1. business and industrial

BUSINESS VALUATION REPORT
SUBJECT BUSINESS: COMMERCIAL PRINTER
SAMPLE REPORT WITH IDENTIFYING DATA DELETED
Prepared
By
DONALD SONNEMAN, ASA
ABLEPLUS VALUATIONS
9715 Lorraine Way, #203
Santee, CA., 92071
Phone: (619)-334-3105
Fax: (619)-374-2358
AblePlus Valuations
BUSINESS VALUATION SAMPLE REPORT
WITH IDENTIFYING DATA DELETED
Notes to Reader:
Throughout this report, the company name is replaced with “X Printing Corporation.” to protect
confidentiality. Address and location and competitor names are also deleted.
This report was selected as a sample because it demonstrates competence with a moderate complexity.
Other business valuation assignments can be substantially more complex.
This sample report also demonstrates capability to research industries efficiently. Any expertise with this
specific industry was developed strictly within a four week period of preparing this report.
The industry trends section was written several years ago. Therefore comments about industry trends will
not fit well with current reality, even though they accurately reflected this analyst’s viewpoints at that time.
The original report had tables that prepared in grayscale. They have been replaced with color graphics
more consistent with current technology and my current capability.
The address and phone information for AblePlus Valuations has been updated to reflect current information.
Donald Sonneman, ASA
AblePlus Valuations
9715 Lorraine Way, #203, Santee, CA 92071
Phone: (619)-334-3105 E-Mail: ds@companyvalu.com
(Date Deleted)
Mr. (Name Deleted)
President
X Printer Corporation
(Company Address Deleted)
RE:
VALUATION OF 100% CONTROLLING INTERESTS IN (COMPANY NAME DELETED)
Dear Mr. (Name Deleted):
I have been asked by you to give my opinion of the fair market value of the above referenced interest in
(Company Name Deleted):
Fair Market Value is defined as the amount at which the business interest would change hands between a
willing buyer and a willing seller when neither is acting under compulsion and when both have reasonable
knowledge of the relevant facts.
The Fair Market Value of the 100% Controlling interest in the Subject Company, as the valuation date is as
follows:
Fair Market Value of Business Equity
$1,980,000
Fair Market Value of Non-Operating Assets
(Loans to Related Parties)
Fair Market Value of Equity
(Business and Non-Operating Equity Combined)
($-0-)
$1,980,000
The report that follows describes the facts and reasoning upon which my opinion is based. My estimate of
value is subject to the attached Certification and Assumptions and Limiting Conditions.
Respectfully submitted,
Donald Sonneman, ASA
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Table of Contents
Letter of Transmittal ………………………………………………………………………………………………… 1
Table of Contents …………………………………………………………………...……………………………........2
Valuation Estimate and Reconciliation ………………………………...……………………………………….........3
Assumptions and Limiting Conditions and Certification ………………………………….......................................4
Valuation Introduction and Concepts.......................................................................................................................6
Description of the Subject Business.…………………………………………………………………………………... 8
Industry Trends…………………………………………………………………………………………………………...9
Subject Business Strengths and Weaknesses.……..…….………………………………………………………...12
Financial Condition of Subject Company……………………………………………………………………………..15
Overview of Valuation Approaches Used……………………………..………………….......................................18
Market Approaches:
Multiples of Seller’s Discretionary Earnings…………………………………………………………...………..19
Multiples of Revenues………………………………………………………………..…………………................21
Income Approaches:
Capitalization of Single Period Earnings………………………………………………………………..……….23
Excess Earnings Analysis………………………………………………………………………………………...26
Discussion of Normalizing Adjustments.…………………………………..……………………………….................28
Normalized Financial Statements.....………………………………………………………………………………….. 29
Addenda: Working Capital Analysis, Ratio Analysis, Qualifications of Appraiser…………………………………31
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SUMMARY OF VALUE INDICATORS FOR BUSINESS EQUITY VALUE
MARKET COMPARABLE APPROACHES (BASED ON SALE TRANSACTIONS)
FAIR MARKET VALUE
OF BUSINESS EQUITY
MARKET BASED APPROACHES
MULTIPLE OF SELLER’S DISCRETIONARY CASH FLOW
$1,983,000
MULTIPLE OF REVENUE
$2,220,000
INCOME BASED APPROACHES
CAPITALIZATION OF SINGLE PERIOD INCOME
$1,569,000
EXCESS EARNINGS ANALYSIS
$1,904,000
RECONCILIATION AND VALUATION ESTIMATE
Reconciliation
Greatest emphasis is placed on the market based approaches which consider actual sales transactions.
Least emphasis is placed on the Excess earnings analysis, which is considered least reliable among all
available methods.
Valuation Conclusion
Based on consideration of the approaches above, the Fair Market Value of the Business Equity for the
Subject Company as of the valuation date is as follows:
$1,980,000
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ASSUMPTIONS AND LIMITING CONDITIONS AND CERTIFICATION
This appraisal report does not purport to be an all-inclusive list of all of the considerations undertaken in order
to arrive at the opinion of value.
This report is an appraisal report designed to give a conclusion of value. It is not an accounting report and it
should not be relied on to disclose hidden assets or to verify financial reporting. It is an opinion of value of the
specific assets and liabilities considered by AblePlus Valuations.
The purpose of this appraisal report is to provide a valuation for information for a proposed sale transaction.
For valuation purposes, AblePlus Valuations has reviewed financial information and other documents
provided to us by (Name Deleted) of the (Company Name Deleted). The financial information and documents
are believed to be reliable, but no responsibility is assumed for the accuracy of the documents and financial
information.
This Appraisal Report was prepared for the exclusive use of (Name Deleted) of the (Company Name
Deleted). No reproduction, publication, distribution, or other use of this appraisal report for other than its
stated purpose is authorized without prior consent of AblePlus Valuations and the undersigned appraiser.
This appraiser assumes no responsibility for matters legal in character; ownership is assumed to be valid and
marketable.
All facts and data set forth in this report are true and accurate to the best of the appraiser's knowledge and
belief. No matters affecting the conclusions have been knowingly withheld or omitted.
The fee charged for this appraisal report is not contingent upon the value conclusion.
This appraisal and its conclusions are subject to review upon the presentation of data which may have been
undisclosed or not available at this writing.
AblePlus Valuations and its employees and subcontractors have no present or contemplated future interest in
the subject business valued in this appraisal report. I have no interest in or bias with respect to the Subject
Company or the owners thereof.
The undersigned appraiser is fully qualified to value businesses based on both experience and educational
background. The detailed business valuation experience is reflected in the appraiser qualifications at the end
of this report.
The undersigned appraiser’s relevant educational background consists of the following: (1) 3 Basic courses
through ASA and IBA, covering valuation of small and mid-sized businesses (2) Specialty courses through
ASA, IBBA, IBA and Valuation Institute covering: Merger & Acquisition Valuations, Merger & Acquisition
Financing, Technology Company Valuation, Valuing Intangibles, Discounted Cash Flow and Discount Rates,
Control & Marketability. (3) Taxation Courses – 54 continuing education courses taken while working as tax
preparer. (4) Public utility accounting and valuation course, (5) Accounting, Cost Accounting, Economics I &
Economics II, Engineering Economics (Same as Finance), Finance (graduate level).
The undersigned appraiser further maintains my business valuations qualifications by subscribing and
reviewing key business valuation periodicals. These periodicals provide information on changes in
methodology of business valuation.
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ASSUMPTIONS AND LIMITING CONDITIONS AND CERTIFICATION
(CONTINUED)
The undersigned appraiser is also currently certified under the continuing education programs of the
American Society of Appraisers for the Real Property/Urban designation which he holds.
The undersigned appraiser has prepared the valuation report in a manner intended to be consistent with the
Uniform Standards of Professional Appraisal Practice (USPAP), the Principles of Appraisal Practice and
Code of Ethics of the America Society of Appraisers.
______________________
Donald Sonneman, ASA
SCREA AG003493
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VALUATION INTRODUCTION AND CONCEPTS
SUBJECT OF VALUATION
A 100% Controlling Interest in (Company Name Deleted).
DATE OF VALUE
The Valuation date is as of (Valuation Date Deleted).
PURPOSE OF THE REPORT
The purpose of this appraisal report is to provide a valuation for information for a proposed sale transaction.
USE OF THE REPORT
This valuation report is intended to provide information in conjunction with a proposed sale transaction.
The appraiser is not required to give further consultation, testimony, or make a court appearance with
reference to the subject interest being valued, unless separate contractual arrangements have been
made prior to such consultation, testimony or court appearance.
USER
This Appraisal Report was prepared for the exclusive use of (Name Deleted) of the (Company Name
Deleted). No reproduction, publication, distribution, or other use of this appraisal report for other than its
stated purpose is authorized without prior consent of AblePlus Valuations and the undersigned appraiser.
BASIS OF VALUE: FAIR MARKET VALUE
As used in this report, "fair market value" is defined as outlined in Treasury Regulations 25.2512-1 (gift tax),
20.231-1(b) (estate tax) and S1.170A-1 (c)(2) (charitable contributions). The definition is as follows: Fair
Market Value is defined as the price at which the property would change hands between a willing buyer and a
willing seller when the former is not under any compulsion to sell, both parties having a reasonable knowledge
of the facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to
be able, as well as willing, to trade and to be well informed about the property concerning the market for such
property.
Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller
to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are
well-informed or well-advised, and each is acting in what he/she considers to be in their own best interest; (3)
a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in United
States dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the
normal consideration for the property sold unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale. FAIR MARKET VALUE - VALUATION APPROACH
Revenue Ruling 59-60 suggests that all relevant factors affecting fair market value should be considered in
the valuation of closely-held business interests. “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.
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VALUATION INTRODUCTION AND CONCEPTS
Revenue Ruling 59-60 Factors (Continued):
(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 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 overthe counter."
Each of these factors is considered in the valuation process.
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DESCRIPTION OF THE SUBJECT BUSINESS
Type of Business
X Printer Corporation does high quality lithography printing services using color separations. To produce their
work, they use 5 and 6 color sheet-fed presses, a comprehensive electronic prepress and a full-service
bindery. Their range of products include catalogs, brochures, calendars, annual reports and other items
requiring a high degree of quality control.
Organizational Structure
This company is structured as a California based C Corporation. The officers and their holdings of company
stock are as follows:
(Officers Names and % Ownership Deleted)
The company employs approximately (Number Deleted) full time staff including a sales staff of (Number
Deleted).
Types of Facilities - The Subject Company occupies two adjacent buildings which are a mix of office space
and industrial space. The premises is on a 25 year lease with approximately 20 years remaining. The lease
is between related parties. The annual lease amount is equal to the annual debt service on the bank loan on
the property. The lease rate is substantially higher than market rents for a similar office and
industrial/warehouse space. Alternative space is readily available in the surrounding area. The facilities are
38 years old and leave little room for further expansion.
Locational Characteristics:
The company facilities are located in , a centrally located commercial neighborhood with good access to large
concentration of small business, retailers and professional offices. The facility has its own off-street parking.
Competition - The Subject Company is ranked number (Number Deleted) among the 25 largest printing firms
within the County based on number of employees. The printers below are well located to serve the same
trade areas and have somewhat similar range of services:
•
(Competitor Name and Address Deleted) - Revenues of 21.6 million dollars annually and a staff of
190. The location is inferior for direct access by customers, but the facilities are in a recently
developed industrial park located in the (Geographic Area Deleted).
•
(Competitor Name and Address Deleted) - Revenues of 16 million dollars annually and a staff of 110.
The location is superior for direct access by customers.
•
(Competitor Name and Address Deleted) - Revenues of 11 million dollars annually and a staff of 92.
The location is inferior for direct customer access and facility age is similar.
•
(Competitor Name and Address Deleted) - Revenues of 2.7 million dollars annually and a staff of 33.
The location is closer to downtown customers for direct customer access and the facility age is
similar.
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INDUSTRY TRENDS
The data provided here is a summary of data from the National Association of Printers and Lithographers
(NAPL), the Digital Printing and Imaging Association (DPI) and other sources.
Type of work
The printing industry is called upon to handle a spectrum of work that falls between the following extremes:
(1) Work requiring high quality of color control and large production runs - i.e. catalogs, brochures, annual
reports
(2) Work requiring less quality of color control and shorter production runs (i.e. 2,000 copies or less).
The machinery and equipment investment is substantially higher for the first category of work. Conklin Litho
falls primarily in this category.
Technology Trends
Changes in technology over the past 5 to 10 years, require a close look at obsolescence of equipment for any
printer that has been in business for a decade or more. Newer methods are saving time and effort and
reducing potential for error in each stage of the printing process.
C
Digital Color - Digital color systems are now in over 3,000 locations - This represent very rapid expansion
of a relatively new technology. This process does not provide the same quality as lithography. However,
for customers that can accept lesser quality, the major advantages are in price, speed and paper
handling capability. The process is well suited to short runs (2,000 copies or less).
•
Type creation & Preparation of Copy and Art - Desktop publishing using floppy or Syquest disks.
Eventually internet data transmission.
•
Printing and Postpress operations - computer to plate systems, and plates that are less light
sensitive.
•
Mechanicals - Being replaced by digital printing. Provides less opportunity for customer to see product in
preliminary stages.
•
Waterless ink - Less chemistry problems.
•
Faster drying inks
Revenue Trends
National Trends - Printing company revenues nationally are increasing at about 4% over 1996 (not adjusted
for inflation), after increases of 8.5% in 1994, 8.7% in 1995 and 4.7% in 1996. The industry had its last
decrease in this figure in 1991.
Regional Trends - The western region revenues increased by 5.3% in 1996 and are projected to increase by
6.7% in 1997
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INDUSTRY TRENDS (CONTINUED)
Revenue Trends (Continued)
NAPL Forecast - Generally strong revenue projections for the future from printers - The National Association
of Printing and Lithography surveys it’s membership. 49% of the respondents expect growth of sales
revenues in excess of 5% in and another 21% expect growth in excess of 10%, while 31% expect a
decrease in revenues.
WEFA Forecast - The WEFA Industrial Monitor 1997 projects a 5% to 6% annual revenue growth over the
next 10 years for the printing and publishing industry (which includes book publishers).
Economic limitations on future revenue growth - Both business spending and consumer spending is a record
levels which do not appear sustainable. Federal Reserve may elect to raise interest rates as a response
(note to reader: this is written from the perspective available as of the 04/20/97 valuation date). Growth in
Gross Domestic Product growth will began to slow and return to normal levels in the latter part of 1997 and
early 1998.
Technological Limitations on future revenue growth - Technology may erode and certainly will change the
role of printers. Many associations are producing newsletters using in house desktop publishing where
previously printers were used. Some catalogs and manuals are being replaced with CDs using CD-ROM
technology rather than the printed page. Some vendors and associations are using internet web pages to
replace much of their previously printed communication. Specific segments affected include real estate
agencies, association, catalog houses. Additionally, the food/grocery industry downsizing the number of
pages printed for their advertising campaigns. The intensity of these trends is difficult to foresee, but is
considered more of a concern over the longer term, i.e. 10 years or more in the future.
Pricing Trends
Price index continuing upward - This reflects the prices commercial printers are able to charge for services.
The price index increased by 2.8% in 1996, after increases of 1.3% for 1994 and 5.8% for 1995. The lower
increase in 1996 probably reflects a normal reaction after an unusually high increase of 5.8% the previous
year. During the recessionary years of 1991 and 1992 increases were 0.8 and 1.6%
Paper Costs
Paper prices fell by 1.9% in 1996 after doubling from 1993 to 1995, in spite of an improved economy. They
appear to be stable for the foreseeable future.
Operating Costs
Better control of operating costs - A 1.4% increase in operating costs for 1996 following a 7.7% increase in
1995.
Wages, Fringe Benefits and Overhead
Modest wage, fringe benefit and overhead increases - Each cost category had increases ranging between
2.8% and 3.0% for 1996.
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INDUSTRY TRENDS (CONTINUED)
Demand Indicators
Total spending for print advertisements - Up by 8.7% in 1994 and 8.0% in 1995.
Gross Domestic Product adjusted for inflation - Up by 3.5% in 1994, 2.1% in 1995 and 2.5% in 1996 (note:
during 1991 this figure was negative 1.0%).
Capacity utilization continuing and upward trend - 4th quarter 96 capacity utilization was at 85.7% up from
84.9% from the same quarter in 1995.
Profitability
Our data on profitability trends covers 1991 - 1995. The 1995 profit ratio is in the middle of the range between
low profits in the early 1990's and a spike in profits in 1996.
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BUSINESS STRENGTHS – SUBJECT COMPANY
In the evaluation of the subject business, there were several strengths of the business that a potential buyer
would consider in estimating an appropriate purchase price for the business. They are as follows:
Well established
The company has a 25 year history and was established and operated under the same ownership for
their entire history.
Management and Staffing Depth (Strengths)
The ownership and key management and staffing of the company has been very stable and is highly
experienced. Two of the officers of the company (Names Deleted) have been in place for 15 years and
Ted Higgins has been with the company for over 20 years. Key managers and staff have are also highly
experienced. They include the following:
President/CEO - Over 6 years as President/CEO, preceded by 12 years in a sales position in the
company and 6 months in production. However, the company is also rich in other experienced staff.
Sales Staff - Highest producing salesperson has 12 years in sales with the company. Another member of
the sales Staff has been with the company for over 20 years.
Accountant - With the company for 19 years.
Production Manager - With the company for over 16 years.
Lead Pressman - With the company for 7 years.
Prepress Foreman – With the company for 11 years.
Estimating - With the company for 16 years.
Cross trained production staff
This allows the most cost effective use of staff during both peak periods and slow periods without
requiring constant hiring, training and laying off of staff.
A loyal customer base
Over 95% of the company’s business is from repeat customers. However, the addition of two new sales
staff should also ensure a growing segment of new customers.
Diverse customer base
The company has a very diverse customer base which makes it less vulnerable to changes in an
individual client relationship.
Location
The company is centrally located in an area that gives good access to heavy concentrations of
companies within all areas of the county.
