Valued Representation. VR is celebrating 32 years of successful business sales through valued representation Valued Representation defines VR.

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1 Valued Representation VR is celebrating 32 years of successful business sales through valued representation Valued Representation defines VR.

2 VR is: VALUED REPRESENTATION Welcome to Volume #6 Course # 3 ANALYZING AND RECASTING RECASTING EXAMPLE

3 ANALYZING AND RECASTING OUR GOAL FOR THIS COURSE IS TO: PRACTICE RECASTING AN INCOME STATEMENT AND REVIEW OF THE BALANCE SHEET 3

4 ANALYZING AND RECASTING WHAT YOU WILL LEARN Recast a financial statement for a Typical Company 4

6 Typical Company Income Statement 2007 % Revenue Net Sales $1,500, % Cost of Goods Sold Purchases 700, % Gross Profit 800, % Operating Expenses Officer s Salary 150, % Payroll 250, % Payroll Taxes 27, % Workman s Compensation 4, % Office Supplies 10, % Auto Expenses 3, % Freight 4, % Auto Lease 8, % Legal & Accounting 8, % Charitable Contributions 2, % Utilities 5, % Telephone 7, % Advertising 18, % Travel 5, % Meals & Entertainment 4, % Dues and Subscriptions 2, % Insurance-General 10, % Insurance- Medical 6, % Insurance-Officer s Life 1, % Interest Expense 15, % Maintenance and Repairs 7, % Rent 48, % Equipment Rent 3, % Security & Alarms 2, % Licenses & Fees 2, % Personal Property Taxes % Bank Service Charge % Depreciation 10, % Miscellaneous 3, % Total Operating Expenses $616, % Ordinary Income $184, % Copyright 2008 VR Business Brokers

7 Seller Comments about Typical Company s Add Backs Payroll taxes ran 11% Auto expense was personal Auto lease was personal General insurance included $2,000 for Seller s auto insurance Medical insurance was Seller s Life insurance was Seller s Equipment rental was a one-time non-recurring expense for a fork lift they now own. Lease will expire next year. New lease available for $5,000 per month. Copyright 2008 VR Business Brokers 7

8 SDE RECAST SHEET Name of Business: Typical Company Year/Period Sales 1,500,000 2 Cost of Sales 700,000 3 Payroll 250,000 4 Rent 48,000 5 Remaining Opt. Expenses 345,000 6 Total Operating Expenses 643,000 7 Operating Income/Pre-Tax Profit 157,000 8 Depreciation & Amortization 10,000 9 Interest 15, Officer s/owner s Salary 150, Adjusted Income for SBA 332,000 Discretionary Expenses (Define Miscellaneous) 12 Auto for owner s personal use 3, Insurance for owner s personal use 9, Travel not required by business 5, Entertainment 4, Meals 17 Profit Sharing/Retirement for owner 18 Miscellaneous: (Charitable Contrib.) 2, Miscellaneous: 20 Miscellaneous: Non-Recurring Expenses (Define) 21 Rented fork lift now own it. 3, Expenses not included on P&L (To be subtracted from Earnings) 24 New Rent adjustment (12,000) Total Adjustments 14, Seller s Discretionary Earnings $346,500 The undersigned hereby warrant(s): 1) He/They is/are the owner(s) of the business, 2) the above is a true representation of the discretionary earnings of the business, 3) the information is furnished to broker pursuant to the Representation/Listing Agreement between owner and broker, 3) broker is authorize to share with potential purchasers of the business, 4) Owner hereby indemnifies Broker for any liability arising from Broker s use of this information. All parties receiving this information are hereby notified that Broker has not made any investigation into the accuracy of the information contained on this sheet and those parties are to make their own independent investigation as to the accuracy of this information and to look solely to the Seller for any loses or damages caused by the inaccuracy of this information. Owner: Date: Owner: Date: Copyright 2008 VR Business Brokers

10 Module 3: Recasting a Balance Sheet In this section you will: Review a typical balance sheet Learn why we recast a balance sheet Compare what items we typically recast: For an asset sale For a stock sale Review a Sample Balance Sheet Recast form Copyright 2008 VR Business Brokers 10

11 What is a Balance Sheet? A Balance Sheet is a financial statement that expresses the financial status of a business on a given date. It is a listing of all the assets and liabilities of a company on that date and can be used to identify the assets and liabilities of the company. A balance sheet can also help an associate or buyer determine the financial health of the business. It is referred to as a Balance Sheet because Total Assets equal (are in balance with) Total Liabilities + Shareholder Equity Copyright 2008 VR Business Brokers 11

12 Sample Company Inc. Balance Sheet SAMPLE COMPANY, INC. STATEMENT OF ASSETS, LIABILITIES AND STOCKHOLDER S EQUITY INCOME TAX BASIS (BALANCE SHEET) April 30, 2003 (Unaudited) ASSETS Current Assets Cash $ 7,937 Accounts Receivable 78,520 Inventory 52,853 Prepaid Expenses 53,614 Total Current Assets $192,924 Fixed Assets Office Furniture & Equipment 10,363 Machinery & Equipment 143,857 Vehicles 42,377 Less: Accumulated Depreciation (96,858) 99,739 TOTAL ASSETS $292,663 LIABILITIES AND STOCKHOLDER S EQUITY Current Liabilities Trade Accounts Payable $189,388 Payroll and Sales Taxes Payable 9,478 Accrued Expenses Payable 740 Total Current Liabilities $199,606 Stockholder s Equity Common Stock 1000 Retained Earnings 92,057 93,057 TOTAL LIABILITIES AND STOCKHOLDER S EQUITY $292,663 See accountants compilation report. Copyright 2008 VR Business Brokers

