Business Valuation and Sale
Prospectus Report

 

For:

 

Central States Supply

132 Industrial Park Road
Bowling Green, Kentucky 42101

 

Prepared for:

Leonard Shuster

 

Date of Valuation: January 27, 2008


Prepared by:

Russell L. Brown
RDS Associates, Inc.

291 Main Street
Niantic, CT 06357

Personal and Confidential




Preface

This Company's Business Valuation and Sale Prospectus Report is provided for the sole and exclusive use of Leonard Shuster, Owner. The business valuation pertains to Central States Supply, a C-Corporation, (herein after referred to as the “Company”). The purpose of this Report is to provide the opinion of Russell L. Brown as to the fair market value of the Company based on the financial operating information for the last three fiscal years through December 31, 2007, and other considerations.

The term “fair market value” is defined as the price at which a business would change hands between a willing and knowledgeable buyer and a willing and knowledgeable seller. This Report:

The appraisal and subsequent valuation estimate of a closely-held business such as Central States Supply, is not an exact science and requires considerable judgment of many factors such as:

The author of this Business Valuation and Sale Prospectus Report has relied on the information provided by Thomas C. David, Accountant, Robert T. Hedden, Attorney as to the nature of its operations and financial performance. No attempt has been made to independently verify the accuracy of the information although all facts presented are believed to be true and fully supportable under a rigorous due diligence examination.




 

Section 1

BUSINESS DESCRIPTION

 

 

BUSINESS DESCRIPTION

ORIGIN, OWNERSHIP AND CONTROL

 

Central States Supply, (hereinafter referred to as the “Company”) was started as a C corporation and was incorporated in the State of Kentucky on September 1, 1992 by Mr. Leonard Shuster, et al.

As of the date of this valuation the corporate shareholders and officers are:

Mr. Leonard Shuster, 50% stockholder, age 60, (President/Operations Manager)
Mr. William Shuster, 25% stockholder, age 62, (Vice-President/Sales Manager) - brother of Mr. Leonard Shuster
Mrs. Libby Shuster, 25% stockholder, age 58, (Secretary/Financial Manager
) - spouse of Mr. Leonard Shuster

The Company’s headquarters are located at 132 Industrial Park Road, Bowling Green, Kentucky.

The Company’s Federal Employer Identification Number is: 43-1625426

The Company’s accounting firm/statutory agent is Thomas C. Davis, CPA, 432 Elm Street, Suite 5, Bowling Green, Kentucky


 

 NATURE OF THE BUSINESS

 

The Company’s primary business is the acquisition and reselling of used industrial truck parts, principally engines and associated parts. The Company last year purchased more than 2,500 used engines from a wide variety of sources across the United States. Employees routinely travel within a 1,000 mile radius of the Company's headquarters in Kentucky to purchase and/or deliver truck engines. Commercial freight services are also used for pickup and delivery of engines. The main buyers are Leonard and William Shuster. Each week, these two individuals travel to established trade areas primarily to purchase inventory which is returned to the Company's warehouse where it is inspected, inventoried and readied for resale. Essentially no refurbishment is accomplished. Running engines are left intact and sold to a regular client base of purchasers, many of whom have verbal agreements to purchase a certain number per month. Certain types of non-running engines are also sold intact, while  the other engines are broken into parts; the salable used parts are then categorized and stored on the Company's premises for future sale. Any non-usable parts are sold for scrap metal value.

The Company has developed a significant competitive advantage in finding good quality engine cores by offering to buy all qualities of cores (poor through good) and most importantly, paying the suppliers on the spot. 
 

PRIMARY CUSTOMERS

 

As with the supplier base, the customer base is large and diverse and national (and to some extent, international) in scope; and some of the suppliers are also customers. This large customer base ensures the Company will have reliable outlets for its inventory, enabling it to acquire engines and parts with less concern for selectivity than its competitors. This fact seems to be one of the keys to the Company’s success; it has the proven sales outlets to give it a more confident and aggressive buying approach. The customer base includes independent engine rebuilders; large corporations such as Caterpillar, Cummins, Mack, International and Ford; various truck body shops and certain parts exporters.

The owners indicate there are about 400 accounts on their books, of which about 25% tend to be active on a given billing cycle. The largest account is the Caterpillar Corporation which represents approximately 12% of the Company’s revenues and several others fall in the 5%-8% range. All major accounts are reported to be active and prospects for continued relationships appear sound. The Company reports that they are one of only three primary suppliers of engine cores to Caterpillar and that the business relationship is excellent and arm’s-length in nature.

The Company exports a small (less than 10%) of its products to Canada, Mexico, and South America. The Company does not have an export license and sells through intermediaries.

 

 

PRIMARY PRODUCTS AND SUPPLIERS

 

One of the several keys to success for the Company has been its development of a large, diverse base of suppliers who provide a steady flow of used engines and parts. These suppliers include a variety of independent repair shops, trucking companies with in-house service departments, salvage haulers and salvage yards, other core suppliers and small local scrap dealers.

The Company has developed a reputation within its industry as a dependable purchaser for both running and rough used industrial engines. Unlike many of their competition, they will offer to “take the good with the bad” at a fair price. The Company’s owner and the other buyer/salesman are typically in the field and each travel a route with a tractor/trailer, picking up engines for resale and delivering sold items. Although some of the Company’s engines are purchased outside of its travel area (approximately a 1000 mile radius), the majority of its used engine core buys are accomplished in person by a Company employee.

