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Business Valuation

In 2001, John and Mary Drake founded the Baltimore Resins Corporation (BRC). Their business was finding waste products and plastics manufacturing that had been simply discarded, and finding ways to harvest this material and actually sell it for profit to possible manufacturing groups that could use this material. At the time, a big company (Waste Management) was actually charging customers to pick up and discard what was once considered waste. BRC was an innovator; it began to get these "waste" items for re-cycling and new uses by paying creators of this "waste" a penny a pound. Staff was hired, and the business grew. In March of 2013, John and Mary were divorced. The court specified a division of assets.

Subsequently, several years later, Mary Drake brought suit against the attorney that had represented her in the divorce proceedings. Her claim was that that attorney had not commissioned a business valuation, and therefore the proper value of the company wasn't established, and hence the cash consideration associated with the judge's decree was inappropriate or lacking in full factual basis.

In this legal malpractice suit, Mary Drake, the plaintiff, commissioned a financial economist to place a value on the company around the time of the divorce decree. However, several facts make this choice of date less than straightforward.

First, the husband John Drake, had apparently for several years been planning to found a new company (called Towson Resins Corporation) to which he migrated several of the clients of Baltimore Resins Corporation. In other words there was some pilferage of Baltimore Resin's business. Second, in addition despite vigorous efforts at what lawyers call discovery, the last set of financial documents for Baltimore Resins Corporation that is available to the financial economist are as of the close of calendar year 2011. In addition, the only balance sheet available was 2010 (note I may be able to add 2011). No doubt, you will find industry analyses such as IBIS WORLD that offer much more recent data. The assignment from the client is to value the company as of the divorce date. Part of your job is to decide whether or not to use recent data, or to act as if you only have data for 2011-2013. Be sure to explain your choice.

In a separate document you are provided with several years of financial data such as P & L Statements, and tax data compiled from subchapter S corporation returns (Form 1120S) for Baltimore Resins Corporation. It's very common for tax return data and P&L data to differ, and the analyst has to attempt to ask the client about that, or study the line items for clues. In your assignment, please describe your choice.

You are also provided with data for several SIC codes obtained from Business Valuation Resources Dealstats database. You are also provided with several background articles on the industry. Some of these are random data dumps, and are best disregarded. Others DO seem relevant, in terms of DCF or valuation multiples, on which you will rely in valuing the business. In real-world valuation engagements, picking good sources, and eschewing bad ones, is a big part of the job.

THE OVERALL TASK SUMMARY: Imagine that I am the attorney who is bringing forth the malpractice suit, and I "engage (hire you)" you to do a complete formal business valuation of Baltimore Resins Company, as of (or close to, since 2013 financial statements are not available).

Here are the questions (think of this as a way to choose topics to address and organize in your full report):

1) Describe, as best you can, each of the ATTACHMENTS below (mostly Business Valuation Resources Dealstats data sheets) that you actually used in formulating your opinion (a phrase used in litigation). State what you think each exhibit might be, and how each one might be used by an analyst....it's part of the digging process as one prepares to do a valuation. The format of each exhibit is what I got from DEALSTATS, as I entered queries....some search queries were casual attempts, just to see what the transactions looked like. Some, I used in my valuation report. You must decide which ones are useful and usable and relevant.

2) Giving considerable detail, propose which multiples and metrics from the Dealstats downloaded data sheets you feel would be valuable or appropriate in placing a value on Baltimore Resins Corporation as of the end of 2011. To be more specific: View the exhibit titled MAIN DATA-BALTIMORE RESINS CASE-EXHIBITS A-F. Look at B,C,D,E AND F. Each one is a download of BVR's DEEALSTATS reported transactions. But on each one, I specified slightly different search criteria, such as SIC code or sales level, etc (read the heading very carefully to see what I did). Your task is to glean from this mass of data what you feel are appropriate valuation multiples/metrics to actually apply. For example, for one of the group of metrics that you apply, you might choose the average of MVIC/NET SALES from Exhibit B and Exhibit C. Try to justify your choices. When you look at Exhibit F, you might choose specific transactions that have the word resins or plastics within. Your pdf "app" may have scanning ability-for example Adobe Acrobat can scan for words within a pdf document.