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BUSINESS STRENGTHS – SUBJECT COMPANY
History of Investment in new technology and more efficient practices
In the printing industry, obsolescence is a particularly major concern for companies that have been in
place for twenty years or more. In the early 1990's the company was among the first of the city’s large
printers to invest in the following: (1) A color separator so that the profits on this function can be kept inhouse rather than outsourcing this work and (2) Electronic Prepress Equipment which reduces the extent
of manual labor in that process, (3) Training of clients in preparation of files for the electronic prepress
process.
Continuing investment in improved efficiency
The most recent expenditures to improve efficiency include (1) Addition of a dryer and an aqueous coater
to the 40" press to minimize drying time. This minimizes downtime for pressman and reduces storage
requirements for jobs resulting in a 20% to 30% reduction in total time for most jobs., (2) Modifications to
the bindery and rebuilding of folders, (3)Purchase of an upgraded computerized estimating system which
speeds the estimating time by 300% and automatically selects the most appropriate press for each job.
Future investments will include the addition of a 2 color press for to handle pages with text only which do
not require for or 6 color work.
Steadily growing Revenues and profitability for the company
For the five fiscal years analyzed, the company experienced only one downturn in revenues during fiscal
year 2 during the recession. Overall, the compound annual growth of revenues has been 4.8% during a
period where a minimum of 3 years were during recessionary conditions and major shakeouts for the
printing industry in (City Name Deleted).
Positive Long Term Economic Trends for California and the County
(Deleted paragraph describing retail sales, and the health of the retail and industrial markets within the
county)
Revenues Place the Firm among the Top 20 Printing Firms in (City Name Deleted)
During the last four years of the period analyzed revenues have exceeded 5 million dollars and are
expected to exceed 6 million dollars for next year.
Good cost control in several areas of operating expenses
The company’s expenditures are below average for factory expense, materials and administrative expenses.
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BUSINESS WEAKNESSES - SUBJECT COMPANY
The strengths of the business substantially outweigh the weaknesses. The weaknesses are as follows:
Current facilities limit growth
Because of the limitation of the existing facilities, it will be difficult to increase the volume of the printing work
by more than 25% above current levels. A move to a new location is anticipated no earlier than 5 years in the
future. This restricts average growth to under 5% annually over the next 5 years. In an environment where
(City Name Deleted) is recovering from recession this may serve as an artificial limit on growth, particularly
four to five years from now.
Rent paid for the existing structure exceeds market rent
This is a related party lease. The terms of the lease are simply to pay two mortgage loans on the two
facilities which are owned by related parties. One mortgage loan is a fixed payment and the other is
variable interest. The current payments total $10,762/mo. or $0.72 per square foot. With a part of the
payment being a variable interest loan, there is a risk of a maximum increase of up to $1,000 or 10%
over time in smaller annual increments. Fair market rent for the current facility is in the $0.55 to $0.60
per square foot range. A move to a more suitable industrial park location would lower rent to $0.60 to
$0.70 per square foot for a larger industrial facility with a higher percentage of administrative and
production office space.
Additional working capital is needed
An estimated $159,000 in additional working capital is needed to be in the normal range for the level of
revenues of the Subject Company.
Factory payroll cost is well above average
The management has made significant improvements in this area by improving technology (which
reduces drying time and other down time) and by cross training staff to provide greater flexibility in using
them for multiple tasks. The remaining difference may be attributable to higher than average wages paid
to production staff, because of greater training investment and a desire to minimize turnover.
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FINANCIAL CONDITION – SUBJECT COMPANY
In examining the financial condition of the Subject Company financial ratio data from the following sources
were considered: (1) Printing Industries of America, (3) Robert Morris & Associates (RMA), (4) Dun &
Bradstreet industry Norms and Key Business Ratios, (5) Financial Research Associates, (6) Tax and
Financial Statement Benchmarks. Detailed spreadsheets of the data are in the addenda.
INCOME STATEMENT ANALYSIS
Profitability
Historical Data
During the five year period analyzed, the company’s pre-tax profitability as a percentage of gross revenues
was as follows:
Actual
Fiscal Year 1
0.7%
Fiscal Year 2
2.7%
Fiscal Year 3
2.0%
Fiscal Year 4
0.9%
Fiscal Year 5
3.0%
Normal before tax profits
Before tax profits are somewhat volatile, but partially reflects (1) Movement from a recessionary economy
to recovery and (2) expenditures for technological change. Median before tax profits for printing firms in
similar size range according to multiple sources appears to be in the 3.0% to 5.0% range, while profit
leaders have a median profit of 9.0%. Current before tax profit is reasonably consistent with industry
norms at 3.0%. During the next fiscal year, the company will have paid off a major equipment loan which
will generate an additional 2.6% of before tax profits. Additionally, the firm is paying above fair market rent
in a related party lease of their facilities. Fair market rent would add an additional 0.4% of before tax
profits. This would indicate a 6.0% profit which is approximately double the median, but below the
median for the profit leaders in the same size range based on revenues. If they elect to enhance their
facility with a two color printer for text only, that expenditure will reduce profitability to the 4.0% to 5.0%
range which is still in the normal range.
Gross Profit slightly below median levels
Gross Profit can be defined and analyzed in two different ways: (1) cost of good sold is labor and
materials only and (2) cost of goods sold is labor, materials, direct supplies, outside processing and
factory expense. Dun & Bradstreet and Financial Research Associates use the first definition in their ratio
analysis and RMA and Printing Industries Associates favor the second definition. The company appears
to be in the normal range using the first definition, but appears to have a slightly lower gross profit than
the median using the more precise second definition of cost of goods sold. RMA reflects a 30% median
gross profit for similar size printing companies, while Printing Industries Associates has 24.5% for all
similar size companies and 27.5% for profit leaders. At 23.3% the Subject Company is slightly low. This
is apparently primarily driven by the factory payroll which is substantial above the median even after
substantial increases in efficiency over previous years. At the same time non-labor costs are kept below
the median.
Return on Assets
This is an indicator of efficiency in use of assets to generate profit. Return on Assets before taxes appears to
be in the normal range at 7.8%. Medians reported from several sources range from 5.7% to 8.6% with profit
leaders generating a minimum of 29% for this indicator.
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FINANCIAL CONDITION – SUBJECT COMPANY (CONTINUED)
Sales/Total Assets
An indicator of efficiency of the firm. This indicator appears to be significantly above average at 2.59 vs.
median figures from several sources in the 1.7 to 2.1 range.
Salary of Officers
This component is within the normal range. There appears to be a wide variation between medians reported
from all sources, ranging for 3.6% to 7.0% and 8.4% for the most profitable. The Subject Company pays
4.5% of revenues to officers, which is within this wide range.
Factory Payroll
This cost component is higher than normal. The available data reflects a median of 25.51% of revenues for
factory payroll for all similar size printers and 22.39% for profit leaders. The Subject Company is at
substantially higher at 28.72% of gross revenues. The Subject Company has been reducing this component
partially by reconfiguring machinery and equipment to reduce drying time and other downtime. The previous
years figure was 32.54%. An offsetting benefit is that the company has a low staff turnover rate, perhaps
consistent with company philosophy to pay higher wages to have a stable production work force.
Factory Expense
This cost component is slightly lower than normal reflecting good cost control. The available data reflects a
median of 14.34% of revenues for factory payroll for all similar size printers and 13.22% for profit leaders. The
Subject Company is at 13.52% of gross revenues. The Subject Company has been reducing this component
partially by reconfiguring machinery and equipment to reduce drying time and other downtime. The previous
years figure was 32.54%.
Materials
This cost component is also substantially lower than normal reflecting good cost control. The available data
reflects a median of 35.69% of revenues for factory payroll for all similar size printers and 36.78% for profit
leaders. The Subject Company is at 34.82% of gross revenues. The previous years figure was 32.77%.
Advertising
The Subject Company does substantially less advertising than industry norms. Median for all similar size
companies is 0.46% while profit leader expend 0.30% of revenues. The Subject Company is expending only
0.16% of revenues. However, this may be compensated for by strong customer retention rates and above
average selling expense for the company sales force.
Selling Expense
Selling expenses are slightly above the median for similar size companies, but not significantly. The company
is in a transition phase of carefully redefining its customer base to focus on categories of customers that
provide the most profitable types of printing jobs. The median cost for all similar size companies is 9.89%
while profit leaders expend 8.86% of revenues. The Subject Company expending 10.42% of revenues.
Administrative Expenses
This area reflects increasing good cost control. The current expenditure level is consistent with profit leaders.
Median cost for this component for similar size companies is 10.28% and 9.07% for profit leaders. The
Subject Company’s expenditures are at 8.84%.
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FINANCIAL CONDITION – SUBJECT COMPANY (CONTINUED)
BALANCE SHEET ANALYSIS
Quick Ratio
Current liabilities are adequately covered by current assets. At 1.47 the company’s quick ratio appears to be
consistent with industry medians from four different data sources, but below profit leaders at 1.76%
Sales/Working Capital
This indicator is the more important measure of adequate working capital. Based on review of industry
medians and ranges, this indicator should normally be between 8.0 and 15.0. The company’s ratio as of
04/30/97 is 25.44. This indicates a substantial working capital deficit of $159,000.
Sales/Fixed Asset
This is an efficiency measure. It measures how efficiently fixed assets are being used to generate revenues.
