Sample Business Valuations Report

                   ABC Limited     Share Valuation Report        

ABC Limited Draft   Description Page Contents Executive Summary Background Information Section Financial Performance 1 Valuation Methods 2 Valuation 3 Dains Recent Deals 4 5 Description 6 ABC Limited Discounted Cash Flow Abbreviations Profit before interest, and tax Profit before interest, tax, depreciation and amortisation Definition Price divided by Earnings ratio ABC ABC Limited DCF The financial year ending 31 March 20XX EBIT EBITDA P/E the Company YE20XX Page 2 of 11   Your Future Figured…

ABC Limited Draft   1. Executive Summary Shareholder value  The shareholding of the Company is Mrs Smith 40%, Mr Smith 30% %, Mr Bloggs 15 % Context of the report and Mrs Bloggs 15%, with value attributable in those proportions.  We have prepared this high-level valuation report based upon information provided by Summary profit and loss account Mrs Smith, with the intention being to provide an indicative valuation of the Company, and this report should not be used for any other purpose. Year ended 31 March YE2018 YE2019 YE2020 £'000s Stat Stat F'cast  We can perform a more detailed valuation on request, which will look at identifying normalised working capital and comment on the tax implications of any transaction, if Sales 686 901 1,023 required. Cost of sales (409) (504) (561) Gross Profit Valuation technique Gross Margin % 277 396 462 40.3% 44.0% 45.2%  We have valued the company using a multiple of profits method. Adjusted EBIT (before shareholder costs) 166 313 283  This method calculates a valuation by applying a multiple to underlying EBITDA. We Adjusted EBITDA (before shareholder costs) 173 319 283 have used a multiple of EBITDA with no significant ongoing capex requirement as future spend on fixed assets is expected to be insignificant. Adjusted EBIT (after shareholder costs) 106 253 223 Adjusted EBITDA (after shareholder costs) 113 259 223  In calculating the value of the Company by this method, we have: £'000sValuation ranges o identified the adjusted EBITDA for the Company on a pre and post-Mrs Smith 2,250 replacement cost basis; 2,000 1,750 o identified a suitable multiple to apply by reference to similar transactions and 1,500 our own experience; and 1,250 1,000 o adjusted the valuation according to the likely net cash/debt levels in the 750 Company at various points in time, the net cash position at the year-end is 500 forecast to be c.£0.3million. 250 Valuation ranges 4x 5x 6x YE2018 - post replacement costs YE2019 - post replacement costs  This valuation reports highlights the possible valuations of the Company, as at 1 YE2018 - pre replacement costs YE2019 - pre replacement costs September 2019.  The valuation ranges from a value of c.£1.2million if the Company was valued on a 4x multiple with Mrs Smith being replaced, to a high of c.£2.2million if a 6x EBITDA multiple was achieved without needing replacing, and the Company achieved the financial results being forecast for YE2019 and these were repeatable.  The chart opposite shows the possible equity valuations that could be achieved.  It should be noted that these proceeds are before costs associated with the transaction, such as adviser fees, lawyer fees and capital gains tax. Page 3 of 11   Your Future Figured…

ABC Limited Draft   2. Background Information Shareholders  The shareholders of the Company are shown below: Context of the report Shareholder Share type Number of shares Shareholding  This report is a high-level valuation report, based on the latest statutory accounts to 31 March 2019, 5-months to 31 August 2019 management information and an out-turn for Mrs Smith A Ordinary 40 40% the year ending 31 March 2020. Management has provided commentary and Mr Smith B Ordinary 30 30% information on the estimated YE2020 out-turn, the intention being to provide an Mr Bloggs C Ordinary 15 15% indicative valuation of the Company, and this report should not be used for any other Mrs Bloggs C Ordinary 15 15% purpose. Total 100 100.0%  In order to provide a more detailed valuation, we would require the following further information: Source: Annual return filed at Companies House o 3-year financial forecasts to 31 March 2022;  The different share classes enable differing dividends to be paid out to shareholders. o Detailed capex requirements; and o Detailed working capital requirements. o Customer dependency details and profit by customer  We can perform a more detailed valuation on request. Background to ABC Limited  ABC Limited (“ABC”) is a growing business with a track record of winning and retaining blue chip clients.  ABC is owned 40% by Mrs Smith, 30% by Mr Smith 15% by Mr Bloggs and 15% by Mrs Bloggs and the shareholding table can be found opposite. Page 4 of 11   Your Future Figured…