The business had its start with the seller buying salvage engines and parts, developing reliable continuing sources and nurturing trusted relationships with those sources. The Company continues to operate in the same fashion today and most engine cores and parts are picked up and paid for on the spot.

Marketing efforts in the past year have been expanded to include a direct mail campaign, Yellow Pages ad, web site (under construction) and the addition of another full-time salesman/buyer (in addition to the owner). Even with these efforts, the sellers believe there is much room for expansion of the business through addition of sales personnel for the conventional market and an increased emphasis on the export market as well as other opportunities.

It appears to this writer that the fundamental requirement for the past and future success of this Company is a continuing supply of resalable diesel engine cores. It seems that the market for used diesel cores is very large nationally and global in nature so continued demand for the Company’s product doesn’t appear to be an issue. Maintenance and expansion of the Company’s business base will depend on its ability to continue to locate and purchase engine cores at favorable prices. The Company appears to have developed a successful three-facet business model to accomplish this:

 

         Cores are primarily acquired through a face-to-face transaction between a Company employee who is empowered to make an immediate purchase decision. (The Company owner and one other carefully trained employee).

         On-the-spot  purchases are made at favorable prices to the Company by offering immediate payment and removal of the engines.

         The Company purchases all quality of engine cores from the suppliers who see an opportunity to generate immediate cash and rid themselves of questionable engine cores that may not otherwise be salable.

 

COMPETITION

 

The Company reports its primary competitors are:


•��� Tom’s Truck Parts, Ohio
•��� Lake City Truck Parts, Tennessee
•��� World Trucking Supply, New Jersey
•��� Truck Rebuilders Supply, Florida

 

The Company doesn’t envision any problems with increased competition from any of its competitors. They feel that there is more than enough business to go around and that many of the competitors specialize to a degree that works in the Company’s favor. For example, some competitors deal only with Cummins or Caterpillar engines, some are only interested in engine tear-downs and the ability to rebuild the engines, etc. The Company's primary competitive advantage is that it handles essentially all engine types.

 

EMPLOYEES

The Company has ten full-time employees including the three owners. The husband-wife ownership team (Leonard and Libby) are both active in the business on a day-to-day basis with the husband serving as both the Operations Manager and one of three engine buyers/salesmen. The wife serves in an accounting/bookkeeping capacity. She is the Corporation’s Secretary; he is the President. William Shuster is Leonard's brother and works as an engine buyer/salesman.  It appears that Leonard Shuster is the primary reason for the Company’s apparent business success. The staff include:

Engine Disassembly (3) -$10-$12 per hour
Shipping/Receiving (1) -$12 per hour
Operations/Sales Manager (1) -$500 per week plus commissions
Product Buyer/Salesman (1) - $500 per week plus commissions
Facility Manager (1) - $50,000 annually
Accounting/Payroll (1) - $800 per week
Shop Help (1) - $10 per hour
Office Clerk (1) -$10 per hour

Employee benefits include health insurance and uniforms. There are no pension or profit-sharing liabilities and the Company is non-union.

The key employee (besides the owner, Leonard Shuster) is Mr. Jim Taylor, the Facility Manager. The Company owner (Leonard Shuster) reports that he has groomed Mr. Taylor to do everything that he himself is able to do in the key aspects of running the Company and favorably purchasing engine cores. Mr. Shuster reports that Mr. Taylor is well-satisfied with his employment arrangements and is willing to stay on with the Company under new ownership. Mr. Shuster believes an employment contract can be arranged with Mr. Taylor if a new owner wants it.

 

FACILITIES, PROPERTY AND LOCATION

 

The Company is located in Bowling Green, Kentucky, a mid-sized city. Bowling Green has been experiencing high economic growth due to its desirable location and general quality of life. The labor market is considered adequate for the current business and any possible expansion of the Company.

The Company operates from a two-building facility owned by the sellers and leased back to the Corporation. The main building is 20,000 square feet, brick and block, and houses the main warehouse plus shop, shipping and receiving operations. The second building is 5,000 square feet and houses the office plus additional storage space. The entire parcel comprises three acres of land, is properly zoned (industrial) for the Company's business, and offers significant physical expansion opportunity. There are two loading docks and enough paved area to allow the receiving of two full-size trailer trucks at one time. Mr. Shuster estimates that the business activity could increase by about 25% before additional space would be required.

The facility is located in an Industrial Park and is located within one mile of a major interstate highway.

The Company owners are willing to enter into a long term lease for the real estate with the purchasers, terms to be negotiated, as part of the business sale.

Due to the nature of the business involving automotive fuels and oils, the Company reports it is fully compliant with all local, state and federal environmental controls and conditions.

 

REASON FOR SALE

 

The Company owners are hands-on and detail-oriented which results in long workdays. This management style, combined with their choice to continue traveling as an  engine buyer/salesman, have resulted in many six and seven day weeks over the past fourteen  years and the owners are experiencing some personal burn-out as they approach retirement age. Also, they seem to be unsure of their ability to provide the marketing and management expertise needed to take the business to a higher level. Leonard Shuster has agreed to staying on for a substantial transition period (up to one year) with a new owner in a separately compensated operations management role or other capacity to be negotiated to help ensure the Company's continued success.

The principal owner also reports that he has other non-competitive  and less taxing business interests in the area that he would pursue part-time in the event of a Company sale. All three current Company owners will enter into a Non-Competitive agreement with the new owners. Based on this, the owners' ages (60, 62, 58) and the stated desire for semi-retirement, I conclude that the sale of the Company will be financially motivated with the requirement for a substantial amount of up-front cash by the buyer. However, the Company owners are willing to finance up to 60% of the purchase price at terms to be negotiated.

