verification of data nor was there any audited financials. I had to
rely and the accuracy of the data and financials submitted by management. If more
information were available to me, matters may have come to my attention that could have
a material impact on the opinion of value contained in this report.
Accordingly, my level of assurance on the estimate of value is reduced. This report is not
intended to serve as a basis for expert testimony in a court of law or other governmental
agency without further analysis and resulting documentation.
COMPANY
History
Peachtree plumbing, Inc is a plumbing contracting company. Mike Jones father,
Reginald Jones, founded the company in Atlanta, Georgia in 1989. The company
remained fairly small until 2000 when the founder, Reginal Jones died and Mike &
Shirley Jones and their family inherited the company. Mike and Shirley have been more
aggressive in their marketing of the company to the general construction trade. The
company is located in their own facilities, which are owned by the Jones Family Limited
Partnership and leased back to the company which allows them to be flexible with the
lease rates. The facility is adequate for further expansion and it is in excellent shape. In
the last quarter of 2003 the company realized some economies of scale by branching out
into the residential plumbing sector (instead of just commercial) which greatly increased
Page 6 of 98
their revenue and net margins. The company has a great reputation and Mike Jones is
well known throughout the business. The primary market for the company’s services is
the general construction markets of Georgia and Northern Florida, with the major share
of its business coming from the Atlanta Area. The market for these services is
moderately large and stable. Most of the company’s services are marketed through the
reputation of the company as well as through Mike’s association and reputation through
construction trades organizations. Mike uses the “green sheet” to keep abreast of the
construction work in the areas the company services. The company has issued one class
of common stock in the amount of 55,000 shares. Mike & Shirley Jones owns 91% of
the company and their two children Mark and Jill own the remaining 9 %. Each share of
stock carries one vote so Mike Jones can have majority vote because he owns more than
50% of the shares. Historically there have been neither prior sales transactions of
common stock nor any related party transactions of company interest.
Nature of the Business
The company focuses on plumbing construction for residential and commercial
application. Their core competency is in the rough plumbing on new construction.
Peachtree Plumbing inc. now has gross sales of $7,295,000 and employs 51 people. The
employee turnover rate is very low by industry standards, which implies a high degree of
employee satisfaction, a relative constant level of construction work, and low employee
costs. Peachtree offers great competitive benefits along with competitive wages. The
Company’s production workers have excellent skills and are paid accordingly. There is
an adequate supply of labor in the area when occasional help is needed and the
compensation for these individuals is average for the area. The company operates as a
union shop and does not make its employees sign a non-compete. Entry into this type of
specialized construction is moderately difficult as it takes large sums of money and
equipment. Exit, on the other hand, is relatively easy. Given the small level of market
share that Peachtree owns (1/5 of 1%) the threat of new entry is minimal because of how
much market share is still available for Peachtree to try and win over.
Products or Services
Peachtree products include supplying all commercial and residential plumbing parts from
rough plumbing to finished products. The company doesn’t manufacture the products but
plays as a middle man in the mark-up chain; however most of the revenues come from
their services they provide on new construction contracts for plumbing installation.
There appears to be no proprietary content or technology owned or used by the company.
The company’s products and service don’t differ much from its competitors, except for
the quality of service performed and reputation, in which Peachtree is considered to be in
the top rankings for quality of service and reputation.
Operating and Investment Assets
The bulk of the companies operating and investments assets come from there working
capital and their investments in short term securities (30 day reset bonds). A big
percentage of these assets are held in the company’s name for tax purposes but are not
Company
Page 7 of 98
important to the daily operations of the company. Another large asset the company has in
the adjacent land which is held for investment with the intent to expand the facility to that
lot at a future date. Other operating assets include equipment at the facility that
assembles certain plumbing equipment to specs of the customer. Other assets include
vehicles and trucks.
Capital Structure
The company has sufficient working capital and marketable securities in excess of what it
needs. There seems to be no need of capital expenditure for equipment or facility
expansion in the next 3-5 years. Financial statements for Peachtree Plumbing, Inc. are
prepared monthly on an accrual basis. Income tax returns are also filed on an accrual
basis. The financial statements are compiled by an outside CPA, and are available seven
days after the end of each month. Tax planning is done annually and the company’s
financial plan is updated quarterly. The Company’s banking relationship is excellent.
The company has a $500,000 credit line at their bank, which they rarely, if ever, need to
use.
Sales Records and Management
The sales of the company increased substantially starting in 2003 when Peachtree decided
to use their good name and contacts to expand into the residential market place. This
synergy play worked well and has given management a good reputation. Management
has also spent more time and energy in a marketing campaign to broaden their market
share as well. Currently Peachtree’s estimated market share where it operates is around
.157% which is a very small part of the market; however there is great opportunity for
gaining more market share which would make the company more valuable. The
company has no single large customer because of the nature of the business.
Management below the owner level is very good and capable. They are quite capable of
doing their own jobs without a lot of supervision or control. The owners Mike and
Shirley Jones work 100% of the time in the business where Mike takes care of the
bidding, marketing and supervision and Shirley is an office manager. No other family
members (owners) work for the company. Other top management includes Don Smith
who is a construction manager, Jack Sxhwartz who is the lead estimator, Steve Gonzalez
who is the maintenance foreman, and David Black who is the controller.
Expectations
Management expectation is that the plumbing construction industry will be strong and
remain strong in the coming years. Even if a recession is inevitable many of their
commercial contracts take up to 2-3 years to complete which helps the company weather
the down turns. The growth of the company looks to be around a 2% nominal sustainable
Company
Page 8 of 98
growth rate. Other expectations are that the company see no reason for future liabilities
beyond what would normally be covered by their insurance policies including any
environmental issues or liabilities. Management see no future devaluation of the
company because of internal theft or embezzlement because of their tight internal
controls and book keeping policies.
Company
Page 9 of 98
APPRAISAL OF ECONOMIC CONDITIONS
National Economy
2nd Quarter 2006 and Outlook Through 2006
The following is a discussion and analysis of the national economy for the second quarter of 2006. It is based upon the Center for Economic and
Industry Research’s review of current economic statistics, articles in the financial press and economic reviews from current business periodicals. The
purpose of the review is to provide a representative “consensus” on the condition of the national economy and its general outlook for the remainder
of 2006.
General Overview
The persistence of high gas and oil prices into the second quarter of 2006, after several years of double- digit percentage increases and anticipated
new record highs in the following summer months, is finally leading to higher prices in the broader economy.
There is a growing sense among consumers and businesses that the rise in energy prices is more permanent than they thought, and they are starting to
adjust their spending and supplier contracts accordingly. This is bad news for the Federal Reserve, as it means current inflation trends are becoming
more entrenched in the rest of the economy and will soon start to filter into expectations about future inflation.
The trucking and transportation industry is now actively and openly passing along higher fuel costs to their customers. Air fares and hotel room rates
are on the rise. Perhaps more insidious is the jump in rents, as high home prices and rising interest rates shut more potential home buyers out of the
housing market. The idea is that higher prices lead to ever higher prices. The only way for the Fed to short-circuit this process is to slow demand
enough so that companies can no longer safely pass along price increases without losing a significant number of customers and market share.
Leading Indicators
The Conference Board reported that leading economic indicator index declined slightly two of the three months during the second quarter 2006. The
Conference Board’s leading economic indicators include the following:
Appraisal of Economic Conditions
Page 10 of 98










Vendor Performance
Building Permits
Interest Rate Spread
Stock Prices
Average Weekly Claims for Unemployment Insurance
Index of Consumer Expectations
Conference Board’s Money Supply,
Economy at a Glance
Average Weekly Manufacturing Hours
April
Manufacturer’s New Orders for NonManufacturer’s New Orders for Industrial production (2002=100) 112.2
Six of the ten indicators that make up the
positive contributors - beginning with the
average
weekly
initial
claims
for
index of consumer expectations, real money
manufacturing hours, interest rate spread, and
defense capital goods. The negative
largest negative contributor - were vendor
stock prices. The manufacturers' new orders
held steady in June.
M2
May
June
112.3
113.2
363.6
364.1
363.8
Unemployment Rate (%)
4.7
4.6
4.6
PMI (Manufacturing Diffusion
Index)
57.3
54.4
53.8
confidence 109.8
104.7
105.4
Retail sales (billions of dollars)
Consumer
(1985=100)
Leading indicators (1996=100)
138.7
137.9
138.1
Leading indicators (% Change)
-0.1
-0.6
0.1
Defense Capital Goods
Consumer Goods and Materials
leading index increased in June. The
largest positive contributor - were
unemployment insurance (inverted),
supply,
average
weekly
manufacturers' new orders for noncontributors - beginning with the
performance, building permits, and
for consumer goods and materials*
The leading index stood at 138.1 (1996=100) in June 2006. Based on revised data, this index decreased 0.6 percent in May and decreased 0.1 percent
in April. During the six-month span through June, the leading index decreased 0.3 percent, with five out of ten components advancing.
The coincident index stood at 122.9 (1996=100) in June 2006. Based on revised data, this index increased 0.1 percent in May and increased 0.2
percent in April. During the six-month period through June, the coincident index increased 1.1 percent.
14,000.000
12,000.000
10,000.000
8,000.000
6,000.000
4,000.000
2,000.000
0.000
DOW
6/26/2006
6/12/2006
5/29/2006
5/15/2006
5/1/2006
NASDAQ
4/17/2006
Appraisal of Economic Conditions
Stock Prices for the Second Quarter 2006
4/3/2006
The lagging index stood at 123.7 (1996=100)
The positive contributors to the index were average duration of unemployment
outstanding, change in CPI for services, change
rate charged by banks, ratio of consumer
of manufacturing and trade inventories to
increased 0.2 percent in both May and April.
in June, with all seven components advancing.
beginning with the largest positive contributor (inverted), commercial and industrial loans
in labor cost per unit of output, average prime
installment credit to personal income*, and ratio
sales*. Based on revised data, the lagging index
Page 11 of 98
The Dow reached its quarterly high on May 10, when it peaked at 11,709.09. The Dow reported a steady decline, when it reached its low on June
13, after which the Dow rallied to the end of the quarter. The NASDAQ peaked on April 20, 2006 at 2375.54. The NASDAQ reported a steady fall
starting May 8 until it reached a low of 2065.1101 on June 14.
Industrial Production
The production of consumer goods rose 0.9 percent in June. The output of durable consumer goods moved up 2.2 percent and was led by an increase
in the production of automotive products, which jumped 4.2 percent after having fallen in the previous two months. In the second quarter, the
production of automotive products registered its first gain in three quarters. The output of home electronics increased for a second month in June and
was up 10.4 percent from the previous year. The index for miscellaneous durable goods moved up, while the index for appliances, furniture, and
carpeting dropped. The production of nondurable consumer goods rose 0.4 percent, as the output of consumer energy products gained 1.4 percent and
the production of non-energy nondurable consumer goods edged up 0.1 percent. Output increased for all major categories of nondurable goods except
foods and tobacco. In the second quarter, the output of non-energy nondurable consumer goods increased at an annual rate of 3.2 percent, while the
output of consumer energy products advanced 11.6 percent.
The index for business equipment advanced 0.7 percent in June and at an annual rate of 13.2 percent in the second quarter, its twelfth consecutive
quarterly rise. The production of transit equipment rose 0.8 percent in June, and the output of information processing equipment advanced 1.3
percent. The index for industrial and other equipment edged up after having fallen in May; output in this category increased at an annual rate of 11.9
percent in the second quarter. The production of defense and space equipment rose 0.9 percent in June.
The index for construction supplies increased 0.4 percent in June but was down at an annual rate of 0.9 percent in the second quarter. The index for
business supplies increased 0.6 percent in June and moved up at an annual rate of 5.9 percent in the second quarter.
The production of materials advanced 0.8 percent in June, and the output of both energy and non-energy materials increased. All of the major
categories of durable materials posted gains in June. Among nondurable materials, a decline in the output of textiles was more than offset by
increases in the production of paper and of chemicals
Manufacturing output rose percent 5.4 percent in the second quarter, about the same rate as in the previous quarter. In June, the overall factory
operating rate increased 0.4 percentage points, to 81.1 percent. The production of durable goods rose 1.0 percent and was led by a 3.3 percent gain in
the output of motor vehicles and parts. Gains were widespread among the other major categories of durable goods, although the indexes for wood
products and for furniture and related products fell. The production of computer and electronic products rose 1.3 percent, a slightly smaller gain than
those recorded in the first two months of the second quarter.
Appraisal of Economic Conditions
Page 12 of 98
The output of utilities increased 0.7 percent in June; both electricity generation and natural gas output increased by similar amounts. The operating
rate at utilities rose to 86.8 percent. The output of mines increased 1.2 percent, and the utilization rate for mining advanced 1.2 percentage points, to
91.1 percent.
Retail Sales
While industry-related sales paint a somewhat rosier picture than Commerce numbers, it still represents a slight slowing in consumer spending. The
U.S. Census Bureau reported that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and
trading-day differences, but not for price changes, were $363.8 billion, a decrease of 0.1 percent from the previous month, but up 5.9 percent (±0.8%)
from June 2005. Total sales for the April through June 2006 period were up 6.8 percent from the same period a year ago. The April to May 2006
percent change was up 0.1 percent.
Gasoline stations were up 20.4 percent from June 2005 and sales of non-store retailers were up 12.3 percent from last year. Health and personal care
stores showed strong gains, increasing 8.6 percent unadjusted from last year, while increasing a slight 0.7 percent seasonally adjusted over May.
Sporting goods, hobby, book & music stores also showed robust growth, increasing 11.3 percent unadjusted from last June, while increasing a
modest 0.4 percent seasonally adjusted from the previous month. Clothing and clothing accessories stores, benefiting from the summer heat rose 5.9
percent unadjusted from last June, while only increasing 0.3 percent from May. Building material and garden equipment and supplies dealers still
showed steady growth, up 8.4 percent unadjusted from last June. However, seasonally adjusted comparisons from the previous month show a 1.0
percent decline. In spite of a slowing housing market, furniture and home furnishings stores remain healthy with a 10.4 percent increase in sales
unadjusted from last year and 1.3 percent seasonally adjusted increase month-to-month.
Retail prices for goods other than food and energy raised more than expected in June 2006. The Consumer Price Index, the government's main
inflation gauge, rose 0.2 percent in June after climbing 0.4 percent in May. Core CPI, which excludes volatile food and energy prices, rose by a
higher-than-expected 0.3 percent. Economists were looking for a 0.2 percent rise in the core CPI.
The June increase left core CPI, considered by most economists to be the best gauge of the underlying inflation rate, up 2.6 percent from a year
earlier - above the Fed's presumed comfort zone of about 2 percent. Moreover, the three-month annualized core rate stands at 3.6 percent, well above
the Fed's comfort zone. May's 0.3 percent gain in the core CPI was higher than expected, and sent stocks and bond prices tumbling on fears it would
prompt the Fed to keep raising rates.
Appraisal of Economic Conditions
Page 13 of 98
The Fed has raised its key lending rate, which currently stands at 5.25 percent, 17 consecutive times since June 2004 in a fairly predictable manner.
The central bank's next move is a matter of widespread uncertainty on Wall Street, as Chairman Ben Bernanke and other Fed policy-makers have said
any hike or pause will depend on the most recent economic data.
Job Growth
The Conference Board Help-Wanted Advertising Index, a key measure of job offerings in major newspapers across America, dipped two points in
May 2006. The Index now stands at 33. It was 38 one year ago. In the last three months, help-wanted advertising declined in all nine U.S. regions.
Steepest declines occurred in the West South Central (-19.5%), West North Central (-17.9%) and Pacific (-17.3%) regions.
During the second quarter, businesses remained cautious about hiring when near-term economic prospects appear soft. They remain fundamentally
worried about the expense of new hiring (in terms of wages, as well as health and pension benefits) relative to pricing power. With some evidence
that retail inflation may be picking up, that concern may be alleviated. But consumers worry about price hikes outstripping their wage gains, and may
limit their spending increases.
New online job ads increased in May to 2,354,500, according to The Conference Board Help-Wanted Online Data Series. The May level was 91,800,
or 4 percent above the previous month and followed a sharp decline in April. Despite the increase, the number of new ads for online jobs in May was
lower than in March, which was the month with the highest count since The Conference Board launched the Help-Wanted Online Data series in April
2005. In May, there were 1.57 online job ads per 100 persons in the U.S. labor force, compared with 1.51 in April 2006 and 1.60 in March.
Manufacturing
Economic activity in the manufacturing sector grew in June for the 37th consecutive month, while the overall economy grew for the 56th consecutive
month. Manufacturing growth continued in June, and although growth slowed slightly, renewed strength in June's New Orders Index provides
encouragement for the third quarter. The sector is benefiting from the weaker dollar and business investment.
The PMI indicates that the manufacturing economy grew in June for the 37th consecutive month as it registered 53.8 percent, a decrease of 0.6
percentage point when compared to May's reading of 54.4 percent. A reading above 50 percent indicates that the manufacturing economy is generally
expanding; below 50 percent indicates that it is generally contracting. A PMI in excess of 42 percent, over a period of time, generally indicates an
expansion of the overall economy. The June PMI indicates that both the overall economy and the manufacturing sector are growing.
Appraisal of Economic Conditions
Page 14 of 98
The Institute o f Supply Chain Management's (ISM) New Orders Index registered 57.9 percent in June. The index is 4.2 percentage points higher than
the 53.7 percent registered in May. ISM's Production Index registered 55.1 percent in June, 2.1 percentage points lower than the 57.2 percent reported
in May. ISM's Employment Index contracted in June following 12 consecutive months of growth. The index registered 48.7 percent in June
compared to 52.9 percent in May, a decrease of 4.2 percentage points. ISM's Supplier Deliveries Index for June registered 55 percent, a decrease of
2.6 percentage points when compared to May's reading of 57.6 percent. The ISM Customers' Inventories Index is at 45.5 percent in June, 1.5
percentage points higher than the 44 percent reported in May. Manufacturers' inventories contracted in June as ISM's Inventories Index registered
46.9 percent, a 1.1 percentage point decrease when compared to May's reading of 48 percent.
In June, the ISM Prices Index was 76.5 percent, indicating manufacturers are paying higher prices on average when compared to May. While 39
percent of supply executives reported paying the same prices and 4 percent reported paying lower prices, the majority of respondents (57 percent)
reported that prices were higher than the preceding month.
Consumer Confidence
The Conference Board Consumer Confidence Index, which had decreased in May, posted a slight increase in June. The Index now stands at 105.7
(1985=100), up from 104.7 in May. The Present Situation Index decreased to 132.7 from 134.1. The Expectations Index, however, edged up to 87.6
from 85.1 last month.
Consumers' overall assessment of current conditions, while favorable, declined for the second consecutive month. Those claiming conditions are
"good" declined to 26.8 percent from 28.5 percent. Those claiming conditions are "bad" eased to 14.9 percent from 15.2 percent. Labor market
conditions were mixed. Consumers saying jobs are "plentiful" decreased to 28.1 percent from 29.1 percent, while those claiming jobs are "hard to
get" decreased to 19.9 percent from 20.2 percent.
Consumers' outlook for the next six months, which had deteriorated in May, improved moderately in June. Those expecting business conditions to
worsen decreased to 11.8 percent from 12.9 percent. Those expecting business conditions to improve increased to 16.8 percent from 16.5 percent.
The outlook for the labor market was also somewhat more optimistic. Those expecting more jobs to become available in the next six months
increased to 15.6 percent from 14.8 percent in May. Those expecting fewer jobs declined to 17.0 percent from 18.0 percent. The proportion of
consumers anticipating their incomes to increase in the months ahead remained virtually unchanged at 17.1 percent.
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Outlook
The inflation scare in the first half of this year has extended the Fed’s tightening campaign and raised the end-point on Fed rate hikes, raising the
probability economic difficulty in 2007. External shocks threaten to exacerbate domestic economic problems. Strong growth in China and India,
along with the threat of energy supply disruptions in the Middle East, could keep energy price inflation on the rise, despite the Fed’s attempts to keep
inflation at bay. The Fed has very little, if any, control over global energy prices and energy supply. In order to contain inflation, the Fed may end up
pushing rates too high, triggering a housing market and consumer- lead recession.
Retailers can expect the second half of the year to show moderate gains due to the slowdown in the housing market and other economic factors such
as rising interest rates and higher gas prices. According to National Retail Federation’s latest Retail Sales Outlook, retail industry sales in the third
quarter are expected to increase 5.5 percent, followed by a gain of 4.6 percent in the fourth quarter. Because of the strong first half, even with some
deceleration in sales for the balance of the year, industry sales are tracking to a 6.0 percent gain for the year.
