ANALYSING AND RECASTING FINANCIAL … #3...The greater the loan you can get ... behind the decision to buy or sell the assets vs. the corporation. ... 34 . Title: ANALYSING AND

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through valued representation

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REPRESENTATION

Welcome to Volume #6 Course # 3

ANALYZING AND RECASTING

“RECASTING EXAMPLE”


OUR GOAL

FOR THIS COURSE IS TO:

PRACTICE RECASTING AN INCOME STATEMENT AND

REVIEW OF THE BALANCE SHEET

3


WHAT YOU WILL LEARN…

Recast a financial statement for a Typical

Company

•

4

Copyright © 2008 VR Business Brokers 5

Course 2: Class exercise

In this section you will:

Recast a financial

statement for a

Typical Company

Typical Company Income Statement __________________________________________________________ 2007 %_____________ Revenue Net Sales $1,500,000 100.00% Cost of Goods Sold Purchases 700,000 46.67% Gross Profit 800,000 53.33% Operating Expenses Officer’s Salary 150,000 10.00% Payroll 250,000 16.67% Payroll Taxes 27,500 1.83% Workman’s Compensation 4,000 0.26% Office Supplies 10,000 0.67% Auto Expenses 3,000 0.20% Freight 4,000 0.26% Auto Lease 8,000 0.53% Legal & Accounting 8,000 0.53% Charitable Contributions 2,000 0.13% Utilities 5,000 0.33% Telephone 7,000 0.46% Advertising 18,000 1.20% Travel 5,000 0.33% Meals & Entertainment 4,000 0.26% Dues and Subscriptions 2,000 0.13% Insurance-General 10,000 0.67% Insurance- Medical 6,000 0.40% Insurance-Officer’s Life 1,500 0.10% Interest Expense 15,000 1.00% Maintenance and Repairs 7,000 0.46% Rent 48,000 3.20% Equipment Rent 3,000 0.20% Security & Alarms 2,000 0.13% Licenses & Fees 2,000 0.13% Personal Property Taxes 500 0.03% Bank Service Charge 500 0.03% Depreciation 10,000 0.66% Miscellaneous 3,000 0.02% Total Operating Expenses $616,000 41.07% Ordinary Income $184,000 12.26%

Copyright © 2008 VR Business Brokers


Seller Comments about Typical

Company’s Add Backs

Payroll taxes ran 11%

Auto expense was personal

Auto lease was personal

General insurance included $2,000 for Seller’s

auto insurance

Medical insurance was Seller’s

Life insurance was Seller’s

Equipment rental was a one-time non-recurring

expense for a fork lift they now own.

Lease will expire next year. New lease available

for $5,000 per month.

SDE RECAST SHEET

Name of Business: Typical Company

Year/Period 2007

1 Sales 1,500,000

2 Cost of Sales 700,000

3 Payroll 250,000

4 Rent 48,000

5 Remaining Opt. Expenses 345,000

6 Total Operating Expenses 643,000

7 Operating Income/Pre-Tax Profit 157,000

8 Depreciation & Amortization 10,000

9 Interest 15,000

10 Officer’s/Owner’s Salary 150,000

11 Adjusted Income for SBA 332,000

Discretionary Expenses (Define Miscellaneous)

12 Auto for owner’s personal use 3,000

13 Insurance for owner’s personal use 9,500

14 Travel not required by business 5,000

15 Entertainment 4,000

16 Meals

17 Profit Sharing/Retirement for owner

18 Miscellaneous: (Charitable Contrib.) 2,000

19 Miscellaneous:

20 Miscellaneous:

Non-Recurring Expenses (Define)

21 Rented fork lift – now own it. 3,000

22

23

Expenses not included on P&L (To be subtracted from Earnings)

24 New Rent adjustment (12,000)

25

26 Total Adjustments 14,500

27 Seller’s Discretionary Earnings $346,500

The undersigned hereby warrant(s): 1) He/They is/are the owner(s) of the business, 2) the above is a true representation of

the discretionary earnings of the business, 3) the information is furnished to broker pursuant to the Representation/Listing

Agreement between owner and broker, 3) broker is authorize to share with potential purchasers of the business, 4) Owner

hereby indemnifies Broker for any liability arising from Broker’s use of this information. All parties receiving this

information are hereby notified that Broker has not made any investigation into the accuracy of the information

contained on this sheet and those parties are to make their own independent investigation as to the accuracy of this

information and to look solely to the Seller for any loses or damages caused by the inaccuracy of this information.