 

DEAL STRUCTURE

 

This valuation includes the following Company tangible and intangible assets:

This valuation does not include the following tangible assets and liabilities:

Additionally:

 

FUTURE GROWTH POTENTIAL

 

This Company has an excellent outlook for future growth using its current business model. This conclusion is based on its consistent revenue and available cash flow (ACF) growth for the past five years, a growing market in which the Company competes and viable plans within the Company of expanding its customer reach. The Company has a very secure product and/or services mix that will discourage new competition based on:

  1. The Company�s primary product refurbishment process is protected by patent number 5,534,759 issued by the U.S. Patent and Trademark Office (USPTO) on July 9, 1996 and which has five years of remaining life. The Company believes that a new patent pending application will essentially extend the useful protected life of its current basic process by an additional 17 years.
  2. The Company�s primary raw product (engine cores) consists of a proprietary acquisition method which is not well known and is expected to inhibit future competition.
  3. The Company has a well-known name protected by local common usage laws and a high quality reputation earned within its market area.
  4. The Company�s product production requires the use of significant capital equipment and specialized unique tooling not easily replicated by a new competitor.

The Company has a new product that is expected to contribute significantly to the future revenues and earnings growth:

  1. The Company has a new proprietary product developed as part of its ongoing operations but not yet deployed. This new product is expected to contribute significantly to the future revenues and earnings growth beginning in 12-24 months. Please refer to the Confidential Addendum for more information describing this new proprietary product. This Addendum is available from Mr. Thomas Davis, Accountant, Bowling Green CPA Offices upon acceptable execution of a Non-Disclosure Agreement. This new proprietary product has not yet been launched because of the following:
    1. The Company does not have the necessary capital required to successfully introduce the new product to the expected market without taking on new financing which is counter-productive to the owner�s plans to sell the business and retire.
    2. The Company owners have elected not to introduce the new product to the expected market due to their retirement plans within the next year.
  2. The Company also has a new marketing and sales approach that has been tested and is forecasted to increase market share and to be begin contributing significantly to the future revenues and earnings growth beginning within the next 24-36 months.
    1. The new marketing and sales approach will target an entirely new segment of the market for their existing products. Test marketing has revealed that there is a large potential for overseas sales in rapidly developing economies such as India and China.
    2. Early test marketing has shown that the acquisition of used engine cores and the sale of refurbished engines is potentially profitable even with the increased cost of transportation and in-country sales and marketing.

 

LITIGATION



The Company reports that it is not a defendant in any litigation nor is it aware of any claims pending or which may be asserted against the Company.




 

Section 2

COMPANY FINANCIAL HISTORY

 

 




COMPANY FINANCIAL HISTORY

The following examples are taken from actual business valuations and are provided for your adaptation to fit the details of this business valuation. Select the most appropriate example below, edit it to describe this business valuation, and delete the other examples as well as this bolded text.

Example 1:

The Company has a stable business history with moderately increasing sales over the last three years. The following pages contain copies of the Company�s Federal Income Tax Returns and/or financial statements for the latest three fiscal years.

Example 2:

The Company has a strongly growing business history with sales increasing substantially in each of the last three years with commensurate profit growth. The following pages contain copies of the Company�s Federal Income Tax Returns and/or financial statements for the latest three fiscal years.

Example 3:

The Company has a declining financial history in both sales and profits sales for the last three fiscal years. The following pages contain copies of the Company�s Federal Income Tax Returns and/or financial statements for the latest three fiscal years.

In summary, sales have been:

Unreconstructed taxable income has been:

Ending inventory levels have been:




 

Section 3

RECONSTRUCTED INCOME AND EXPENSES

 

 




RECONSTRUCTED
INCOME AND EXPENSES

The Company�s Income and Expenses have been reconstructed (adjusted, recast, normalized) to determine the potentially available cash flow (ACF) for a new owner. This has been done to show the �free cash flow� or �current net earnings� in the business to allow a potential buyer to determine the true investment value of the business.

The following pages contain the reconstructed income and expenses (with explanatory notes) and the resultant reconstructed earnings (ACF).

The reconstructed earnings are the business�s earnings before interest, taxes, depreciation and amortization (EBITDA), before the owner�s discretionary expenses, and appropriately adjusted for extraordinary and/or non-recurring income and expense items.

The reconstructed earnings (ACF) for the latest three fiscal years are:


A weighted reconstructed annual adjusted earnings (ACF) will be a factor in calculating an estimated overall value for the business under the premise that the most recent results are the most predictive of future earnings and therefore should carry greater weight in a three-year span of consideration. The calculated three-year weighted average adjusted reconstructed earnings (ACF) is $689,520.