Despite the up-tick in consumer confidence, consumers remain concerned about the short-term outlook. Furthermore, the Present Situation Index lost
ground for the second consecutive month, a signal that the economy is shifting into lower gear heading into the second half of 2006. Consumers may
slow spending if energy prices continue to climb.
August 2006
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Information contained in this report has been obtained by the Center for Economic and Industry Research, LLC from sources believed to be reliable.
The Center for Economic and Industry Research, LLC is not able to guarantee the accuracy or completeness of this information, nor is the Center for
Economic and Industry Research, LLC responsible for any errors, omissions or damages arising from the use of this information.
©2006 Center for Economic & Industry Research, LLC 1111 Brickyard Road, Salt Lake City, Utah 84106; ALL RIGHTS RESERVED.
Appraisal of Economic Conditions
Page 17 of 98
Bibliography
National Economic Report 2nd Quarter 2006
Industrial Production and Capacity Utilization; Federal Reserve Board; July 17, 2005
Retail & Wholesale Trade; U.S. Department of Commerce/U.S. Census Bureau; July 2006
Labor Force Statistics from the Current Population Survey; U.S. Department of Labor/Bureau of Labor Statistics; October 2005
The PMI; Institute of Supply Chain Management; 2005
Manufacturing, Mining and Construction Statistics; U.S. Department of Commerce/U.S. Census Bureau; 2005
2006 Consumer Confidence Index; The Conference Board; September 2005
Summary of Commentary on Current Economic Conditions by Federal Reserve District; Federal Reserve Board; October 19, 2005
National Economic Outlook; The PNC Financial Services Group; October 2005
George W. Bush’s Job Approval Ratings Unchanged as Optimism about the Economy Fades; American Research Group; September 22, 2005
Industrial Production and Capacity Utilization; Federal Reserve; October 14, 2005
Despite High June Temps, Consumer Spending Starts to Cool, According to NRF; National Retail Federation; July 14, 2006
Fed Now a Risk; Economic Indicators; July 2006
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Regional/Local Economy
Metropolitan Area Study
Atlanta-Sandy Springs-Marietta, GA
Metropolitan Statistical Area (MSA)
Overview
A metropolitan/economic study is a straightforward look at the economy in a specific geographic area. Data for this study was found in a wide
variety of reliable sources, ranging from government web sites to regional reports. This was done to give a realistic view of the economy. The study
looks at the key economic factors of the area including population, income, and earnings and employment by industry. The numerous tables and
graphs that accompany this report show how the major industries are doing relative to the overall economy and their respective share of the economy.
The graphs provide a good snapshot of the recent trends and offer good insight as to what is discussed in the report, such as how one industry
compares to another. Any economic trends that take place can be seen with a quick glance at the graphs and reviewed more closely with the specific
data from the tables. The direction and rate of change from year to year for major economic factors are clearly indicated.
Having good economic information for a geographic area can be useful in a variety of ways. Whether a business has done well or not, a
metropolitan/economic study can be utilized when making a correlation between the performance of the business and the overall state of the
economy. A metropolitan study can help to show what type of trend or the amount of growth a business in a particular industry might be expected to
have during certain years. Other purposes include being utilized by local Chambers of Commerce, developers, companies deciding whether to
expand or relocate, and anyone needing comprehensive economic information on an area.
Atlanta-Sandy Springs-Marietta, GA MSA
The Atlanta-Sandy Springs-Marietta, GA MSA is made up from Barrow County, Bartow County, Butts County, Carroll County, Cherokee County,
Clayton County, Cobb County, Coweta County, Dawson County, DeKalb County, Douglas County, Fayette County, Forsyth County, Fulton County,
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Gwinnett County, Haralson County, Heard County, Henry County, Jasper County, Lamar County, Meriwether County, Newton County, Paulding
County, Pickens County, Pike County, Rockdale County, Spalding County, and Walton County.
Located in northwestern Georgia, the area is well served by abundance of major roadways; including interstates and state and national highways.
This allows for good access to other areas of the state and nation, making it easy to get raw materials and finished goods in and out of the area. The
Atlanta area is a major east-west and north-south crossroads for the state as well as that region of the United States. Atlanta has the world's largest
passenger terminal complex, and 80 percent of the population of the United States lives within a two-hour flight of Atlanta.
Atlanta is the home to many national and international firms. Atlanta is also home to many professional sports teams, such as Baseball's Braves,
Football's Falcons, Basketball's Hawks, and Hockey's Thrashers. Atlanta was also home to the 1996 Olympic Summer Games. Atlanta is also home
to three symphonies, Atlanta Community Orchestra, Atlanta Pops Orchestra, and Atlanta Symphony Orchestra, as well as the Atlanta Opera, and
Atlanta Ballet Company.
Population
Woods and Poole estimated the population of the Atlanta-Sandy Springs-Marietta, GA MSA in 2005 totaled 4,972,219. Table 1 shows the
population estimate for the Atlanta-Sandy Springs-Marietta, GA MSA in 2005.
Table 1-Population Estimate for Atlanta-Sandy Springs-Marietta, GA MSA (2005)
Number
Percent
4,972,219
100.0%
Age Under 5 Years
392,848
7.9%
Age 5 to 9 Years
351,989
7.1%
Age 10 to 14 Years
356,412
7.2%
Age 15 to 19 Years
338,305
6.8%
Age 20 to 24 Years
336,747
6.8%
Age 25 to 29 Years
376,185
7.6%
Age 30 to 34 Years
430,736
8.7%
Total Population
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Age 35 to 39 Years
425,216
8.6%
Age 40 to 44 Years
426,225
8.6%
Age 45 to 49 Years
379,378
7.6%
Age 50 to 54 Years
316,589
6.4%
Age 55 to 59 Years
270,752
5.4%
Age 60 to 64 Years
183,667
3.7%
Age 65 to 69 Years
126,115
2.5%
Age 70 to 74 Years
99,175
2.0%
Age 75 to 79 Years
70,592
1.4%
Age 80 to 84 Years
49,094
1.0%
Age 85 Years and Over
42,194
0.8%
Source: Woods and Poole
Woods and Poole estimated the median age of the population of the Atlanta-Sandy Springs-Marietta, GA MSA in 2005 was 34.0 years old. Woods
and Poole further estimated that 26.4 percent of the population of the Atlanta-Sandy Springs-Marietta, GA MSA in 2005 was 17 and younger, while
7.8 percent of the population was 65 and over.
Total Personal Income
The U.S. Department of Commerce/Bureau of Economic Analysis reported that total personal income in the Atlanta-Sandy Springs-Marietta, GA
MSA totaled $173.2 billion in 2005, a 15.6 percent increase from the 2002 total personal income of $149.8 billion. Total personal income consists of
net earnings, transfer payments and dividends, interest and rent. In 2005, net earnings accounted for 76.9 percent of total personal income in the
Atlanta-Sandy Springs-Marietta, GA MSA.
Per Capita Personal Income
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The per capita personal income in the Atlanta-Sandy Springs-Marietta, GA MSA increased 6.1 percent from $32,825 in 2002 to $34,825 in 2005.
The cost of living in the Atlanta area is less expensive than the national average, according to the ACCRA Cost of Living Index. The ACCRA Cost
of Living uses several categories to measure the cost of living within specific areas. The national average is equal to 100. Table 2 shows the
ACCRA Cost of Living for Atlanta, GA, and how it compares with other locations. The table shows the composite score for each location as well as
the components of the composite score.
Table 2-ACCRA Cost of Living Index in Select Areas (2Q 2006)
Metropolitan Area
Composite Grocery Housing Utilities Transport Health Care
Misc.
New York (Manhattan), NY
204.7
146.8
372.0
150.2
116.3
130.9
141.7
San Francisco, CA
169.4
140.3
275.2
88.2
116.3
124.5
139.0
Washington, DC
140.9
110.9
218.2
121.0
109.6
112.3
107.9
Boston, MA
136.4
119.2
161.8
131.5
108.6
125.5
133.0
Miami, FL
114.4
102.2
137.6
92.6
108.4
117.6
107.8
Chicago, IL
114.2
109.2
131.1
109.1
107.7
111.4
106.2
Orlando, FL
104.9
106.1
104.1
110.5
108.6
96.3
103.5
Atlanta, GA
97.7
98.6
93.2
85.8
111.2
107.9
99.3
Raleigh, NC
96.1
98.6
87.6
97.2
101.1
103.7
99.4
Dallas, TX
94.4
101.9
76.2
111.9
108.6
102.1
96.2
Source: Huntsville, AL Chamber of Commerce
Earnings
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The U.S. Department of Commerce/Bureau of Economic Analysis reported earnings in the real estate and rental and leasing sector increased 34.3
percent between 2002 and 2005. However, the industry accounted for just 3.3 percent of total non-farm earnings in 2005. The government sector,
which accounted for 11.9 percent of total non-farm earnings, increased 19.1 percent between 2002 and 2005. It should be noted that no single sector
accounted for more than 12 percent of total non-farm earnings in 2005, thus pointing to a fairly diverse economy. Table 3 shows the percentage
change in earnings of key non-farm sectors between 2002 and 2005.
Table 3-Earnings by Key Non-farm Sector 2002 - 2005
Total % Change 02-05
% of 2005 Non-farm Total
Forestry, fishing, related activities, and other
N/A
N/A
Mining
N/A
N/A
Utilities
N/A
N/A
Construction
22.8%
6.5%
Manufacturing
10.0%
8.6%
Wholesale trade
13.9%
8.2%
Retail trade
9.4%
6.1%
Transportation and warehousing
-2.6%
4.4%
Information
6.0%
7.3%
Finance and insurance
16.3%
7.3%
Real estate and rental and leasing
34.3%
3.3%
Professional and technical services
17.4%
11.1%
Management of companies and enterprises
43.7%
3.2%
Administrative and waste services
27.1%
5.3%
Educational services
19.2%
1.3%
Health care and social assistance
21.9%
6.8%
Arts, entertainment, and recreation
-1.3%
0.9%
Accommodation and food services
18.9%
2.7%
Other services, except public administration
12.9%
2.6%
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Government and government enterprises
19.1%
11.9%
Source: U.S. Department of Commerce/Bureau of Economic Analysis
The U.S. Department of Commerce/U.S. Census Bureau reported the total number of residential building permits issued in the Atlanta-Sandy
Springs-Marietta, GA MSA totaled 38,693 during the first half of 2006, a 7.6 percent increase from the same time period the previous year. The
number of permits issued for single-family homes increased 2.3 percent from 30,115 during the first six months of 2005 to 30,795 during the same
time period the following year. The number of permits issued for residential structures containing two units fell 10.5 percent from 114 during the
first two quarters of 2005 to 102 during the first two quarters of 2006, while the number of permits issued for residential structures containing three
and four units increased a whopping 256.6 percent from 83 during the first half of 2005 to 296 during the first half of 2006. The number of permits
issued for residential structures containing five or more units increased 33.0 percent from 5,640 during the first half of 2005 to 7,500 during the same
time period the following year.
Georgia’s corporate income tax is 6 percent. Tax collections in the state of Georgia were up $1 billion during the first three quarters of the fiscal
year, which ends June 30. The state is expected to end the fiscal year with a surplus.
Water is expected to be a key issue for Atlanta.
Atlanta saw a 2.2 percent gain in the Consumer Price Index in March and April 2006, the biggest jump in overall costs for consumer goods such as
cars, clothes, gas and homes in ten major U.S. cities tracked by the government. The hefty gain in Atlanta's CPI was mainly due to the region's higher
costs for gas, as well as homes, cars and all the purchases that go along with maintaining those two big-ticket items. Transportation and housing
costs in Atlanta rose 5.1 percent and 7.3 percent respectively during March and April.
Employment
The U.S. Department of Labor/Bureau of Labor Statistics reported the civilian labor force of the Atlanta-Sandy Springs-Marietta, GA MSA increased
3.0 percent from 2,589,696 in June 2005 to 2,666,358 in June 2006. The number unemployed fell 8.5 percent from 142,839 in June 2005 to 130,678
in June 2006. The unemployment rate fell from 5.5 percent in June 2005 to 4.9 percent in June 2006. Table 4 shows the percentage change in
employment of key non-farm sectors operating in the Atlanta-Sandy Springs-Marietta, GA MSA.
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Table 4-Employment by Key Non-farm Sector (# of jobs, f/t & p/t) 2002 - 2005
Total % Change 02-05
% of 2005 Non-farm Total
Forestry, fishing, related activities, and
other
N/A
N/A
Mining
N/A
N/A
Utilities
N/A
N/A
Construction
10.9%
6.5%
Manufacturing
-3.5%
6.3%
Wholesale trade
2.3%
5.3%
Retail trade
2.0%
10.5%
Transportation and warehousing
0.6%
4.0%
Information
-9.7%
3.4%
Finance and insurance
3.2%
4.9%
Real estate and rental and leasing
28.1%
4.9%
Professional and technical services
8.3%
8.0%
0.4%
1.4%
Administrative and waste services
14.4%
8.6%
Educational services
5.9%
2.0%
Health care and social assistance
12.1%
7.4%
Arts, entertainment, and recreation
5.5%
1.7%
Management
enterprises
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of
companies
and
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Accommodation and food services
10.8%
6.9%
Other
services,
administration
public
6.9%
5.4%
government
5.5%
11.1%
Government
enterprises
except
and
Source: U.S. Department of Commerce/Bureau of Economic Analysis
In 2004, Atlanta was home to 24 Fortune 1000 companies, including Coca-Cola, Home Depot, BellSouth, Delta Airlines and UPS. Table 5 shows
the top employers in DeKalb County.
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Table 5-Top Employers in DeKalb County and the Greater Metro Area
Company
Employees
Delta Air Lines
27,344
Emory University
22,242
Wal-Mart
17,689
BellSouth Corp.
15,800
DeKalb County Schools
12,968
Publix Super Markets
10,650
Wellstar Health System
10,112
City Of Atlanta
8,657
United States Postal Service
8,520
IBM
7,500
DeKalb County Government
7,498
Georgia Department of Human Resources
7,425
United Parcel Service
7,351
Suntrust Banks
7,287
Emory Healthcare
6,690
Cox Enterprises
6,177
Waffle House
6,093
Centers for Disease Control and Prevention
6,002
Source: DeKalb County Office of Economic Development
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The Atlanta economy is expected to add about 63,000 jobs in 2006 and about 48,500 in 2007, roughly two-thirds of the new positions in the state.
That growth, and the quality of the jobs, falls short of the pace set during the 1990s, when the economy repeatedly expanded by more than 100,000
jobs. Now only one in five of the new jobs will be jobs paying more than $60,000 a year. That sluggishness at the high end of incomes is the result
of a shift in the local economy. During the 1990s, job growth was often led by the technology and transportation sectors. This time, growth comes
disproportionately from tourism, where low-paying jobs are typical, along with other jobs in leisure and hospitality.
Projections
Woods and Poole projected the population of the Atlanta-Sandy Springs-Marietta, GA MSA will increase 9.8 percent between 2005 and 2010.
Woods and Poole expect the median age of the population will reach 34.61 by 2010. Woods and Poole also anticipates that in 2010, 25.7 percent of
the population will be 17 and younger, while 8.7 percent of the population will be 65 and over.
Total employment is projected to increase 10.5 percent between 2005 and 2010, according to Woods and Poole. The agricultural services sector is
projected to increase employment 16.2 percent between 2005 and 2010. However, the sector is projected to account for just 1.0 percent of total
employment in 2010. The services sector, which is projected to account for 36.0 percent of total employment in the Atlanta-Sandy Springs-Marietta,
GA MSA in 2010, is projected to employment 14.8 percent between 2005 and 2010.
Woods and Poole projected total earnings will increase 10.9 percent between 2005 and 2010. The mining sector is projected to increase earnings
25.5 percent between 2005 and 2010. However, the sector is projected to account for just 0.2 percent of total earnings in 2010. The services sector,
which is projected to account for 32.4 percent of total earnings in the Atlanta-Sandy Springs-Marietta, GA MSA in 2010, is projected to increase
earnings 12.0 percent between 2005 and 2010.
Information contained in this report has been obtained by the Center for Economic & Industry Research, LLC from sources believed to be reliable.
The Center for Economic & Industry Research, LLC is not able to guarantee the accuracy or completeness of this information, nor is the Center for
Economic & Industry Research, LLC responsible for any errors, omissions or damages arising from the use of this information.
©2008 Center for Economic & Industry Research, LLC 4575 Galley Road, Suite 200E Colorado Springs, CO 80915, ALL RIGHTS RESERVED.
Appraisal of Economic Conditions
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Bibliography
Atlanta-Sandy Springs-Marietta, GA Metropolitan Statistical Area
Regional Economic Information System (REIS); U.S. Department of Commerce/Bureau of Economic Analysis; 2007
ACCRA Cost of Living Index; Huntsville, AL Chamber of Commerce; February 2008
Local Area Unemployment Statistics; U.S. Department of Labor/Bureau of Labor Statistics; 2008
Housing Units Authorized by Building Permits; U.S. Department of Commerce/U.S. Census Bureau; February 27, 2008
Largest Employers; DeKalb County Office of Economic Development; 2006
Economic Growth Will Slow; Atlanta Journal and Constitution; May 25, 2006
Inflation Leap Stuns Market; Atlanta's Jump Worst of 10 Cities; The Atlanta Journal-Constitution; May 18, 2006
SUMMARY OF NATIONAL AND REGIONAL ECONOMIC OUTLOOK
The economic conditions on a macro level and micro level predict a moderate growth for the next 3-4 years. In the regional area where Peachtree
operates the economists predict around a 10% growth in the population, earnings growth, and employment. There is some risk of future inflation
which would increase the costs of Peachtree materials but the company believes they have enough pricing power to pass those costs increases onto
the customer.
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Industry Outlook
PLUMBING INDUSTRY REPORT
Atlanta. GA 6/30/2006
Introduction
This study examines the general construction & plumbing, heating, and air conditioning contractors, NAICS 238220 and SIC codes 1711,1791,1795
and the plumbing industry via the construction and plumbing industries. The focus of the report is to identify trends within the plumbing industry, as
well as to identify key elements that drive the sector. This study also examines the industry in the Atlanta, GA area and identifies trends that
influence the plumbing industry as well as demographic data that drive the sector. The accompanying charts are provided in support of the
information provided. This study is intended to give a realistic view of the industry and can serve as a guide in comparing a particular business to the
industry at large.
Overview
Demand for plumbing services and supplies was uneven across the U.S in 2006, according to a survey of contractors nationwide reported in
Contractor Magazine online. Contractors in Syracuse, N.Y. and Cleveland, OH reported to have “nothing going on,” while contractors in Kansas City
and cities across California couldn’t find enough help. High prices for metals and other raw materials, continuing consolidation of suppliers and more
green building initiatives were some of the trends that began to affect the plumbing industry in 2006. Overall, plumbing contractors and
manufacturers were optimistic about 2006 prospects, although no one expected the year to be better than 2005. Housing began to slow due to rising
mortgage rates; however, many areas saw strengthening in commercial projects and sustained growth in the remodeling and renovation sector.
Construction Industry
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The general construction industry is fragmented, with smaller operations collectively dominating. There are a number of large players with
nationwide coverage. Many smaller companies manage to survive in this competitive market due to the localized, specialized nature of their
operations.
The residential construction segment accounts for about 54 percent of the construction industry. The rest is spent on private non-residential
construction and public construction and public projects. The entire sector employs an estimated 8 million workers.
The construction sector is highly dependent on both local and national economic conditions. The residential construction industry is acutely
dependent upon mortgage rates.
In the immediate aftermath of the global economic downturn of 2001, the United States construction and engineering industry suffered, experiencing
contraction in 2002 and 2003. The industry is now in a period of recovery and is anticipated to post positive growth rates consistently until the end of
the decade.
The U.S. construction and engineering industry generated total revenues of $479.3 billion in 2005, representing an increase of 6.1 percent on the
previous year’s value and a compound annual growth rate (CAGR) of 1.2 percent between 2001 and 2005.
