1. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 17-1 Valuation – Lawyer’s Non-Role Never valuation opinion giver or expert Why know lingo and basic valuation techniques Valuation central issue of many planning strategies Improved capacity to understand and analyze work of valuation experts Enhanced communications (casual and strategic) with business owners and executives Better negotiator

2. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 17-2 Problem 17-A: XYZ Inc. A.Book Value: $3.7 million – Straight from balance sheet B.Adjusted Book Value: $5.6 million – Assets adjusted to FMV C.Capitalized Earnings: - EBITDA Calculation Income after taxes 1,254,000 Plus: Taxes 646,000 Interest 140,000 Depreciation 260,000 EBITDA 2,300,000

3. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 17-3 Problem 17-A: XYZ Inc. C.Capitalized Earnings: 2,300,000 (EBITDA) x 6 = 13,800,000 2,300,000 / 16.67% = 13,800,000 D. Hybrid B & C : 30-70 split Adjusted Book: 5,600,000 x.3 = 1,680,000 Capitalized Earnings: 13,800,000 x.7 = 9,660,000 Hybrid value 11,340,000

4. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 17-4 Problem 17-A: XYZ Inc. E.Excess Earnings Method Market Value of Tangible Assets 8,700,000 Applied Lending Rate 7% Annual Cost of Money 609,000 Valued cash flow (Pre-Tax Income) 1,900,000 Less: Money Cost 609,000 Excess earnings to cost 1,291,000 Required yield multiple (12.5%) 8 Excess earnings value 10,328,000 Plus: Hard Asset Value 8,700,000 Total Value 19,028,000

5. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 17-5 Problem 17-A: XYZ Inc. F. Discounted Future Cash Flow Analysis