Note-One non-standard term used in DEALSTATS is SDE "Seller's discretionary income." That is defined as EBITDA +owner's salary and perks (perquisites such as car, food, salaries for the owner's children).

3) Using the background articles provided (last six files), write between two and three typed pages about the industry in which Baltimore Resins Corporation operates. Consider both microeconomic and macroeconomic trends. Consider industry-specific information that you glean from the documents. You may also find the following three websites relevant. They contain industry definitions and the industry's outlook.

https://www.plasticsindustry.org/

https://www.isri.org/

https://wasterecycling.org/

4) Now proceed to a final write-up to turn in to Sakai, which includes lengthy and complete descriptions of what you did in every single one of the steps above, and then at the end, present a shorter section that summarizes all the steps taken above. This will lead to and support your formal estimate of the value of Baltimore Resins Corporation. Your write-up should have a well-formatted reference list and include whatever exhibits you choose to create and to provide.

Examples of a full valuation report of this nature appear in the Trugman text, and I have also posted some in LESSONS.

This is how it would be in a real consulting context. A client would concentrate on your report, even if you made a presentation, or shared calculations.

In conducting this work, you will employ various documents that are posted. In this assignment, you do not have to gather additional outside industry information (you may be asked to do that on other cases). It is sufficient to process and summarize, in your own words, a subset of the information in the articles and sources that I provided above. In summary, you will submit THREE DELIVERABLES:

1-WORD or pdf document describing everything about your research and your calculations that lead to a statement of the business's value. Format this in any way you think adds to the reader's comprehension, I am agnostic with respect to formatting. TURNITIN will check for plagiarism.

2-EXCEL document showing valuation calculations

3-PPT document which is your "presentation." This does not need to have video of the team doing the talking, but it does have to include audio. PPT lets you record your voice, but there are many equivalent routes.

CH 10 TRUGMAN TEXTBOOK refers to PRATT's STATS---a private transactions database (now named DEALSTATS)

A big part of your job is to choose which list of "comps" to use.

I attach a rough valuation (VALUATION SPREADSHEET-2018 Goodwill article) workbook that I wrote, and I adapt all sorts of changes to it for specific situations. You should probably do a lot of personal editing for this case (I use this one mainly for doing sensitivity analysis).

I also attach a template that I think is good for working with DEALSTATS data (titled VALUATION METRICS AND WEIGHTS use with DEALSTATS).

You are TOTALLY free to edit these spreadsheets to suit your data, your "opinion," as they say in court proceedings. In fact, you can probably do better with your own custom EXCEL workbooks. I just wanted to give you tools if you wanted a good headstart.

This is a big assignment. This was a real-life consulting assignment. Part of your job, as students, is to parse through the masses of data, and boil this down to a usable product (i.e., your report, as if it were submitted to an attorney who engaged you).

Here are some responses to questions that have been asked by students:

1-You are not writing an engagement letter...that would be the job of the client who is "engaging you." Unless perhaps you mean a letter that YOU write to the client, outlining what you plan to do.

2-You ARE most definitely doing a full evaluation of Balt Resins Co. When I used the word "summary" in the assignment, I simply meant that you do all the steps of a valuation of the company, and then, in addition, you summarize all your steps, which of course you have written in report format. This is like anything you write at MSB...you do the job, and then you summarize at the end.

3-You are doing a full valuation as of 2013, or as close to that as the data allows, because the legal issue is that when the divorce decree happened, the court did not have information on the value of Baltimore Resins Co. And thus, it is claimed (in real life), that the settlement decree promulgated an inappropriate, and possibly unfair, asset split.