Table 1-United States Construction & Engineering Industry Value
Year
Billions of Dollars
Percentage Change
2001
456.6
N/A
2002
441.1
-3.4%
2003
433.1
-1.8%
2004
451.8
4.3%
2005
479.3
6.1%
CAGR, 2001-2005: 1.2%
Source: Datamonitor
The construction and engineering industry in the United States currently generates 82.4 percent of total industry value for the Americas. This
percentage share has declined slightly over the past five years, down from an industry share of 84 percent in 2001. However, the U.S. industry is
predicted to recover slightly, reaching a share of 83 percent in 2010. The U.S. industry is mature and becoming saturated.
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The U.S. industry is facing significant cost increases. Labor costs have also increased in recent years, a problem that will be compounded as the baby
boomers reach retirement, as the supply of laborers declines, the upward pressure on wages will increase.
Following a robust gain of 11 percent in 2004, total domestic construction increased 9.2 percent in 2005, in nominal terms. Total construction is
expected to decelerate to 6.9 percent, in 2006, followed by a mild three-year downturn. Total construction grew 8.3 percent in the first quarter of
2006, with spending on residential construction rising a modest 0.7 percent and nonresidential construction growing 2.7 percent. This trend is
expected to continue, with nonresidential investment exceeding residential investment into the fourth quarter of 2007, a reversal not witnessed for
several years.
Overall, 2006 will be a strong year for commercial activity but a slightly weaker year for overall construction, as the booming housing market
decelerates and home prices transition to a relatively soft landing. Rising interest rates will dampen the red-hot housing market in 2006, but overall
construction will remain strong, supported by robust nonresidential construction. An increase in commercial and public construction will spur nonresidential growth throughout 2006.
Improving budget outlooks allowed state and local governments to spend more freely in 2005. About 90 percent of public construction spending
comes from state and local governments. Even with climbing fuel prices, rising interest rates and many businesses looking to cut costs, investment
growth is giving the manufacturing sector an extra boost this year. Manufacturing output is expected to increase nearly 5.0 percent, and a primary
recipient will be the machinery sector. Manufacturing was a main driver of nonresidential construction in 2005, and it will be even stronger this year.
However, while manufacturing construction will remain at a healthy level in 2007-08, growth is expected to slow.
Plumbing Fixtures & Fittings
Market size demand for plumbing fixtures and fittings in the U.S. totaled $9.7 billion in 2005 based on annual growth of 3.0 percent from 2000.
Plumbing product demand is related to building construction, as more than 95 percent of fixtures and fittings are installed inside buildings.
Trends in plumbing fixture and fitting demand, however, do not necessarily move in lockstep with those of building construction, as the aftermarket
in plumbing products can support demand in face of weak new construction activity. Generally, advances in the plumbing product market lag that of
building construction. For much of the 1995 to 2000 period, plumbing product price increases were limited, posting growth slower than the building
construction price deflator. During most of the 1995 to 2005 period, rising real household income helped generate demand for plumbing products in
kitchen and bathroom renovations. In 2001, the U.S. entered a recession and subsequently struggled through a year and a half of fitful growth.
Consequently, plumbing product demand slowed, even declining in 2001 and 2002. In 2004, the plumbing product market emerged from its slump to
post the strongest yearly gains since 1995. The strong growth was driven by gains in the new housing market and a rebound in non-residential
construction spending.
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Table 2 - National Key Indicators for Plumbing Products
(billions dollars U.S.)
% Annual Growth
Item
2000
2005
2010
05/00
10/05
Gross Domestic Product
9,817
12,500
16,150
5.0
5.3
Resident
Population
(Millions persons)
282.2
296.4
309.8
1.0
0.9
Residential
380.0
632.5
674.0
10.7
1.3
New Housing
270.4
476.0
475.0
12.0
0.0
Improvement
109.6
156.5
199.0
7.4
4.9
Non-residential
Construction Expenditures
306.3
317.5
496.0
0.7
9.3
Private
Completions
1824
2074
1815
2.6
-2.6
Construction Expenditures
Housing
Source: The Freedonia Group, Inc.
Heating Ventilation and Air-Conditioning
Heating, air-conditioning, and refrigeration systems consist of many mechanical, electrical, and electronic components, such as motors, compressors,
pumps, fans, ducts, pipes, thermostats, and switches. Technicians often specialize in either installation or maintenance and repair, although they are
trained to do both. They also may specialize in doing heating work or air-conditioning or refrigeration work. Some specialize in one type of
equipment—for example, hydronics (water-based heating systems), solar panels, or commercial refrigeration. Plumbing skills may be required for
installation and maintenance and repair of many climate systems.
Sophisticated control systems along with more sophisticated plumbing fixtures (whirlpool tubs, steam rooms, multiple shower spray systems), are
also finding their way into high-end hotels. Guest rooms in luxury hotels provide a glimpse of what networked homes may be like in the next decade,
as do some of the systems for homes already on the market.
Appraisal of Economic Conditions
Page 33 of 98
Table 3 - Plumbing and HVAC Contractors, U.S. Total
Year
2001
2002
2003
2004
2005
% Change
Employees
828,859
829,301
848,187
891,199
933,572
12.6%
Establishments
83,892
86,684
89,733
93,538
96,835
15.4%
Wages (1000)
32,468,843
33,025,988
33,970,543
36,392,663
39,291,249 21.0%
Average Annual Pay
39,173
39,824
40,051
40,836
42,087
7.4%
Source: U.S. Department of Labor/ Bureau of Labor Statistics
The number of plumbing and HVAC contractors in the U.S. increased 12.6 percent from 828,859 in 2001 to 933,572 in 2005. The number of
establishments increased 15.4 percent from 83,892 in 2001 to 96,835 in 2005.
Concern for the environment has prompted the development of new energy (and water)-saving heating and air-conditioning systems. An emphasis on
better energy management should lead to the replacement of older systems and the installation of newer, more efficient systems in existing homes
and buildings. Also, demand for maintenance and service work should increase as businesses and homeowners strive to keep increasingly complex
systems operating at peak efficiency. Regulations prohibiting the discharge and production of CFC and HCFC refrigerants should continue to result
in the need to replace many existing air conditioning systems or modify them to use new environmentally safe refrigerants. The pace of replacement
in the commercial and industrial sectors will quicken if Congress or individual States cut the time needed to fully depreciate the cost of new HVACR
systems, which is being considered. Table 4 contains a “short list” of the largest HVAC Companies in the U.S.; Appendix A provides a more
comprehensive list, including number of employees, and what percentage of their business is from new construction, remodel/retrofit, and service
contracts.
Table 4 - Largest HVAC Companies- Nationwide
Appraisal of Economic Conditions
Company/Location
$ Millions
ComfortSystemsUSA,Houston
$781.81
EMCORGroup,Norwalk,Conn.
$683.39
Page 34 of 98
Table 4 - Largest HVAC Companies- Nationwide
ServiceExperts/LennoxRetail,Dallas
$654.10
ACCOEngineeredSystems,Glendale,Calif.
$378.51
CentricaNorthAmerica/ResidentialServicesGroup,Dublin,Ohio
$348.00
AmericanResidentialServicesLLC,Memphis,Tenn.
$345.85
Cal-AirInc.,Whittier,Calif.
$180.00
LimbachFacilityServicesLLC,Pittsburgh
$163.20
TDIndustries,Dallas
$123.50
PPLEnergyServicesGroup,Allentown,Pa.
$106.50
Source: Contractor Magazine
Traditionally, many organizations with extensive pipe systems have employed their own plumbers or pipe fitters to maintain equipment and keep
systems running smoothly. But, to reduce labor costs, many of these firms no longer employ full-time, in-house plumbers or pipe fitters. Instead,
when they need a plumber, they rely on workers provided under service contracts by plumbing and pipefitting contractors.
Construction projects generally provide only temporary employment. When a project ends, some pipe layers, plumbers, pipe fitters, and steamfitters
may be unemployed until they can begin work on a new project, although most companies are trying to limit these periods of unemployment in order
to retain workers. In addition, the jobs of pipe layers, plumbers, pipe fitters, and steamfitters are generally less sensitive to changes in economic
conditions than jobs in other construction trades. Even when construction activity declines, maintenance, rehabilitation, and replacement of existing
piping systems, as well as the increasing installation of fire sprinkler systems, provide many jobs for pipe layers, plumbers, pipe fitters, and
steamfitters.
Industry Indicators
U.S. shipments of HVAC controls totaled $1.7 billion in 2005, or 75 percent of total shipments. Between 2000 and 2005, HVAC control shipments
declined 6.9 percent per year as the economic recession limited demand for HVAC equipment, especially in the lackluster nonresidential market,
which makes use of some of the more expensive computerized and electronic products and systems.
Shipments of computerized energy controls for buildings declined 12.6 percent per year between 2000 and 2005 to $298 million. This sub-segment in
particular was affected by the recession as spending in the office and commercial sector of the nonresidential building market declined. Spending on
controls during the historical period suffered as few new commercial/office buildings were constructed and replacement of existing HVAC
Appraisal of Economic Conditions
Page 35 of 98
equipment with more expensive integrated climate control systems was postponed. In 2004 and 2005, computerized energy control shipments finally
began a slow recovery.
Shipments of environmental control parts and components that are sold separately declined 11.8 percent per year between 2000 and 2005 to $86
million. As environmental controls have become more complex, separate parts and components for HVAC and appliance controls are not as readily
consumed. Replacing the entire unit is easier and may be less costly, depending on repair time, than dismantling and rebuilding a complex control to
repair a single part.
Sophisticated control systems are also finding their way into high-end hotels, such as the Mandarin Oriental in Manhattan, New York. The hotel uses
smart technology to improve customer service. Computer systems record guest preferences for room temperature, lighting and other conditions, and
the data is stored for future retrieval. The environmental control systems are activated upon the guest’s next arrival to regulate the environment
before the guest steps into the room. These guest rooms in luxury hotels provide a glimpse of what networked homes may be like in the next decade,
as do some of the systems for homes already on the market. For example, Smarthome’s INSTEON lighting and appliance controls utilize dual-band,
wireless home-controlled network technology. The system combines radio frequency communications with the home’s existing wiring to provide
connection for automatic or remote control of lighting, appliances and climate, as well as security and entertainment systems.
Earnings & Employment
The BLS reports that pipe layers, plumbers, pipe fitters, and steamfitters are among the highest paid construction occupations. In May 2006, the
national median hourly earnings of plumbers, pipe fitters, and steamfitters was $20.56. The middle 50 percent earned between $15.62 and $27.54.
The lowest 10 percent earned $12.30, and the highest 10 percent earned $34.79. Median hourly earnings in the industries employing the largest
numbers of plumbers, pipe fitters, and steamfitters in May 2004 were as follows:
Table 5 - Earnings: plumbers, pipe fitters, and steamfitters,
May 2004
Natural gas distribution
$23.86
Nonresidential building construction
$21.55
Building equipment contractors
$19.85
Utility system construction
$18.29
Local government
$16.30
Source: U.S. Department of Labor/ Bureau of Labor Statistics
Appraisal of Economic Conditions
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Apprentices usually begin at about 50 percent of the wage rate paid to experienced pipe layers, plumbers, pipe fitters, and steamfitters. Wages
increase periodically as skills improve. After an initial waiting period, apprentices receive the same benefits as experienced pipe layers, plumbers,
pipe fitters, and steamfitters.
Many pipe layers, plumbers, pipe fitters, and steamfitters are members of the United Association of Journeymen and Apprentices of the Plumbing
and Pipefitting Industry of the United States and Canada.
Plumbing and HVAC
Pipe layers, plumbers, pipe fitters, and steamfitters install, maintain, and repair many different types of pipe systems. For example, some systems
move water to a municipal water treatment plant and then to residential, commercial, and public buildings. Other systems dispose of waste, provide
gas to stoves and furnaces, or provide for heating and cooling needs. Pipe systems in power plants carry the steam that powers huge turbines. Pipes
also are used in manufacturing plants to move material through the production process. Specialized piping systems are very important in both
pharmaceutical and computer-chip manufacturing.
Although pipe laying, plumbing, pipefitting, and steam fitting sometimes are considered a single trade, workers generally specialize in one of five
areas. Pipe layers lay clay, concrete, plastic, or cast-iron pipe for drains, sewers, water mains, and oil or gas lines. Before laying the pipe, pipe layers
prepare and grade the trenches either manually or with machines. After laying the pipe, they weld, glue, cement or otherwise join the pieces together.
Plumbers install and repair the water, waste disposal, drainage, and gas systems in homes and commercial and industrial buildings. Plumbers also
install plumbing fixtures—bathtubs, showers, sinks, and toilets—and appliances such as dishwashers and water heaters. Pipe fitters install and repair
both high- and low-pressure pipe systems used in manufacturing, in the generation of electricity, and in the heating and cooling of buildings. They
also install automatic controls that are increasingly being used to regulate these systems. Some pipe fitters specialize in only one type of system.
Steamfitters install pipe systems that move liquids or gases under high pressure. Sprinkler fitters install automatic fire sprinkler systems in buildings.
The number of plumbing and HVAC contractors in the U.S. increased 12.6 percent from 828,859 in 2001 to 933,572 in 2005 (see Table 6). The
number of establishments increased 15.4 percent from 83,892 in 2001 to 96,835 in 2005.
Table 6 - Plumbing and HVAC Contractors, U.S. Total
Year
2001
2002
2003
2004
2005
Employees
828,859
829,301
848,187
891,199
933,572
12.6%
Establishments
83,892
86,684
89,733
93,538
96,835
15.4%
Wages (1000)
32,468,843
33,025,988
33,970,543
36,392,663 39,291,249
21.0%
39,173
39,824
40,051
Average Annual Pay
40,836
42,087
% Change
7.4%
Source: U.S. Department of Labor/ Bureau of Labor Statistics
Appraisal of Economic Conditions
Page 37 of 98
Plumbing Fixtures Manufacturing
Demand for plumbing fixtures is forecast to expand 2.7 percent per annum through 2010 to $5.8 billion. Gains will be bolstered by strong residential
and nonresidential repair and improvement activity over the forecast period. In addition, solid growth in new nonresidential building and nonbuilding construction will benefit plumbing fixture demand, particularly in the institutional and lodging segments. Consumer interest in higher-end
fixtures will aid value demand advances as well. However, a weak new housing environment, highlighted by a decline in single-family housing
completions, will restrain demand. Bathtubs and showers are expected to remain the largest fixture category in 2010, accounting for 46 percent of
plumbing fixture demand; however, gains for these plumbing products will be limited by a weak new housing environment.
Above-average growth in demand for whirlpool bathtubs, showers, sinks, and hot tubs and spas will be aided by increasing residential remodeling
activity, as the kitchen, bathroom and outdoor living area continue to increase in prominence in homes. Hot tubs and spas in particular will continue
to benefit from personal income gains as consumers look for water recreation and spa-like higher-end fixtures at home. Toilet fixtures (water closet
bowls, flush tanks and urinals) will post below-average gains through 2010, as most of the gains from the low-flow mandate have dissipated and new
housing activity will wane from 2005 highs. Modest gains will be aided by non-residential construction activity.
Atlanta, GA
Atlanta has in recent years undergone a transition from a city of regional commerce to a city of international influence. Between 2000 and 2006, the
Atlanta metropolitan area grew 20.5 percent, making it the fastest growing metropolitan area in the nation. As of July 2006, the Atlanta metropolitan
area had an estimated population of 5,138,223. Atlanta is often considered a poster child for cities worldwide experiencing rapid growth and urban
sprawl.
Atlanta has been in the midst of a construction and retail boom, with over 60 new high-rise or mid-rise buildings either proposed or under
construction as of April 19, 2006. October 2005 marked the opening of Atlantic Station, a former Brownfield steel plant site redeveloped into a
mixed-use urban district. In early 2006, Mayor Franklin set in motion a plan to make the 14-block stretch of Peachtree Street in Midtown Atlanta a
street-level shopping destination envisioned to rival Beverly Hills' Rodeo Drive or Chicago's Magnificent Mile. In spite of civic efforts such as the
opening of Centennial Olympic Park in downtown in 1996, Atlanta ranks near last in area of park land per capita among cities of similar population
density, with 8.9 acres per thousand residents in 2005.
One of seven American cities classified as Gamma world cities, Atlanta ranks third in the number of Fortune 500 companies headquartered within
city boundaries, behind New York City and Houston. Several major national and international companies are headquartered in Atlanta or its nearby
suburbs, including four Fortune 100 companies: The Coca-Cola Company, Home Depot, and United Parcel Service in adjacent Sandy Springs. The
headquarters of AT&T Mobility (formerly Cingular Wireless), the largest mobile phone service provider in the United States, and Newell
Rubbermaid are also in Atlanta and around the metro area, as well as other major companies including Arby's, Chick-Fil-A, Earthlink, Equifax,
Appraisal of Economic Conditions
Page 38 of 98
Georgia-Pacific, Oxford Industries, Southern Company, SunTrust Banks, and Waffle House. Over 75 percent of the Fortune 1000 companies have a
presence in the Atlanta area, and the region hosts offices of about 1,250 multinational corporations.
Delta Air Lines is the city's largest employer and the metro area's third largest. Delta operates the world's largest airline hub at Hartsfield-Jackson
Atlanta International Airport and, together with the hub of competing carrier AirTran Airways, has helped make Hartsfield-Jackson the world's
busiest airport, both in terms of passenger traffic and aircraft operations. The airport, since its construction in the 1950s, has served as a key engine of
Atlanta's economic growth.
Atlanta has a sizable financial sector. SunTrust Banks, the seventh largest bank by asset holdings in the United States, has its home office on
Peachtree Street in downtown. The Federal Reserve System has a district headquarters in Atlanta; the Federal Reserve Bank of Atlanta, which
oversees much of the deep South, relocated from downtown to midtown in 2001. Wachovia announced plans in August 2006 to place its new creditcard division in Atlanta, and city, state and civic leaders’ harbor long-term hopes of having the city serve as the home of the secretariat of a future
Free Trade Area of the Americas.
The auto manufacturing sector in metropolitan Atlanta has suffered setbacks recently, including the shutdown of Ford Motor Company's Atlanta
Assembly plant in Hapeville in 2006. Kia, however, has broken ground on a new assembly plant near West Point, Georgia.
The city is a major cable television programming center. Ted Turner began the Turner Broadcasting System media empire in Atlanta, where he
bought a UHF station that eventually became WTBS. Turner established the headquarters of the Cable News Network at CNN Center, adjacent today
to Centennial Olympic Park. As his company grew, its other channels – the Cartoon Network, Boomerang, TNT, Turner South, CNN International,
CNN en Espanola, CNN Headline News, and CNN Airport Network – centered their operations in Atlanta as well.
Cox Enterprises has substantial media holdings in and beyond Atlanta. Its Cox Communications division is the nation's third-largest cable television
service provider; the company also publishes over a dozen daily newspapers in the United States, including The Atlanta Journal-Constitution. WSB –
the flagship station of Cox Radio – was the first AM radio station in the South.
Atlanta is also home to the Centers for Disease Control and Prevention (CDC). Adjacent to Emory University, with a staff of nearly 15,000
(including 6,000 contractors and 840 Commissioned Corps officers) in 170 occupations, including: engineers, entomologists, epidemiologists,
biologists, physicians, veterinarians, behavioral scientists, nurses, medical technologists, economists, health communicators, toxicologists, chemists,
computer scientists, and statisticians.
Beige Books Indicators
According the Beige Book report for June 2006, indicators from the Atlanta Sixth District were mixed in April and May. While most retail merchants
reported that sales rose at a solid pace and expressed an upbeat near-term outlook, some segments reported lower demand. Auto sales were varied,
and dealers noted that sales of SUVs and large trucks were especially soft. Residential construction remained steady with sales near year-ago levels
in most parts of the District. However, sales weakened in Florida, especially in the condominium market. Nonresidential construction advanced at a
modest pace, and factory activity was mixed. Regional transportation companies continued to report strong demand for their services, and Florida's
Appraisal of Economic Conditions
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tourism industry posted good results in the spring. Bank loan demand continued to slow in parts of the District. Employers in several industries noted
difficulty in obtaining skilled workers. Upward cost pressures were reported in many industries, whereas the ability to pass on these higher costs to
customers remained mixed. Consumer spending seemed to be maintaining healthy levels, especially in areas receiving Katrina evacuees. Inventories
were described as a bit heavy overall, but most merchants were still comfortable with their position, and continued to express a positive near-term
outlook.
Real Estate
Beige Book reported that single-family home construction and sales were near 2005 levels in most parts of the District. However, Florida reports
noted slowing in both construction and sales in April and May. Inventories of homes for sale in Florida remained higher than at the same time last
year. In addition, Florida condominium sales continued to weaken with several project cancellations reported. Some parts of Katrina-damaged areas
in Mississippi noted a modest improvement in residential construction activity, and some demolition work had begun in the New Orleans area.