The company appears to be generating a low level of sales relative to their investment in fixed assets. Too
high a ratio could reflect inadequate investment in changing technology. Too low a ratio, could reflect
deficient marketing effort. The company has a ratio of 4.91 compared to a median from Printing Industries of
America of 6.89 for similar size companies and 7.13 for profit leaders and 5.3 from RMA for similar size
companies. This ratio has never been higher than 5.0 during the last four years of this analysis.
Sales/Receivables
Efficiency of collection is measured here. The company’s ratio of 7.45 appears to be somewhat better than
the figures reported by Printing Industries Association for both similar size companies (7.18) and profit leaders
(7.07).
Average Collection Period
Again this is a measure of collection efficiency. There is a wide variation in median figures from data sources.
The company’s average collection period of 49 days falls within these figures and is slightly better than the
figures reported by Printing Industries Association for both similar size companies (51 days) and profit leaders
(52 days).
17
AblePlus Valuations
VALUATION APPROACHES OVERVIEW – COMMERCIAL PRINTING COMPANIES
Market Approach: Multiple of Seller’s Discretionary Cash Flow (SDCF)
Where it is possible to obtain the specifics of completed sale transactions, that is the best source of
information for identifying how commercial printing firms are sold. That information was not directly available.
It was feasible to find data several sales of printing companies with revenues from 1 million to 7 million in
BIZCOMPS. The seller’s discretionary cash flow method is most useful for valuations of company’s with 20
employees or less, but is also used for somewhat larger companies.
Market Approach: Multiple of Revenue
Where it is possible to obtain the specifics of completed sale transactions, that is the best source of
information for identifying how commercial printing firms are sold. It was feasible to find data several sales of
printing companies with revenues from 1 million to 7 million in BIZCOMPS. The sale price for many sale
transactions can be analyzed on a multiple of revenue basis. While this method does not explicitly consider
earning or cash flow, the revenue multiple selected will often factor this in. This method is particularly
convenient to use, because it does not require explicit information about cash flow or earnings. This is
particularly convenient where: (1) businesses may be performing below normal, (2) may need substantial
restructuring or (3) it is difficult to develop a reliable analysis of cash flow or earnings.
Income Approach: Capitalization of Single Period Earnings
The method involves the division of a single year’s income stream by a capitalization rate to estimate value. It
is only reliable where the Subject Company has a stable revenue base, stable income and faces moderate
long term growth (long term growth is over a 20 to 30 year period). The income stream capitalized was
normalized pre-tax earnings. This method of calculation is described later in this report.
Income Approach: Excess Earnings Method
This method applies best to small businesses that are not complex. The subject business has 60 employees,
is in a single location and does printing related business only. The excess earnings method, which is
described in greater detail later in this report, is useful for estimating goodwill and other intangibles.
Monthly Net Revenue Multipliers (Rule of Thumb)
This rule of thumb method is cited in Glen Desmond’s Handbook of Small Business Formulas. A rule of thumb
method is only used where other methods are not available. Since other methods are available, this method is
not presented in the analysis. This rule of thumb was only used as a check for reasonableness for the other
methods used.
Income Stream Analyzed - How many years earnings or cash flow
Out of a five year history, a weighted average of the last 3 fiscal years of earnings is used. Greatest weight in
put on the current year and least on the earliest year. Acquisition experts differ in identifying which years of
cash flow to use. Some use the most recent year’s income only, others rely on recent trends. Little emphasis
is placed on earlier historical data in estimating the cash flow. The reasoning is that a local competitive
environment can and does change rapidly and earlier years do not properly reflect current market conditions.
For the same reasons, i.e. volatility of market conditions, experts avoid valuing the business based on future
potential and avoid use of discounted cash flow. This method (of relying only on recent history rather than on
potential improved revenues and profit), prevents the buyer from paying for potential that the seller has failed
to realize, and that the buyer must create through additional effort and additional investment. Placing greater
emphasis on the more recent years, makes sense. Both revenue and profitability for the Subject Company
have experienced some volatility over the past five years and overall market conditions have changed.
Additionally, the efficiency of the production process and the cost of the factory payroll component have
changed significantly in recent years.
18
AblePlus Valuations
VALUATION - MULTIPLE OF SELLER’S DISCRETIONARY EARNINGS
See the next page for a spreadsheet reflecting the details of this method.
Sales Data and Trends
When it is possible to obtain the specifics of completed sale transactions, that is the best source of information
for identifying how these firms are sold. This method can be used most precisely if good comparable sales of
similar companies are available. Several sales of printing firms with revenues in the 1 million to 7 million dollar
range in the BIZCOMPS data base. The sales data base is entirely asset sales (tangible and intangible
assets) where inventory, current assets and all liabilities are specifically excluded from the sale price.
Out of the ten sales, six had revenues in the $1.0 to $6.9 million range and four were grouped around
$600,000 in revenues. The focus for analysis was the six larger companies. The median multiple for the six
larger companies was approximately 3.5 with a range of 2.3 to 4.1. The median was used for the starting
point for the valuation estimate.
Preliminary Valuation Estimate
The median multiple of 3.5 for was adjusted downward based on positive and negative factors specific to the
company which are listed on the next page. The final estimated multiple of 2.97 was applied to our estimate
of seller’s discretionary earnings (cash flow) after normalization adjustments and the addition of interest
income, deduction of interest expense and add back of depreciation.
This develops a preliminary value of: $2,188,000 (rounded).
Adjustment for working capital less long term liabilities
The net of existing working capital of $228,401 less long term liabilities of $433,160 must be added to this
figure to estimate equity value.
Business Equity Fair Market Value:
$1,983,000 (rounded)
19
AblePlus Valuations
MULTIPLE OF SELLER'S DISCRETIONARY EARNINGS
ESTIMATE OF DISCRETIONARY CASH FLOW
NORMALIZED PRE-TAX EARNINGS
ADD BACK TYPICAL SINGLE OWNERS' COMPENSATION
(6.5% OF WEIGHTED AVG. REVENUES)
SUBTRACT INTEREST INCOME
$337,176 ROUNDED
$80,000
($238)
ADD BACK INTEREST EXPENSE
$88,372
ADD BACK NORMAL DEPRECIATION
$231,433
ADDITIONAL ANNUAL CAPITAL EXPENDITURES NEEDED
(BEYOND HISTORICAL LEVEL)
DISCRETIONARY CASH FLOW TO OWNER
$0
$736,743
DATA ON MULTIPLIER OF
SELLER'S DISCRETIONARY CASH FLOW (SDCF)
REVENUES (MILLIONS)
MULTIPLE OF SDCF
SDCF AS % OF REVENUES
SDCF OF SUBJECT BUSINESS
(AFTER CUSTOMER LOSSES)
13.3%
BIZCOMPS DATA
REVENUES $1 MILLION OR MORE
MEDIAN
LOW
HIGH
$2.54
$1.00
$6.90
3.5
2.3
4.1
14.9%
22.7%
19.5%
13.3%
10 SALES ANALYZED -SIC 2752
MEDIAN MULTIPLE
3.5 ROUNDED
UPWARD ADJUSTMENT FOR FOLLOWING FACTORS:
DOWNWARD ADJUSTMENT
-ESTABLISHED - 25 YEAR HISTORY
-EXCEPTIONALLY EXPERIENCED STAFF
-OVER 95% REPEAT CUSTOMERS
-CONTINUED INVESTMENT IN NEW TECHNOLOGY
-GOOD LOCATION FOR COUNTY WIDE SERVICE
-GOOD COST CONTROL
-EXISTING FACILITY LIMITS EXPANSION POTENTIAL
-WORKING CAPITAL IS BELOW AVERAGE
-PAYROLL COST IS ABOVE AVERAGE
-BELOW MEDIAN % SDCF
(ALREADY CONSIDERED IN MULTIPLE OF SDCF)
VALUATION ESTIMATE
MEDIAN MULTIPLE OF SELLER'S DISCRETIONARY
EARNINGS
OVERALL NET ADJUSTMENT FOR FACTORS ABOVE
DOWNWARD BY 15% OF MEDIAN
(CONSTRAINTS ON GROWTH & BELOW AVG. SDCF)
ESTIMATED MULTIPLE OF SELLER'S DISCRETIONARY
EARNINGS
VALUE OF FORMULA ASSETS (ROUNDED)
PLUS CURRENT NET WORKING CAPITAL
PLUS LIABILITIES ASSUMED (NEGATIVE FIGURE)
EQUITY VALUE OF BUSINESS
(EXCLUDING NON-OPERATING ASSETS)
20
3.50
(0.53)
2.97
$2,188,000
$228,401
($433,160)
$1,983,241
$1,983,000 ROUNDED
AblePlus Valuations
VALUATION - MULTIPLE OF REVENUES
See the next page for a spreadsheet reflecting the details of this method and the Bizcomps sale transaction
data.
Sales Data and Trends
When it is possible to obtain the specifics of completed sale transactions, that is the best source of information
for identifying how these firms are sold. This method can be used most precisely if good comparable sales of
similar companies are available. Several sales of printing firms with revenues in the 1 million to 7 million dollar
range in the BIZCOMPS data base. The sales data base is entirely asset sales (tangible and intangible
assets) where inventory, current assets and all liabilities are specifically excluded from the sale price.
