Capitalized earnings or discounted cash
flow approach - This method estimates a company’s fair market
value based on its earnings and cash flow capacity. This approach
evaluates the present worth of the future economic benefits that accrue
to a business investor. These benefits or future cash flows are discounted
to the present or capitalized at a rate of return which is commensurate
with the company's inherent risk and expected growth. This present
worth determines a business’ fair market value.
Market approach - This method estimates
a business’ fair market value by comparing it to guideline firms in
similar lines of business whose stocks are publicly traded or which
have been part of a public or private transaction. In determining
the comparability of guideline publicly traded companies, several
factors are analyzed including growth patterns, relative size, revenues,
earnings trends, and risk characteristics. This analysis is used to
develop multiples of market price to earnings parameters which are
then compared to various measurements of the subject company's earnings.
Comparable transactions approach - This
method entails the investigation of public and private sales and purchases
of entities similar to the corporation. This analysis assists in the
determination of valuation multiples based on the purchase price paid.
Such multiples might include, depending on the data available, purchase
price to earnings, revenues, and book value.
One of the most important factors in the valuation
of an interest in a closely held entity is the application of the
appropriate discounts from value. In the Company’s valuation, we will
consider discounts or adjustments for the following factors, if appropriate:
- Key man
- Minority interest
- Lack of marketability
- Access to capital
- Investment holding company
The magnitude of these adjustments will be
based on the facts and circumstances that arise as part of our investigation
and will be based on various quantitative studies that have been published
in recent years.
Option pricing models are used to estimate
what an option would sell for in the market today (i.e., its fair
market value) given the terms of the option and the underlying stock
characteristics, including future expectations. The marketplace sets
the value of publicly-traded stock, so the value of options to buy
this stock can be readily calculated. However, if the company is closely
held, stock compensation raises a valuation issue. First, the company’s
value must be determined by performing detailed financial analysis
of the company and of comparable publicly traded companies. Second,
the value attributable to the option must be determined.
Traditionally, the Black-Scholes model is the
preferred method for determining the value of an option for financial
reporting and taxation purposes. The main assumption underlying the
Black-Scholes model is that the underlying stock behaves in such a
way that future price changes can be modeled by a probability distribution.
These modeled future values, along with other variables, are then
used to determine the option’s estimated fair market value. These
variables include the:
- Underlying stock’s value
- Exercise price of the option
- Underlying stock price volatility
- Dividend expected
- Risk-free interest rate for the option term
remaining
- Time until expiration (or the expected life)
of the options
As part of our engagement, we will continually
monitor the marketplace and based on your input, adjust the Tech valuation
model for changing company and market conditions. We will maintain
a timeline of significant company developments related to valuation
which will enable you to quickly respond in an informed fashion on
valuation issues related to equity options, capital, and terms.
Staffing
Mr. David P. Adams III, Certified Public Accountant,
Accredited in Business Valuation, and Accredited Senior Appraiser,
will be responsible for this engagement. A resume is enclosed for
your review. He will be assisted by other Adams Capital professionals.
Qualifications
Adams Capital’s professionals have experience
with over 2,000 transactions. We possess:
- Professional accreditations: Certified Public
Accountant, Accredited in Business Valuation, Accredited Senior
Appraiser, Chartered Financial Analyst and Professional Engineer;
- Degrees in accounting, finance, engineering,
marketing, and law;
- Leadership positions in the Georgia Society
of Certified Public Accountants and the American Society of Appraisers;
and
- Over 40 hours annually of continuing education
instruction or coursework in valuation and engineering per employee.
Deliverables
The result of our analysis will be a letter
report and financial schedules that will outline the value of Tech
and the associated stock options, appropriate information for your
Board of Directors, and presentation of our findings at a Board meeting.
We understand that you will assist us in gathering the data listed
on the attached preliminary information request.
Professional Fees
We estimate professional fees for this engagement
will be $7,500 to $10,000 for the business and option valuation, plus
any out-of-pocket expenses. Out-of-pocket expenses may include, but
are not limited to copy charges, mail, telephone, and travel. A retainer
of $3,750 is requested. We anticipate professional fees for updates
will be $3,500 to $5,000 per quarter, assuming no substantial changes
have occurred in the nature of the Company’s business such as acquisitions
or changes in business strategies, markets served, etc. All bills
are payable upon receipt.
We will be available to support our valuation
conclusions at our standard hourly rates.
General Conditions
Our valuation conclusions and letter report
are intended for and restricted to the members of Technologies, Inc.
for transaction pricing and tax reporting purposes, and may not be
shown to any other party for any purpose without our express written
approval.
The procedures we expect to perform on this
assignment will be limited in scope, and will not constitute an examination,
review or compilation of historical information in accordance with
generally accepted auditing standards or an examination, review or
compilation of prospective information in accordance with established
standards by the American Institute of Certified Public Accountants.
Accordingly, we will not express an opinion as defined by the American
Institute of Certified Public Accountants on the financial, statistical
or other data included in our summary of findings.
In performing our valuation, we will use and
rely on the accuracy and completeness of various historical and prospective
information provided to us by you. By accepting this engagement, you
implicitly represent to us that such information is accurate and complete
to the best of your knowledge and belief.
* * * * *
We sincerely appreciate the opportunity to
offer our services and look forward to working with you on this important
engagement. If the terms of this agreement are acceptable to you,
kindly acknowledge your acceptance by signing the enclosed duplicate
of this letter and returning the signed letter and retainer to us
at the letterhead address. Should you have any questions or comments,
please call me at 770-432-0308.
Very truly yours,
David P. Adams III, CPA, ABV, ASA
President
DPA/jdh
Enclosures
If this letter contains an accurate statement of your understanding
of this project, please sign a copy of this letter in the appropriate
space below and return it to us, retaining a copy for your files.
ACCEPTED BY: __________________________
TITLE: __________________________________
Date: ____________________________________