Gradually declining vacancy rates and positive absorption indicated healthy demand in nonresidential real estate markets across the District.
However, construction had only picked up modestly according to most contacts. The pace of nonresidential redevelopment in hurricane-hit areas
remained modest, although some parts of the Mississippi coast were further along.
Table 7 - New Privately Owned Housing Units Authorized—
Unadjusted Units by Metropolitan Area—YTD June 2006
Atlanta-Sandy Springs-Marietta,
GA
Total
1 Unit
2
Units
3-4
Units
5 Units or
more
Structures w/more than 5
units
38,693
30,795
102
296
7500
229
Source: U.S. Census Bureau
Employment and Prices
Contacts continued to report tight labor markets in many Sixth District areas. A growing number of employers expressed difficulty in attracting new
employees to South Florida, reportedly because of housing affordability issues. A shortage of housing has also hampered labor availability in the
Gulf Coast region.
Most reports noted continuing upward price pressures, especially for building materials and energy-related goods. Builders reported that prices for
concrete, steel, copper, and zinc continued to move higher. High crude oil prices have pushed up the costs of petroleum-based goods such as PVC,
roofing, and asphalt. Several contacts in coastal areas noted higher insurance costs. Despite these pressures, however, the ability to pass on higher
costs to customers remained mixed. Slowing demand and strong competition were the most often cited reasons for not being able to raise prices.
Appraisal of Economic Conditions
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Table 8 shows the number of Plumbers and HVAC Installers employed in the Atlanta-Sandy Springs-Marietta, GA Metropolitan Statistical Area
(MSA) as reported by the U.S. Department of Labor/Bureau of Labor Statistics, and their relative wages.
Table 8– Plumbers, Pipefitters, and Steamfitters
Atlanta-Sandy Springs-Marietta, GA MSA, May 2006
Occupation
Plumbers, Pipefitters,
and
Steamfitters
(472152)
Employment
5390
Hourly
mean
wage
Annual
mean
wage
Hourly
median
wage
Annual
median
wage
$19.32
$40,180
$18.57
$38,620
Source: U.S. Department of Labor/Bureau of Labor Statistics
Outlook
Looking forward, the construction and engineering industry in the United States is expected to accelerate from its current value growth position. With
an anticipated CAGR of 5 percent in the 2005 to 2010 period, the market is expected to reach a value of $611.5 billion by the end of 2010. The
significant amounts of reconstruction necessary in the wake of the hurricane season of 2005 will increase revenues for companies operating within
this industry, as will enhanced state funding for transport infrastructure construction.
Table 9-United States Construction & Engineering Industry Value Forecast
Appraisal of Economic Conditions
Year
Billions of Dollars
Percentage Change
2005
479.3
6.1%
2006
502.4
4.8%
2007
524.9
4.5%
2008
550.4
4.9%
2009
580.8
5.5%
2010
611.5
5.3%
Page 41 of 98
CAGR, 2005-2010: 5.0%
Source: Datamonitor
According to Woods and Poole earnings in the construction sector are expected to increase 10.5 percent from $9.6 million in 2005 to 10.6 million in
2010. Total employment in the construction sector is expected to increase 8.2 percent from 2005 to 2010.
High prices for metals and other raw materials, continuing consolidation of suppliers and more green building initiatives were some of the trends that
affected the plumbing industry in 2006. Overall, plumbing contractors and manufacturers were optimistic about 2006, although slowing in the
residential housing sector began to affect the industry by the close of 2006.
Table 10 - 2006 Housing Outlook
(Percent change from previous year)
Sector
2004
2005
2006
2007
Residential construction
10.3%
7.4%
-0.6%
0%
Housing starts
5.2
5.8
-7
3.4
Existing Home sales
9.7
4.7
-3.7
1.5
New single-family sales
10.8
7
-4.8
1.1
Single-family sales unit
6.6
6.6
-8
0.4
Multifamily unit sales
-0.9
2.2
-2.1
16.7
Sources: National Association of Realtors, Contractor magazine
It is expected that contractors and all market suppliers will operate well below capacity for several more years, which will keep home prices declining
into next year. Starts are expected to return to a pace near 1.500 million by late 2008 and then gradually rise as the surplus of available homes is
absorbed. Expect the surplus to be bigger than now reported. The housing decline is most severe in the Southeast, Southwest and the declining
manufacturing centers in the Midwest.
The decline in new residential construction spending is expected to be largely complete this fall after a 21-month, 30 percent drop. The sub-prime
mortgage collapse is now reducing the ability of banks to lend to the broader economy. This will keep the housing markets shrinking slowly for at
least several more months as home sale prices continue to decline. No significant improvement is expected until well into 2008, when the current
surplus inventory will have shrunk enough to stop the decline in home prices.
Appraisal of Economic Conditions
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Job prospects for heating, air-conditioning, and refrigeration mechanics and installers are expected to be excellent. A growing number of retirements
of highly skilled technicians are expected to generate many job openings. As the population and stock of buildings grows so will the demand for
residential, commercial, and industrial climate-control systems. It is expected that the increased complexity of HVACR systems, increasing the
possibility that equipment may malfunction, will also create opportunities for service technicians.
Demand for plumbing fittings is projected to grow 2.0 percent per year from 2005 to $5.1 billion in 2010. Advances will be aided by healthy gains in
residential and nonresidential repair and improvement of kitchens and bathrooms. Additionally, accelerating growth in nonresidential construction
spending is expected to bolster demand for fittings through 2010. Product developments -- such as a broader palette of finishes, electronic
functionality and universally accessible control design -- will also help generate demand for plumbing fittings. Nevertheless, gains will be limited
somewhat by a weak new housing environment, highlighted by an expected decline in single-family housing completions over the forecast period.
The lavatory fittings and kitchen and other sink fittings sub-segments are both expected to advance at an above-average pace of 3.3 percent per
annum through 2010, boosted by favorable repair and improvement expenditures. In addition, gains for lavatory fittings will be supported by the
growing popularity of dual lavatories in master bedroom suites, while kitchen and other sink fittings will benefit from product enhancements and
consumer trends toward higher-end fittings. ADA accessibility products are also forecast to exhibit strong growth over the forecast period.
According to the U.S. Bureau of Labor Statistics (BLS), employment of pipe layers, plumbers, pipe fitters, and steamfitters is expected to grow about
as fast as average (9 to 17 percent increase) for all occupations through the year 2014. Demand for plumbers will stem from new construction and
building renovation. Bath remodeling, in particular, is expected to continue to grow and create more jobs for plumbers. In addition, repair and
maintenance of existing residential systems will keep plumbers employed. Demand for pipe fitters and steamfitters will be driven by maintenance
activities for places having extensive systems of pipes, such as power plants, water and wastewater treatment plants, office buildings, and factories.
Growth of pipe layer jobs will stem from the building of new water and sewer lines and pipelines to new oil and gas fields. Demand for sprinkler
fitters will increase due to changes to State and local rules for fire protection in homes and businesses.
The BLS predicts job opportunities should be excellent in the plumbing profession because not enough people are seeking training. Pipe layers,
plumbers, pipe fitters, and steamfitters make up one of the largest and highest paid construction occupations.
Overall, as residential construction has slowed, HVAC and plumbing contractors have begun to move into light commercial or service companies
where demand has remained strong.
Appendix A. Top Industry Leaders--Table
Appraisal of Economic Conditions
Page 43 of 98
Top Industry Leaders
Percentage of HVAC Work
COMPANY NAME
Annual
HVAC
No. HVAC
Employees
New
Construction
Retrofit/
Service
Area
Renovation
Vol. (in $
millions)
Emcor
Group,
Norwalk CT
Inc.
$1,848
14,095
68%
24%
8%
Nationwide
Systems,
$820
5,863
54%
30%
16%
Nationwide
ACCO
Engineered
Systems, Glendale, CA
$365
1,800
65%
30%
15%
West Coast
Southland
Irvine, CA
Industries,
$285
1,456
55%
37%
8%
TD Industries, Dallas, TX
$160
900
40%
30%
30%
Hill Mechanical Group,
Chicago, IL
$152
716
58%
35%
7%
Brandt
Dallas, TX
Engineering,
$130
900
65%
35%
10%
TX, OK, LA, NM
Coastal
Mechanical
Services, Melbourne, FL
$103
NR
56%
11%
33%
Southeast US
John W. Danforth Co.,
Tonawanda, NY
$102
429
30%
62%
8%
Ivey
Mechanical
Company, Kosciusko, MS
$100
700
65%
20%
15%
Nationwide
University
Mechanical,
CA
Marelich
Anaheim,
$100
400
95%
5%
0%
S. California
A.O. Reed & Co., San
Diego, CA
$92
450
55%
30%
15%
S. California
Hill York & Associated
Companies,
Ft.
Lauderdale, FL
$81
450
65%
20%
15%
S. Florida
Way
Holding
Houston TX
$73
322
77%
11%
12%
TX, OK
Comfort
Houston, TX
Appraisal of Economic Conditions
Ltd.,
CA, NV, CO, HI,
and Mid-Atlantic
TX, AZ
Northeast IL
Central/
Western NY
Page 44 of 98
Top Industry Leaders
Percentage of HVAC Work
Lee Company, Franklin,
TN
$70
500
60%
20%
20%
Construction:
Nationwide
Service: Mid-TN
MacDonald-Miller
Facility Solutions, Seattle
WA
$70
390
48%
35%
17%
Western WA/
Critchfield
Mechanical
Menlo Park, CA
$68
400
85%
15%
0%
Environmental
Air
Systems, Greensboro, NC
$62
550
60%
30%
10%
Southeast
Charles
E.
Jarrell
Contracting, Earth City,
MO
$57
305
55%
30%
15%
St. Louis, Western
IL
Martin Petersen
Kenosha, WI
Co.,
$52
240
60%
20%
20%
Chicago
Milwaukie
L.H. Cranston & Sons,
Timonium, MD
$40
100
65%
25%
10%
Baltimore/
Hermanson
Kent, WA
Company,
$38
150
70%
10%
20%
WA. AK
Wiegmann Associates, St.
Charles, MO
$37
125
50%
48%
11%
Nationwide
Streimer Sheet
Portland, OR
Metal,
$35
113
41%
48%
11%
OR, WA, ID, CA
Berger Engineering Co.,
Dallas, TX
$34
200
89%
10%
1%
N. Oregon
CA, NV, HI
to
Washington DC
Nationwide
Sources: National Association of Realtors, Contractor magazine
Information contained in this report has been obtained by the Center for Economic and Industry Research, LLC from sources believed to be reliable. The Center for Economic and
Industry Research, LLC is not able to guarantee the accuracy or completeness of this information, nor is the Center for Economic and Industry Research, LLC responsible for any
errors, omissions or damages arising from the use of this information.
©2008 Center for Economic & Industry Research, LLC 1111 Brickyard Road, Salt Lake City, Utah 84106, ALL RIGHTS RESERVED.
Appraisal of Economic Conditions
Page 45 of 98
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6.
7.
8.
Federal Reserve Districts; The Beige Book, June 13, 2006.
Atlanta, GA; Wikipedia
Plumbing Fixtures & Fittings: Industry Profile, Freedonia, May 2006.
The Complete Economic and Demographic Data Source; Woods and Poole; 2006
Plumbing industry in '06 — 'a 7 or an 8'; Contractor Magazine.com; 2005
Commercial Contractor Survey; Contracting Business, June 8, 2006.
Battle cry for licensed plumbers; Contracting Magazine; May, 2006.
Construction & Engineering in the United States; Datamonitor; May 2006
Appraisal of Economic Conditions
Page 46 of 98
(Financials were internally prepared and unaudited)
COMPANY HISTORICAL BALANCE SHEETS
Year
Ended
June 30, 2006
Year
Ended
June 30, 2005
Year
Ended
June 30, 2004
Year
Ended
June 30, 2003
Year
Ended
June 30, 2002
ASSETS
Cash
Accounts Receivable
Inventory
Other Current Assets
Total Current Assets
Fixed Assets
Net Intangible
Other Non-Current
Total Assets
1,403,000
891,000
49,000
2,150,000
4,493,000
1,825,000
0
150,000
6,468,000
1,435,000
714,000
45,000
1,220,000
3,414,000
1,593,000
0
150,000
5,157,000
1,005,000
689,000
39,000
514,000
2,247,000
1,463,000
0
150,000
3,860,000
350,000
750,000
30,000
65,000
1,195,000
1,390,000
0
150,000
2,735,000
209,000
290,000
25,000
50,000
574,000
1,362,000
0
150,000
2,086,000
LIABILITIES & EQUITY
Accounts Payable
Short Term Notes Payable
Current Portion of LT Debt
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Other Non-Current Liabilities
Total Liabilities
Total Equity
Total Liabilities & Equity
10,000
135,000
0
3,000
148,000
1,831,000
0
1,979,000
4,489,000
6,468,000
12,000
119,000
0
4,000
135,000
1,517,000
0
1,652,000
3,505,000
5,157,000
15,000
111,000
0
2,000
128,000
1,158,000
0
1,286,000
2,574,000
3,860,000
13,000
88,000
0
5,000
106,000
830,000
0
936,000
1,799,000
2,735,000
11,000
73,000
0
3,000
87,000
705,000
0
792,000
1,294,000
2,086,000
Page 47 of 98
COMPANY COMMON SIZE BALANCE SHEET
(Common size is putting all numbers into percentages)
Company historical Balance Sheets
Page 48 of 98
Historic Balance Sheets
Assets:
Current Assets
Cash
Checking
Savings
Marketable Securities
Total Cash
Accounts Receivable
Inventory
Raw Materials
Work in Progress
Finished Goods
Total Inventory
Other Current Assets
Short-Term investments
Total Other Current Assets
Total Current Assets
Fixed Assets - Net
Property, Plant, Equipment
Land
Other Fixed Assets
Leasehold Improvements
Total Fixed Assets - Cost
Accumulated Depreciation
Machinery & Equipment
Vehicles
Leasehold Improvements
Total Accumulated Depreciation
Total Fixed Assets - Net
Intangible Assets - Net
Intangible Assets - Cost
Accumulated Amortization
Total Intangible Assets - Net
Other Non-Current Assets
Other Assets
Non-Operating Assets
Total Other Non-Current Assets
Total Assets
Liabilities and Equity:
Liabilities
Current Liabilities
Accounts Payable
Short Term Notes Payable
Current Portion - LTD
Other Current Liabilities
Total Current Liabilities
Long-Term Debt
Nots Payable
Note 2
Total Long-Term Debt
Other Non-Current Liablilities
Other Liabilities
Deferred Income Taxes
Non-Operating Liabilities
Total Other Non-Current Liablilities
Total Liabilities
Equity
Common Stock
Dividends
Add'l Paid-In Capital
Retained Earnings
Total Equity
Total Liabilities and Equity
Company historical Balance Sheets
Year
Ended
June 30, 2006
Year
Ended
June 30, 2005
Year
Ended
June 30, 2004
Year
Ended
June 30, 2003
Year
Ended
June 30, 2002
21.69%
27.83%
26.04%
12.80%
10.02%
21.69%
13.78%
0.76%
27.83%
13.85%
0.87%
26.04%
17.85%
1.01%
12.80%
27.42%
1.10%
10.02%
13.90%
1.20%
0.76%
0.87%
1.01%
1.10%
1.20%
33.24%
33.24%
69.47%
23.66%
23.66%
66.20%
13.32%
13.32%
58.21%
2.38%
2.38%
43.69%
2.40%
2.40%
27.52%
13.91%
13.91%
0.39%
13.09%
17.45%
0.35%
14.25%
23.32%
0.34%
17.37%
32.91%
0.55%
21.57%
43.14%
0.58%
28.22%
30.89%
37.90%
50.82%
65.29%
0.00%
28.22%
0.00%
30.89%
0.00%
37.90%
0.00%
50.82%
0.00%
65.29%
0.00%
0.00%
0.00%
0.00%
0.00%
2.32%
2.91%
3.89%
5.48%
7.19%
2.32%
100.00%
2.91%
100.00%
3.89%
100.00%
5.48%
100.00%
7.19%
100.00%
0.15%
2.09%
0.23%
2.31%
0.39%
2.88%
0.48%
3.22%
0.53%
3.50%
0.05%
2.29%
0.08%
2.62%
0.05%
3.32%
0.18%
3.88%
0.14%
4.17%
28.31%
29.42%
30.00%
30.35%
33.80%
28.31%
29.42%
30.00%
30.35%
33.80%
0.00%
30.60%
0.00%
32.03%
0.00%
33.32%
0.00%
34.22%
0.00%
37.97%
0.85%
1.07%
1.42%
2.64%
7.19%
61.36%
69.40%
100.00%
9.02%
57.88%
67.97%
100.00%
12.05%
53.21%
66.68%
100.00%
2.01%
1.57%
17.00%
45.19%
65.78%
100.00%
22.29%
37.10%
62.03%
100.00%
Page 49 of 98
COMPANY HISTORICAL PROFIT & LOSS
Historic Income Statements
Revenues
Sales
Revenue
Miscellaneous Income
Total Revenues
Cost of Goods Sold
Raw Materials Consumed
Direct Labor
Overhead
COGS Depreciation
Total Cost of Goods Sold
Gross Profit
Operating Expenses
Accounting
Advertising
Automobiles/Truck/Equipment
Pension & Profit Sharing
Contributions
Employee Benefits
Insurance
Legal
Depreciation
Amortization
Office
Payroll Taxes
Rent
Repairs & Maintenance
Officers' Compensation
Salaries
Director Fees
Travel & Entertainment
Total Operating Expenses
Operating Profit
Other Income/(Expense)
Interest Expense
Other Income
Other Expense
Total Other Income/(Expense)
Income Before Taxes
Income Taxes
Net Income/(Loss)
Company historical Profit & Loss
Year
Ending
June 30, 2006
Year
Ending
June 30, 2005
Year
Ending
June 30, 2004
Year
Ending
June 30, 2003
Year
Ending
June 30, 2002
7,295,000
6,489,000
5,755,000
4,156,000
3,529,000
7,295,000
6,489,000
5,755,000
4,156,000
3,529,000
0
7,295,000
0
6,489,000
0
5,755,000
0
4,156,000
0
3,529,000
633,000
73,000
520,000
65,000
463,000
58,000
411,000
42,000
325,000
35,000
78,000
41,000
73,000
61,000
31,000
84,000
49,000
29,000
86,000
36,000
27,000
68,000
29,000
26,000
57,000
405,000
66,000
360,000
54,000
320,000
48,000
231,000
42,000
196,000
36,000
240,000
3,495,000
18,000
5,000
5,127,000
2,168,000
192,000
3,109,000
10,000
5,000
4,491,000
1,998,000
168,000
2,757,000
6,000
5,000
3,989,000
1,766,000
144,000
1,991,000
5,000
4,000
3,001,000
1,155,000
120,000
1,691,000
3,000
4,000
2,522,000
1,007,000
-120,000
84,000
-522,000
-558,000
1,610,000
626,000
984,000
-107,000
67,000
-469,000
-509,000
1,489,000
558,000
931,000
-94,000
53,000
-416,000
-457,000
1,309,000
491,000
818,000
-68,000
31,000
-332,000
-369,000
786,000
324,000
462,000
-58,000
22,000
-286,000
-322,000
685,000
270,000
415,000
Page 50 of 98
COMPANY COMMON SIZE INCOME STATEMENT
(Common size is putting all numbers into percentages)
Historic Income Statements
Revenues
Sales
Revenue
Miscellaneous Income
Total Revenues
Cost of Goods Sold
Raw Materials Consumed
Direct Labor
Overhead
COGS Depreciation
Total Cost of Goods Sold
Gross Profit
Operating Expenses
Accounting
Advertising
Automobiles/Truck/Equipment
Pension & Profit Sharing
Contributions
Employee Benefits
Insurance
Legal
Depreciation
Amortization
Office
Payroll Taxes
Rent
Repairs & Maintenance
Officers' Compensation
Salaries
Director Fees
Travel & Entertainment
Total Operating Expenses
Operating Profit
Other Income/(Expense)
Interest Expense
Other Income
Other Expense
Total Other Income/(Expense)
Income Before Taxes
Income Taxes
Net Income/(Loss)
Company historical Profit & Loss
Year
Ending
June 30, 2006
Year
Ending
June 30, 2005
Year
Ending
June 30, 2004
Year
Ending
June 30, 2003
Year
Ending
June 30, 2002
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
0.00%
100.00%
0.00%
100.00%
0.00%
100.00%
0.00%
100.00%
0.00%
100.00%
8.68%
1.00%
8.01%
1.00%
8.05%
1.01%
9.89%
1.01%
9.21%
0.99%
1.07%
0.56%
1.00%
0.94%
0.48%
1.29%
0.85%
0.50%
1.49%
0.87%
0.65%
1.64%
0.82%
0.74%
1.62%
5.55%
0.90%
5.55%
0.83%
5.56%
0.83%
5.56%
1.01%
5.55%
1.02%
3.29%
47.91%
0.25%
0.07%
70.28%
29.72%
2.96%
47.91%
0.15%
0.08%
69.21%
30.79%
2.92%
47.91%
0.10%
0.09%
69.31%
30.69%
3.46%
47.91%
0.12%
0.10%
72.21%
27.79%
3.40%
47.92%
0.09%
0.11%
71.47%
28.53%
-1.64%
1.15%
-7.16%
-7.65%
22.07%
8.58%
13.49%
-1.65%
1.03%
-7.23%
-7.84%
22.95%
8.60%
14.35%
-1.63%
0.92%
-7.23%
-7.94%
22.75%
8.53%
14.21%
-1.64%
0.75%
-7.99%
-8.88%
18.91%
7.80%
11.12%
-1.64%
0.62%
-8.10%
-9.12%
19.41%
7.65%
11.76%
Page 51 of 98
RMA PEER COMPARISONS
For purposes of comparison with industry financial measures available from non-public
company sources, I reviewed the Annual Statement Studies, published by The Risk
Management Association (RMA). RMA compiled average percentage income statement
and balance sheets and key financial ratios of companies classified under Standard
Industrial Classification (SIC) # 1711/238220. I believe the RMA data provide limited
comparative perspective and strict comparisons should be made with caution.