Out of the ten sales, six had revenues in the $1.0 to $6.9 million range and four were grouped around
$600,000 in revenues. The focus for analysis was the six larger companies. The median multiple for the six
larger companies was approximately 0.65 with a range of 0.45 to 0.77. The median was used for the starting
point for the valuation estimate.
When using the median multiple as a starting point, it is important to understand that this revenue multiple is
paid assuming typical seller’s discretionary cash flow will be realized. If significantly below normal seller’s
discretionary cash flow is expected to be generated, then a buyer will adjust the revenue multiplier downward.
If significantly above normal seller’s discretionary cash flow is expected to be generated, then a buyer will
adjust the revenue multiplier upward.
Preliminary Valuation Estimate
The median multiple of 0.65 for was adjusted downward based on positive and negative factors specific to the
company which are listed on the next page. The final estimated multiple of 0.44 was applied to our estimate
of seller’s discretionary earnings (cash flow) after normalization adjustments and the addition of interest
income, deduction of interest expense and add back of depreciation.
This develops a preliminary value of: $2,425,000 (rounded).
Adjustment for working capital less long term liabilities
The net of existing working capital of $228,401 less long term liabilities of $433,160 must be added to this
figure to estimate equity value.
Business Equity Fair Market Value:
$2,220,000 (rounded)
21
AblePlus Valuations
MULTIPLE OF GROSS REVENUE
SUBJECT COMPANY: ANNUAL GROSS REVENUE
(NORMALIZED)
$5,521,000
REVENUES
MULTIPLE OF GROSS REVENUES
SDCF AS % OF REVENUES
SDCF OF SUBJECT BUSINESS
10 SALES ANALYZED -SIC 2752
MEDIAN MULTIPLE
BIZCOMPS DATA
REVENUES $1 MILLION OR MORE
MEDIAN
LOW
HIGH
$2.54
$1.00
$6.90
0.65
0.45
0.77
19.5%
14.9%
22.7%
13.3%
0.65
UPWARD ADJUSTMENT FOR FOLLOWING FACTORS:
DOWNWARD ADJUSTMENT
-ESTABLISHED - 25 YEAR HISTORY
-EXCEPTIONALLY EXPERIENCED STAFF
-OVER 95% REPEAT CUSTOMERS
-CONTINUED INVESTMENT IN NEW TECHNOLOGY
-GOOD LOCATION FOR COUNTY WIDE SERVICE
-GOOD COST CONTROL
-EXISTING FACILITY LIMITS EXPANSION POTENTIAL
-WORKING CAPITAL IS BELOW AVERAGE
-PAYROLL COST IS ABOVE AVERAGE
-BELOW MEDIAN % SDCF
VALUATION ESTIMATE
MEDIAN MULTIPLE OF REVENUES
0.65
OVERALL ADJUSTMENT FOR FACTORS ABOVE
(DOWNWARD BY 20% OF MEDIAN)
(0.21)
ESTIMATED MULTIPLE OF REVENUES
0.44
ESTIMATED NORMALIZED REVENUES
$5,521,000
VALUE OF FORMULA ASSETS (ROUNDED)
$2,425,000 ROUNDED
PLUS CURRENT NET WORKING CAPITAL
$228,401
PLUS LIABILITIES ASSUMED (NEGATIVE FIGURE IF APPLICABLE)
EQUITY VALUE OF BUSINESS
(EXCLUDING NON-OPERATING ASSETS)
($433,160)
$2,220,241
$2,220,000
SALE TRANSACTION DATA - BIZCOMPS ASSET SALES
SELLER'S
DISCRETIONARY
CASH FLOW
AS % OF
REVENUES
41.4%
29.8%
25.7%
20.8%
SALE
PRICE
$471,000
$355,000
$330,000
$338,000
$1,074,000
$829,000
$450,000
$2,900,000
$4,500,000
$2,000,000
SALE
DATE
11/30/1992
3/31/1994
1/1/1992
4/30/1995
GROSS
REVENUE
MULTIPLIER
0.78
0.56
0.52
0.56
SELLER'S
DISCRETIONARY
CASH
FLOW
MULTIPLIER
1.88
1.89
2.01
2.70
8/31/1989
6/30/1991
7/31/1994
1/1/1992
2/28/1993
5/31/1996
0.77
0.65
0.45
0.76
0.65
0.54
3.41
2.93
2.25
4.00
4.14
3.64
SIC
2752
2752
2752
2752
BUSINESS
TYPE
PRINTER - COMMERCIAL
PRINTER - COMMERCIAL
PRINTER - COMMERCIAL
PRINTER - COMMERCIAL
ANNUAL
GROSS
REVENUES
$606,000
$630,000
$637,000
$600,000
2752
2752
2752
2752
2752
2752
PRINTER - COMMERCIAL
PRINTING SHOP
PRINTER - COMMERCIAL
PRINTING SHOP
PRINTER - COMMERCIAL
PRINTER - COMMERCIAL
$1,386,000
$1,283,000
$1,000,000
$3,800,000
$6,900,000
$3,700,000
22.7%
22.1%
20.0%
19.1%
15.8%
14.9%
MEDIAN ALL
$1,141,500
21.4%
MEDIAN ALL
0.60
2.82
MEDIAN REVENUES
UNDER $1 MILLION
$618,000
27.8%
MEDIAN REVENUES
UNDER $1 MILLION
0.56
1.95
MEDIAN REVENUES
$1 MILLION OR MORE
$2,543,000
19.5%
MEDIAN REVENUES
$1 MILLION OR MORE
0.65
3.52
22
ROUNDED
AblePlus Valuations
VALUATION – CAPITALIZATION OF SINGLE PERIOD EARNINGS
The method involves the division of a single year’s income stream by a capitalization rate to estimate value.
This method is only reliable where the Subject Company has a reasonably stable revenue base, stable
income and faces moderate long term growth (long term growth is over a 20 to 30 year period). The income
stream capitalized was normalized pre-tax earnings. This method of calculation is described later in this
report.
The analysis is presented in the spreadsheet below and on the next two pages.
This capitalization process develops a preliminary value of: $1,728,000 (rounded).
Adjustment for shortage of working capital
The working capital shortage of $159,000 is subtracted from the preliminary value above to estimate equity
value.
Business Equity Fair Market Value:
$1,569,000 (rounded)
23
AblePlus Valuations
CAPITALIZATION OF SINGLE PERIOD EARNINGS - PAGE 1 OF 2
(INCOME APPROACH)
NORMALIZED PRE-TAX EARNINGS
$337,000
ESTIMATED CAPITALIZATION RATE
(BASED ON TWO ESTIMATES BELOW)
19.5%
PRELIMINARY VALUE OF BUSINESS (ROUNDED)
$1,728,000
ADD EXCESS ASSETS (I.E. EXCESS WORKING CAPITAL)
$0
SUBTRACT ASSET SHORTAGES (I.E. WORKING CAPITAL)
($159,000)
VALUE OF BUSINESS EQUITY
$1,569,000
ESTIMATE OF CAPITALIZATION RATE USING JAMES SCHILT FACTORS
RISK FREE RATE
6.0%
ESTIMATED RISK PREMIUM
13.5%
ESTIMATED CAPITALIZATION RATE
19.5%
JAMES SCHILT FACTORS
CATEGORY
1
RISK
PREMIUM
6% - 10%
DESCRIPTION
-ESTABLISHED BUSINESS
-STRONG TRADE POSITION
-WELL FINANCED
-DEPTH OF MANAGEMENT
-PAST STABLE EARNINGS
-PREDICATABLE FUTURE
2
-ESTABLISHED BUSINESS
-MORE COMPETITIVE INDUSTRY
-WELL FINANCED
-DEPTH OF MANAGEMENT
-PAST STABLE EARNINGS
-REASONABLY PREDICTABLE FUTURE
11 - 15%
3
-HIGHLY COMPETITIVE
-LITTLE CAPITAL REQUIRED TO ENTER
-NO MANAGEMENT DEPTH
-ELEMENT OF RISK IS HIGH
16% - 20%
4
-SMALL BUSINESSES DEPENDENT ON SKILLS
OF 1 OR 2 PEOPLE
-CYLICAL BUSINESSES
-FUTURE EARNINGS COULD DEVIATE MARKEDLY
FROM PAST
5
-SMALL 1 PERSON BUSINESSES, PERSONAL SERVICE
-TRANSFERABILITY OF INCOME TO NEW OWNER
IS QUESTIONABLE
24
21 - 25%
26% - 30%
AblePlus Valuations
CAPITALIZATION OF SINGLE PERIOD EARNINGS - PAGE 2 OF 2
(INCOME APPROACH)
SECOND ESTIMATE OF CAPITALIZATION RATE USING BUILD-UP APPROACH
RISK FREE RATE (LONG TERM TREASURIES)
6.3%
EQUITY RISK PREMIUM - STOCKS OVER BONDS
(FROM 1960 FORWARD ONLY)
RISK PREMIUM FOR SIZE (2% TO 6%)
4.0%
3.0%
COMPANY SPECIFIC RISK FACTORS
(FINANCIAL RISK, DIVERSIFICATION, MGMT. DEPTH)
NEXT YEAR'S NET CASH FLOW DISCOUNT RATE
1.0% VERY LOW RISK
14.3%
INCREMENT BY WHICH NET EARNINGS RATE
EXCEEDS NET CASH FLOW (1% TO 6%)
3.0%
NET AFTER TAX EARNINGS DISCOUNT RATE
17.3%
SUBTRACT GROWTH RATE
-5.0%
NET AFTER TAX EARNINGS CAP RATE FOR NEXT YEAR
12.3%
DIVIDE BY (1-TAX RATE):
60.0%
PRE-TAX EARNINGS CAP RATE FOR NEXT YEAR
20.5%
DIVIDE BY 1+ LONG TERM GROWTH RATE
105.0%
NET EARNINGS CAP RATE FOR CURRENT YEAR
19.5%
25
AblePlus Valuations
VALUATION – EXCESS EARNINGS
Intangible assets add value to a business in addition to the value of the underlying tangible assets. Goodwill is
one of several intangible assets that may exist in business enterprises. It is generally considered to exist as a
result of reputation, customer base, long establishment, or other intangible attributes that may have economic
value. Nearly, all businesses have goodwill; the issue is whether or not a particular business enterprise's
goodwill has economic value.