ABC Limited Draft   3. Financial Performance Year ended 31 March YE2018 YE2019 YE2020 £'000s Stat Stat O'turn Profit and loss account Sales 686 901 1,023 Overview Cost of sales (409) (504) (561) Gross Profit  The profit and loss account for ABC for the financial years ending 31 March 2018 and 31 Gross Margin % 277 396 462 March 2019 and an out-turn for YE2020 have been summarised in the table opposite. 40% 44% 45% The YE2020 out-turn has been prepared by pro-rating the 5-month management Other income accounts to estimate results to 31 March 2020 after accounting for non-repeating Administrative expenses 4 13 (263) costs/revenues and any changes in costs/revenues predicted by Management. Given EBIT (202) (234) 199 the nature of trade, there are no seasonal adjustments required. Depreciation EBITDA 78 175 199  Sales have increased from £685,000 in YE2018 to £901,000 in YE2019 and are forecast to 8 6 increase to £1.0million in YE2020. Adjustments 85 24 181  Gross profit margin has increased from 40% in YE2018 to 44% in YE2019 and is forecast Adjusted EBIT (after replacement costs) 28 223 to be 45% in YE2020. Adjusted EBITDA (after replacement costs) 78 223 106  Admin expenses were £202,000 in YE2017, £234,000 in YE2018 and are forecast to be Replacement shareholder costs 113 253 60 £263,000 in YE2019. The largest increases in YE2019 are due to an office move in 259 September 2018 which has led to additional administrative costs. ABC are now required Adjusted EBIT (before replacement costs) 60 283 to pay rates and water charges whereas before the move, the only expense of this Adjusted EBITDA (before replacement costs) 60 283 nature, was for car parking. There is also an additional rent charge which together with 166 rates and water charges account for an additional £31,000 increase in administrative 173 313 expenses. Additional computer software was employed during the YE2019 which led to 319 a further £15,000 increase, which will continue to be used in future years. There was a significant increase in travel in YE2018 due to Mrs Smith having to step back into the  We comment on the adjustments we have made to EBIT and EBITDA on the following business as a result of losing a director, this cost has been added back as part of our page, with the adjustments relating to add backs for one-off costs or deductions for adjustments on page 7. replacement costs required to run the company in the future.  The adjusted EBIT after replacement shareholder costs for YE2018 was £106,000, Conclusion on ‘Maintainable EBITDA’ £253,000 in YE2019 and £223,000 in YE2020.  We have assumed all revenue in the outturn for YE2020 is recognised in the correct  The adjusted EBITDA after replacement shareholder costs for YE2018 was £113,000, period and contains no income that should be deferred; £259,000 in YE2019 and £223,000 in YE2020.  On page 11, we have used both adjusted EBIT/EBITDA before replacement shareholder costs and after replacement shareholder costs. This is because if a Company providing a similar service was to purchase ABC for strategic reasons, replacement shareholder costs may not be required.  As capital expenditure requirements going forward are expected to be insignificant, we recommend using adjusted EBITDA to value the business rather than adjusted EBIT. Page 5 of 11   Your Future Figured…

ABC Limited Draft   3. Financial Performance (continued) Year ended 31 March YE2017 YE2018 YE2019 £'000s Stat Stat O'turn Adjusted EBIT / EBITDA 78 Reported EBIT 85 175 199 Details of adjustments Reported EBITDA 181 199 88  In analysing the profit and loss account of ABC, we have identified the following Adjustments: 64 9 adjustments that are required to arrive at a maintainable EBIT or EBITDA: Directors' costs 88 20 4 Travel & subsistence (60) 14 o directors’ costs have been added back and a normal level of director Legal and professional (60) 34 32 replacement costs for Mrs Smith has been added back at a notional £60,000 per MD role 20 year; Severance pay 28 20 Repairs and maintenance 106 138 5 o travel and subsistence was significantly higher in YE2018 due to the additional Other 113 (60) travelling that Mrs Smith had to do after an old director left the Company and she (60) 84 was required to take a more active role in the business; Add back 78 (60) o in YE2019 there was a higher than normal legal and professional an unsuccessful Replacement Director costs 253 (60) litigation case, these one-off costs have all been added back; Deduct 259 24 o in YE2018, £20,000 of costs have been added back in relation to an ex gratia Total Adjustments payment, this was a one-off cost; 223 Adjusted EBIT (after replacement costs) 223 o the repairs and maintenance costs all relate to the office move in September Adjusted EBITDA (after replacement costs) 2018 and as a one-off expenditure have been added back for the purposes of calculating a valuation; and  The table opposite shows an EBITDA and EBIT position after replacement shareholder costs. We have valued the business both before and after replacement shareholder o other one-off or costs not required going forward include: costs due to the assumption that a potential purchaser may not need to replace Mrs Smith if ABC can be integrated into their business.  £1,000 computer migration cost and;  £4,400 relating to one-off consultancy Page 6 of 11   Your Future Figured…

