1. FOR WHAT IT’S WORTH: HOW AN APPRAISER VALUES YOUR BUSINESS Presented by Sherry C. Smith To The Rotary Club of Pawleys Island May 3, 2007

2. Events That May Trigger the Need for a Business Valuation Estate Planning, Gifting – minority interests Death – step up the basis Sale of Business Recapitalization – new equity Buyout of a Partner – buy/sell provisions Minority Shareholder Dispute Employee Stock Ownership Plan (ESOP) Divorce, Litigation

4. Drivers of Value In investment theory, the two drivers of value are risk and return Higher value = lower risk and/or higher return Discount rate = the return required by an investor to make a particular investment Return = true cash return, not income that has been manipulated by tax planning

5. Context: Look at the Economy, Industry, and Subject Company What are the prospects for growth? How risky is it? How well has the company performed historically? What are the implications of trends in the economy, industry, and company on: –Revenue Growth? –Operating Profit Margins? –Interest Costs? –Business Risk? –Financial Risk?

8. SWOT ANALYSIS Strengths Weaknesses Opportunities Threats

10. Valuation Approach #1: Income Approach Favorite method of appraisers (when possible) because treats the business as an investment Best measure for income approach: project future cash flows to invested capital (debt and equity) Estimate a rate of return appropriate for the business that takes into account the level of risk Two methods within this approach: Single Period Capitalization Method and Multiple Period Discounting Method

11. Build-up Method of Determining a Discount Rate and Capitalization Rate

12. Valuation Approach #2: Market Approach Guideline Public Company Method – look for close comparables Merger & Acquisition Method – look for transactions in the marketplace Direct Market Data Method – statistical, large database, not close comps  Goal is to find appropriate multiples of revenues, or some other measure (cash flow, earnings, etc.)

13. Direct Market Data Method

14. Valuation Approach #3: Asset Usually last choice The value of the whole business should be greater than the sum of its parts If not: liquidation The asset-based approach marks every entry on the balance sheet to market The Excess Earnings Method (an asset-based method) gives a value for goodwill

18. So, How to Increase Value Most importantly, keep good financial records Increase returns by: –Going after new, growing markets –Seeking advantages over competitors (strong brand recognition, dominant market share, excellent distribution channels, patents) –Lowering expenses Reduce risk by: –Building management strength –Stabilizing balance sheet –Locking in customer contracts –Diversifying in terms of customers, geography, suppliers

20. 4420 Oleander Drive, Suite 203 Myrtle Beach, SC 29577 843-839-3763 Sherry C. Smith