From the following ratio comparison you be able to see how Peachtree compares to other
private companies in the same industry. The liquidity ratios show how liquid the
company is in case of a forced liquidation or any other reason for the need of quick cash.
The coverage and leverage ratios compare how well the company can cover it
obligations. The operating ratios will show how well management is utilizing the
company’s assets.
RMA Peer Comparisons
Page 52 of 98
The following liquidity ratios are compared to the subject company.
Based On Adjusted Financial Statements
LIQUIDITY RATIOS:
Upper Current Ratio
Median Current Ratio
Lower Current Ratio
Subject Current Ratio
Upper Quick (Acid-Test) Ratio
Median Quick (Acid-Test) Ratio
Lower Quick (Acid-Test) Ratio
Subject Quick (Acid-Test) Ratio
Upper Revenues/Receivable
Median Revenues/Receivable
Lower Revenues/Receivable
Subject Revenues/Receivable
Upper Days' Receivables
Median Days' Receivables
Lower Days' Receivables
Subject Days' Receivables
Upper Cost of Sales to Inventory
Median Cost of Sales to Inventory
Lower Cost of Sales to Inventory
Subject Cost of Sales to Inventory
Upper Days' Inventory
Median Days' Inventory
Lower Days' Inventory
Subject Days' Inventory
Upper Cost of Sales to Payables
Median Cost of Sales to Payables
Lower Cost of Sales to Payables
Subject Cost of Sales to Payables
Upper Days' Payables
Median Days' Payables
Lower Days' Payables
Subject days' Payables
Upper Sales to Working Capital
Median Sales to Working Capital
Lower Sales to Working Capital
Subject Sales to Working Capital
RMA
220
Peachtr
2006
RMA
1071
Peachtr
2005
RMA
962
Peachtr
2004
RMA
1084
Peachtr
2003
RMA
811
Peachtr
2002
2.10
1.60
1.20
30.22
2.10
1.50
1.20
25.26
2.00
1.40
1.10
17.52
2.10
1.40
1.10
11.27
2.00
1.40
1.20
6.60
1.80
1.30
0.90
15.41
1.70
1.20
0.90
15.92
1.70
1.10
0.80
13.23
1.70
1.20
0.90
10.38
1.70
1.20
0.90
5.74
8.30
5.60
4.40
8.22
9.60
6.40
4.70
9.04
11.00
6.80
4.80
8.34
9.80
6.30
4.70
5.54
9.50
6.20
4.70
12.17
44
65
83
44
38
57
78
40
33
54
76
44
37
58
78
66
38
59
78
30
0.00
82.40
24.70
0.00
0.00
88.60
23.90
0.00
0.00
83.60
23.70
0.00
0.00
87.60
24.50
0.00
0.00
96.10
23.80
0.00
0
4
15
0
0
4
15
0
0
4
15
0
0
4
15
0
0
4
15
0
17.10
11.70
7.30
0.00
20.20
11.80
7.70
0.00
20.50
12.20
8.00
0.00
18.60
11.40
7.60
0.00
19.70
11.50
7.60
0.00
21
31
50
0
18
31
47
0
18
30
46
0
20
32
48
0
19
32
48
0
6.70
12.10
29.70
1.67
7.80
13.50
33.30
1.97
7.90
15.30
48.80
2.72
7.90
13.70
39.60
3.82
7.50
13.10
32.00
7.25
As you can see Peachtree has ample current & quick ratios and because of these excess
cash equivalencies they have a very low working capital turnover. Peachtree also able to
collect their money quicker than industry standards. Inventory and payables turnover
was incomplete.
RMA Peer Comparisons
Page 53 of 98
The following coverage and leverage ratios are compared to the subject Company.
Based On Adjusted Financial Statements
COVERAGE RATIOS:
Upper Times Interest Earned
Median Times Interest Earned
Lower Times Interest Earned
Subject Times Interest Earned
RMA
220
Peachtr
2006
RMA
1071
Peachtr
2005
RMA
962
Peachtr
2004
RMA
1084
Peachtr
2003
RMA
811
Peachtr
2002
Min
Max
Mean
Median
23.10
7.30
2.20
15.34
18.40
4.80
1.10
15.65
14.00
4.00
0.20
15.99
15.80
4.70
1.40
13.56
15.10
4.20
1.70
13.59
14.00
4.00
0.20
13.56
23.10
7.30
2.20
15.99
17.28
5.00
1.32
14.83
15.80
4.70
1.40
15.34
Upper Net Profit + Depr.,Dep.,Amort./Cur.Mat.L/T/D
Median Net Profit + Depr.,Dep.,Amort./Cur.Mat.L/T/D
Lower Net Profit + Depr.,Dep.,Amort./Cur.Mat.L/T/D
Subject Net Profit + Depr.,Dep.,Amort./Cur.Mat.L/T/D
7.50
1.50
0.80
0.00
7.30
2.50
0.80
0.00
5.50
2.20
0.70
0.00
5.90
2.40
0.90
0.00
4.60
2.50
1.40
0.00
4.60
1.50
0.70
0.00
7.50
2.50
1.40
0.00
6.16
2.22
0.92
0.00
5.90
2.40
0.80
0.00
LEVERAGE RATIOS:
Upper Fixed Assets/Tangible Worth
Median Fixed Assets/Tangible Worth
Lower Fixed Assets/Tangible Worth
Subject Fixed Assets/Tangible Worth
0.10
0.30
0.70
1.20
0.20
0.40
1.00
1.10
0.20
0.40
1.00
1.17
0.20
0.40
1.00
1.39
0.20
0.40
0.90
2.76
0.10
0.30
0.70
1.10
0.20
0.40
1.00
2.76
0.18
0.38
0.92
1.52
0.20
0.40
1.00
1.20
Upper Debt-to-Tangible Net Worth
Median Debt-to-Tangible Net Worth
Lower Debt-to-Tangible Net Worth
Subject Debt-to-Tangible Net Worth
0.90
1.80
4.30
1.06
1.00
2.00
4.60
1.07
0.90
2.00
4.40
0.95
0.90
1.90
4.20
0.84
0.90
1.90
4.00
1.40
0.90
1.80
4.00
0.84
1.00
2.00
4.60
1.40
0.92
1.92
4.30
1.06
0.90
1.90
4.30
1.06
RMA Debt-to-Equity
Subject Debt-to-Equity
0.00
1.06
0.00
1.07
0.00
0.95
0.00
0.84
0.00
1.40
0.00
0.84
0.00
1.40
0.00
1.06
0.00
1.06
Some of these ratios were incomplete as well but because of the high level of cash and
investments the company has a low debt to tangible worth ratio. This makes the
company very solvent in case of an unexpected cash call.
The following operating ratios are compared to the subject company.
RMA Peer Comparisons
Page 54 of 98
RMA
220
Peachtr
2006
RMA
1071
Peachtr
2005
RMA
962
Peachtr
2004
RMA
1084
Peachtr
2003
RMA
811
Peachtr
2002
0.00%
100.00%
0.00%
100.00%
0.00%
100.00%
0.00%
100.00%
0.00%
100.00%
Upper EBT/Tangible Worth
Median EBT/Tangible Worth
Lower EBT/Tangible Worth
Subject EBT/Tangible Worth
51.80%
25.90%
7.20%
86.01%
39.00%
16.10%
2.60%
102.36%
36.90%
13.30%
40.00%
105.52%
37.30%
15.90%
4.00%
77.97%
42.20%
18.70%
5.20%
132.55%
Upper EBT/Total Assets
Median EBT/Total Assets
Lower EBT/Total Assets
Subject EBT/Total Assets
17.60%
7.90%
2.10%
41.74%
13.50%
5.00%
10.00%
49.37%
12.70%
4.10%
-0.90%
54.15%
11.90%
4.80%
80.00%
42.45%
15.10%
8.10%
1.30%
55.21%
Upper Fixed Asset Turnover
Median Fixed Asset Turnover
Lower Fixed Asset Turnover
Subject Fixed Asset Turnover
64.20
32.30
17.80
3.16
53.60
28.20
15.80
4.05
46.70
25.60
14.90
3.93
46.50
25.40
15.00
2.99
47.20
24.30
14.60
2.59
Upper Total Asset Turnover
Median Total Asset Turnover
Lower Total Asset Turnover
Subject Total Asset Turnover
3.90
3.10
2.50
1.84
4.20
3.20
2.50
2.15
4.20
3.30
2.60
2.36
4.00
3.10
2.60
2.26
3.90
3.20
2.50
2.98
EXPENSE TO REVENUE RATIOS:
Upper % Deprtn., Depltn., Amort./Revenue
Median % Deprtn., Depltn., Amort./Revenue
Lower % Deprtn., Depltn., Amort./Revenue
Subject % Deprtn., Depltn., Amort./Revenue
0.50%
0.90%
1.60%
1.01%
0.60%
1.10%
1.80%
1.30%
0.70%
1.20%
2.10%
1.50%
0.70%
1.30%
2.10%
1.64%
0.60%
1.20%
2.00%
1.62%
Upper % Officer's &/or Owner's Compensation/Revenue
Median % Officer's &/or Owner's Compensation/Revenue
Lower % Officer's &/or Owner's Compensation/Revenue
Subject % Officer's &/or Owner's Compensation/Revenue
1.70%
2.90%
5.50%
2.15%
2.00%
3.60%
6.50%
2.51%
2.40%
4.30%
7.30%
2.47%
2.20%
3.90%
7.40%
3.51%
2.20%
4.20%
7.50%
4.05%
Based On Adjusted Financial Statements
OPERATING RATIOS:
RMA Gross Profit Margin
Subject Gross Profit Margin
As far as income from operations the Peachtree has trended right in the middle of the
industry with shows there profit is average compared to other companies. There revenues
and net income have increased dramatically since they expanded into the residential
sector making them more comparable to its peers.
SUMMARY OF FINANCIAL RATIOS
You will find that Peachtree has much more fixed assets, cash and marketable securities
then the industry standards. This creates a strong balance sheet however the company
doesn’t need all of these extra assets to operate. Also this skews other variables like
“sales per working capital” in the liquidity ratios and any “asset turnover” in the
operation ratios. If you were to take these extra assets off the balance sheet then the
remaining comparable ratios are fairly comparative to industry standards.
RMA Peer Comparisons
Page 55 of 98
NORMALIZATION ADJUSTMENTS
Normalization adjustments are required to adjust the historical financial statements so
that they are representative of a normal condition as of the valuation date.
Balance Sheet Adjustments
Book Value (Going Concern)
The Company’s reported book value at the date of valuation was $4,489,000 . Listed
below, I have identified adjustments that are required to restate shareholders’ equity and
reflect the net asset value of the Company. I felt it was important to represent a 5 year
history to show patterns and trends, however most of the adjustments and attention were
given to the present balance sheet. Those adjustments include the following:









Working capital was way over funded and management said $750k would be
sufficient.
Accounts Receivables was adjusted $13,000 because one client just filed chapter
7 bankruptcy ($9500) and $3500 was over 180 days old with no expectation of
collection.
Inventories were adjusted $8000 because of some obsolete products and to reflect
a LIFO to FIFO accounting standard which was adjusted to the amount in the
LIFO reserve.
Short-term investments were adjusted $1,400,000 to reflect the amount that
management needed to sustain normal working future capital expenditures and
working capital for large account.
Property/Plant & Equipment were adjusted $458,250 to reflect the current
appraised market value (see attached letter in exhibits).
The adjacent land was held on the balance sheet for investment and for future
expansion. Management said they didn’t see a need for expanding the facility in
the foreseeable future so it was taken off the books. If the owners decided to sell
the company that land would probably be sold with it, however it would need a
current appraisal and then it should be added onto the total value of the company.
Other assets was adjusted to reflect the Kelly Book Value of the fleet of vehicles.
None-operating liabilities was adjusted by $100,000 to reflect the loan amount on
the adjacent land which is considered excess assets and non-operating.
Deferred income taxes was adjusted $137,000 from build-in-gains on the LIFO
reserve and it reflects a NPV of PPE using a 7 year horizon and a 5% discount
rate (risk-free).
Normalization Adjustments
Page 56 of 98
Adjusted Summary Balance Sheets
ASSETS
Cash
Accounts Receivable
Inventory
Other Current
Total Current Assets
Fixed Assets
Net Intangible
Other Non-Current
Total Assets
LIABILITIES & EQUITY
Accounts Payable
Short Term Notes Payable
Current Portion of LT Debt
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Other Non-Current Liabilities
Total Liabilities
Total Equity
Total Liabilities & Equity
Adjusted Year
Ended
Adjusted Year
Ended
Adjusted Year
Ended
Adjusted Year
Ended
Adjusted Year
Ended
June 30, 2006
June 30, 2005
June 30, 2004
June 30, 2003
June 30, 2002
1,403,000
878,000
41,000
2,150,000
4,472,000
2,283,250
0
-2,838,000
3,917,250
1,435,000
714,000
41,000
1,220,000
3,410,000
1,593,000
0
-2,005,000
2,998,000
1,005,000
689,000
34,000
514,000
2,242,000
1,463,000
0
-1,269,000
2,436,000
350,000
750,000
30,000
65,000
1,195,000
1,390,000
0
-750,000
1,835,000
209,000
290,000
25,000
50,000
574,000
1,362,000
0
-750,000
1,186,000
10,000
135,000
0
3,000
148,000
1,831,000
37,000
2,016,000
1,901,250
3,917,250
12,000
119,000
0
4,000
135,000
1,517,000
-100,000
1,552,000
1,446,000
2,998,000
15,000
111,000
0
2,000
128,000
1,158,000
-100,000
1,186,000
1,250,000
2,436,000
13,000
88,000
0
5,000
106,000
830,000
-100,000
836,000
999,000
1,835,000
11,000
73,000
0
3,000
87,000
705,000
-100,000
692,000
494,000
1,186,000
Income Statement Adjustments
I felt it was important to represent a 5 year history to show patterns and trends, however
most of the adjustments and attention was given to last year’s income statement. The
company’s reported profit and loss statement was adjusted for one time charges and
abnormalities as listed below:



Revenue as adjusted $82k to reflect the Account Receivable that was expected to
be collected and to reflect the interest earned through the excess cash (which is in
a sweep account earning 2% annually) and the interest earned through the shortterm investments(which were in a bond reset account earning 4% annually).
Auto/truck expenses were adjusted because Mr. & Mrs. Jones paid for their
personal cars through the company.
Rent expense was adjusted to reflect fair market rents provided by Sue Land with
Commercial Realty (see attached letter in exhibits).
Normalization Adjustments
Page 57 of 98



Officers compensation was adjusted to reflect the market compensation for Mr.
and Mrs. Jones completed by Personnel Consultants (see attached letter in
exhibits).
Interest expense was adjusted because a portion of that expense related to the
adjacent land with is an excess asset and a non-operating asset held for investment
speculation.
Other expenses were adjusted to reflect the property taxes paid on the adjacent
land which shouldn’t be in any of the company’s expenses and it should be held
in the Family Limited Partnership.
Adjusted Summary Income Statements
Revenue
Cost of Goods Sold
Gross Profit
Operating Expenses
Operating Profit
Other Income/(Expense)
Income Before Taxes
Income Taxes
Adjusted Net Income
Normalization Adjustments
Year
Ending
June 30, 2006
Year
Ending
June 30, 2005
Year
Ending
June 30, 2004
Year
Ending
June 30, 2003
Year
Ending
June 30, 2002
7,213,000
0
7,213,000
5,027,000
2,186,000
-550,800
1,635,200
626,000
1,009,200
6,455,000
0
6,455,000
4,473,000
1,982,000
-501,900
1,480,100
558,000
922,100
5,744,000
0
5,744,000
3,975,000
1,769,000
-450,000
1,319,000
491,000
828,000
4,156,000
0
4,156,000
3,015,000
1,141,000
-362,100
778,900
324,000
454,900
3,529,000
0
3,529,000
2,559,000
970,000
-315,200
654,800
270,000
384,800
Page 58 of 98
ESTIMATE OF VALUE
Determination of Fair Market Value
Because this is a case study valuation I have decided to all three methods of estimating
Fair Market Value (Asset, Income, and Market) of Mrs. Jones going concern interest. I
have chosen to use the adjusted book value method-going concern under the Asset
Valuation method, the capitalization of earnings under the Income method, and under the
Market approach I have chosen to use guideline companies from the Bizcomps report.
Adjusted Book Value Method – Going Concern
The adjusted value of Peachtree Plumbing, Inc as of June 30, 2006 was $4,891,000. The
adjusted book value - going concern method develops a valuation indication by adjusting
the reported book values of a subject company’s assets to their actual or estimated fair
market valueand subtracting its liabilities (adjusted to fair market value, if appropriate).
The specific adjustments were described in the analysis of the balance sheet. The
indicated value should not be interpreted as an estimate of liquidation value. Neither an
orderly nor a forced liquidation is contemplated.
See “balance sheet adjustments” under the Normalization Adjustments paragraph (page
55) above for a detailed report of what line items were adjusted and why.
There was no evidence of any off balance sheet items not recorded on the balance sheet
and there were no recorded intangible assets.
Application of Built In Gains Adjustment
Deferred income taxes resulting from “built-in” or deferred gains on a company’s balance
sheet have long been recognized under Accounting Principles Board Opinion No.11 as a
necessary adjustment to the balance sheet. Clearly, when writing up fixed assets to fair
market value for valuation purposes, it is likewise relevant to consider the application of
a deferred tax liability to reflect the economic reality of the company’s balance sheet.
However this valuation is different because we are not selling out to another party that
would have a potential tax liability from any “built-in”gains on the assets. This is an
estate valuation because of the death of Shirley Jones and Mike Jones will not receive
any tax consequences from her death, therefore I have chosen not to apply any
adjustment for built in gains.
Estimate of Value
Page 59 of 98
Appendix E contains further information on the lack of a marketability discount.
Indicated Value Calculation
As determined below, the fair market value indicated by using the Adjusted Book Value
as a Going Concern method was $4,891,250 and was rounded to $4,891,000.
Year
Ended
June 30,
2006
Adjusted Equity
Indicated Value
4,891,250
4,891,250
Capitalization of Cash Flow Method
Capitalization of cash flow requires an estimate of an ongoing benefit stream and a
capitalization multiple. The capitalization multiple represents the required rate of return
minus the sustainable growth rate. Capitalization of cash flow effectively determines the
present value of the Company’s ongoing economic benefit stream growing perpetually at
a fixed rate and discounted at the required rate of return. The present value is
representative of the amount a willing buyer and a willing seller would exchange for the
business.
