Business Valuation Assessment Summary

Transcription

1 [COMPANY NAME] Research & Development Tax Credit Assessment For tax year ended December 31, 20xx For ABC Co Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein HA&W CEO Tools, LLC Page 1 of 14

2 Valuation Multiples HA&W CEO Tools, LLC engaged the services of Habif, Arogeti & Wynne, LLP, on behalf of ABC Manufacturing, Inc. ( ABC or The Company ), to identify, evaluate and compare recent merger and acquisition (M&A) transactions involving target companies similar to ABC. Nineteen (19) M&A transactions were identified and compared against ABC data in the valuation calculations explained throughout this summary. To estimate the value of a company, two widely used valuation multiples are employed: Total Invested Capital (TIC) to Revenue, and TIC to EBITDA. Total Invested Capital (TIC) represents the value of your business and is normally calculated as the sum of debt and equity of the company. Accordingly, both TIC to Revenue multiple and TIC to EBITDA multiple for the selected M&A transactions were calculated. The following table provides a summary of these transaction multiples. TIC/Revenue Multiple Implied TIC ($MM) TIC/EBITDA Multiple Implied TIC ($MM) Maximum 0.7x $ x $27.6 Mean 0.3x $ x $10.1 Median 0.4x $ x $7.3 Harmonic Mean 0.2x $ x $6.3 Minimum 0.1x $ x $2.2 See Glossary of Terms for detailed explanation of terms HA&W CEO Tools, LLC Page 2 of 14

3 Valuation Range These multiples can vary significantly based on several factors, including revenue growth, profitability, size and/or other company-specific factors. Based on our assessment, both TIC to Revenue and TIC to EBITDA could be appropriate indicators for ABC Co. Our reasons for this selection include: We were able to identify a relatively sizable set of transaction data within the industry which ABC Co. operates in; The transaction search results provided us both TIC to Revenue multiple and TIC to EBITDA multiple data; and The size of ABC Co. was within the range of sizes of the identified target companies. Based on this data, your valuation multiple range is as follows: TIC / Revenue: Between 0.1x and 0.7x TIC / EBITDA: Between 1.0x and 12.5x High-Level Benchmark Data HA&W compared your high-level financial metrics to a database of peer companies to gain an initial understanding of how your financial performance compares to the industry. The following parameters were used: NAICS code: 2362 Nonresidential Building Construction NAICS description: This industry group comprises establishments primarily responsible for the construction (including new work, additions, alterations, maintenance, and repairs) of nonresidential buildings. This industry group includes nonresidential general contractors, nonresidential for-sale builders, nonresidential design-build firms, and nonresidential project construction management firms. Revenue range: $50 million - $150 million Geography: United States 78 financial statements were chosen as the representative peer group based on the demographics above. A comparison of your performance to the peer group is shown below HA&W CEO Tools, LLC Page 3 of 14

4 Profitability Metrics ABC Co. Peer Group 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 9.8% 8.7% 3.2% 5.6% Gross Profit Margin EBITDA as a percent of Sales ABC Co.'s Gross Profit Margin is 1.07 percentage points higher than the peer group ABC Co.'s EBITDA as a percent of Sales is 2.37 percentage points lower than the peer group 2016 HA&W CEO Tools, LLC Page 4 of 14

5 Operations Metrics ABC Co. Peer Group Accounts Receivable Days Accounts Payable Days Inventory Days ABC Co.'s Accounts Receivable Days is 7.46 days lower than the peer group ABC Co.'s Accounts Payable Days is days higher than the peer group ABC Co.'s Inventory Days is 3.17 days lower than the peer group 2016 HA&W CEO Tools, LLC Page 5 of 14

6 Operations Metrics (continued) ABC Co. Peer Group 100% 90% 80% 70% 60% 50% 40% 30% 20% 50.1% 54.1% 60.4% 43.0% 10% 0% Accounts Receivable as a percent of Total Assets Accounts Payable as a percent of Total Assets 0.0% 0.5% Inventory as a percent of Total Assets ABC Co.'s Accounts Receivable as a percent of Total Assets is 3.94 percentage points lower than the peer group ABC Co.'s Accounts Payable as a percent of Total Assets is percentage points higher than the peer group ABC Co.'s Inventory as a percent of Total Assets is 0.48 percentage points lower than the peer group 2016 HA&W CEO Tools, LLC Page 6 of 14

7 Liquidity Metrics ABC Co. Peer Group Current Ratio Quick Ratio Debt-to-Equity Ratio ABC Co.'s Current Ratio is 0.18 points lower than the peer group ABC Co.'s Quick Ratio is 0.52 points lower than the peer group ABC Co.'s Debt-to-Equity Ratio is 0.3 points lower than the peer group 2016 HA&W CEO Tools, LLC Page 7 of 14