15 Liabilities Current Liabilities (due within 12 months) Accounts Payable Payroll and Sales Taxes Accrued Expenses Current Portion of Long-Term Liabilities Current Portion of Long-Term Leases Copyright 2008 VR Business Brokers 15

19 Tax Return & Balance Sheet Tax Returns include a balance sheet page listing all assets and liabilities at the time the tax return completion date. Interim Balance Sheets give a more current value of assets. Offers are usually based on current balance sheet information. Copyright 2008 VR Business Brokers 19

21 Why Recast a Balance Sheet? To determine a realistic picture of the value of the assets included in a sale and what liabilities come with the business. Book value of assets and fair market value of assets may differ significantly. The greater the assets: The greater the loan you can get The more value the buyer sees in the deal Copyright 2008 VR Business Brokers 21

23 Inventory The value of the inventory often needs to be adjusted for: Obsolete merchandise Surplus merchandise Unsaleable merchandise Physical inventory vs. book value Sometimes inventory includes Works in Progress Copyright 2008 VR Business Brokers 23

24 Personal Story Seller owned two liquor stores and sold one. The one he sold had a substantial wine section but the wine was stocked upright. Buyer was concerned the wine might be spoiled so the wine was excluded from the sale. The night before the escrow closed the Seller moved the wine to his second store. Buyer had already arranged for new wine to be delivered. Copyright 2008 VR Business Brokers 24

25 Book Value vs. Market Value Balance sheet shows the depreciated value of the furniture, fixtures, and equipment. Depreciation is usually taken at an accelerated rate. Thus market value can be significantly higher than book value. Copyright 2008 VR Business Brokers 25

26 Sample Co. Fixed Assets Fixed Assets (from Balance Sheet) Office Furniture $ 10,363 Machinery & Equipment $143,857 Vehicles $ 42,377 Less Accumulated Deprec. -$ 96,858 Current Book Value $ 99,739 Copyright 2008 VR Business Brokers 26

27 Potential Adjustments to Sample Company s Fixed Assets Auto is not included in sale. What is the Market Value of: Office Furniture Machinery & Equipment When doing a formal valuation you may need to appraise the equipment piece by piece. In most transactions a reasonable estimate will due. What would it cost to buy the equipment in its current condition on the open market? One tip is to adjust the amount of depreciation to reflect the real life of the equipment. Copyright 2008 VR Business Brokers 27

29 RECASTED BALANCE SHEET FORM BUSINESS NAME: Sample Co Date: 05/01/2003 ASSETS Book Value Adjustments Adj. Balance Comments Current Assets Cash 7,937 (7,937) 0 Not Included Accounts Receivable 78,520 (78,520) 0 Not Included Prepaid Expenses & Deposits 53,614 (53,614) 0 Not Included Inventory 52,853-52,853 No Adjustment Total Current Assets 192,914 (140,071) 52,853 Fixed Assets Machinery & Equipment 143, ,857 Vehicles 42,377 (42,377) 0 Not included Furniture 10, ,363 Leasehold Improvements Less Accum. Depreciation (96,858) 50,000 (46,858) *Depreciation was reduced by $50,000 to account for current value of F,F, & E Net Fixed Assets 99,739 7, ,362 TOTAL ASSETS $160,195 Total Adjusted Assets Included in Sale = Adjusted Balance of Current Assets + LIABILITIES Adjusted Balance of Fixed Assets) Current Liabilities Accounts Payable 189,388 (189,388) 0 * Accrued Expense Liabilities 740 (740) 0 * Accrued Tax Liabilities 9,478 (9,478) 0 * Current Portion of L.T. Lease Current portion of L.T. Notes Total Current Liabilities *Seller delivered business Free & Clear of any Liabilities! Notes Payable - No long term - liabilities Capital Leases - Loans from Shareholders - Total Long Term Liabilities 0 0 Total Liabilities Copyright 2008 VR Business Brokers

30 Asset Sale vs. Corporate Sale There are many advantages and disadvantages to selling or buying the assets vs. the corporation. That is not the scope of this class. A good associate must learn the basic reasoning behind the decision to buy or sell the assets vs. the corporation. Copyright 2008 VR Business Brokers 30

31 Asset Sales Buyer buys most of the assets of the company but not the stock of the company The corporation is the seller Typically the Cash is not included. Receivables can be included or excluded Except in cases where assuming a liability may help make a deal, payables and other liabilities are usually not included. Some personal items may not be included Copyright 2008 VR Business Brokers 31

32 Corporate Sales Buyer actually buys the stock of the company and thus becomes the corporation. The Share Holders are the Sellers Most balance sheet items are included Sometimes personal items like the owner s vehicle are excluded. Less than 10% of our sales are corporate sales Copyright 2008 VR Business Brokers 32

33 ANALYZING AND RECASTING WHAT YOU HAVE LEARNED Recast a financial statement for a Typical Company 33

34 ANALYZING AND RECASTING THINK POSITIVE THINK BIG THINK VALUED REPRESENTATION VR HAS SOLD MORE BUSINESSES IN THE WORLD THAN ANYONE 34