Estimate of Ongoing Benefit Stream
The analysis presented below represents the calculation of the ongoing economic benefit
stream. It depicts the calculation of the after tax cash flow benefit stream. In talking with
management they felt that since there expansion into the residential market they are
almost at full capacity and see their growth slowing down, however they see a 2% stable
long term growth for the future. So our projections for ongoing benefit stream is a
weighted average cash flow of 2006 with a 2% growth in perpetuity from there on out. I
have chosen to weight only the last 3 years because those reflect more closely what the
cash flows will look like. There are no plans in the future for large capital expenditures
to enter into new markets or create new services.
Estimate of Value
Page 60 of 98
Calculation of the Ongoing Economic Benefit Stream
Earning Power Based on Net of Debt After Tax Cash Flow
Adjusted Pretax Income
Add Depreciation/Amortization and Other Non-Cash Expenses
Total
Weight
Year
Ending
June 30,
2006
1,635,200
73,000
1,708,200
3
Ongoing Earning Power
Less Ongoing Depreciation/Amortization
Taxable Base
Less Estimated State Income Taxes - Effective Rate:
Before Federal Taxes
Less Federal Taxes
Subtotal
Depreciation/Amortization
Subtotal
Adjust for Working Capital Requirements
Adjust for Capital Expenditure Requirements
Adjust for Long Term Debt Requirements
Calculated Ongoing Net of Debt After Tax Cash Flow
1,609,633
78,833
1,530,800
4.00%
1,469,568
499,653
969,915
78,833
1,048,748
SELECTED ONGOING NET OF DEBT AFTER TAX CASH FLOW
1,048,700
Estimate of Value
Year
Ending
June 30,
2005
1,480,100
84,000
1,564,100
2
Year
Ending
June 30,
2004
1,319,000
86,000
1,405,000
1
Year
Ending
June 30,
2003
778,900
68,000
846,900
0
Year
Ending
June 30,
2002
654,800
57,000
711,800
0
1,048,748
Page 61 of 98
The weighting above was chosen because years 2003 and 2002 do not reflect the
operations which currently exist or which will exist into the future. In 2003 the company
expanded into the residential sector and almost doubled their net income and because of
that I felt that years 2003 and 2002 shouldn’t have any weight or even be considered.
Although pre-tax net income have been increasing around 12-13% (nominal) since 2003
management forecasts future sustainable growth to be around 2%(nominal). Income
taxes are in Georgia and Florida. Georgia income tax is 6% and Florida has no income
tax, so I weighted the tax rates to the revenues on a pro-rata basis per state.
Taxes
Taxes were calculated as $61,232 for the state and $499,653 for federal. The ongoing
benefit stream was reduced by these outflows.
Cash Flow
A cash flow stream needs to define the changes in working capital, capital expenditures
and long term debt. Management sees no ongoing increase/decrease in working capital so
there are not adjustments to capital expenditures and debt amounts.
Capitalization Rate
Capitalization Rates
The discount rate represents the risk an investor is willing to accept for the potential
reward an investment in the subject company will return. Different rates apply to types of
businesses. It can also be considered the rate of return that an investor requires on an
ongoing basis. This risk is not calculated in a vacuum or a sterile environment but rather
it is calculated based on the factors that can be contrasted against the investment in other
vehicles that are available and in the specific environment as of the valuation date.
The buildup method layers different risk estimates to build up a discount rate. The
appropriate discount rate components for the Company are the risk free rate, equity risk
premium, size premium and company specific premium. Subtracting sustainable growth
from the discount rate develops the capitalization rate.
Risk Free Rate
The risk free rate measures the rate of return an investor can earn without taking any
additional risk. Examples of risk free returns are United States Treasury bonds. As of the
valuation date June 30, 2006, this yield was 4.80%. The rate applied to the buildup was
4.80%.
Equity Risk Premium
The equity risk premium represents the risk an investor accepts for investing in large
public companies. This risk is measured by taking the returns of public companies over
Estimate of Value
Page 62 of 98
the last 80 years and subtracting the risk free return over the last 80 years (average annual
returns for large capitalization stocks minus average annual returns for long term
government bonds). This information is published by Morningstar. As of June 30, 2006,
the equity risk premium was 6.10%. The rate applied to Peachtree Plumbing, Incwas
6.10%.
Size Risk Premium
Empirical evidence shows that the risk reward principle (the greater the risk the greater
the reward) holds true in the size or capitalization of the company. The size premium
represents average annual returns for small capitalization stocks minus average annual
returns for large capitalization stocks. Based on Stocks, Bonds, Bills, and Inflation
Yearbook, a publication of Morningstar, the small stock risk premium averaged 9.90%
from 1926 to 2006. The rate applied to Peachtree Plumbing, Inc was 9.90%.
Industry Risk Premium
Based upon the industry of the subject company as reported in Stocks, Bonds, Bills, and
Inflation Yearbook, a publication of Morningstar, the industry risk premium was
calculated as 0.63%. The rate applied to Peachtree Plumbing, Inc was 0.63%.
Specific Company Risk Premium
Based upon Company specific factors - cyclical risk, risks of competitive encroachment,
size and various operating concentrations (key executive dependency, customer
concentration, for example) - the summation requires an additional risk premium of
3.68%. The main item I looked for in company specific risk was the company’s financial
risk, diversification of company’s operations, and other operating characteristics. The
biggest risk I say was the key personal risk with Mike Jones. He plays a big part in the
relationships with clients and reputation. The other factors such as stability of industry
and diversification of product line were given some consideration of risk but not much.
Expected Sustainable Growth Rate
We estimate 2.00% long term compound annual growth. This cash flow growth estimate
is based upon my assessment of the Company’s prospects for sustained growth in
relationship to the estimate of ongoing cash flow power developed above.
Rate to Factor Conversion
The capitalization rate developed using the buildup method is 23.11%. The reciprocal of
this measure (1/23.11%) provides a capitalization multiple of 4.413674.
Calculation of the Rate
The schedule below shows how the multiple was calculated
Estimate of Value
Page 63 of 98
BUILDUP CAPITALIZATION RATE
Risk-Free Rate of Return
Equity Risk Premium
Small Stock Risk Premium
Plus/Minus Industry Risk Premium
Company Specific Premium
Net Cash Flow Discount Rate
Discount Rate
Sustainable Growth
Capitalization Rate To Apply To Next Year Stream
4.80%
6.10%
9.90%
0.63%
3.68%
25.11%
Selected Rate
25.11%
2.00%
23.11%
23.11%
Indicated Value
To calculate an indicated value for Peachtree Plumbing, Inc, the first step is to use the
after tax cash flow benefit steam and multiply it by the multiple. In order to match the
appropriate period to the rate, the rate is divided by one plus the growth rate.
The next step is to apply adjustments to value for Peachtree Plumbing, Inc.
Application of Minority Interest Discount
A minority interest discount is a reduction to the initial indicated value due to a lack of
control prerogatives such as declaring dividends, liquidating the company, going public,
issuing or buying stock, directing management, setting management’s salaries, etc. In my
opinion, a minority interest discount of 26.50% is appropriate because Mr. Shirley Jones
owns a minority interest in Peachtree Plumbing (36.5%) so it is appropriate to apply a
Minority Interest Discount. I have chosen to use a Mergerstat Review 2003 Data base
(found in the NACVA Business Valuations: Fundamentals, Techniques and Theories
book chapter 7 page 13). Normally I would Subscribe to Mergerstat Review premiums
and discounts to get a more recent and accurate discount pertaining to this case and
industry. The Data base premiums and discounts ranged significantly over the most
recent 5 year period (almost 12%) so I decided to take a five year weighted Average of
the Median percentage discount.
Application of Marketability Discount
In my opinion, a discount of 42.00% is required for lack of marketability. The discount
reflects an expectation for the lack of a secondary market in which to negotiate a quick
sale. Peachtree Plumbing is a closely held private company which warrants a discount for
Lack of Marketability. Normally I would subscribe to Mergerstat Review Premiums and
discounts to get a more recent and accurate discount pertaining to this case and industry.
The Data I chose to use came from the NACVA’s Business Valuations: Fundamentals,
Techniques and Theory Chapter 7 Page 36 in reference to Mandelbaum v. Commissioner,
T.C. Memo 1995-225, aff’d. 91F3d 124 (3rd dir. 1996). This court case is important
because it established a market discount base rate between 35% - 45%. Many factors can
affect whether you increase or decrease the based rate, however I have chosen to remain
on the higher discounted side (42%) because of the company’s dividend policy, access to
financial information, some limited stock restrictions (right of first refusal to family
Estimate of Value
Page 64 of 98
members) and no prospect of public offering or sale. However I chose not to use the
highest base rate said resource because of good management and the company’s
economic outlook.
Appendix E contains further information on the lack of a marketability discount.
Application of Excess or Non-Operating Assets
Excess or Non-operating assets represent the value of resources the company has control
of but are not required to operate the business. Examples are excess cash on hand, real
estate or other securities not used in the production of goods or services. In my judgment,
excess and non-operating assets that need to be added back and are a part of the
business’s value total $2,853,000. The bulk of these assets include excess working
capital, marketable securities, and the adjacent piece of land. After several years of the
company not paying out dividends and retaining and investing its earnings there has
become a lot of excess which isn’t needed in a day-to-day operation.
Indicated Value Calculation
The following schedule presents the indicated value using the capitalization of earnings
method. As calculated, the indicated fair market value is $4,826,181 which has been
rounded to $4,826,000.
Net of Debt After Tax Cash Flow
Sustainable Growth Rate
Net of Debt After Tax Cash Flow
Capitalization Rate
Subtotal
Minority Interest Discount
Subtotal
Marketability Discount
Subtotal
Excess/Non-Operating Assets
Indicated Equity Value
SELECTED EQUITY VALUE
Estimate of Value
1,048,700
2.00%
1,069,674
23.11%
4,628,620
26.50%
3,402,035
42.00%
1,973,181
2,853,000
4,826,181
4,826,000
Page 65 of 98
Direct Market Data Method:
Transaction Data
The companies that I compared Peachtree too came from BIZCOMPS which is a
database that contains detailed transaction information on the sales of small private
businesses. My search criteria included those business that were sold during 1995-2006
with the SIC code 1711(plumbing/hvac construction). From there I only included those
businesses that were sold during the last 5 years in the states of Georgia or Florida. I
used all of those companies that fit this criteria except for 3 which I felt had missing
information and some of their ratios & multiples were way out of the normal industry
averages, so I didn’t use them. Below are the 12 comparable sales transactions I used to
determine my multiple. (See Exhibit for a complete detailed list used from Bizcomps)
BIZCOMPS Data
Business Type
Contr-Plumbing
Contr-Plumbing
Contr-Plumbing
Contr-Plumbing
Contr-HVAC/Plumbing
Contr-Plumbing
Contr-HVAC
Contr-HVAC
Contr-Mechanical
Contr-HVAC
Contr-HVAC
Contr-Refrigerattion
Date
09/24/04
03/05/01
10/20/04
09/10/04
11/10/00
09/21/04
12/30/04
07/21/03
03/18/02
03/29/01
05/30/05
05/01/01
SIC
1711
1711
1711
1711
1711
1711
1711
1711
1711
1711
1711
1711
Area
Florida
Georgia
Florida
Florida
Florida
Florida
Florida
Florida
Georgia
Florida
Florida
Georgia
(000's)
Revenue
710
4659
532
1648
794
1016
934
2668
6500
1366
336
862
(000's)
Discr. Earn.
93
575
87
346
149
243
202
254
375
157
65
280
(000's)
Sales Price
159
720
135
595
275
408
525
850
850
550
230
650
(000's)
FF&E
(000's)
Price W/O FFE
P/SDE
P/R
W/O FFE
P/SDE
1.71
1.25
1.55
1.72
1.85
1.68
2.60
3.35
2.27
3.50
3.35
2.32
Selected Multiples
The BIZCOMP data base did include information on how much inventory and
FF&E(Furniture, Fixtures, and equipment) was included in the sale but I chose not to use
it because my focus was on only one multiple and that was Sales Price/ Sellers
Discretionary Earnings(SP/SDE). The reason why I only used this multiple is because
first of all it is a derivative of inventory and FF&E so in a roundabout way it gives
consideration to these assets. SP/SDE also appeared to be the most consistent multiple in
the data base with little outliers, and most investors or owners are more interested in the
cash flow coming in from the company as a measure of its success or value. There were
other multiples I could have used but Seller Discretionary Earnings is a good indicator of
what a company cash flows and SDE is a preferred variable to base a company’s value
off of by most people I the industry. Below is the schedule for how I calculated seller
discretionary earnings. I have chosen to use and weight only the last three years because
that is when Peachtree branched out into the residential sector and almost doubled their
income.
Estimate of Value
Page 66 of 98
BIZCOMPS Seller's Discretionary Earnings Base
Year
Ending
June 30,
2006
1,730,000
240,000
73,000
Year
Ending
June 30,
2005
1,596,000
192,000
84,000
Year
Ending
June 30,
2004
1,403,000
168,000
86,000
Year
Ending
June 30,
2003
854,000
144,000
68,000
Year
Ending
June 30,
2002
743,000
120,000
57,000
2,043,000
1,872,000
1,657,000
1,066,000
920,000
Weight on SDE
Ongoing Seller's Discretionary Earnings
3
1,921,667
2
1
0
0
SELECTED ONGOING SDE BASE
1,921,700
Historic
Debt Free Pretax Income
Officers' Compensation
Depreciation/Amortization
Additional Adjustment
Seller's Discretionary Earnings
Application of Minority Interest Discount
A minority interest discount is a reduction to the initial indicated value due to a lack of
control prerogatives such as declaring dividends, liquidating the company, going public,
issuing or buying stock, directing management, setting management’s salaries, etc. In my
opinion, a minority interest discount of 26.50% is appropriate because Mr. Shirley Jones
owns a minority interest in Peachtree Plumbing (36.5%) so it is appropriate to apply a
Minority Interest Discount. I have chosen to use a Mergerstat Review 2003 Data base
(found in the NACVA Business Valuations: Fundamentals, Techniques and Theories
book chapter 7 page 13). Normally I would Subscribe to Mergerstat Review premiums
and discounts to get a more recent and accurate discount pertaining to this case and
industry. The Data base premiums and discounts ranged significantly over the most
recent 5 year period (almost 12%) so I decided to take a five year weighted Average of
the Median percentage discount.
Application of Marketability Discount
In my opinion, a discount of 42.00% is required for lack of marketability. The discount
reflects an expectation for the lack of a secondary market in which to negotiate a quick
sale. Peachtree Plumbing is a closely held private company which warrants a discount for
Lack of Marketability. Normally I would subscribe to Mergerstat Review Premiums and
discounts to get a more recent and accurate discount pertaining to this case and industry.
The Data I chose to use came from the NACVA’s Business Valuations: Fundamentals,
Techniques and Theory Chapter 7 Page 36 in reference to Mandelbaum v. Commissioner,
T.C. Memo 1995-225, aff’d. 91F3d 124 (3rd dir. 1996). This court case is important
because it established a market discount base rate between 35% - 45%. Many factors can
affect whether you increase or decrease the based rate, however I have chosen to remain
on the higher discounted side (42%) because of the company’s dividend policy, access to
financial information, some limited stock restrictions (right of first refusal to family
members) and no prospect of public offering or sale. However I chose not to use the
highest base rate said resource because of good management and the company’s
economic outlook.
Appendix E contains further information on the lack of a marketability discount.
Estimate of Value
Page 67 of 98
Application of Excess or Non-Operating Assets
Excess or Non-operating assets represent the value of resources the company has control
of but are not required to operate the business. Examples are excess cash on hand, real
estate or other securities not used in the production of goods or services. In my judgment,
excess and non-operating assets that need to be added back and are a part of the
business’s value total $2,853,000. The bulk of these assets include excess working
capital, marketable securities, and the adjacent piece of land. After several years of the
company not paying out dividends and retaining and investing its earnings there has
become a lot of excess which isn’t needed in a day-to-day operation.
Indicated Value Calculation
As determined below, the fair market value indicated by using Direct Market Data
Method was $4,134,900.
Base
Multiple
Subtotal
Net Operating Assets
Subtotal
Weight
Ongoing Value
Adjustment
Subtotal
Minority Interest Discount
Subtotal
Marketability Discount
Operating Value
Excess/Non-Operating Assets
Indicated Equity Value
6,769,700
0.00
0
-951,750
-951,750
0
3,006,952
SELECTED EQUITY VALUE
4,134,900
Estimate of Value
1,921,700
2.06
3,958,702
-951,750
3,006,952
1
3,006,952
26.50%
2,210,110
42.00%
1,281,864
2,853,000
4,134,864
Page 68 of 98
CONCLUSION OF VALUE
Valuation Indication by Method
Indicated
Value
Book Value Method
Adjusted Book Value Method - Going Concern
Adjusted Book Value Method - Liquidation
Capitalization of Earnings Method
Multi-Stage Growth
Discounted Cash Flow Method - Summary Projections
Discounted Cash Flow Method - Detailed Projections
Capitalization of Excess Earnings Method
Market Data Method - Bizcomps
Market Data Method - IBA
Industry Data Method - Mergerstat Industry PE
Market Data Method - MMC
Market Data Method - Pratts Stats
Market Data Method - Merged, Acquired and Guideline Data
Market Data Method - Private Company Data
Market Data Method - Analyst Data
Subject Company Transactions Method
Industry Data Method - Analyst Data
Calculated Conclusion of Equity Value
0
4,891,000
0
4,826,000
0
0
0
0
4,134,900
0
0
0
0
0
0
0
0
0
4,617,300
SELECTED CONCLUSION OF EQUITY VALUE
4,617,300
Weight
0
1
0
1
0
0
0
0
1
0
0
0
0
0
0
0
0
0
Revenue Ruling 59-60 states:
Because valuations cannot be made on the basis of a prescribed formula, there
is no means whereby the various applicable factors in a particular case can be
assigned mathematical weights in deriving the fair market value. For this
reason, no useful purpose is served by taking an average of several factors
(for example, book value, capitalized earnings and capitalized dividends) and
basing the valuation on the result. Such a process excludes active
consideration of other pertinent factors, and the end result cannot be
supported by a realistic application of the significant facts in the case except
by mere chance.
Because of this, the method selected to value Peachtree Plumbing, Inc was Market Data
Method-Bizcomps.
Application of Minority Interest Discount
A minority interest discount is a reduction to the initial indicated value due to a lack of
control prerogatives such as declaring dividends, liquidating the company, going public,
Conclusion of Value
Page 69 of 98
issuing or buying stock, directing management, setting management’s salaries, etc. In my
opinion, a minority interest discount of 26.50% is appropriate because Mr. Shirley Jones
owns a minority interest in Peachtree Plumbing (36.5%) so it is appropriate to apply a
Minority Interest Discount. I have chosen to use a Mergerstat Review 2003 Data base
(found in the NACVA Business Valuations: Fundamentals, Techniques and Theories
book chapter 7 page 13). Normally I would Subscribe to Mergerstat Review premiums
and discounts to get a more recent and accurate discount pertaining to this case and
industry. The Data base premiums and discounts ranged significantly over the most
recent 5 year period (almost 12%) so I decided to take a five year weighted Average of
the Median percentage discount.
Application of Marketability Discount
In my opinion, a discount of 42.00% is required for lack of marketability. The discount
reflects an expectation for the lack of a secondary market in which to negotiate a quick
sale. Peachtree Plumbing is a closely held private company which warrants a discount
for Lack of Marketability. Normally I would subscribe to Mergerstat Review Premiums
and discounts to get a more recent and accurate discount pertaining to this case and
industry. The Data I chose to use came from the NACVA’s Business Valuations:
Fundamentals, Techniques and Theory Chapter 7 Page 36 in reference to Mandelbaum v.
Commissioner, T.C. Memo 1995-225, aff’d. 91F3d 124 (3rd dir. 1996). This court case is
important because it established a market discount base rate between 35% - 45%. Many
factors can affect whether you increase or decrease the based rate, however I have chosen
to remain on the higher discounted side (42%) because of the company’s dividend policy,
access to financial information, some limited stock restrictions (right of first refusal to
family members) and No prospect of public offering or sale. However I chose not to use
the highest base rate said resource because of good management and the company’s
economic outlook.
Appendix E contains further information on the lack of a marketability discount.
