Valuation of the Common Stock of: «Cell│[1]ReportWriter!B3│0││Peachtree Plumbing, Inc»
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- Application of Minority Interest Discount
- Application of Marketability Discount
- Application of Excess or Non-Operating Assets
- Indicated Value Calculation
- Opinion of Fair Market Value
Direct Market Data Method:Transaction DataThe 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) Range│[1]BizcompsData!L11:AJ25│0│0│«Range│[1]BizcompsData!L11:AH25│0│0│ Selected MultiplesThe 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. «Range│[1]BizcompsSDE!K11:V26│0│0│ Application of Minority Interest DiscountA 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 «Cell│[1]ReportWriter!b19│0││my» opinion, a minority interest discount of «Cell│[1]ReportWriter!h60│0││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 DiscountIn «Cell│[1]ReportWriter!b19│0││my» opinion, a discount of «Cell│[1]ReportWriter!h61│0││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 AssetsExcess 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 «Cell│[1]ReportWriter!b19│0││my» judgment, excess and non-operating assets that need to be added back and are a part of the business’s value total $«Cell│[1]ReportWriter!h62│0││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 CalculationAs determined below, the «Cell│[1]ReportWriter!b41│0││fair market value» indicated by using Direct Market Data Method was $«Cell│[1]BizcompsConclusion!N38│0││4,134,900». «Range│[1]BizcompsConclusion!L15:P39│0│0│ Conclusion of Value«Range│[1]ConclusionOfValue!K14:U48│1│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 «Cell│[1]ReportWriter!b3│0││Peachtree Plumbing, Inc» was Market Data Method-Bizcomps. Application of Minority Interest DiscountA 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 «Cell│[1]ReportWriter!b19│0││my» opinion, a minority interest discount of «Cell│[1]ReportWriter!bd37│0││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 DiscountIn «Cell│[1]ReportWriter!b19│0││my» opinion, a discount of «Cell│[1]ReportWriter!bd38│0││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 AssetsExcess 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 «Cell│[1]ReportWriter!b19│0││my» judgment, excess and non-operating that need to be added back and are part of the value total $«Cell│[1]ReportWriter!bd39│0││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. Opinion of Fair Market Value«Cell│[1]ReportWriter!B15│0││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 «Cell│[1]ReportWriter!B3│0││Peachtree Plumbing, Inc». This valuation was performed solely to assist in the matter of «Cell│[1]ReportWriter!B43│0││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:
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 « Peachtree Plumbing, Inc» as of «Cell│[1]ReportWriter!B5│0│mmmm d, YYYY│June 30, 2006» was «Cell│[1]ReportWriter!B24│0││$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. «Cell│[1]ReportWriter!B32│0││June 30, 2009» «Cell│[1]ReportWriter!B6│0││Jason Allred»
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