Income & Expense Reconstruction <%cont%>

Central States Supply
132 Industrial Park Road

Bowling Green, Kentucky 42101

This data is "as of" December 31, 2007

Accounts             Notes
Fiscal Year Ending: 2007   2006   2005        
  ACTUAL ADJUSTED ACTUAL ADJUSTED ACTUAL ADJUSTED  
REVENUES                  
Business Sales 3,067,651 3,067,651 2,713,044 2,713,044 2,461,540 2,461,540 1    
Return & Allowances 10,551 10,551 8,432 8,432 0 0      
Other Income.1 6,695 5,534 12,714 8,004 6,870 2,897 2    
TOTAL INCOME $3,063,795 $3,062,634 $2,717,326 $2,712,616 $2,468,410 $2,464,437  
                   
COST OF SALES              
Purchases 1,457,005 1,457,005 1,317,300 1,317,300 1,227,057 1,227,057      
Direct Labor 42,900 42,900 38,322 38,322 35,200 35,200      
Other Costs 8,240 8,240 6,500 6,500 0 0      
TOTAL COST OF SALES $1,508,145 $1,508,145 $1,362,122 $1,362,122 $1,262,257 $1,262,257  
Beginning Inventory 451,570 451,570 354,973 354,973 282,900 282,900      
TOTAL COST OF INVENTORY FOR SALE $1,959,715 $1,959,715 $1,717,095 $1,717,095 $1,545,157 $1,545,157  
Ending Inventory 544,750 544,750 451,570 451,570 354,973 354,973      
TOTAL COST OF GOODS SOLD $1,414,965 $1,414,965 $1,265,525 $1,265,525 $1,190,184 $1,190,184  
                   
GROSS INCOME $1,648,830 $1,647,669 $1,451,801 $1,447,091 $1,278,226 $1,274,253  
                   
OPERATING EXPENSES              
Advertising and Promotions 18,485 18,485 5,548 5,548 5,257 5,257      
Amortization 10,352 0 10,352 0 10,352 0 3    
Automobile 3,432 3,432 2,875 2,875 3,205 3,205      
Bad Debts 2,870 2,870 0 0 0 0      
Bank Charges 949 949 851 851 643 643      
Compensation of Officers/Partners 607,356 250,000 641,393 266,102 529,233 267,000 4    
Contract Labor 3,657 3,657 14,018 14,018 2,414 2,414      
Contribution & Charity 520 0 540 0 354 0 5    
Depreciation 49,667 0 39,271 0 44,000 0 6    
Dues and Subscriptions 3,223 3,223 1,945 1,945 1,286 1,286      
Employee Benefit Programs 2,346 2,346 7,891 7,891 1,438 1,438      
Entertainment 379 379 498 0 316 0 7    
Freight & Shipping 70,564 70,564 74,593 74,593 42,039 42,039      

Income & Expense Reconstruction -continued

Central States Supply
132 Industrial Park Road

Bowling Green, Kentucky 42101

This data is "as of" December 31, 2007

Accounts             Notes
Fiscal Year Ending: 2007   2006   2005        
  ACTUAL ADJUSTED ACTUAL ADJUSTED ACTUAL ADJUSTED  
Fuel 14,337 14,337 13,852 13,852 12,826 12,826      
Insurance-health 11,591 11,591 6,725 6,725 5,730 5,730      
Insurance-keyman 10,500 0 9,800 0 9,500 0 8    
Insurance-property 31,988 31,988 22,667 22,667 20,244 20,244      
Interest 15,299 0 16,102 0 17,000 0 9    
Internet Related 677 677 580 580 550 550      
Janitorial & Cleaning 6,478 6,478 5,874 5,874 5,643 5,643      
Miscellaneous-1 14,848 8,470 4,561 4,561 2,373 2,373 10    
Office 7,352 7,352 3,899 3,899 5,553 5,553      
Postage 1,618 1,618 912 912 656 656      
Professional Fees 2,525 2,525 2,467 2,467 2,323 2,323      
Rental Equipment 1,235 1,235 0 0 0 0      
Rents 142,500 102,000 100,231 100,231 51,381 51,381 11    
Repairs and Maintenance 20,463 20,463 39,781 39,781 10,459 10,459      
Rolling Equipment (repairs,fuel,etc.) 44,962 44,962 18,604 18,604 23,295 23,295      
Salaries and Wages 144,990 144,990 128,573 128,573 99,524 99,524      
Supplies-office/shop 18,810 18,810 26,088 26,088 17,052 17,052      
Taxes-miscellaneous and Licenses 56,909 56,909 47,670 47,670 48,385 48,385      
Telephone and Telecommunications 9,334 9,334 8,594 8,594 7,511 7,511      
Tools and Equipment 7,096 7,096 13,373 13,373 6,981 6,981      
Trash and Refuse 2,555 2,555 2,411 2,411 2,210 2,210      
Travel 24,636 19,636 16,968 12,968 10,782 8,782 12    
Utilites (heat, electricity, etc.) 7,959 7,959 8,367 8,367 4,852 4,852      
TOTAL EXPENSES $1,372,462 $876,890 $1,297,874 $842,020 $1,005,367 $659,612  
                   
TAXABLE INCOME $276,368   $153,927   $272,859    
                   
AVAILABLE CASH FLOW(ACF)   $770,779   $605,071   $614,641  
                   
Weighted Average ACF $689,520            

Income & Expense Reconstruction -continued

Central States Supply
132 Industrial Park Road

Bowling Green, Kentucky 42101

This data is "as of" December 31, 2007





Notes:

1 Sales have increased at approximately a 10% rate for the past several years and are projected to increase at this rate for the next several years. Sales appear to be the result of a business base increase rather than an increase in pricing to existing customers.

2 Other income is primarily due to incidental sales of minor services rather than the Company's primary product. This income item has been adjusted downward in each of the three years to exclude the Company's interest income on bank deposits in keeping with the Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) component of the valuation approach.

3 In keeping with the EBITDA component of this valuation the Amortization expense is adjusted to zero in each of the three years.