1 DEALSTATS VALUE INDEX | 2Q 2019bvresources.com/dealstats

Value Index 2Q 2019

MULTIPLES FALL IN 1Q 2019

EBITDA multiples across all industries were highest over a five-year period in the third quarter of 2017, at 4.8x. In the second quarter of 2018, these multiples fell to 3.1x—the lowest levels since the third quarter of 2013. After rising in the third and fourth quarters of 2018, these multiples once again fell to near recent lows (3.2x) in the first quarter of 2019. Nevertheless, the trailing three-month average for multiples has increased over the past three quarters. The relatively smooth trailing three-month average trend line from the third quarter of 2014 through the first half of 2017 gave no clear indication that large fluctuations in multiples paid would ensue in the quarters ahead.

The DealStats Value Index summarizes valuation multiples and profit margins for private companies that were sold over the past several quarters. Business Valuation Resources (BVR) captures this private company transaction data in its DealStats platform. Most BVR deals are not otherwise publicly available. The DealStats Value Index is updated quarterly and, as a result, past figures may change in future issues as new data are reported.

3.5

3.1 3.2

4.1

3.9

3.6

4.0

3.9

3.6

3.9 4.0

3.5

3.6

4.1

4.4

3.7 3.6

4.8

3.9

3.2 3.1

4.4

4.6

3.2

2.5

3.0

3.5

4.0

4.5

5.0

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Q1 2017

Q2 2017

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

S el

lin g

P ri

ce /E

B IT

D A

Selling Price/EBITDA Trailing 3-month average

EXHIBIT 1. MEDIAN SELLING PRICE/EBITDA WITH TRAILING THREE-MONTH AVERAGE

This digital edition was created exclusively for the use of Joel Morse of University of Baltimore. For licensing options, please contact Business Valuation Resources at sales@bvresources.com.

https://www.bvresources.com/learn/dealstats
2 DEALSTATS VALUE INDEX | 2Q 2019bvresources.com/dealstats

EBITDA MARGINS ON THE RISE

EBITDA, as a percentage of revenue, has trended upwards in the most recent two quarters, tying a five-year high in the first quarter of 2019, at 15%. After reporting at the lowest level (3.1x) in the second quarter of 2018, the selling price-to-EBITDA multiple steadily rose through the fourth quarter of 2018, to 4.6x, before falling near a five-year low to 3.2x in the first quarter of 2019. The peaks and valleys of the EBITDA multiple moved opposite to that of the EBITDA margins. DealStats is tracking the trend to see whether it continues through the rest of 2019.

EXHIBIT 2. MEDIAN SELLING PRICE/EBITDA WITH EBITDA MARGINS

2.0

2.3

2.6

2.9

3.2

3.5

3.8

4.1

4.4

4.7

5.0

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Q1 2017

Q2 2017

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

S el

lin g

P ri

ce /E

B IT

D A

EB IT

D A

P er

ce nt

ag e

EBITDA Margin

Selling Price/EBITDA

SELLING PRICE/EBITDA MEDIAN IS 4.4X

EBITDA multiples are highest for the information sector (11.1x) and the mining, quarrying, and oil and gas extraction sector (8.4x). Meanwhile, the lowest EBITDA multiples are in the accommodation and food services (2.6x) and the other services sectors (3.0x). The median across all industry sectors is 4.4x.

EXHIBIT 3. SELLING PRICE/EBITDA BY SECTOR

7.7 8.4

6.4

4.0

6.6

5.5

3.8 3.8

11.1

7.5

3.7

6.6

3.6 3.6

6.3

3.7

2.6 3.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

S el

lin g

P ri

ce /E

B IT

D A

Median for All Sectors

Agriculture, Forestry,

Fishing, and Hunting

Construction

Manufacturing

Wholesale Trade

Retail Trade

Transportation and

Warehousing

Information

Finance and

Insurance

Real Estate,

Rental and Leasing

Professional, Scientific,

and Technical Services

Administrative, Support,

Waste Mgmt., and

Remediation Svcs.