ABC Limited Draft YE2018 YE2019 YE2020   Stat Stat O'turn 3. Financial Performance (continued) Year ended 31 March 176 157 £'000s 181 Indebtedness 3 (13) (20) Cash (4)  Typically, when valuing a company, we would take into consideration the net cash / Dividends to be taken 179 144 146 (debt) as an adjustment, as most companies are sold on a ‘debt free / cash free’ basis. Corporation tax 304 We would usually add on the cash and deduct the debt to arrive at a value for the shares PAT generated in the remainder of the year of the Company. The table opposite summarises the net cash / debt position of the Net Cash/(debt) Company at various points in time. Conclusion on indebtedness  We would also consider the normalised working capital position of the Company, as cash is only considered ‘free cash’ if a normal level of working capital is being left in the  Based on our calculations, assuming £20,000 of dividends are declared, the Company Company. We have assumed that the working capital is normal for the purpose of this will have ‘net cash’ of £304,000, and this will be taken into consideration as part of the valuation but would explore this further in a full valuation report. valuation later in this report. Details of balance sheet  In analysing the balance sheet of ABC, we have taken into consideration the following items: o the cash as at 31 March 2019 is £182,000; o Dividends will continue to be paid until the valuation date; and o there is a corporation tax liability of £4,000. Page 7 of 11   Your Future Figured…

ABC Limited Draft   4. Valuation methods Valuing a business Valuation methods  The most appropriate method of valuing the business is the multiple of profits method where the Company is a profitable trading company.  Four commonly used valuation methods for privately owned businesses are:  The ‘enterprise value’ is calculated by multiplying the maintainable EBIT or EBITDA by a o Multiple of profits multiple which is dependent on the relative strength and attractiveness of the business. o Net asset value  The multiple can vary, and we comment on some basic principles overleaf. A higher multiple may be achieved if a strategic buyer was identified as they may pay a premium o Discounted cash flows or a trade party able to achieve synergies through the bringing together of the two businesses. o Dividend valuation model  The ‘equity value’ adjusts the enterprise value for surplus cash, debt, corporation tax  Multiple of profits – this method is calculated based on applying a multiple to the and surplus assets (such as a property) to arrive at the ‘equity value’ which reflects the business’s most recent (or most representative) underlying profit before interest and payment for the shares. tax. Several adjustments are made to ascertain a sustainable profit figure for the business. The multiple to be applied is then calculated by finding comparable £’000s transactions and/or listed business multiples. Finally, the value would need to be adjusted upwards/downwards to reflect any surplus assets/liabilities; Maintainable / Adjusted EBIT / EBITDA A PBIT multiple B  Net asset value – the net asset value of a business is the sum of its assets less liabilities Enterprise value AxB and is typically based on the most recent balance sheet. Several adjustments are then usually necessary to arrive at the fair value of assets or liabilities, for instance where the Add: surplus cash C book value is not representative of fair value. The net asset value of a business (which Add: property D is profitable) is often regarded by shareholders as the minimum value of a business, as Less: debt E it ignores any future value that can be generated from these assets, nor does it include Less: corporation tax liabilities F any goodwill value; Add/less: working capital adjustment G Equity value X  Discounted cash flows – it is possible to value a business using the present value of its future cash flows. The future cash flows are drawn from the business’s own budgets and assumptions are made to project these figures forward. The present value of these cash flows is calculated by discounting the future cash flows by a specific percentage, called the weighted average cost of capital; and  Dividend valuation model – this valuation model is based on the principle that the share price of a business should be equal to the value of future dividends, discounted to reflect the cost of equity. Given the dividend policy can vary widely in an owner-managed business, this method is perhaps considered more useful for valuing minority shareholdings in businesses with a broader shareholder base rather than an owner- managed business where dividend policy can vary dramatically between years. Page 8 of 11   Your Future Figured…