4 The Compensation of Officers expense item has been adjusted downward in each of the three years to reflect the actual amount the Company would have had to pay an employee to accomplish the day-to-day functions of the Company's three owners as follows:

Operations Manager - $125,000 (replaces Leonard Shuster)
Buyer/Salesman - $75,000 (replaces William Shuster)
Accountant/Bookkeeper - $50,000 (replaces Libby Shuster)

5 The Contributions expense has been adjusted to zero to reflect the discretionary nature of this expense as not necessary to the successful operation of the Company.

6 In keeping with the EBITDA component of this valuation the Depreciation expense is adjusted to zero in each of the three years.

7 The Entertainment expense has been adjusted to zero to reflect the nature of this item as a discretionary expense.

8 The Keyman Insurance expense has been adjusted to zero to reflect the nature of this item as a discretionary expense and not necessary to the successful operation of the Company.

9 In keeping with the IBITDA component of this valuation the Interest expense has been adjusted to zero in each of the three years

10 The Miscellaneos expense has been adjusted downward by $6,000 in 2007 to reflect the nature of this item as a discretionary expense and not necessary to the successful operation of the Company. The Company sponsored a local race car driver.

11 The Rent expense for 2007 has been adjusted to reflect the amount of rent the Company owners will lease the Company's facilities for to a new owner. The Company owners are not including the real estate in the business sale and will provide a long term lease for the Company's new owner.

12 The Travel expense has been adjusted downward in each of the three years to reflect the nature of this item as a discretionary expense and not necessary to the successful operation of the Company.




 

Section 4

VALUATION OPINION AND ANALYSIS

 

 




VALUATION OPINION AND ANALYSIS

Russell L. Brown estimates that the fair market value for all of the (insert the words either �corporate stock� or �specified assets� here) in the designated company, Central States Supply is approximately $2,912,734 based on the Company's sales, earnings, and balance sheet, and other considerations, as of December 31, 2007.

In considering the potential fair market value of a business it's assumed that the most likely type of buyer will be either:

A financially motivated/investment oriented buyer (generally a private party) or,
A strategic buyer (another company wishing access to one or more of the key Company assets for expansion purposes).

Although there are many variations of ways to estimate the value of a business, they tend to group within three possible approaches:

Asset Based Valuation
Market Comparison Valuation
Income Based Valuation

This valuation was done using BizPricerTM Business Valuation Software which uses the most commonly used (and most appropriate valuation) approach for the company; an Income Based Valuation. The Income Based Valuation approach is further broken down into four generally accepted methods:

Present Value of Future Earnings Valuation
Capitalization of Excess Earnings Valuation
Multiple of Discretionary Earnings Valuation
Gross Revenue Multiples

The valuation method used in this valuation is a combination of both the widely used and professionally accepted Capitalization of Excess Earnings method and the Multiple of Discretionary Earnings method. This combined approach will assign a financial value to the Company's reconstructed/adjusted earnings (resulting in available cash flow) that is reflective of the risk associated with the continued operation of the business with recent proven financial results that can reasonably be expected to continue after the business sale for an indefinite but substantial duration.

This valuation method will include the following Company tangible and intangible assets:

(Adapt the following wording to your situation, if necessary � then delete this line)

All Furniture/Fixtures/Equipment (F/F/E) customary to normal operation of the business.
All customer lists and related information and marketing data/plans.
All proprietary Company information regarding methods of doing business.
All rights and source code to the Company's software products and/or intellectual property including patents.
All Goodwill and other intangible assets (including intellectual property, trade names, trademarks and service marks).

This valuation calculation method does not include the tangible assets or liabilities listed below. The value of these items, if they are to be included in the sale, will be separately priced and added to the calculated business value.

Cash and cash equivalents
Accounts receivable
Prepaid expenses
Inventory (at cost, adjusted at the time of sale)
Liabilities of any type
Real Estate

In applying this valuation approach the Company's latest three full fiscal year's pre-tax available cash flow (ACF) has been reconstructed/adjusted using BizPricerTM Business Valuation Software (reported on in the section preceding this one). Additionally, the multiplier to be used in the valuation calculation has been determined using BizPricer's proprietary Multiplier Calculation. This multiplier calculation method combines the pertinent elements of most published capitalization rate estimation processes and results in an earnings/ACF multiplier (an inverse of a capitalization rate).

The multiplier has been calculated to be 3.27 for this Company. Documentation supporting the calculation of this multiplier is contained in this section immediately following the text.

Applying the valuation formula results in the preliminary valuation of the designated Company assets as follows:

Preliminary Value = Reconstructed Weighted ACF times the (Capitalization Rate) Multiplier

Preliminary Value = $689,520 x 3.27 = $2,254,730

It's important to note that this valuation is based in part on the three year weighted-average reconstructed/adjusted Available Cash Flow (ACF), also referred to as the "earnings before interest, taxes, depreciation, and amortization (EBITDA), and discretionary expenses. In addition to paying for the business and providing operating capital, a new owner will also be responsible for interest expenses, income taxes, and equipment replacement costs.

This preliminary valuation opinion assumes the following:

To arrive at an overall appraised value for 100% of the corporate stock (or to include other assets not included in the preliminary value calculation) of the Company, it is necessary to adjust the preliminary value as follows:

Preliminary Value = $2,254,730
Plus Cash & Equivalents = $212,734
Plus Accounts Receivable = $418,494 *
Plus Pre-paid Expenses = $0
Plus Inventory = $544,750 **
Plus Real Estate (if applicable) = $0
Plus Other Assets (if applicable) = $0
Less Liabilities (to be assumed) = $517,974
Business Valuation = $2,912,734

The Goodwill value in the Company is calculated as follows:

Goodwill = Preliminary Valuation less the Liquidation Value of F/F/E
Goodwill = $1,879,730 ***

Russell L. Brown estimates that the fair market value for all of the (insert either "corporate stock" or "specified assets" here) in the designated company, Central States Supply is approximately $2,912,734 based on the Company's sales, earnings, and balance sheet, and other considerations, as of December 31, 2007.