_____________________________________ _____________________________________

Owner: Date: Owner: Date:




Course 3: Recasting a Balance Sheet


Module 3: Recasting a Balance Sheet

In this section you will:

Review a typical balance sheet

Learn why we recast a balance sheet

Compare what items we typically recast:

For an asset sale

For a stock sale

Review a Sample Balance Sheet Recast form


What is a Balance Sheet?

A Balance Sheet is a financial statement that

expresses the financial status of a business on a

given date.

It is a listing of all the assets and liabilities of a

company on that date and can be used to identify

the assets and liabilities of the company.

A balance sheet can also help an associate or

buyer determine the financial health of the

business.

It is referred to as a Balance Sheet because Total

Assets equal (are in balance with) Total Liabilities

+ Shareholder Equity

Sample Company Inc. Balance Sheet SAMPLE COMPANY, INC.

STATEMENT OF ASSETS, LIABILITIES AND STOCKHOLDER’S EQUITY – INCOME TAX BASIS

(BALANCE SHEET)

April 30, 2003 (Unaudited)

ASSETS Current Assets

Cash $ 7,937 Accounts Receivable 78,520 Inventory 52,853 Prepaid Expenses 53,614

Total Current Assets $192,924 Fixed Assets

Office Furniture & Equipment 10,363 Machinery & Equipment 143,857 Vehicles 42,377

Less: Accumulated Depreciation (96,858) 99,739

TOTAL ASSETS $292,663 LIABILITIES AND STOCKHOLDER’S EQUITY Current Liabilities

Trade Accounts Payable $189,388 Payroll and Sales Taxes Payable 9,478 Accrued Expenses Payable 740

Total Current Liabilities $199,606 Stockholder’s Equity

Common Stock 1000 Retained Earnings 92,057 93,057

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY $292,663

See accountants’ compilation report.



Assets

Current Assets

Cash

Accounts Receivable

Inventory

Prepaid Expenses


Assets (Continued)

Fixed Assets

Furniture

Equipment

Vehicles

Leasehold Improvements

Less Depreciation

Total Assets


Liabilities

Current Liabilities (due within 12 months)

Accounts Payable

Payroll and Sales Taxes

Accrued Expenses

Current Portion of Long-Term Liabilities

Current Portion of Long-Term Leases


Liabilities (Continued)

Long-Term Liabilities (exceed 12 months)

Equipment loans

Capital Leases

Loans from Shareholders

Total Liabilities


Shareholder Equity

Stock (Shows # of Shares)

Preferred

Common

Retained Earnings


The Two Sections of the Sheet Balance

Total Liabilities

+ Share HolderEquity

Total Assets


Tax Return & Balance Sheet

Tax Returns include a balance sheet page

listing all assets and liabilities at the time the

tax return completion date.

Interim Balance Sheets give a more current

value of assets.

Offers are usually based on current balance

sheet information.



Why Recast a Balance Sheet?

To determine a realistic picture of the value of the

assets included in a sale and what liabilities come

with the business.

Book value of assets and fair market value of

assets may differ significantly.

The greater the assets:

The greater the loan you can get

The more value the buyer sees in the deal


Current Assets

Are these current assets included?

Cash

Receivables

Prepaid Expenses

Inventory

Are there any adjustments to current assets?


Inventory

The value of the inventory often needs to be

adjusted for:

Obsolete merchandise

Surplus merchandise

Unsaleable merchandise

Physical inventory vs. book value

Sometimes inventory includes Works in

Progress


Personal Story

Seller owned two liquor stores and sold one.

The one he sold had a substantial wine section

but the wine was stocked upright.

