Business Valuation

Proposal Presented to

Sample Company Presented by

Doug Ingram Capstone Financial Group

Based on financials from

2012 - 2014

BB9868SBVAL-06 | ML 12-002778

FOR EMPLOYERS

BUSINESS OWNER & EXECUTIVE SOLUTIONS BUSINESS OWNER & EXECUTIVE SOLUTIONS

How to Determine the Value of Your Business

Lean on the Capstone Financial Group to help you maximize the effectiveness of your business.

Tailored solutions Capstone Financial Group provides you access to a complete package of tailored solutions to help you, your business and your key employees. These solutions have been categorized into six primary areas of financial need. After helping you identify and prioritize your areas of need, we can focus on offering solutions to enhance your financial security.

Solutions

Retirement Business protection – In the event of a death, resignation of a key employee or a future change in management, would your business be as successful as it is today? Exit planning – Do you occasionally obtain a valuation for your business? If you were to sell your business today what would be the market value? Have you established a definite time period to transfer your business to a specific party at an established price? Income protection – If you or a key person to your organization were to experience an accident or severe illness, how would this affect your business? Would you be able to meet present financial obligations based on your expected income during that stressful time? Survivor income – Will your spouse and beneficiaries be able to maintain their desired standard of living after your death? How would the unexpected death of a partner or key person affect your business? Wealth transfer – Is your personal will/trust current and does it accurately reflect how you want your assets distributed? Is the buy-sell agreement or business succession plan for your business current and properly funded? Retirement income – Are you or your key employees able to set aside enough money for retirement considering the limited amount of contributions that can be made to a qualified plan?

The Problem of Business Valuation

An exact method for determining the value of a business does not exist. The more "experts" you ask, the more opinions you will receive. And more than likely, the opinions will vary widely. There are many instances when the value of business assets is needed, such as for buy-sell agreements, business loans, and for estate planning purposes. At your death, the value of your estate is subject to estate taxes. Your business assets are part of your estate. Therefore, the higher the value of your business in your estate, the more estate taxes you will pay. The lower the value of your business, the less estate tax you will pay. The IRS will attempt to value your business at the highest reasonable level, while your heirs will try to minimize the value of your business. There are many methods by which a business may be valued. Five of the most commonly used methods are described below. • Book Value: The value at which the business is carried on a balance sheet, with all assets adjusted for fair market value (fair market value may not be the same as the depreciated value for income purposes). • Straight Capitalization Method: The amount of capital that would have to be invested at a specified rate to yield the current average net annual earnings of the business. • Capitalization of Earnings Method: Assumes that part of earnings are attributed to the assets of the business (book value). Remaining earnings are capitalized at a rate consistent with the relative risk of the business. The result is then added to book value. • Years' Purchase Method: A conservative rate (the pure money rate for an investment with generally accepted lower risk) is used to determine the earnings attributed to assets. The balance is assumed to be provided by goodwill. The earnings provided by goodwill are then multiplied by the number of years for which goodwill is expected to be valuable to a purchaser. The result is then added to the book value to obtain the valuation. • Discounted Future Earnings Method: Projected future business earnings are forecasted, and then discounted using an appropriate rate which reflects the return from the next best investment opportunity with a comparable level of risk. The sum of the discounted future earnings is the current valuation. The average of these five methods is not an acceptable method of valuation. It is shown in this presentation for comparison purposes only. Each business should have a professional appraiser determine the method that will best represent all of its factors.

How to Determine the Value of Your Business

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EXIT

PLANNING Buy-sell agreement funding

Buy-sell agreements involve the selling and buying of the departing owner�s business interests in accordance

with the formal agreement. It is important for business owners to have a plan in place for securing the

money needed to complete this transaction when it occurs. Various options exist for business owners.

FUNDING METHODS

Cash � Requires sufficient funds be available to pay the full price in the designated timeframe.

Borrowing � Involves future unknown factors such as credit availability and cost of borrowing. Any

borrowed funds must be repaid with interest from earnings.

Saving � Does not assure that sufficient funds will be available when needed because the timing of

departure is not predictable.

Installment sale � Requires repayment from earnings and forces your heirs to rely upon the future success

of the business in order to receive your payments.

Insurance � Is purchased on the departing owner at the time the buy-sell agreement is implemented.

Provides liquidity when needed. Upon death or total disability, the buyer receives the insurance benefit

which can be used to fund the purchase of the business.

Timing of liquidity and cost are important considerations when determining an appropriate funding

method for your situation. Compare these hypothetical protection costs for a $1,000,000 purchase price.

$75,000 $76,395

$928,379

$1,186,982

$1,000,000

$1,400,000

$1,200,000

$1,000,000

$800,000

$600,000

$400,000

$200,000

$0 Cash Borrow Sinking Life DBO Fund Insurance Insurance

Cash $1,000,000

Borrow Represents five equal annual payments of $200,000 plus interest at 6%.

Sinking Fund

& Cash

Sinking fund of $146,621 (annual deposits equal to the life insurance premiums growing at 8%) plus the balance necessary of $853,379 in cash.

Insurance

Life � Estimated premiums of $5,000 for Male, 45, Preferred, Nontobacco, UL Flex II policy.

Disability Buy-Out (DBO)� Estimated premiums of $5,093 for Male, 45, Executive Occupation class DBO policy.

Insurance premiums paid for 15 years. Not valid without accompanying insurance illustrations. See illustrations for important information.

Hypothetical Funding Method Cost at End of 15 Years

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ײ¼·ª·¼«¿´ Ü·­¿¾·´·¬§ ײ½±³» ײ­«®¿²½» � ݱ²­·¼»® °«®½¸¿­·²¹ ¼·­¿¾·´·¬§·²½±³» ·²­«®¿²½» ¬± °®±¬»½¬ §±«® ·²½±³» ­¸±«´¼ §±« ¾»½±³» ¬±± ­·½µ ±®¸«®¬ ¬± ©±®µò

The previous pages depict certain business planning options. All of these options are based on the information you shared with us for this purpose and the assumptions stated throughout the report. Of course, any variance in the information or assumptions could change the results. All assets assume specific growth rates, calculated based on information from the client. These individual rates are used to project the possible growth of the business. These projections are made to estimate future business insurance needs. Although the informal business valuation from The Principal can provide a valuable starting point in helping you determine the value of your business, the valuation will not be a substitute for a formal valuation nor does it establish a value for tax purposes. A formal valuation should be constructed with the guidance of your legal and/or tax advisors. Solutions outlined in this report do not imply a recommendation that a specific business planning option should be implemented. Rather it represents a summary of potential considered strategies, which each individual should discuss with his or her tax advisor, attorney, and/or other professional advisor before taking any action. Because your business planning goals may change in the future, periodic monitoring should be an essential component of your program. Disability income insurance has certain limitations and exclusions. For costs and complete details of coverage, contact your Principal Life financial representative. Individual disability income insurance Series 700. Not all products available in all states. While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance issued by Principal National Life Insurance Co. (except in NY) and Principal Life Insurance Co. Securities offered through Princor Financial Services Corp., 800-247-1737, member SIPC. Principal National, Principal Life and Princor® are

members of the Principal Financial Group®, Des Moines, IA 50392.

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