The conceptual basis of this method is that a business with intangible assets will generate two types of fair
market returns on assets: (1) A Fair Market Return on tangible assets and (2) A Fair Market Return on
intangible assets. For small businesses (like our Subject Company) these two components add up to the pretax income. For larger businesses net free cash flow may be more appropriate.
The method assumes that any excess return above the Fair Market Return on tangible assets can be used to
estimate the value of intangible assets. Then business equity is estimated by summing the net tangible assets
(tangible assets minus liabilities) plus the intangible assets.
This method has many critics and it is only typically applied to small businesses. Some practitioners rarely use
the excess earnings method, others give it lesser emphasis. Where other methods are available, there is
ample valuation literature that indicates it should be given lesser emphasis. The method was developed by
the Treasury department during the 1920s as a means of estimating goodwill for businesses that went
through forced closure as a result of prohibition.
Primary challenges to the method include the following: (1) Estimating the Fair Market Return (cap rates) for
intangible assets – Little available data supporting cap rate estimates, (2) Debate about which income stream
should be analyzed, (3) Debate about how to normalize the income stream, (4) Debate about the definition of
Net Tangible Assets.
The following page reflects our calculation in a spreadsheet format as well as the factors considered in
estimating the intangibles capitalization rate (using two different methods).
26
AblePlus Valuations
EXCESS EARNINGS ANALYSIS
NORMALIZED PRE-TAX EARNINGS (ROUNDED)
$337,000
NET TANGIBLE ASSETS
MULTIPLIED BY:
REASONABLE RATE OF RETURN OF TANGIBLE ASSETS
$1,191,000
10.0%
EARNINGS ON NET TANGIBLE ASSETS
$119,100
EXCESS EARNINGS
DIVIDED BY:
CAPITALIZATION RATE ON INTANGIBLE ASSETS
=
INDICATED VALUE OF INTANGIBLE ASSETS (ROUNDED)
PLUS
MARKET VALUE OF NET TANGIBLE ASSETS (ROUNDED)
PLUS
VALUE OF NON-OPERATING ASSETS
MINUS
ASSET SHORTAGES: WORKING CAPITAL DEFECIT
BUSINESS EQUITY VALUE
BY EXCESS EARNINGS METHOD
CAPITALIZATION RATE RANGE: 20 - 35%
MAJOR FACTORS AFFECTING
LEVEL OF INTANGIBLE ASSET VALUE
(1=BEST, 3=WORST)
LONGEVITY OF BUSINESS
EASE OF ENTRY
COMPETITION
COMPETITIVE EDGE FACILITIES
MANAGEMENT QUALITY
GROWTH PROSPECTS
GENERAL RISK OF THIS BUSINESS
HIGH FIXED COSTS
OVERALL RISK
$217,900
25.0%
$872,000
RATING
1
1
2
2
1
2
2
3
1.75
27
$872,000
$1,191,000
$0
($159,000)
ROUNDED
ESTIMATE OF INTANGIBLE CAPITALIZATION RATE
CAPITALIZATION RATE ESTIMATE
25.0%
$119,100
$1,904,000
AblePlus Valuations
NORMALIZATION ADJUSTMENTS TO FINANCIAL STATEMENTS
The income statement is normalized by review of each income and expense line item to ensure that they
reflect normal business operating expenses. Non-operational expenses or non-recurring costs that are not
expected in future years are adjusted out of the income statement. Other common adjustments include
owner/officer compensation, depreciation based on fair market value and rent between related parties.
The balance sheet is normalized by review of major asset and liability categories to ensure that they
accurately reflect the fair market value. Accounts receivable is analyzed to determine collectibility, loans to
related parties are examined in that light. Fixed assets are adjusted to reflect Fair Market Value rather than
book value. Working capital is examined relative to industry norms.
To normalize the balance sheet the following adjustments were made:
•
Fixed Assets - Economic rather than book depreciation was used. Major assets were depreciated
based on their estimated market value. The remaining assets are each several orders of magnitude
smaller dollar value individually than the major assets. The value of the remaining fixed assets was
estimated by using 40% of the acquisition price as a proxy for market value. No real estate is owned
by the company.
•
Receivables - No adjustments were needed on the audited statements. All receivables are
considered collectible (less the allowance for bad debts). No notes from shareholders were included.
All non-trade receivables were eliminated.
•
Payables - No adjustments were needed. The payables included a note payable to a shareholder.
This related party payable is fully documented with all terms specified and consistent with market
rates.
The balance sheet reflects a generally healthy company with the exception of a working capital deficit.
The normalized income statement and balance sheet follow this page.
28
AblePlus Valuations
NORMALIZED INCOME STATEMENT
FISCAL YR.
1
FISCAL YR.
2
% INCREASE OVER PRIOR YR.
HISTORICAL INCOME DATA
FISCAL YR.
FISCAL YR.
3
4
-4.6%
11.6%
FISCAL YR.
5
3.6%
9.6%
SALES
$4,809,204 100.0%
$5,367,522 100.0%
$5,121,780 100.0%
$5,303,942 100.0%
$5,811,465 100.0%
COST OF SALES
DIRECT MATERIALS
LABOR COSTS
DIRECT SUPPLIES
OUTSIDE PROCESSING
FACTORY EXPENSES
$1,267,155
$1,387,063
$121,211
$455,826
$384,536
26.3%
28.8%
2.5%
9.5%
8.0%
$1,434,045
$1,602,986
$138,152
$424,255
$482,582
26.7%
29.9%
2.6%
7.9%
9.0%
$1,278,011
$1,530,600
$164,340
$342,528
$451,326
25.0%
29.9%
3.2%
6.7%
8.8%
$1,239,335
$1,721,069
$192,166
$489,775
$457,822
23.4%
32.4%
3.6%
9.2%
8.6%
$1,569,005
$1,676,595
$230,762
$453,901
$528,600
27.0%
28.8%
4.0%
7.8%
9.1%
GROSS PROFIT
$1,193,413
24.8%
$1,285,502
23.9%
$1,354,975
26.5%
$1,203,775
22.7%
$1,352,602
23.3%
SELLING GENERAL & ADMINISTRATIVE EXPENSES
$1,159,257
24.1%
$1,138,090
21.2%
$1,254,358
24.5%
$1,153,703
21.8%
$1,176,273
20.2%
$34,156
0.7%
$147,412
2.7%
$100,617
2.0%
$50,072
0.9%
$176,329
3.0%
PRE-TAX OPERATING INCOME
3 YR. WEIGHTED AVG. PRE-TAX EARINGS
$123,310
FISCAL YR.
3
FISCAL YR.
4
FISCAL YR.
5
ADJUSTMENTS:
NON-RECURRING PAYMENT ON KIMORI 6 COLOR
PAID OFF @ $12,700/MO.
LOWER RENT TO FAIR MKT. RENT
ADD BACK ACTUAL DEPRECIATION
SUBTRACT NORMALIZED DEPRECIATION
NORMALIZED PRE-TAX EARNINGS
$152,400
$152,400
$152,400
$152,400
$24,000
$24,000
$24,000
$24,000
$306,068
$286,631
$256,898
$306,068
($231,433)
($231,433)
($231,433)
($231,433)
$337,176
$332,218
$251,941
$427,369
FISCAL YR.
3
6.5%
NORMALIZED PRE-TAX EARNINGS
AS % OF REVENUES
3 YR. WEIGHTED AVG. REVENUE
$5,521,271
29
FISCAL YR.
4
4.8%
FISCAL YR.