Buyer was concerned the wine might be spoiled

so the wine was excluded from the sale.

The night before the escrow closed the Seller

moved the wine to his second store.

Buyer had already arranged for new wine to be

delivered.


Book Value vs. Market Value

Balance sheet shows the depreciated value of the

furniture, fixtures, and equipment.

Depreciation is usually taken at an accelerated

rate.

Thus market value can be significantly higher than

book value.


Sample Co. Fixed Assets

Fixed Assets (from Balance Sheet)

Office Furniture $ 10,363

Machinery & Equipment $143,857

Vehicles $ 42,377

Less Accumulated Deprec. -$ 96,858

Current Book Value $ 99,739


Potential Adjustments to Sample

Company’s Fixed Assets

Auto is not included in sale.

What is the Market Value of:

Office Furniture

Machinery & Equipment

When doing a formal valuation you may need to

appraise the equipment piece by piece.

In most transactions a reasonable estimate will

due. What would it cost to buy the equipment in its

current condition on the open market?

One tip is to adjust the amount of depreciation to

reflect the real life of the equipment.


The following form was used to recast the

balance sheet for Sample Company.

RECASTED BALANCE SHEET FORM

BUSINESS NAME: _Sample Co________________ Date: ___05/01/2003______

RECASTED BALANCE SHEET FORM

BUSINESS NAME: Sample Co Date: 05/01/2003

ASSETS Book Value Adjustments Adj. Balance Comments

Current Assets

Cash 7,937 (7,937) 0 Not Included

Accounts Receivable 78,520 (78,520) 0 Not Included

Prepaid Expenses & Deposits 53,614 (53,614) 0 Not Included

Inventory 52,853 - 52,853 No Adjustment

Total Current Assets 192,914 (140,071) 52,853

Fixed Assets

Machinery & Equipment 143,857 0 143,857

Vehicles 42,377 (42,377) 0 Not included

Furniture 10,363 0 10,363

Leasehold Improvements

Less Accum. Depreciation (96,858) 50,000 (46,858) *Depreciation

was reduced by $50,000 to account for current value of F,F, & E

Net Fixed Assets 99,739 7,623 107,362

TOTAL ASSETS $160,195

LIABILITIES

Total Adjusted Assets Included in Sale = Adjusted Balance of Current Assets + Adjusted Balance of Fixed Assets)

Current Liabilities

Accounts Payable 189,388 (189,388) 0 *

Accrued Expense Liabilities 740 (740) 0 *

Accrued Tax Liabilities 9,478 (9,478) 0 *

Current Portion of L.T. Lease

Current portion of L.T. Notes

Total Current Liabilities

*Seller delivered business Free & Clear of any Liabilities!

Notes Payable - No long term

- liabilities

Capital Leases -

Loans from Shareholders -

Total Long Term Liabilities 0 0

Total Liabilities



Asset Sale vs. Corporate Sale

There are many advantages and disadvantages

to selling or buying the assets vs. the

corporation.

That is not the scope of this class. A good

associate must learn the basic reasoning

behind the decision to buy or sell the assets vs.

the corporation.


Asset Sales

Buyer buys most of the assets of the company but

not the stock of the company

The corporation is the seller

Typically the Cash is not included.

Receivables can be included or excluded

Except in cases where assuming a liability may

help make a deal, payables and other liabilities are

usually not included.

Some personal items may not be included


Corporate Sales

Buyer actually buys the stock of the company and

thus becomes the corporation.

The Share Holders are the Sellers

Most balance sheet items are included

Sometimes personal items like the owner’s vehicle

are excluded.

Less than 10% of our sales are corporate sales


WHAT YOU HAVE LEARNED…

Recast a financial statement for a Typical

Company

33


THINK POSITIVE

THINK BIG

THINK VALUED REPRESENTATION

VR HAS SOLD MORE BUSINESSES

IN THE WORLD THAN ANYONE

34

Documents

ANALYSING AND RECASTING FINANCIAL … #3...The greater the loan you can get ... behind the decision to buy or sell the assets vs. the corporation. ... 34 . Title: ANALYSING AND