ABC Limited Draft   5. Valuation Valuation multiples Determining value  In considering what would be an appropriate multiple to use, the following sources have been considered:  Using the multiple of profits method, we calculate an adjusted EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) to arrive at an ‘enterprise value’. o BDO PCPI index – this is a quarterly survey of deal statistics in the UK. The 2018 Q4 report suggests that on average private companies are being sold to trade  The ‘enterprise value’ is adjusted for surplus cash, debt, corporation tax and surplus buyers at 10.4x historic EBITDA and to private equity buyers at 12.1x historic assets (such as property) to arrive at the ‘equity value’ used to value the shares. EBITDA. However, the survey recognises that the profit information used in these calculations tends to be suppressed by various expenses that may be non-  A valuation assumes a business operates with a ‘normal’ level of working capital. If recurring under a new owner, which in turn will over-stare the earnings multiple. actual working capital is significantly above/below the average level, then you would A discount of 50% should be applied to the above percentages in order to obtain expect the valuation to be adjusted upwards/downwards accordingly. a more accurate multiple.  Any permanent reduction that can be achieved in the ‘normal’ level of working capital o The UK200 (mutual professional association of independent firms of accountants of the business prior to a valuation will result in further surplus cash becoming available. in the UK) latest SME valuation report suggests at a 95% confidence level, the EBITDA multiple range is between 5.2x – 6.6x historic EBITDA (at November 2018),  The value another party may place on a business may be significantly higher if that buyer with a median multiple of 5.5x EBITDA, as shown in the table below: has strong strategic reasons for owning that business, such as the achievement of sales/cost synergies, or perhaps the reduction of competition within their market place. Median Mean Avg. EBITDA EBITDA Deal size Factors affecting value November 2018 5.5x 6.0x £4.4m  There are several factors that determine the value of your business: November 2017 4.2x 6.2x £3.4m November 2016 4.8x 5.6x £5.7m o Underlying profit and cash generation November 2015 5.4x 6.1x £4.2m o Profit quality November 2014 4.5x 5.1x £4.4m o Growth prospects of the business o Quality and on-going commitment of management o The PERDa index (Price Earnings Ratio Database) compiles transaction data from o Barriers to entry corporate finance teams as well as Experian, and again seeks to use current data o Cash/debt levels and availability of working capital and banking facilities which more accurately shows the multiples businesses are being sold for. The o Identification last index was issued in June 2018 and showed an average EBIT multiple of c.7.4x o Competitive disposal process based on transactions with an average EBIT of £3.5million. o Provision of warranties o Marktomarket collates EBITDA deal multiples on transactions in each industry. In the digital marketing industry for deals under £10million, the average EBITDA multiple was 5.8x which was based on an average EBITDA of £750,000. o In our own recent experience, across a broad range of transactions, an EBITDA multiple of 3-6x historic EBITDA is not uncommon for owner managed businesses with a significant proportion valued at 4-5x. This also has a degree of consistency with the other sources of information above. Page 9 of 11   Your Future Figured…

ABC Limited Draft   5. Valuation (continued) Our valuation ranges YE2019 YE2020 YE2019 YE2020 post replacement post replacement pre replacement pre replacement Adjusted EBITDA Year ended 31 March £'000s costs costs costs costs  As mentioned previously, in the case of ABC, we would recommend using a multiple of 283 adjusted EBITDA with no capex deductions on the basis the ongoing capex requirement Adjusted EBITDA 259 223 319 is insignificant. Multiple 1,130 4x 1,038 890 1,278 1,413  The table opposite provides a range of valuations for ABC, which vary according to the 5x 1,297 1,113 1,597 1,696 multiple used and the time of the sale. 6x 1,557 1,336 1,917 304  Generally speaking, the higher multiples can be attracted if the following can be Net cash (assume YE2019 304 304 304 demonstrated: sale) 1,434 1,717 o Regular recurring income; Equity Value 1,342 1,194 1,582 1,999 o Large order books of underpinned work; Multiple 1,601 1,417 1,901 o Consistent growth in profits; 4x 1,861 1,639 2,221 o High growth industries; and 5x o A strategic reason for a potential buyer to purchase the Company. 6x  In our opinion, we would suggest ABC is valued using a multiple of between 4x and 6x Source: Dains' adjusted EBITDA analysis, weighted average, and a straight average Adjusted EBITDA. This is due to long term contracts held with blue chip clients and strong recurring revenues enjoyed by the Company. £'000s 2,250 2,000  At the upper end of the valuation range, it is assumed that a strategic buyer acquires the 1,750 Company in order to enter this niche market with a well-managed, well invested 1,500 business. If this is the case, they may not need to replace the exiting shareholders as 1,250 they may be able to integrate ABC into their existing business. As a result, we have shown 1,000 both YE2018 and YE02019 EBITDA’s on a pre and post replacement shareholder cost basis. 750 500  In the graph opposite, we have shown the valuation of the business based on a 4x, 5x or 250 6x multiple of EBITDA. We have done this for YE2018 and YE2019 pre and post replacement shareholder costs. 4x 5x 6x YE2018 - post replacement costs YE2019 - post replacement costs  Assuming the business is sold based on the YE2019, a 4-5x multiple with replacement YE2018 - pre replacement costs YE2019 - pre replacement costs director costs required may attract a valuation of £1.2million-£1.6million.  However, if replacement director costs are not required, based on the YE2019 sale, a 4- 5x multiple of Adjusted EBITDA would value the business at £1.4million-£1.9million. This value may increase if the sale was delayed further and growth was achieved. Page 10 of 11   Your Future Figured…

ABC Limited Draft 6. Dains’ recent transactions For further details on any of these, or other transactions, visit http://www.dains.com/corporate-finance/corporate-finance-deals/ Page 11 of 11 Your Future Figured…

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