5
7.4%
AblePlus Valuations
BALANCE SHEET - PER BOOKS AND NORMALIZED
CURRENT ASSETS
OTHER ASSETS
AS OF VALUATION DATE
BOOK
NORMALIZED
$956,997
$889,218
$6,817
$6,817
FIXED ASSETS
$1,004,173
$1,388,601
TOTAL ASSETS
$1,967,987
$2,284,636
CURRENT LIABILITIES
$660,817
$660,817
LONG TERM LIABILITIES
$433,160
$433,160
$1,093,977
$1,093,977
$874,010
$1,190,659
TOTAL LIABILITIES
NET TANGIBLE ASSETS
NORMALIZATION ADJUSTMENTS
BOOK
VALUE
TOTAL FIXED ASSETS
$1,004,173
LESS $67,779 IN NON-TRADE
RECEIVABLES
SEE CALCULATIONS BELOW
FMV
ADJUSTED
MAJOR FIXED ASSETS
$907,895
$896,000
OTHER FIXED ASSETS
$96,278
$492,601
FIXED ASSET TOTALS
$1,004,173
$1,388,601
ACQUISITION
PRICE
FURNITURE & FIXTURES
MACHINERY & EQUIPMENT
LEASEHOLD IMPROVEMENTS
TOTAL
$38,608
$2,964,638
$58,134
$3,061,380
MAJOR FIXED ASSETS
6 COLOR KIMORI
$880,202
BOOK
VALUE
$381,422
ELECTRONIC PREPRESS
$341,319
$22,753
$125,000
$71,340
$29,725
$31,000
$537,017
$474,365
$265,000
SCRIPRIP SELECTSET
5 COLOR KIMORI
FMV
$475,000
FMV
OTHER FIXED ASSETS
$1,231,502
$492,601
30
AblePlus Valuations
ADDENDA
WORKING CAPITAL ANALYSIS
RATIO ANALYSIS – BALANCE SHEET
RATIO ANALYSIS – INCOME STATEMENT
APPRAISER QUALIFICATIONS
31
AblePlus Valuations
WORKING CAPITAL ANALYSIS
AS OF
VALUATION
DATE
$889,218
$660,817
$228,401
CURRENT ASSETS
CURRENT LIABILITIES
NET WORKING CAPITAL
CURRENT REVENUES
$5,811,465
SALES TO WORKING CAPITAL
25.44
REQUIRED WORKING CAPITAL
(AT RATIO OF 15.0 SALES TO WORKING CAPITAL)
$387,431
WORKING CAPITAL AS OF VALUATION DATE
$228,401
WORKING CAPITAL DEFECIT
$159,030
$159,000
ROUNDED
Ratio Analysis Details - The tables on the next page reflect the ratio analysis of the balance sheet and
income statement data considered in evaluating the Subject Company’s financial condition.
32
2.23
6.89
7.18
51
SALES/TOTAL ASSETS
SALES/NET FIXED ASSETS
SALES/RECEIVABLES
AVERAGE COLLECTION PERIOD
52
7.07
7.13
2.21
N/AV
MEDIAN
PROFIT
LEADERS
1.76
3.03%
9.14%
N/AV
N/AV
24.5%
N/AV
BEFORE TAX PROFIT
(OPERATING INCOME)
RETURN ON ASSETS
(BEFORE TAXES & INTEREST)
RETURN ON ASSETS
(BEFORE TAXES)
GROSS PROFIT
(USING MATERIALS & LABOR
ONLY AS COST OF GOODS SOLD)
GROSS PROFIT
(USING MATERIALS & LABOR,
DIRECT SUPPLIES, OUTSIDE
PROCESSING & FACTORY EXPENSE
AS COST OF GOODS SOLD)
OFFICERS COMPENSATION
(SALARY, BONUS, COMMISSION)
MEDIAN
ALL
SIZE COS.
N/AV
27.6%
3.6%
30.1%
N/AV
5.7%
N/AV
20.86%
N/AV
N/AV
N/AV
N/AV
N/AV
10.0
N/AV
N/AV
N/AV
N/AV
18.9 - 6
N/AV
N/AV
N/AV
1.9
N/AV
N/AV
N/AV
N/AV
1.1 - 4.3
N/AV
N/AV
N/AV
N/AV
3.0
N/AV
INDUSTRY BENCHMARKS
INCOME STATEMENT FINANCIAL RATIOS
31.4 - 54.8
5.7 - 9.0
3.3 - 7.8
1.6 - 2.7
214.5 - 7.6
N/AV
N/AV
N/AV
2.2 - 5.9
N/AV
N/AV
9.8
N/AV
1.7
12.8
2.4% - 5.9%
N/AV
N/AV
1.8% - 12.8%
N/AV
N/AV
N/AV
N/AV
41.1%
6.8%
N/AV
N/AV
N/AV
N/AV
N/AV
33
1.2% - 16.8%
N/AV
N/AV
8.4%
N/AV
64.7%
53.20%
N/AV
15.46%
N/AV
N/AV
N/AV
29.2% - 128.0%
N/AV
N/AV
7.0%
N/AV
45.0%
8.60%
N/AV
4.24%
N/AV
N/AV
N/AV
0.9% - 16.9%
N/AV
N/AV
6.3%
N/AV
N/AV
7.1%
N/AV
1.3%
TAX &
FINANCIAL
RMA -SIC 2752
DUN & BRADSTREET
FINANCIAL RESEARCH. ASSOCIATES
STATEMENT
SALES $5 TO 10 MILLION SIC 2752 - ALL SIZE COS. 25% MOST PROFITABLE ASSETS 500K TO 1,000K BENCHMARKS
RANGE
RANGE
RANGE
RANGE
COMMERCIAL &
LOWER TO
LOWER TO
LOWER TO
LOWER TO OTHER PRINTING
UPPER
UPPER
UPPER
UPPER
ASSETS
MEDIAN
QUARTILE
MEDIAN
QUARTILE MEDIAN
QUARTILE
MEDIAN
QUARTILE
1,000 TO 5,000 K
42.0
7.2
5.3
2.1
13.9
4.80%
N/AV
INDUSTRY BENCHMARKS
TAX &
FINANCIAL
RMA -SIC 2752
DUN & BRADSTREET
FINANCIAL RESEARCH. ASSOCIATES
STATEMENT
SALES $5 TO 10 MILLION SIC 2752 - ALL SIZE COS. 25% MOST PROFITABLE ASSETS 500K TO 1,000K BENCHMARKS
RANGE
RANGE
RANGE
RANGE
COMMERCIAL &
LOWER TO
LOWER TO
LOWER TO
LOWER TO OTHER PRINTING
UPPER
UPPER
UPPER
UPPER
ASSETS
MEDIAN
QUARTILE
MEDIAN
QUARTILE MEDIAN
QUARTILE
MEDIAN
QUARTILE
1,000 TO 5,000 K
1.1
0.7 - 1.6
1.4
0.8 - 2.5
1.9
1.1 - 4.3
1.4
1.1 - 3.0
N/AV
9.43%
MEDIAN
PROFIT
LEADERS
PRINTING INDUSTRIES
OF AMERICA (PIA)
SALES
$3 TO $6 MILLION
N/AV
SALES/WORKING CAPITAL
QUICK RATIO
MEDIAN
ALL
SIZE COS.
1.24
PRINTING INDUSTRIES
OF AMERICA (PIA)
SALES
$3 TO $6 MILLION
BALANCE SHEET FINANCIAL RATIOS
AblePlus Valuations
77.2
8.32
4.73
2.46
16.63
74.9
6.98
4.87
2.56
17.71
SUBJECT COMPANY
FINANCIAL RATIOS
100.6
7.57
3.63
2.22
22.49
72.7
8.05
5.02
2.48
10.16
1.96%
2.75%
0.71%
2.1% RECENT YRS. ONLY
1.81% RECENT YRS. ONLY
0.94%
4.5% RECENT YRS. ONLY
23.27% 22.70% 26.46% 23.95% 24.82%
44.15% 44.18% 45.16% 43.42% 44.81%
7.8%
9.37%
3.03%
FIVE YR. - FISCAL YEAR HISTORY
YR. 5
YR. 4
YR. 3
YR. 2 YR. 1
74.3
7.45
4.91
2.59
17.05
FIVE YR. - FISCAL YEAR HISTORY
YR. 5
YR. 4
YR. 3
YR. 2 YR. 1
1.47
1.34
1.35
1.40
1.82
SUBJECT COMPANY
FINANCIAL RATIOS
0.46%
1.79%
14.34%
25.51%
35.69%
9.89%
10.28%
ADVERTISING EXPENSE
RENT
FACTORY EXPENSE
FACTORY PAYROLL
MATERIALS
SELLING EXPENSE
ADMINISTRATIVE EXPENSE
MEDIAN
ALL
SIZE COS.