Application of Excess or Non-Operating Assets
Excess or Non-operating assets represent the value of resources the company has control
of but are not required to operate the business. Examples would be excess cash on hand,
real estate or other securities. In my judgment, excess and non-operating that need to be
added back and are part of the value total $2,853,000. The bulk of these assets include
excess working capital, marketable securities, and the adjacent piece of land. After
several years of the company not paying out dividends and retaining and investing its
earnings there has become a lot of excess which isn’t needed in a day-to-day operation.
Conclusion of Value
Page 70 of 98
Opinion of Fair Market Value
I have performed a valuation engagement, as that term is defined in the Statement on
Standards for Valuation Services (SSVS) of the American Institute of Certified Public
Accountants, of Peachtree Plumbing, Inc. This valuation was performed solely to assist in
the matter of Federal Estate Tax Return; the resulting estimate of value should not be
used for any other purpose or by any other party for any purpose. This valuation
engagement was conducted in accordance with the SSVS. The estimate of value that
results from a valuation engagement is expressed as a conclusion of value.
We were restricted or limited in the scope of our work or data available for analysis as
follows:


Some of the data bases available didn’t have the most updated information and
was several years old.
There was no audited financial statement so I relied on the accuracy of the
information that management submitted.
Based on our analysis, as described in this valuation report, the estimate of value of
minority bases (20,000 shares of 55,000) non-marketable basis of Plumbing, Inc as of
June 30, 2006 was $1,679,000. This conclusion is subject to the Statement of
Assumptions and Limiting Condition found in Appendix B and to the Valuation
Analyst’s Representation found in Appendix A. We have no obligation to update this
report or our conclusion of value for information that comes to our attention after the date
of this report.
June 30, 2009
Jason Allred
Viking Valuations & Analytics, llc
Conclusion of Value
Page 71 of 98
APPENDIX A: VALUATION ANALYST’S
REPRESENTATIONS
The analyses, opinions, and conclusion of value included in the valuation report are
subject to the specified assumptions and limiting conditions (see Appendix B), and they
are the personal analyses, opinions, and conclusion of value of the valuation analyst.
The economic and industry data included in the valuation report have been obtained from
various printed or electronic reference sources that the valuation analyst believes to be
reliable. The valuation analyst has not performed any corroborating procedures to
substantiate that data.
The valuation engagement was performed in accordance with the American Institute of
Certified Public Accountants Statement on Standards for Valuation Services.
The parties for which the information and use of the valuation report is restricted are
identified; the valuation report is not intended to be and should not be used by anyone
other than such parties.
The analyst’s compensation is fee-based and is not contingent upon the development or
reporting of a predetermined value or direction in value that favors the cause of the client,
the amount of the estimate of value or the attainment of a stipulated result.
The valuation analyst did use the work of one or more outside specialists to assist during
the valuation engagement. These include:



Personnel Consultants (15873 Sepulveda Atlanta Georgia 30309) hired to assess
the market compensation for Mr. & Mrs. Jones
Quality Appraisal Company (18572 Century Blvd. Atlanta Georgia 30339) to
appraise the equipment owned and used by Peachtree Plumbing.
Commercial Realty Company (8930 Lemon drive Atlanta, Ga 30342) to give
market value of commercial rents for the facility Peachtree is operating in.
The valuation analyst has no obligation to update the report or the opinion of value for
information that comes to his or her attention after the date of the report.
Signature of the Analyst:
Mr./Ms. Jason Allred
Title: Owner
Viking Valuations & Analytics, llc
Appendix A: Valuation Analyst’s Representations
Page 72 of 98
APPENDIX B: LIMITING CONDITIONS
1. The conclusion of value arrived at herein is valid only for the stated purpose as of the
date of the valuation.
2. Financial statements and other related information provided by Peachtree Plumbing,
Inc or its representatives, in the course of this engagement, have been accepted without
any verification as fully and correctly reflecting the enterprise’s business conditions and
operating results for the respective periods, except as specifically noted herein. Viking
Valuations, llc has not audited, reviewed, or compiled the financial information provided
to me and, accordingly, I express no audit opinion or any other form of assurance on this
information.
3. Public information and industry and statistical information have been obtained from
sources I believe to be reliable. However, I make no representation as to the accuracy or
completeness of such information and have performed no procedures to corroborate the
information.
4. I do not provide assurance on the achievability of the results forecasted by Peachtree
Plumbing, Inc because events and circumstances frequently do not occur as expected;
differences between actual and expected results may be material; and achievement of the
forecasted results is dependent on actions, plans, and assumptions of management.
5. The conclusion of value arrived at herein is based on the assumption that the current
level of management expertise and effectiveness would continue to be maintained, and
that the character and integrity of the enterprise through any sale, reorganization,
exchange, or diminution of the owners’ participation would not be materially or
significantly changed.
6. This report and the conclusion of value arrived at herein are for the exclusive use of
my client for the sole and specific purposes as noted herein. They may not be used for
any other purpose or by any other party for any purpose. Furthermore the report and
conclusion of value are not intended by the author and should not be construed by the
reader to be investment advice in any manner whatsoever. The conclusion of value
represents the considered opinion of Viking Valuations, llc, based on information
furnished to them by Peachtree Plumbing, Inc and other sources.
7. Neither all nor any part of the contents of this report (especially the conclusion of
value, the identity of any valuation specialist(s), or the firm with which such valuation
Appendix B: Limiting Conditions
Page 73 of 98
specialists are connected or any reference to any of their professional designations)
should be disseminated to the public through advertising media, public relations, news
media, sales media, mail, direct transmittal, or any other means of communication
without the prior written consent and approval of Viking Valuations, llc.
8. Future services regarding the subject matter of this report, including, but not limited to
testimony or attendance in court, shall not be required of Viking Valuations, llc unless
previous arrangements have been made in writing.
9. Viking Valuations, llc is not an environmental consultant or auditor, and it takes no
responsibility for any actual or potential environmental liabilities. Any person entitled to
rely on this report, wishing to know whether such liabilities exist, or the scope and their
effect on the value of the property, is encouraged to obtain a professional environmental
assessment. Viking Valuations, llc does not conduct or provide environmental
assessments and has not performed one for the subject property.
10. Viking Valuations, llc has not determined independently whether Peachtree
Plumbing, Inc is subject to any present or future liability relating to environmental
matters (including, but not limited to CERCLA/Superfund liability) nor the scope of any
such liabilities. Viking Valuations, llc’s valuation takes no such liabilities into account,
except as they have been reported to Viking Valuations, llc by Peachtree Plumbing, Inc
or by an environmental consultant working for Peachtree Plumbing, Inc, and then only to
the extent that the liability was reported to us in an actual or estimated dollar amount.
Such matters, if any, are noted in the report. To the extent such information has been
reported to me , Viking Valuations, llc has relied on it without verification and offers no
warranty or representation as to its accuracy or completeness.
11. Viking Valuations, llc has not made a specific compliance survey or analysis of the
subject property to determine whether it is subject to, or in compliance with, the
American Disabilities Act of 1990, and this valuation does not consider the effect, if any,
of noncompliance.
12. [Sample wording for use if the jurisdictional exception is invoked.] The conclusion of
value (or the calculated value) in this report deviates from the Statement on Standards for
Valuation Services as a result of published governmental, judicial, or accounting
authority.
13. No change of any item in this appraisal report shall be made by anyone other than
Viking Valuations, llc, and I shall have no responsibility for any such unauthorized
change.
Appendix B: Limiting Conditions
Page 74 of 98
14. Unless otherwise stated, no effort has been made to determine the possible effect, if
any, on the subject business due to future Federal, state, or local legislation, including any
environmental or ecological matters or interpretations thereof.
15. If prospective financial information approved by management has been used in my
work, I have not examined or compiled the prospective financial information and
therefore, do not express an audit opinion or any other form of assurance on the
prospective financial information or the related assumptions. Events and circumstances
frequently do not occur as expected and there will usually be differences between
prospective financial information and actual results, and those differences may be
material.
16. I have conducted interviews with the current management of Peachtree Plumbing, Inc
concerning the past, present, and prospective operating results of the company.
17. Except as noted, I have relied on the representations of the owners, management, and
other third parties concerning the value and useful condition of all equipment, real estate,
investments used in the business, and any other assets or liabilities, except as specifically
stated to the contrary in this report. I have not attempted to confirm whether or not all
assets of the business are free and clear of liens and encumbrances or that the entity has
good title to all assets.
18. Viking Valuations and its affiliates has no financial interest or contemplated financial
interest in the property that is the subject of this report.
Appendix B: Limiting Conditions
Page 75 of 98
APPENDIX C: QUALIFICATIONS OF
APPRAISER
RECENT PROFESSIONAL EXPERIENCE
Business Solutions located in Rexburg Idaho
2004- Present
Senior Vice President of Finance & Business Valuations:






Prepare valuations for business.
Review and analyze private placement memorandums
Research industries and business segments for feasibility studies on new and
upcoming businesses
Perform due diligence to determine viability of companies financial strength and
industry staying power.
Quantify the value of closely held companies using the following methods;
adjusted net assets, capitalization of earnings, excess earnings, discounted cash
flow, fair market value, investment value, intrinsic value, going-concern value,
book value, liquidation value, and common sense value.
Analyze all financials of perspective business and normalizing those financials to
show trends that can be benchmarked against industry standards as well as
cyclical trends.
Appendix C: Qualifications of Appraiser
Page 76 of 98
APPENDIX D: SOURCES OF INFORMATION
1. Onsite visit to Peachtree Plumbing in Atlanta Georgia:
Interviews with the following persons (June 15, 2009)
President: Mike Jones
Office Manager/Controller: David Black
Construction Manager: Don Smith
2. Analysis of the unaudited statements statements
3. Relevant company documents
Contracts: With the larger commercial projects
Titles and ownership of records of equipment & vehicles
Articles of incorporation
4. Research of the overall economic conditions:
Research included data provided by Key Value Data:
National Economic Data: ©2006 Center for Economic & Industry Research, LLC
1111 Brickyard Road, Salt Lake City, Utah 84106; ALL RIGHTS RESERVED.
Local Economic Data:
Regional Economic Information System (REIS); U.S.
Department of Commerce/Bureau of Economic Analysis; 2007
Industry Economic Data Local Area May 2006 Metropolitan and Non-metropolitan
Area Occupational Employment and Wage Estimates; U.S. Department of Labor/Bureau
of Labor Statistics; 2007
5. Comparable Businesses (earnings & ratios): KeyValueData RMA Analysis
Construction-General-Plumbing, Heating, and Air-Conditioning Contractors NAICS
238220 (SIC 1711,1791,1796).
6. Historical Premium/Discount Compilation: Mergerstat Review 2003 (los Angeles:
Applied Financial Information L.P.) and marketability discounts out of the NACVA
Fundamentals, and Techniques book chapter seven page 34 from the Mandelbaum v.
Commissioner court case.
This information was accepted without further verification. See Appendix B for a
complete list of the assumptions and limitations to which this valuation report is subject
to.
Appendix D: Sources of Information
Page 77 of 98
APPENDIX E: MARKETABILITY DISCOUNT
Marketability relates to the liquidity of an investment relative to a comparable and
actively traded alternative. In essence, impairment of liquidity increases an investor’s
expected rate of return. As a result, the market clearing price of a nonmarketable security
is discounted relative to the price of its marketable counterpart. The discount for lack of
marketability is stated as a percentage of a marketable value.
The valuation of share of stock in closely held corporations typically warrants a discount
for lack of marketability. Many factors affect the liquidity of an investment. Among them
are the following:
1. Number of shareholders;
2. Size of the block of stock being valued;
3. Restrictions on its sale by agreement or law;
4. The absence of registration; and,
5. The anticipated dividend flow attributable to the investment.
When attempting to quantify these factors that influence liquidity into an appropriate
discount for lack of marketability, it is necessary to consider the following factors:
1. The holding period.
Without an active market, an investor must hold for an uncertain
length of time until a liquidity event occurs. In general, longer holding periods without
liquidity imply higher discounts for lack of marketability. An investor should reasonably
characterize exit timing along a probability distribution. Although subjective, the relative
probabilities of exit dates are reasonably related to the following:
a. Historical ownership policies (insiders, outsiders, family, investors, etc.);
b. Buy/sell or other shareholder agreements;
c. Management/ownership succession (age, health, competence, emerging
liquidity needs);
d. Business plans and likely exit strategies of the controlling owner(s); and,
e. Emerging attractiveness for equity offering or acquisition.
2. Required holding period return.
To overcome the unattractiveness of the lack of
liquidity, an investor in such securities expects a premium return in excess of that
provided by liquid alternatives. Investment features that impair marketability will exact
higher expected rates of return which imply higher discounts for lack of marketability.
Unattractive features of a lack of liquid security could include the following:
a. Absence, inadequacy of or inability to pay dividends;
b. Subjective uncertainties related to the duration of the expected holding period
and to achieving a favorable exit date valuation;
c. Restrictive shareholder agreements; and,
d. Various other features that increase uncertainty of cash flows.
Appendix E: Marketability Discount
Page 78 of 98
3. Growth in underlying value during the holding period.
If an investment is
appreciating, that growth will provide a portion of the realized return during the holding
period. Growth and marketability discounts are negatively correlated. As expected capital
appreciation increases, discounts for lack of marketability decrease. Growth potential
should be evaluated in the context of management’s business plan, historical growth, and
external factors such as emerging industry conditions and market valuations.
4. Expected cash flow distributions during the holding period.
Holding period returns
are also provided by interim cash flows (in addition to capital appreciation). As with
growth, holding period cash distributions and discounts for lack of marketability are
negatively correlated. Holding period cash flows (dividends, etc.) should be evaluated in
the context of historical dividend policy, ability to distribute and the cash needs implied
by the business plan.
Empirical Studies
Guidance as to the proper level of the discount can also be found in examining studies
which have approached the question from several different perspectives.
One approach is to analyze the differences in prices between publicly traded securities
and those of restricted stocks of the same companies. Since a “lettered” stock is identical
to the traded stock in all respects except marketability, the difference in price highlights
the marketability discount. Among the more prominent studies are the following:
1. “Discounts Involved in Purchases of Common Stock,” in US 92nd Congress, 1st
Session, House, Institutional Investor Study Report of the Securities and Exchange
Commission (Washington, DC: US Government Printing Office, March 10, 1971,
5:2444-2456, Document No. 92-64, Part 5);
2. A study of closed end investment funds (Milton Gelman, “An Economist-Financial
Analyst’s Approach to Valuing Stock of A Closely Held Company,” Journal of Taxation
(June 1972), p. 354);
3. A study of prices paid for restricted stocks (Robert E. Maroney, “Most Courts
Overvalue Closely Held Stocks,” Taxes, March 1973, pp. 144-54);
4. A study of prices paid for restricted stocks (J. Michael Maher, “Discounts for Lack of
Marketability for Closely Held Business Interests,” Taxes, September 1976, pp. 562-71;
and,
5. A more recent study of restricted stocks (William L. Silber, “Discounts on Restricted
Stock: The Impact of Illiquidity on Stock Prices,” Financial Analysts Journal,
July/August 1991, pp. 62-64.)
All of these studies identified median or average discounts in the range of 30-40% for
prices of non-marketable stocks in comparison to marketable shares which were
otherwise deemed to be comparable. The SEC Institutional Investor study reflected a
mean discount of 25.8% while the remainder had average discounts in the range of 3335%.
Appendix E: Marketability Discount
Page 79 of 98
A second approach is to analyze the relationship between the prices of companies whose
shares were initially offered to the public (IPO) and the prices at which their shares
traded privately within a five month period immediately preceding the public offering. A
series of studies conducted by John D. Emory at Robert W. Baird & Co., Inc. indicate
median and mean lack of marketability discounts of 40% to 45% (see Emory, John D.,
“The Value of Marketability as Illustrated in Initial Public Offerings of Common Stock,
February 1992 through July 1993,” Business Valuation Review, December 1993, pp. 35).
The objective of the Emory studies is to relate the prices at which private transactions
took place before an IPO and the price at which the stock was subsequently offered to the
public, in order to objectively gauge the value of marketability. The majority of the
companies in the survey reflected discounts exceeding 30%. The highest discounts
indicated in the sample were 82% and 94%.
The implication of the studies is clear: presumably arm’s length transactions taking place
within a short time of the actual IPOs occur at substantial discounts to the ultimate public
offering price. These studies support both the validity and magnitude of marketability
discounts in general, and particularly for companies that are not public offering
candidates and for which the prospects for shareholder liquidity may be remote.
Court Decisions
Further guidance for marketability discounts can be found in various court decisions.
These decisions provide insight into the discounts allowed in various circumstances. I
look at evidence from court decisions, not to cite as direct evidence in the instant case,
but to review how courts have previously interpreted the objective evidence presented. In
addition, I look to court cases for general guidance concerning the nature of evidence
deemed acceptable in previous decisions.
A survey performed by Thomas Solberg (Thomas A. Solberg, “Valuing Restricted
Securities: What Factors Do the Courts and the Service Look For,” Journal of Taxation,
September 1979, pp. 150-54) of fifteen cases indicated a mean discount of 37.4%. A
similar study by Phillip Moore (Phillip W. Moore, “Valuation Revisited,” Trusts &
Estates, February 1987, pp. 40-52), which analyzed fourteen cases by the U.S. Tax Court
from 1969 through 1982, indicated wide variations in the decisions but with a trend
toward allowing higher discounts.
In “Estate of Berg” (61 TCM 1991-279), the Tax Court relied upon an expert’s analysis
of specific factors that influenced the magnitude of a minority interest discount (20%)
and a marketability discount (10%). The expert’s specificity appeared to be persuasive to
the court. Other experts in the Berg case were admonished by the court for presenting
discount analyses that were “exceedingly general and lacking in specific analysis of the
subject interest.”
In “Estate of Jung” (101 TIC. No.28), the Tax Court allowed a 35% discount for lack of
marketability for a 21% interest in Jung Corp., a manufacturer and distributor of elastic
textile goods. Jung’s revenues ($68 million) and profits ($3.1 million) had been growing
Appendix E: Marketability Discount
Page 80 of 98
for several years, a dividend was being paid, and there was a reasonable knowledge that
the company could be an attractive acquisition candidate. Of particular note is that the
court relied upon several of the empirical studies cited above.
The various studies indicate that a marketability discount in the range of 35%-40% is
near the mean. The court cases are increasingly referring to objective data, but the courts
are asking for data and analysis that relate to the specific cases in question, not mere
averages. It is important to note that the actual range of discounts can be very wide with
the top end of the range at 70% or more, depending on the features and circumstances of
the subject company.
Appendix E: Marketability Discount
Page 81 of 98
APPENDIX F: GLOSSARY
International Glossary of Business Valuation Terms*
To enhance and sustain the quality of business valuations for the benefit of the profession
and its clientele, the below identified societies and organizations have adopted the
definitions for the terms included in this glossary. The performance of business valuation
services requires a high degree of skill and imposes upon the valuation professional a
duty to communicate the valuation process and conclusion in a manner that is clear and
not misleading. This duty is advanced through the use of terms whose meanings are
clearly established and consistently applied throughout the profession. If, in the opinion
of the business valuation professional, one or more of these terms needs to be used in a
manner which materially departs from the enclosed definitions, it is recommended that
the term be defined as used within that valuation engagement. This glossary has been
developed to provide guidance to business valuation practitioners by further
memorializing the body of knowledge that constitutes the competent and careful
determination of value and, more particularly, the communication of how that value was
determined. Departure from this glossary is not intended to provide a basis for civil
liability and should not be presumed to create evidence that any duty has been breached.
American Institute of Certified Public Accountants
American Society of Appraisers
Canadian Institute of Chartered Business Valuators
National Association of Certified Valuation Analysts
The Institute of Business Appraisers
Adjusted Book Value Method—a method within the asset approach whereby all assets and
liabilities (including off-balance sheet, intangible, and contingent) are adjusted to their fair market
values. {NOTE: In Canada on a going concern basis}
Adjusted Net Asset Method—see Adjusted Book Value Method.
Appraisal—see Valuation.
Appraisal Approach—see Valuation Approach.
Appraisal Date—see Valuation Date.
Appraisal Method—see Valuation Method.
Appraisal Procedure—see Valuation Procedure.
Arbitrage Pricing Theory—a multivariate model for estimating the cost of equity capital, which
incorporates several systematic risk factors.
Asset (Asset-Based) Approach—a general way of determining a value indication of a business,
business ownership interest, or security using one or more methods based on the value of the
assets net of liabilities.
Beta—a measure of systematic risk of a stock; the tendency of a stock’s price to correlate with
changes in a specific index.