*It should be noted that the actual amount for the accounts receivable at the time of sale should be adjusted not only for the current "on the books" amount but also by using an "aging" factor to account for possible non-collectable receivables.

**It should be noted that the actual amount for the inventory at the time of sale should be adjusted not only for the current amount but also by negotiating a fair-market value amount for possible old/outdated (non-salable) inventory.

***See the following Valuation Summary and Goodwill Calculation Sheet.






Multiplier Calculation

Central States Supply
132 Industrial Park Road
Bowling Green, Kentucky 42101

This data is "as of" December 31, 2007

  Possible Score Assessed Score
1. Continued Earnings Risk Assessment    
a. Continuation of Earnings at Serious Risk 0  
b. Steadily Increasing or Stable Earnings Likely (for 3-5 years) 4  
c. Significantly Growing Earnings Assured (for 3-5 years) 8 4
2. Company History Assessment    
a. Recent Start-up Company/Not Well Established (less than 5 years) 0  
b. Well Established Company/Good Customer Base (5-15 years) 3  
c. Long Record of Successful Business/Strong Customer Base(16+ years) 6 6
3. Company Growth Projection    
a. Business Revenues Have Been Declining 0  
b. Steady Revenue Growth/Faster than Inflation 3  
c. Dynamic Revenue Growth Rate (25%+ annually) 6 3
4. Past Earnings Momentum    
a. Earnings Have Declined for Each of the Last 3 Years or More 0  
b. Earnings Have Essentially Stayed the Same (less than 5% increase over inflation) for the Last 3-5 Years 4  
c. Earnings Have Increased Greater than 5% Above Inflation for Each of the Last 3-5 Years or More 8 6
5. Competition Analysis    
a. Highly Competitive Market/Non-Unique Product and/or Service 0  
b. Normal Competitive Conditions in a Stable Market 3  
c. Little Competition in a Stable or Growing Market 6 2
6. Business Expansion Opportunity Assessment    
a. Business Expansion Not Likely Without Major Capital Investment 0  
b. Moderate Expansion Possible With Moderate Capital Investment 3  
c. Immediate Significant Expansion Possible With Little to No Investment 6 2
7. Barriers to Entry for New Competition    
a. None or Minor Barriers to Entry by New Competition 0  
b. Moderate Barriers to Entry by New Competition 4  
c. Major Barriers to Entry (e.g. limited customer base, high capital costs,restrictive licensing, limited business locations, etc.) 8 2
8. Customer Base Sensitivity    
a. Revenues Highly Dependent on One/Few Customers 0  
b. Revenues Dependent on a Moderate Number of Customers (Revenues Not Dependent on One/Few Customers) 3  
c. Broad-based/Diversified Customer Base 6 6
9. Management and/or Key Employee Retention Projection    
a. Owner-Managed with Owner Unable or Unwilling to Remain for Transition and/or Key Employee Retention Uncertain 0  
b. Mainly Owner-Managed With Some Employee Mgmt. to Remain or Owner Willing to Remain for Transition and/or Minimal Key Employee Retention Issues 2  
c. Full Company Management Team Likely to Remain and no Key Employee Retention Issues 4 0
10. Business Location Continuation    
a. The Business Must Be Moved After the Sale 0  
b. The Business Has a Lease That Must Be Renegotiated 2  
c. The Business Has a Long-Term Lease at a Desirable Location With Favorable Terms or Owns Its Premises or is not Dependent on Location 4 2
11. Operational Facility/Equipment Analysis    
a. The Facilities/Equipment Require Significant Immediate Capital Investment 0  
b. The Facilities/Equipment Require Moderate Capital Investment 2  
c. The Facilities/Equipment Do Not Require Capital Investment 4 2

Multiplier Calculation - Continued

Central States Supply
132 Industrial Park Road
Bowling Green, Kentucky 42101

This data is "as of" December 31, 2007

  Possible Score Assessed Score
12. Capital Equipment Analysis    
a. Business Operations Use a Significant Amount of Capital Equipment 0  
b. Business Operations Use a Moderate Amount of Capital Equipment 3  
c. Business Operations Use Very Little or No Capital Equipment 6 2
13. Business Purchase Financing Likelihood    
a. Seller, Banks, etc. Unwilling to Finance Acquisition (100% Cash Required) 0  
b. Limited Financing Available from Seller, or Other Sources. (50% or More Cash Required) 3  
c. Substantial Financing Available at Competitive Rates (Less Than 50% Cash Required) 6 3
14. Industry Strength Assessment    
a. Declining Industry Not Expected to Recover 0  
b. Industry Growing Moderately (faster than inflation) 2  
c. Dynamic Industry With Broad Rapid Growth Likely 4 2
15. Environmental Risk Assessment    
a. Produces/Uses Hazardous Substances Subject to Regulations and/or Licensing 0  
b. Minimal Amounts of Hazardous Materials Involved and All Regulations and Licensing are Met 2  
c. No Hazardous Materials Used/Produced in the Business 4 1
16. New Owner Social Desirability Assessment    
a. No Community Prestige/Rough or Unpleasant Product/Service 0  
b. Respected Business in Satisfactory Environment 2  
c. Highly Regarded Business in an Attractive Environment 4 2
17. Alternative Investment Returns    
a. High Rate of Return on Typically Safe Investments 0  
b. Moderate Rate of Return on Typically Safe Investments 2  
c. Low Rate of Return on Typically Safe Investments 4 2
18. General Broad Economic Conditions    
a. The General Economy is in a Severe Recession 0  
b. The General Economy is in a Typically Normal Condition 2  
c. The General Economy is in a Strong Expansion 4 2
 Total Score for all Risk factors 49
Capitalization Rate 31%
 Capitalization Rate Converted to a Multiplier 3.27