8 Additional Normalized Metrics ABC Co. Peer Group 100% 90% 80% 70% 60% 50% 40% 30% 90.2% 91.3% 75.0% 71.3% 20% 10% 25.0% 28.7% 0% COGS as a percent of Sales Total Liabilities as a percent of Total Assets Total Equity as a percent of Total Assets ABC Co.'s COGS as a percent of Sales is 1.04 percentage points lower than the peer group ABC Co.'s Total Liabilities as a percent of Total Assets is 3.69 percentage points higher than the peer group ABC Co.'s Total Equity as a percent of Total Assets is 3.69 percentage points lower than the peer group 2016 HA&W CEO Tools, LLC Page 8 of 14

9 Glossary of Terms Valuation Multiple A means of expressing the value of a business as a ratio, or multiple, of some financial metric, such as revenue or profit. For example, a value-to-revenue multiple of 1.5x implies that the value of the business is equal to the company s revenue multiplied by 1.5. Mean a method of calculating the average of a set of numbers. It is calculated by taking the sum of the numbers in the set, then dividing this sum by the total count of numbers in the set. Mean of 1, 3, 6, 10, and 17 = ( )/5 = 7.4 Median a method of calculating the midpoint in a series of numbers. It is determined by arranging the numbers in order from least to greatest, then selecting the number in the middle of the range. Median of 1, 3, 6, 10, and 17 = 6 Harmonic Mean a method of calculating the average of a set of numbers. It is determined by first calculating the mean of the reciprocals of the numbers in the set, and then taking the reciprocal of this mean. Harmonic mean of 1, 3, 6, 10, and 17 = Step 1: Calculate the mean of the reciprocals = (1/1 + 1/3 + 1/6 + 1/10 + 1/17)/5 Step 2: Take the reciprocal of the mean = 5/(1/1 + 1/3 + 1/6 + 1/10 + 1/17) = 3.0 Gross Profit Margin - A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. (In general, the higher, the better.) Gross Profit / Sales EBITDA as a percent of Sales - Earnings before interest, taxes, depreciation and amortization. EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. (In general, the higher, the better.) EBITDA / Sales Accounts Receivable Days - The approximate amount of time that it takes for a business to receive payments owed from its customers and clients. (In general, the shorter, the better.) (Accounts Receivable / Sales) * HA&W CEO Tools, LLC Page 9 of 14

10 Accounts Payable Days - A company's average payable period. Days payable outstanding tells how long it takes a company to pay its invoices from trade creditors, such as suppliers. (In general, the shorter, the better.) (Accounts Payable / COGS) * 365 Inventory Days - A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory (including goods that are work in progress, if applicable) into sales. (In general, the shorter, the better.) (Inventory / COGS) * 365 Accounts Receivable as a percent of Total Assets - The approximate amount of time that it takes for a business to receive payments owed from its customers and clients. (In general, the shorter, the better.) Accounts Receivable / Total Assets Accounts Payable as a percent of Total Assets - A company's average payable period. Days payable outstanding tells how long it takes a company to pay its invoices from trade creditors, such as suppliers. (In general, the shorter, the better.) Accounts Payable / Total Assets Inventory as a percent of Total Assets - A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory (including goods that are work in progress, if applicable) into sales. (In general, the shorter, the better.) Inventory / Total Assets Current Ratio - A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. (The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.) Total Current Assets / Total Current Liabilities Quick Ratio - An indicator of a company s short-term liquidity. The quick ratio measures a company s ability to meet its short-term obligations with its most liquid assets. (The higher the quick ratio, the better the company's liquidity position.) (Cash + Accounts Receivable) / Total Current Liabilities 2016 HA&W CEO Tools, LLC Page 10 of 14

11 Debt-to-Equity Ratio - A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. (If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.) Total Liabilities / Total Equity COGS as a percent of Sales A measure of direct product costs (COGS) in relation to overall sales. (In general, the lower, the better) Cost of Goods Sold / Sales Total Liabilities as a percent of Total Assets - The amount of debt in relation to assets. (In general, the lower, the better. However, if the percentage is too low, it may indicate the company is overpaying since debt is cheaper than equity.) Liabilities / Total Assets Total Equity as a percent of Total Assets The amount of equity in relation to assets. (In general, the higher, the better. If the percentage is too high, it may indicate the company is overpaying since debt is cheaper than equity.) Equity / Total Assets 2016 HA&W CEO Tools, LLC Page 11 of 14

12 APPENDIX 2016 HA&W CEO Tools, LLC Page 12 of 14

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14 Thank you for taking our Business Valuation Assessment For more information on HA&W Business Valuation Services visit us at or contact: Carrie Zhou Director, HA&W Valuation Services HA&W CEO Tools, LLC Page 14 of 14