Blockage Discount—an amount or percentage deducted from the current market price of a
publicly traded stock to reflect the decrease in the per share value of a block of stock that is of a
size that could not be sold in a reasonable period of time given normal trading volume.
Book Value—see Net Book Value.
Appendix F: Glossary
Page 82 of 98
Business—see Business Enterprise.
Business Enterprise—a commercial, industrial, service, or investment entity (or a combination
thereof) pursuing an economic activity.
Business Risk—the degree of uncertainty of realizing expected future returns of the business
resulting from factors other than financial leverage. See Financial Risk.
Business Valuation—the act or process of determining the value of a business enterprise or
ownership interest therein.
Capital Asset Pricing Model (CAPM)—a model in which the cost of capital for any stock or
portfolio of stocks equals a risk-free rate plus a risk premium that is proportionate to the
systematic risk of the stock or portfolio.
Capitalization—a conversion of a single period of economic benefits into value.
Capitalization Factor—any multiple or divisor used to convert anticipated economic benefits of a
single period into value.
Capitalization of Earnings Method—a method within the income approach whereby economic
benefits for a representative single period are converted to value through division by a
capitalization rate.
Capitalization Rate—any divisor (usually expressed as a percentage) used to convert anticipated
economic benefits of a single period into value.
Capital Structure—the composition of the invested capital of a business enterprise; the mix of
debt and equity financing.
Cash Flow—cash that is generated over a period of time by an asset, group of assets, or business
enterprise. It may be used in a general sense to encompass various levels of specifically defined
cash flows. When the term is used, it should be supplemented by a qualifier (for example,
“discretionary” or “operating”) and a specific definition in the given valuation context.
Common Size Statements—financial statements in which each line is expressed as a percentage
of the total. On the balance sheet, each line item is shown as a percentage of total assets, and on
the income statement, each item is expressed as a percentage of sales.
Control—the power to direct the management and policies of a business enterprise.
Control Premium—an amount or a percentage by which the pro rata value of a controlling
interest exceeds the pro rata value of a noncontrolling interest in a business enterprise to reflect
the power of control.
Cost Approach—a general way of determining a value indication of an individual asset by
quantifying the amount of money required to replace the future service capability of that asset.
Cost of Capital—the expected rate of return that the market requires in order attracting funds to a
particular investment.
Debt-Free—we discourage the use of this term. See Invested Capital.
Discount for Lack of Control—an amount or percentage deducted from the pro rata share of
value of 100% of an equity interest in a business to reflect the absence of some or all of the
powers of control.
Discount for Lack of Marketability—an amount or percentage deducted from the value of an
ownership interest to reflect the relative absence of marketability.
Discount for Lack of Voting Rights—an amount or percentage deducted from the per share value
of a minority interest voting share to reflect the absence of voting rights.
Discount Rate—a rate of return used to convert a future monetary sum into present value.
Discounted Cash Flow Method—a method within the income approach whereby the present
value of future expected net cash flows is calculated using a discount rate.
Discounted Future Earnings Method—a method within the income approach whereby the
present value of future expected economic benefits is calculated using a discount rate.
Economic Benefits—inflows such as revenues, net income, net cash flows, etc.
Economic Life—the period of time over which property may generate economic benefits.
Effective Date—see Valuation Date.
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Enterprise—see Business Enterprise.
Equity—the owner’s interest in property after deduction of all liabilities.
Equity Net Cash Flows—those cash flows available to pay out to equity holders (in the form of
dividends) after funding operations of the business enterprise, making necessary capital
investments, and increasing or decreasing debt financing.
Equity Risk Premium—a rate of return added to a risk-free rate to reflect the additional risk of
equity instruments over risk free instruments (a component of the cost of equity capital or equity
discount rate).
Excess Earnings—that amount of anticipated economic benefits that exceeds an appropriate rate
of return on the value of a selected asset base (often net tangible assets) used to generate those
anticipated economic benefits.
Excess Earnings Method—a specific way of determining a value indication of a business,
business ownership interest, or security determined as the sum of a) the value of the assets
derived by capitalizing excess earnings and b) the value of the selected asset base. Also
frequently used to value intangible assets. See Excess Earnings.
Fair Market Value—the price, expressed in terms of cash equivalents, at which property would
change hands between a hypothetical willing and able buyer and a hypothetical willing and able
seller, acting at arm’s length in an open and unrestricted market, when neither is under
compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
{NOTE: In Canada, the term “price” should be replaced with the term “highest price”.}
Fairness Opinion—an opinion as to whether or not the consideration in a transaction is fair from a
financial point of view.
Financial Risk—the degree of uncertainty of realizing expected future returns of the business
resulting from financial leverage. See Business Risk.
Forced Liquidation Value—liquidation value, at which the asset or assets are sold as quickly as
possible, such as at an auction.
Free Cash Flow—we discourage the use of this term. See Net Cash Flow.
Going Concern—an ongoing operating business enterprise.
Going Concern Value—the value of a business enterprise that is expected to continue to operate
into the future. The intangible elements of Going Concern Value result from factors such as
having a trained work force, an operational plant, and the necessary licenses, systems, and
procedures in place.
Goodwill—that intangible asset arising as a result of name, reputation, customer loyalty, location,
products, and similar factors not separately identified.
Goodwill Value—the value attributable to goodwill.
Guideline Public Company Method—a method within the market approach whereby market
multiples are derived from market prices of stocks of companies that are engaged in the same or
similar lines of business and that are actively traded on a free and open market.
Income (Income-Based) Approach—a general way of determining a value indication of a
business, business ownership interest, security, or intangible asset using one or more methods that
convert anticipated economic benefits into a present single amount.
Intangible Assets—nonphysical assets such as franchises, trademarks, patents, copyrights,
goodwill, equities, mineral rights, securities, and contracts (as distinguished from physical assets)
that grant rights and privileges and have value for the owner.
Internal Rate of Return—a discount rate at which the present value of the future cash flows of
the investment equals the cost of the investment.
Intrinsic Value—the value that an investor considers, on the basis of an evaluation or available
facts, to be the “true” or “real” value that will become the market value when other investors
reach the same conclusion. When the term applies to options, it is the difference between the
exercise price and strike price of an option and the market value of the underlying security.
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Invested Capital—the sum of equity and debt in a business enterprise. Debt is typically (a) all
interest-bearing debt or (b) long-term, interest-bearing debt. When the term is used, it should be
supplemented by a specific definition in the given valuation context.
Invested Capital Net Cash Flows—those cash flows available to pay out to equity holders (in the
form of dividends) and debt investors (in the form of principal and interest) after funding
operations of the business enterprise and making necessary capital investments.
Investment Risk—the degree of uncertainty as to the realization of expected returns.
Investment Value—the value to a particular investor based on individual investment requirements
and expectations. {NOTE: in Canada, the term used is “Value to the Owner”.}
Key Person Discount—an amount or percentage deducted from the value of an ownership interest
to reflect the reduction in value resulting from the actual or potential loss of a key person in a
business enterprise.
Levered Beta—the beta reflecting a capital structure that includes debt.
Limited Appraisal—the act or process of determining the value of a business, business ownership
interest, security, or intangible asset with limitations in analyses, procedures, or scope.
Liquidity—the ability to quickly convert property to cash or pay a liability.
Liquidation Value—the net amount that would be realized if the business is terminated and the
assets are sold piecemeal. Liquidation can be either “orderly” or “forced.”
Majority Control—the degree of control provided by a majority position.
Majority Interest—an ownership interest greater than 50% of the voting interest in a business
enterprise.
Market (Market-Based) Approach—a general way of determining a value indication of a
business, business ownership interest, security, or intangible asset by using one or more methods
that compare the subject to similar businesses, business ownership interests, securities, or
intangible assets that have been sold.
Market Capitalization of Equity—the share price of a publicly traded stock multiplied by the
number of shares outstanding.
Market Capitalization of Invested Capital—the market capitalization of equity plus the market
value of the debt component of invested capital.
Market Multiple—the market value of a company’s stock or invested capital divided by a
company measure (such as economic benefits, number of customers).
Marketability—the ability to quickly convert property to cash at minimal cost.
Marketability Discount—see Discount for Lack of Marketability.
Merger and Acquisition Method—a method within the market approach whereby pricing
multiples are derived from transactions of significant interests in companies engaged in the same
or similar lines of business.
Mid-Year Discounting—a convention used in the Discounted Future Earnings Method that
reflects economic benefits being generated at midyear, approximating the effect of economic
benefits being generated evenly throughout the year.
Minority Discount—a discount for lack of control applicable to a minority interest.
Minority Interest—an ownership interest less than 50% of the voting interest in a business
enterprise.
Multiple—the inverse of the capitalization rate.
Net Book Value—with respect to a business enterprise, the difference between total assets (net of
accumulated depreciation, depletion, and amortization) and total liabilities as they appear on the
balance sheet (synonymous with Shareholder’s Equity). With respect to a specific asset, the
capitalized cost less accumulated amortization or depreciation as it appears on the books of
account of the business enterprise.
Net Cash Flows—when the term is used, it should be supplemented by a qualifier. See Equity
Net Cash Flows and Invested Capital Net Cash Flows.
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Net Present Value—the value, as of a specified date, of future cash inflows less all cash outflows
(including the cost of investment) calculated using an appropriate discount rate.
Net Tangible Asset Value—the value of the business enterprise’s tangible assets (excluding
excess assets and nonoperating assets) minus the value of its liabilities.
Nonoperating Assets—assets not necessary to ongoing operations of the business enterprise.
{NOTE: in Canada, the term used is “Redundant Assets”.}
Normalized Earnings—economic benefits adjusted for nonrecurring, noneconomic, or other
unusual items to eliminate anomalies and/or facilitate comparisons.
Normalized Financial Statements—financial statements adjusted for nonoperating assets and
liabilities and/or for nonrecurring, noneconomic, or other unusual items to eliminate anomalies
and/or facilitate comparisons.
Orderly Liquidation Value—liquidation value at which the asset or assets are sold over a
reasonable period of time to maximize proceeds received.
Premise of Value—an assumption regarding the most likely set of transactional circumstances
that may be applicable to the subject valuation; for example, going concern, liquidation.
Present Value—the value, as of a specified date, of future economic benefits and/or proceeds
from sale, calculated using an appropriate discount rate.
Portfolio Discount—an amount or percentage deducted from the value of a business enterprise to
reflect the fact that it owns dissimilar operations or assets that do not fit well together.
Price/Earnings Multiple—the price of a share of stock divided by its earnings per share.
Rate of Return—an amount of income (loss) and/or change in value realized or anticipated on an
investment, expressed as a percentage of that investment.
Redundant Assets—see Nonoperating Assets.
Report Date—the date conclusions are transmitted to the client.
Replacement Cost New—the current cost of a similar new property having the nearest equivalent
utility to the property being valued.
Reproduction Cost New—the current cost of an identical new property.
Required Rate of Return—the minimum rate of return acceptable by investors before they will
commit money to an investment at a given level of risk.
Residual Value—the value as of the end of the discrete projection period in a discounted future
earnings model.
Return on Equity—the amount, expressed as a percentage, earned on a company’s common
equity for a given period.
Return on Investment—See Return on Invested Capital and Return on Equity.
Return on Invested Capital—the amount, expressed as a percentage, earned on a company’s total
capital for a given period.
Risk-Free Rate—the rate of return available in the market on an investment free of default risk.
Risk Premium—a rate of return added to a risk-free rate to reflect risk.
Rule of Thumb—a mathematical formula developed from the relationship between price and
certain variables based on experience, observation, hearsay, or a combination of these; usually
industry specific.
Special Interest Purchasers—acquirers who believe they can enjoy post-acquisition economies
of scale, synergies, or strategic advantages by combining the acquired business interest with their
own.
Standard of Value—the identification of the type of value being utilized in a specific
engagement; for example, fair market value, fair value, investment value.
Sustaining Capital Reinvestment—the periodic capital outlay required to maintain operations at
existing levels, net of the tax shield available from such outlays.
Systematic Risk—the risk that is common to all risky securities and cannot be eliminated through
diversification. The measure of systematic risk in stocks is the beta coefficient.
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Tangible Assets—physical assets (such as cash, accounts receivable, inventory, property, plant
and equipment, etc.).
Terminal Value—See Residual Value.
Transaction Method—See Merger and Acquisition Method.
Unlevered Beta—the beta reflecting a capital structure without debt.
Unsystematic Risk—the risk specific to an individual security that can be avoided through
diversification.
Valuation—the act or process of determining the value of a business, business ownership interest,
security, or intangible asset.
Valuation Approach—a general way of determining a value indication of a business, business
ownership interest, security, or intangible asset using one or more valuation methods.
Valuation Date—the specific point in time as of which the valuator’s opinion of value applies
(also referred to as “Effective Date” or “Appraisal Date”).
Valuation Method—within approaches, a specific way to determine value.
Valuation Procedure—the act, manner, and technique of performing the steps of an appraisal
method.
Valuation Ratio—a fraction in which a value or price serves as the numerator and financial,
operating, or physical data serve as the denominator.
Value to the Owner—see Investment Value.
Voting Control—de jure control of a business enterprise.
Weighted Average Cost of Capital (WACC)—the cost of capital (discount rate) determined by
the weighted average, at market value, of the cost of all financing sources in the business
enterprise’s capital structure.
Additional Terms
Assumptions and Limiting Conditions. Parameters and boundaries under which a valuation is
performed, as agreed upon by the valuation analyst and the client or as acknowledged or
understood by the valuation analyst and the client as being due to existing circumstances. An
example is the acceptance, without further verification, by the valuation analyst from the client of
the client’s financial statements and related information.
Business Ownership Interest. A designated share in the ownership of a business (business
enterprise).
Calculated Value. An estimate as to the value of a business, business ownership interest,
security, or intangible asset, arrived at by applying valuation procedures agreed upon with the
client and using professional judgment as to the value or range of values based on those
procedures.
Calculation Engagement. An engagement to estimate value wherein the valuation analyst and
the client agree on the specific valuation approaches and valuation methods that the valuation
analyst will use and the extent of valuation procedures the valuation analyst will perform to
estimate the value of a subject interest. A calculation engagement generally does not include all
of the valuation procedures required for a valuation engagement. If a valuation engagement had
been performed, the results might have been different. The valuation analyst expresses the results
of the calculation engagement as a calculated value, which may be either a single amount or a
range.
Capital or Contributory Asset Charge. A fair return on an entity’s contributory assets, which
are tangible and intangible assets used in the production of income or cash flow associated with
an intangible asset being valued. In this context, income or cash flow refers to an applicable
measure of income or cash flow, such as net income, or operating cash flow before taxes and
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capital expenditures. A capital charge may be expressed as a percentage return on an economic
rent associated with, or a profit split related to, the contributory assets.
Capitalization of Benefits Method. A method within the income approach whereby expected
future benefits (for example, earnings or cash flow) for a representative single period are
converted to value through division by a capitalization rate.
Comparable Profits Method. A method of determining the value of intangible assets by
comparing the profits of the subject entity with those of similar uncontrolled companies that have
the same or similar complement of intangible assets as the subject company.
Comparable Uncontrolled Transaction Method. A method of determining the value of
intangible assets by comparing the subject transaction to similar transactions in the market place
made between independent (uncontrolled) parties.
Conclusion of Value. An estimate of the value of a business, business ownership interest,
security, or intangible asset, arrived at by applying the valuation procedures appropriate for a
valuation engagement and using professional judgment as to the value or range of values based
on those procedures.
Control Adjustment. A valuation adjustment to financial statements to reflect the effect of a
controlling interest in a business. An example would be an adjustment to owners’ compensation
that is in excess of market compensation.
Engagement to Estimate Value. An engagement, or any part of an engagement (for example, a
tax, litigation, or acquisition-related engagement), that involves determining the value of a
business, business ownership interest, security, or intangible asset. Also known as valuation
service.
Excess Operating Assets. Operating assets in excess of those needed for the normal operation of
a business.
Fair Value. In valuation applications, there are two commonly used definitions for fair value: (1)
For financial reporting purposes only, the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
Source: Financial Accounting Standards Board definition in Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements, as used in the context of Generally
Accepted Accounting Principles (GAAP) (Effective 2008). (2) For state legal matters only, some
states have laws that use the term fair value in shareholder and partner matters. For state legal
matters only, therefore, the term may be defined by statute or case law in the particular
jurisdiction.
Guideline Company Transactions Method. A method within the market approach whereby
market multiples are derived from the sales of entire companies engaged in the same or similar
lines of business.
Hypothetical Condition. That which is or may be contrary to what exists, but is supposed for the
purpose of analysis.
Incremental Income. Additional income or cash flow attributable to an entity’s ownership or
operation of an intangible asset being valued, as determined by a comparison of the entity’s
income or cash flow with the intangible asset to the entity’s income or cash flow without the
intangible asset. In this context, income or cash flow refers to an applicable measure of income or
cash flow, such as license royalty income or operating cash flow before taxes and capital
expenditures.
Pre-adjustment Value. The value arrived at prior to the application, if appropriate, of valuation
discounts or premiums.
Profit Split Income. With respect to the valuation of an intangible asset of an entity, a percentage
allocation of the entity’s income or cash flow whereby (1) a split (or percentage) is allocated to
the subject intangible and (2) the remainder is allocated to all of the entity’s tangible and other
intangible assets. In this context, income or cash flow refers to an applicable measure of income
or cash flow, such as net income or operating cash flow before taxes and capital expenditures.
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Relief from Royalty Method. A valuation method used to value certain intangible assets (for
example, trademarks and trade names) based on the premise that the only value that a purchaser
of the assets receives is the exemption from paying a royalty for its use. Application of this
method usually involves estimating the fair market value of an intangible asset by quantifying the
present value of the stream of market-derived royalty payments that the owner of the
intangible asset is exempted from or “relieved” from paying.
Residual Income. For an entity that owns or operates an intangible asset being valued, the
portion of the entity’s income or cash flow remaining after subtracting a capital charge on all of
the entity’s tangible and other intangible assets. Income or cash flows can refer to any appropriate
measure of income or cash flow, such as net income or operating cash flow before taxes and
capital expenditures.
Security. A certificate evidencing ownership or the rights to ownership in a business enterprise
that (1) is represented by an instrument or by a book record or contractual agreement, (2) is of a
type commonly dealt in on securities exchanges or markets or, when represented by an
instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for
investment, and (3) either one of a class or series or, by its terms, is divisible into a class or series
of shares, participations, interests, rights, or interest-bearing obligations.
Subject Interest. A business, business ownership interest, security, or intangible asset that is the
subject of a valuation engagement.
Subsequent Event. An event that occurs subsequent to the valuation date.
Valuation Analyst. For purposes of this Statement, an AICPA member who performs an
engagement to estimate value that culminates in the expression of a conclusion of value or a
calculated value.
Valuation Assumptions. Statements or inputs utilized in the performance of an engagement to
estimate value that serve as a basis for the application of particular valuation methods.
Valuation Engagement. An engagement to estimate value in which a valuation analyst
determines an estimate of the value of a subject interest by performing appropriate valuation
procedures, as outlined in the AICPA Statement on Standards for Valuation Services, and is free
to apply the valuation approaches and methods he or she deems appropriate in the circumstances.
The valuation analyst expresses the results of the valuation engagement as a conclusion of value,
which may be either a single amount or a range.
Valuation Service. See Engagement to Estimate Value.
Appendix F: Glossary
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EXHIBITS
Section 1: Development checklist / Work pages / Notes
Section 2: Valuation Engagement Acceptance Checklist / Executed Acceptance Letter
Section 3: Third Party Professional Opinions on Salaries, Rent, & Appraisal on FF&E
Section 4: References to Discounts / Premiums / RMA / Market Sales Comps
Section 5: Misc Financials / Notes / Equations
Section 6: Misc Charts / Performance Charts
Page 90 of 98
SECTION 1
Development Checklist / Work Pages / Notes
Exhibits
Page 91 of 98
SECTION 2
Valuation Engagement Acceptance Checklist / Executed Acceptance Letter
Exhibits
Page 92 of 98
SECTION 3
Third Party Professional Opinions on Salaries, Rent, & Appraisal on FF&E
Exhibits
Page 93 of 98
SECTION 4
References to Discounts / Premiums / RMA / Market Sales Comps
Exhibits
Page 94 of 98
SECTION 5
Misc Financials / Notes / Equations
Exhibits
Page 95 of 98
SECTION 6
Misc Charts / Performance Charts
Exhibits
Page 96 of 98