Valuation Calculation

Central States Supply
132 Industrial Park Road
Bowling Green, Kentucky 42101

This data is "as of" December 31, 2007



Preliminary Business Valuation = ACF x Multiplier


  Available Cash Flow
$689,520
 
  Multiplier
3.27
 

  Preliminary Value $2,254,730  
       
       
       
       
       
  Add: Preliminary Value:
$2,254,730
 
  Add: Cash and Equivalents
$212,734
 
  Add: Accounts Receivable
$418,494
 
  Add: Pre-paid Expenses
$0
 
  Add: Inventory
$544,750
 
  Add: Other Assets Value
$0
 
  Add: Real Estate Value
$0
 
  Subtract: Liabilities
$517,974
 

  Business Valuation
$2,912,734
 





Business Valuation Summary

Central States Supply
132 Industrial Park Road
Bowling Green, Kentucky 42101

This data is "as of" December 31, 2007


  Prepared By:
Russell L. Brown  
  Preparer's Street Address 291 Main Street
  Preparer's City/State/Zip Code Niantic, CT 06357  
  Preparer's Relationship to the business: Business Appraiser  
  3-Year Weighted-Average Available Cash Flow: $689,520  
  Capitalization Rate: 31%  
  Capitalization Multiplier: 3.27  
  Preliminary Business Value: $2,254,730  
  Liquidation Value of F/F/E: $375,000
  Current Assets to be Conveyed in the Sale:
  Cash and Equivalents $212,734
  Accounts Receivable $418,494
  Pre-paid Expenses $0
  Inventory $544,750  
  Other Assets Value $0
  Real Estate Value $0
  Liabilities to be Assumed: $517,974
  Goodwill Value: $1,879,730
  Business Valuation: $2,912,734
  Business Valuation As Of: December 31, 2007




 

Section 5

BUYER AND SELLER PURCHASE AND SALE ANALYSIS

 

 




BUYER AND SELLER PURCHASE AND SALE ANALYSIS

This section of the valuation report contains an analysis by the user of this program of the financial characteristics of the contemplated business transaction. The results of this analysis will not affect the calculated business valuation of amount from Business Valuation on s-07 but may affect the offering price of the buyer, the asking price of the seller or the negotiated price as determined between the buyer and seller.

The following five pages present the assumptions and results of the analysis by the user of this program but may be intentionally physically omitted in the printed report depending upon the intended use of the valuation. For example:


To support the inclusion or omission of any of the Purchase and Sale Analysis pages the page numbering for the report is intentionally left blank.





Buyer's Estimated Cash Requirements

Central States Supply
132 Industrial Park Road
Bowling Green, Kentucky 42101

This data is "as of" December 31, 2007




  Business Purchase Price $2,912,734  
       Add: Starting Operating Capital $219,223  
       Add: Professional Fees and Closing Adjustments $24,100  
  Total Cash Requirement Before Financing $3,156,057  
  Down Payment $1,456,367  
  Amount to Be Financed - Seller $1,456,367  
  Amount to Be Financed - Other $0  
  Amount to Be Financed - Total $1,456,367  

  Total Estimated Cash Required $1,699,690  

  Total Cash Deposit $200,000  
  Total Cash Required at Closing $1,499,690  
 
  Professional Fees and Closing Adjustments Worksheet  
 
Add  
Attorney Fees $5,000
Accountant Fees $2,500
Brokerage Fees (finder's fee) $0
Inventory Adjustment Service $1,500
Pre-paids (Insurance, Utilities, Rent, Taxes, etc.) Adjustment (up) $3,000
Deposits (Utilities, Lease, etc.) $4,000
Licenses and Permits $0
Inventory Adjustment (up) $10,500
Accounts Receivable Adjustment (up) $0
 
Total (Add) $29,000
 
Deduct  
Pre-paids (Insurance, Utilities, Rent, Taxes, etc.) Adjustment (down) $0
Inventory Adjustment (down) $0
Accounts Receivable Adjustment (down) $3,500
Other $1,400
 
Total (Deduct) $4,900
 
 
  Total Fees and Closing Adjustments $24,100  






Buyer's Estimated Return on Investment (ROI)

Central States Supply
132 Industrial Park Road
Bowling Green, Kentucky 42101

This data is "as of" December 31, 2007




  Weighted Average Available Cash Flow (ACF) $689,520  
  Trend Adjusted ACF $848,848  
  Latest Year's ACF $770,779  
 
  Projected ACF (for the first year after purchase) $848,848  

  Estimated Income Taxes  
            Federal $169,770  
            State $42,442  
            Local $0  
 
  Total Estimated Income Taxes $0  

  Projected ACF After Taxes $636,636  
  Estimated Total F/F/E Depreciation $49,667  
  Buyer's Estimated Cash Required $1,449,166  
 
