SUMMARY BUSINESS VALUATION

A Summary Business Valuation (SBV) is a simplified appraisal of the value of a business entity, excluding real estate. It is based on this appraiser's twenty-five plus years of experience, client supplied financial and other data, and other information readily available to the appraiser. It does not include many factors that are considered by the Internal Revenue Service, and generally accepted by the appraisal community and necessary for a complete business valuation or business appraisal.

SBV's are generally used for businesses with annual sales less than $1 million. The Summary Business Valuation is for the business owner whose objective is to maximize his or her personal or family cash flow and minimize taxes. This contrasts to the typical objective of maximizing earnings in larger private or public companies with absentee owners.

The final email report includes:

• A cover letter with a short company description and a limited opinion of the fair market value of the business,

• A three year pro forma financial comparison,

• Complete calculations for at least three methods of valuation,

• A graphical chart presenting the valuation ranges and final value,

• An explanation appendix describing the assumptions and logic behind the calculations.

The benefits of an SBV are its low cost and relative degree of accuracy and credibility by the interested parties. Your preparation time is minimal gathering and listing the essential data. I bring my twenty-five years plus of doing business valuations. Together we review the issues unique to your business and circumstances. These are incorporated into the SBV unlike many "canned" approaches to business valuation.

Getting Started

• Call me with any questions, (205) 987-5315

• Send three years of financial statements (income statements and balance sheets) or tax returns, an equipment list, a line card - if available, and any other material you feel is appropriate. If you have a web site or pictures, these are helpful.

• List your personal compensation from the business, any other discretionary expenses, or one-time events over the past three years that need to be adjusted in your income statement. See column at right and sample below.

• Authorize a $395.00 charge on your Visa, Master Card, or American Express.

The Next Steps

• I will email to you a questionnaire that should be completed and returned as soon as possible. I will closely review the financial and other data. If there are any questions, these will also be included.

• Once I have the returned questionnaire, we will have an extended phone call to go over any additional questions you have and the information you have supplied to date.

• I will prepare a pro forma income statement adjusting for personal compensation, discretionary expenses, and any one-time events for your review before completing the final report. We will review this on the phone.

Final Report

• I will email your final report 1-2 business days after completing review of the pro forma statement.

• We will have a follow up phone call to go over the report and answer any further questions.

The entire process should take less than a week assuming your prompt completion of the questionnaire and review of the pro forma income statement.

Pricing & Conditions

The $395.00 cost for the SBV should be the total cost for most clients. However, there are situations where my time is extended and there will be additional costs. This occurs most often under the following conditions:

• The financial statements (income statements and balance sheets) are out of balance,

• A pro forma balance sheet needs to be created,

• The compensation figures conflict with the reported amounts,

• A middle of the fiscal year valuation is requested,

• Assets or liabilities need to be added to or removed from the financial statements,

• Real estate is included in the balance sheet.

If any condition conditions arise before the Final Report is sent that require an additional charge, I will let you know. Should you decide to not continue to the Final Report, I will send you a complete refund.

Revisions

After sending the Final Report, any revisions from changes in the data require an additional charge.

SAMPLE LIST

Description	Last Year	Previous Year	2 Years Ago
Owner's Compensation
Dave's W-2 Salary Dave's Payroll Taxes Health & Key Man Insurance Car Allowance	$65,500 $10,584 $9,650 $6,000	$63,575 $13,850 $9,150 $6,000	$58,000 $12,950 $10,000 $6,000
Discretionary Expenses
Convention Expenses Jeff's Off time Year End Board Meeting	$4,500 $0 $3,000	$2,560 $3,050 $3,000	$0 $0 $3,000
One time Events
IRS Refund from 1999 (Income) Loss on sale of equipment Theft of materials - net of insurance	($2,300) $0 $2,500	$0 $3,850 $$0	$0 $1,800 $0

Compensation

List the owner's salary and fringe benefit costs that are recorded in the financial statements for the three years of financial statements that you provided.

If there are multiple owners or multiple family members of the owner who actively participate in the business and who are compensated at arm's length market rates, the only amounts needed are the salary and fringe costs for the highest paid owner.

Discretionary Expenses

Privately owned businesses often minimize reported profits through discretionary expenses.

"Discretionary expenses are paid to shareholder/officers to compensate for the risk associated with private ownership and the lack of liquidity associated with privately held businesses.

In addition, the profits of closely held businesses are usually deemed the result of dedicated work habits of the shareholder/officers and employees rather than a return on invested capital. As a result, it is frequently appropriate to pay discretionary expenses to those to whom the profits are mostly attributable and to pay lesser dividends on shareholder values.

There are many expenses, legitimate for tax purposes, which might not be considered essential by arm's length absentee owners whose objectives are to maximize profits. Discretionary expenses might or might not be incurred if absentee investors owned the business."

Discretionary Expenses - Examples

• The excess of owner's compensation based on what the business can afford over comparable market salaries for the services performed might be a discretionary expense. If the owner paid himself $250,000 for salary, but could find "equivalent" management talent that could be hired for $150,000, then the $100,000 difference might be a discretionary expense.
• Rents paid to stockholders owning the business real estate outside the business that are higher than a fair market value rent are discretionary expenses.
• Uncle Luke was a partner in the business 20 years ago. He passed away. Aunt Tillie owns 35% of the stock and comes up from Florida around the holidays each year for a two hour annual Board Meeting. While her advice and vote may be entered into the corporate minutes each year, it is likely that the travel expense and $10,000 director's fee that she collects is a discretionary expense.
• An annual bonus is paid to the employees each and every year. The amount is decided at the sole discretion of management. However, even with this management discretion, it is likely that the employees consider this bonus as part of their overall compensation based on the repetitive nature of the bonus. This is NOT a discretionary expense for valuation purposes.

One test for a discretionary expense is whether an absentee owner without any family in the business would likely pay the expense.

List what you consider your discretionary expenses for the last three years. We will go over these on the phone and make appropriate adjustments if any items should not be on this list or any items are overlooked.

One Time Events: Expenses and Income

Many businesses experience one time expenses or income that should be adjusted out of the financial data. This is called "normalizing" the data. The general test for whether an item is a one-time event is whether it should be planned to happen again the following year.

One Time Events: Examples

• A fire loss in a year is generally a one-time expense. If it is covered by income from an insurance settlement, both events would be considered as one-time events, albeit, they might come out close to offsetting each other in the reported financial results.
• A one-time write down of the inventory value might be a one-time event if it is not repeated every year.
• A plant closing, a significant warranty job - way out of the ordinary course of business or a large single sales contract - again, way out of the ordinary course of business, might be one-time events.
• Some businesses are job shop in nature in that there may be large jobs in any one year that are not repeated -- however, they are followed by other non-repeating jobs in the following years. These would NOT be one-time events

List your one-time events for the last three years.

Pro Forma

Once I have your list, I will prepare pro forma income statements for the last three years. Pro forma simply means a statement that has been adjusted to reflect certain changes.