Educational Services

Health Care and

Social Assistance

Arts, Entertainment,

and Recreation

Accommodation and

Food Service

Other Services

Mining, Quarrying,

and Oil and Gas Extraction

Utilities

4.4

This digital edition was created exclusively for the use of Joel Morse of University of Baltimore. For licensing options, please contact Business Valuation Resources at sales@bvresources.com.

https://www.bvresources.com/learn/dealstats
3 DEALSTATS VALUE INDEX | 2Q 2019bvresources.com/dealstats

EXHIBIT 4. 2018 INDUSTRY SECTOR VOLUME CHANGE FROM PRIOR YEAR

ACQUISITIONS SLOW IN 11 OF 15 INDUSTRY SECTORS IN 2018

The pace of private-company acquisitions slowed in 11 of the 15 industry sectors from 2017 to 2018. The number of acquisitions in the transportation and warehousing sector had the biggest decline, 48.7%, while acquisitions in the educational services sector saw the largest increase, 68.4%.

8.4%

-20.7% -14.5%

-18.5%

-48.7% -34.8%

-20.9%

0.0%

-38.5%

-18.7%

68.4%

-30.4%

-13.5%

3.2%

-30.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

0

50

100

150

200

250

300

350

P er

ce nt

ag e

C ha

ng e

Fr om

P ri

or Y

ea r

20 18

V ol

um e

by In

du st

ry S

ec to

r

2018 Volume Percentage Change From Prior Year

Construction

Manufacturing

Wholesale Trade

Retail Trade

Transportation and

Warehousing

Information

Finance and

Insurance

Real Estate,

Rental and Leasing

Professional, Scientific,

and Technical Services

Administrative, Support,

Waste Mgmt., and

Remediation Svcs.

Educational Services

Health Care and

Social Assistance

Arts, Entertainment,

and Recreation

Accommodation and

Food Service

Other Services

Note: Each data point in this chart is based on a minimum of 10 transactions of private targets. If an industry sector does not meet this criterion, it is not included in the chart.

The DealStats Value Index (ISSN 1937-9021) is published quarterly and exclusively for subscribers of DealStats by Business Valuation Resources, LLC, 111 SW Columbia Street, Suite 750, Portland, OR 97201-5814. Contact info@ bvresources.com for more information or visit our website at bvresources.com.

Although the information in this publication has been obtained from sources that BVR believes to be reliable, we do not guarantee its accuracy, and such information may be condensed or incomplete. This publication is intended for information purposes only, and it is not intended as financial, investment, legal, or consulting advice.

Copyright 2019, Business Valuation Resources, LLC (BVR). All rights reserved. No part of this document may be reproduced without express written consent from BVR. Please direct requests to permissions@bvresources.com.

Kenneth Woo Economic and Data Editor

David Foster CEO

Lucretia Lyons President

Sarah Andersen Publisher

This digital edition was created exclusively for the use of Joel Morse of University of Baltimore. For licensing options, please contact Business Valuation Resources at sales@bvresources.com.

https://www.bvresources.com/learn/dealstats
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4 DEALSTATS VALUE INDEX | 2Q 2019bvresources.com/dealstats

EXHIBIT 5A. MEDIAN SELLING PRICE/NET SALES BY NET SALES RANGE (PRIVATE TARGETS)

PRICING MULTIPLES AND PROFIT MARGINS ON THE MOVE

As shown in the legend for Exhibits 5A to 5C and Exhibits 6A to 6C, pricing multiples for private target acquisitions are displayed across four selling price ranges. Exhibit 5A shows the nets sales multiple for transactions greater than $10 million reached peak levels in 2017 and 2018, at 1.58x and 1.97x, respectively. Multiples for acquisitions between $5 million and $10 million trended downward from 2014 through 2017, but saw a modest rise in 2018. Net sales multiples for transactions between $1 million and $5 million had been relatively smooth, but rose from 0.44x in 2018 to 0.64x through the first quarter of 2019.

0.0