  Projected Cash-on-Cash Return (ROI) 43.9%  
  Overall Investment (ROI) 40.5%  






Buyer's Estimated Financing and ACF

Central States Supply
132 Industrial Park Road
Bowling Green, Kentucky 42101

This data is "as of" December 31, 2007




  Business Purchase Price $2,912,734  
  Total Purchase Cash Required (all fees and capital needs) $3,156,057  

  Total Amount to Be Financed $1,456,367  
 
  Seller - Financing Amount $1,456,367  
 
  Interest
Rate:
9.00% Term
(months):
60 Payment
(monthly):
$30,232
 
 
  Other - Financing Amount $0  
 
  Interest
Rate:
12.00% Term
(months):
48 Payment
(monthly):
$0
 
 
  Total Financing Payments Monthly/Annual $30,232/$362,781  

  Projected ACF (for the first year after purchase) Monthly/Annual $70,737/$848,848  
  Projected ACF (after estimated income taxes) Monthly/Annual $53,053/$636,636  
  Projected ACF (after financing and estimated income taxes) Monthly/Annual $22,821/$273,855  






Seller's Estimated Cash-Out and Sale Financing

Central States Supply
132 Industrial Park Road
Bowling Green, Kentucky 42101

This data is "as of" December 31, 2007




  Business Valuation (calculated amount) $2,912,734  
 
  Business Sale Price $2,912,734  
       Add: Cash Down Payment $1,000,000  
       Add: Selling Expenses and Payoffs $258,500  
       Subtract: Buyer Closing Adjustments $215,800  
 
  Total Cash Out at Closing $957,300  

  Amount to be Financed $1,912,734  
 
 
  Interest
Rate:
10.00% Term
(months):
60 Payment
(monthly):
$40,640
 
 
  Total of All Monthly Payments $2,438,397  

  Total Overall Cash Out (before income taxes) $3,395,697  
  Estimated Taxes Related to the Business Sale 25.00%  
 
  Total Overall Cash Out (after estimated income taxes) $2,667,513  

Seller's Estimated Cash-Out and Sale Financing
Worksheets

Central States Supply
132 Industrial Park Road
Bowling Green, Kentucky 42101

This data is "as of" December 31, 2007



 
 
 
 
  Selling Expenses and Payoffs Worksheet  
 
 
Selling Expenses  
Attorney Fees $5,000
Accountant Fees $2,000
Brokerage Fees $175,000
Conveyance Taxes $29,000
Inventory Adjustment Service $1,500
Miscellaneous Closing Fees $2,500
Other * $1,000
 
Total Selling Expenses $216,000
 
Pay-Offs  
Equipment Loans and/or Leases $22,000
Receivable Financing $0
Accounts Payable $16,000
Bank Financing $0
Long and Short Term Loans $0
Inventory Adjustment (down) $4,500
Accounts Receivable Adjustment (down) $0
Other * $0
 
Total Pay-Offs $42,500
 
 
  Total Selling Expenses and Pay-Offs $216,000  

  Buyer Closing Adjustments Worksheet  
 
 
Deposits $200,000
Inventory Adjustment (up) $0
Accounts Receivable Adjustment (up) $3,000
Prorated Rent $4,000
Prorated Insurance $3,500
Prorated Taxes $1,500
Other * $1,600
 
 
  Total Buyer Adjustments $213,600  




 

Section 6

SUPPORTING DATA AND DOCUMENTAION

 

 

Supporting Data and Documentation

The following documentation to further describe this business is either included in this section of the Report or is available for review at _______________________________ .

r     Sales Catalogs, Brochures and Flyers

r     Corporate Charter (if incorporated and a stock sale)

r     Corporate By-laws (if incorporated and a stock sale)

r     Corporate Minutes (if incorporated and a stock sale)

r     Partnership Agreement (if a partnership)

r     Joint-Venture Agreements

r     Fictitious Name Filing Documents (“doing business as”)

r     Sales and Use Permits

r     Copies of Real Estate Deeds and/or Leases

r     State and Federal Licenses (if applicable)

r     Franchise Agreement (if applicable)

r     Pending and/or Enforceable Litigation Documentation

r     Copies of Patents, License Agreements, Trade Name and Trademark Filings

r
     Listing of Furniture, Fixtures and Equipment

r
     Listing of Suppliers and Major Customers

r
     Listing of Key Employees





 

Section 7

CERTIFICATION

 

 




Certification

(Note: This Certification Form is generally used only by professional business appraisers, business brokers and non-affiliated accountants/attorneys.)

In regards to the business valuation appraisal of Central States Supply:

  1. To the best of the undersigned appraiser's knowledge, the statements of fact contained in this Report are true and correct.

  2. The reported analyses, opinions, and conclusions are limited only by the written assumptions and limiting conditions, and are the appraiser's personal, unbiased professional analyses, opinions and conclusions.

  3. This appraisal has been performed on the basis of non-advocacy. The appraiser has no present or contemplated interest in the business appraised and has no personal bias with respect to the parties involved.

  4. The appraiser's compensation is not contingent on any action or event resulting from the analyses, opinions, or conclusions in, or the use of, this Report.

  5. The appraiser's analyses, opinions, and conclusions, as well as the development of this Report, have been in reasonable accordance and conformity with the business appraisal standards of The Institute of Business Appraisers.

  6. No person provided significant professional assistance to the undersigned in the development of this appraisal.


Certified by:


Russell L. Brown, January 27, 2008

Business Appraiser
RDS Associates, Inc., 291 Main Street, Niantic, CT 06357


Professional Affiliations:

(Insert name and address of any professional affiliations here)