9.07%
8.86%
36.78%
22.39%
13.22%
1.98%
0.30%
MEDIAN
PROFIT
LEADERS
PRINTING INDUSTRIES
OF AMERICA (PIA)
SALES
$3 TO $6 MILLION
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
34
N/AV
N/AV
N/AV
N/AV
N/AV
2.32%
0.66%
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
3.77%
0.69%
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
N/AV
2.30%
N/AV
TAX &
FINANCIAL
RMA -SIC 2752
DUN & BRADSTREET
FINANCIAL RESEARCH. ASSOCIATES
STATEMENT
SALES $5 TO 10 MILLION SIC 2752 - ALL SIZE COS. 25% MOST PROFITABLE ASSETS 500K TO 1,000K BENCHMARKS
RANGE
RANGE
RANGE
RANGE
COMMERCIAL &
LOWER TO
LOWER TO
LOWER TO
LOWER TO OTHER PRINTING
UPPER
UPPER
UPPER
UPPER
ASSETS
MEDIAN
QUARTILE
MEDIAN
QUARTILE MEDIAN
QUARTILE
MEDIAN
QUARTILE
1,000 TO 5,000 K
INDUSTRY BENCHMARKS
INCOME STATEMENT FINANCIAL RATIOS (CONTINUED)
AblePlus Valuations
0.17%
0.16%
0.15%
8.84% 10.51% RECENT YRS. ONLY
10.42% 10.43% RECENT YRS. ONLY
34.82% 32.77% RECENT YRS. ONLY
28.72% 32.54% RECENT YRS. ONLY
13.52% 12.94% RECENT YRS. ONLY
2.40% RECENT YRS. ONLY
0.16%
FIVE YR. - FISCAL YEAR HISTORY
YR. 5
YR. 4
YR. 3
YR. 2 YR. 1
SUBJECT COMPANY
FINANCIAL RATIOS
Donald Sonneman, ASA
AblePlus Valuations
9715 Lorraine Way, #203, Santee, CA 92071
Phone: (619)-224-3105
Website: companyvalu.com
E-mail: ds@companyvalu.com
BUSINESS VALUATION: QUALIFICATIONS
Manufacturing Sector:
Specialized high tech metal producer - $230 million
Manufacturer of Power Supplies – Revenues $3 million
Wastepaper processing/wholesaler – Revenues $2 million
Winery – Revenues $10 million
Chrome Plating - $2.5 million
Appraisal Reviews – Subcontracts to IRS
Reviewed appraisals of large estates (up to several
hundred million dollars). Include some reviews of
appraisals by national and/or high profile firms. Both
business and real estate interests. Prepared alternate
valuation report as needed.
Communications/Broadcasting:
Television Station group – Revenues of $30 million
Film Library – Revenues of $25 million
Small Scale Publishing companies – Revenues of
$500,000
Other Related Analysis
Other familiarity with the communications industry: The
valuation of a power supply manufacturer required
research
into the telecommunications industry. The
telecommunications industry contributes 30% to 50% of
the demand for power supplies.
Engineering & Design:
Engineering Firm – Revenues of $2 million
Exhibit Production/Design – Revenues of $2.5 million
Medical Related and Medical Laboratory Services:
Specialty Surgical Practice – Revenues of $1.7 Million
Dental Practices – Revenues of $300,000 to $600,000
Medical Laboratory – Revenues of $800,000
Consumer oriented Retail and Service Businesses:
Regional Grocery Chain - Revenues of several $Billion
Grocery Stores – Revenues $600,000 to $10.6 Million
Auto Dealers – Revenues of $20 million to $400 million .
Motorcycle Dealer - Revenues - of $2 million
Truck Accessory Retailer – Revenues - of $6 million
Commercial Printers – Revenues of $2 to $10 million
Emergency Animal Shelter – Revenues of $3 million
Fitness Centers (Group of four) - Revenues of $700,000
Day Camp – Revenues of $500,000
Financial Services for Youth – From business plan
Wholesale/Distribution
Wholesaler of Office Supplies – Revenues of $15 million
Smaller Businesses:
Gift Shops, Publication Clipping Service, Liquor Store,
Fabric Store, Spa Cover Mfg., Carwash, Restaurant/Bar
Control and Marketability Discount Analysis
Purpose: Estate and Gift Tax, Withdrawal of partner,
owner (Over 80 of these analyses). Valuation of partial
interests, minority interests, undivided interests.
Entities:
Corporations (C Corp., S Corp. and LLC)
General Partnerships
Limited Partnerships, Family Limited Partnerships
Undivided Interests
Underlying Asset Categories:
Securities portfolios, real estate, promissory notes,
demand notes, commodity pools.
Related Valuation tasks
Non-Compete Covenant
Employment Agreement
Deferred Compensation
Management Contracts
Secured and Unsecured Debt
Blockage Discounts
Combined Business Valuation and
Commercial Real Estate Appraisal
Hospitality & Senior Living/Care Facilities:
Hotels – Full Service, Limited Service and Resort Hotels
(proposed and existing facilities) – Revenues of $400,000
to $9 Million
Assisted Living Facilities
Residential Alzheimer Assisted Living Facilities
Revenues up to $2.6 Million
(proposed and existing facilities)
Nursing homes – Revenues up to $3.9 Million
Other:
Vineyards - $400,000 revenues
Donald Sonneman, ASA
Experience and Education
Diversified Background
Current occupation: Business valuation, commercial real estate appraisal.
Previous occupations: Income tax preparation, grant/proposal writing and engineering.
Education: Degrees in mechanical engineering and financial planning, supplemented with substantial finance and
valuation education.
Educational Degrees and Professional Designations/Affiliations
BS Mechanical Engineering - Illinois Institute of Technology
CFP (Certified Financial Planner Degree) - Denver College for Financial Planning
ASA Designation (Accredited Senior Appraiser) - Real Property/Urban, American Society of Appraisers (#015326).
To obtain the designation requires appraisal experience, review of narrative reports and appraisal education.
Publications
Business Valuation Review (Journal published by the ASA):
• The Single Customer Business – Valuation of a Captive Business (March 2000 issue)
• Business Valuation Controversies and Choices: Understand Them & Their Impact on Value
(June 2000 issue)
• Blockage Discounts for Large Blocks of Publicly Traded Stocks – Benchmark Data to Test for
Reasonableness (December 2000 issue)
Appraisal Journal (The most highly regarded national publication for real estate appraisers):
• Variables That Influence Hotel Parking Demand (Jan. 1999 issue)
• The Challenges of Appraising Residential Alzheimer’s Assisted Living Facilities (Jan. 2000 issue)
• Challenges in Appraising “Simple” Warehouse Properties, (April 2001 issue)
Appraisal Institute – Appraising Industrial Properties (2005). Paid consultant, developing portions of two chapters
of book by multiple authors.
Advanced and Specialized Business Valuation Education
Mergers & Acquisitions of Mid-Sized Companies (Course 300 International Business Brokers Association)
Merger & Acquisition Financing (Course 300 International Business Brokers Association)
Valuation Institute (Fulcrum Information Services) – Focus on Merger & Acquisition topics. Includes case studies
and presentations on start-up companies, internet companies, break-up analysis and leveraged buyout analysis.
Faculty included top M & A specialists from such highly regarded firms as Arthur Andersen LLP, KPMG LLP,
Houlihan Lokey Howard & Zukin, Broadview International LLC. ($15.4 Billion in transactions during 1999) and
Brueggeman & Johnson, P.C.
Valuing Technology Companies (Master Class, Institute of Business Appraisers) – Covered TV stations, Radio
Stations, Telecommunications and Computer Services
Valuing Intangibles (Institute of Business Appraisers)
Advanced Topics, i.e. Discounted Cash Flow, Discount Rate/ Capitalization Rate Estimation, Intangible Assets,
ESOP valuation, Dissenting Stockholder Fair Value, Control & Marketability Discounts (BV 204 – American Society
of Appraisers)
Donald Sonneman, ASA
Experience and Education
Other Business Valuation Education
Principles of Valuation – Beginning course - Business Valuation (BV201 - American Society of Appraisers)
Appraisal of Small Businesses & Professional Practices - (BV205 - American Society of Appraisers)
How to Value Mid Size and Smaller Businesses, Using Transaction Data to Value Closely Held Businesses
(Institute of Business Appraisers)
ASA 1995 Conference Seminars – Topics: Capital Markets, Bankruptcy Court Viewpoint, Trends in Deal
Structuring, Fairness Opinions
Finance and Taxation Courses
Part of BS Mechanical Engineering Degree Program:
Accounting, Economics I & Economics II, Engineering Economics (Same as Finance)
Finance (Graduate Level, Heriot Watt University)
Part of Certified Financial Planner Degree Program (Denver College of Financial Planning):
Financial Planning, Insurance/Risk Management, Tax Planning & Management, Investments,
Retirement & Estate Planning
Taxation – 54 continuing education courses and seminars covering taxation of real estate, businesses, estates and
trusts (Inland Society of Tax Consultants, National Association of Enrolled Agents, CA Association of Enrolled
Agents)
Principles of Public Utilities Operations & Mgmt. (Including Valuation Methods & Accounting Methods) Course from
Public Utility Reports, Inc.
Litigation Support Related Education
Condemnation on Trial: Mock trial, goodwill and real estate appraisal (International Right of Way Association)
Litigation Valuation (Appraisal Institute)
Attorneys, Appraisers & Real Estate (Appraisal Institute)
Expert Witness Class (Oregon Dept. of Revenue)
Licenses/Certifications
Certified General Real Estate Appraiser - State of California (AG003493)
State Certified General Appraiser - State of Oregon (C000476) – Inactive Status
Registered Appraiser - State of Oregon (required for County Assessors & Revenue Dept. Appraisers)
Certifications/Registrations for previous occupations (no longer current):
Registered Tax Preparer (Cal.)
Registered Investment Advisor (Cal.)
Life and Disability Agent (Cal.)
Variable License (Cal.)
Series 7 NASD Securities License
Note: Qualifications as a commercial real estate appraiser also available upon request.