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Instructions www.excel-skills.com
This template enables business owners and buyers or sellers of businesses to compile an informal valuation of a business based on the cash flow projections that are automatically compiled from the template assumptions. The net annual cash flows are discounted at the weighted average cost of capital (WACC) in order to calculate a net present value (NPV), internal rate of return (IRR) and an estimated business valuation. The flexible design of the template also enables users to perform sensitivities on the projected cash flow and financing of a business in order to evaluate how much the business is worth. All valuation calculations are based on both a three year and a five year period. Note: A formal valuation of a business usually involves a comprehensive analysis of the cash flow that is generated by the business and the inherent risk factors that may affect a business valuation. We therefore believe that it is impossible to compile a formal, independent business valuation by using any stand alone business valuation tool and the results that are produced by this template should therefore not be interpreted as a formal business valuation. This template is however a unique business valuation solution that adds immeasurable value in determining and analyzing the estimated value of a business on a discounted cash flow basis. The following sheets are included in this template: Assumptions - this sheet contains all the user assumptions that are required in order to compile the business valuation calculations in this template. Most of the assumptions are used in compiling the five year forecast of annual cash flows, but some important financing assumptions are also included at the bottom of the sheet. CashFlow - the 5 year annual cash flow forecast on this sheet is automatically compiled from the assumptions that are entered on the Assumptions sheet. The only user input that is required on this sheet is the addition of expense items if the 23 default expenses are not sufficient. Valuation - the annual cash flow projections and the financing assumptions that are entered at the bottom of the Assumptions sheet are used in the calculation of the weighted average cost of capital (WACC), net present value (NPV), internal rate of return (IRR) and estimated business valuation on this sheet. We have also included a calculation of the annual cash flow after debt repayment in order to provide an indication of the estimated net disposable income that the business can be expected to generate.
Assumptions
Turnover
The turnover amounts that are included in the annual cash flow forecast are calculated from the year 1 amount that is entered in cell C6 on the Assumptions sheet and increased for subsequent years by applying the appropriate annual increase percentages that are specified in row 7 on the Assumptions sheet to the appropriate previous year's turnover amount.
Gross Profit %
The estimated gross profit percentages that are entered in row 9 on the Assumptions sheet are used to calculate the appropriate gross profit amounts in each year on the cash flow forecast. The cost of sales amounts are then calculated by deducting the gross profit amounts from the appropriate turnover amounts. Note: Gross profit percentages of 100% can be entered in row 9 in order to compile a cash flow forecast for service based businesses. The turnover amounts will then be the same as the gross profit amounts and you can hide the cost of sales and gross profit rows on the CashFlow sheet if you don't want to include these calculations on the annual cash flow projections.
Expenses
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Some expense items do however require special mention for the purpose of this template. If you are calculating a business valuation for a start-up business, some costs may be incurred in the first year but not in subsequent years. These start-up costs should be included in the list of expense items on the Assumptions sheet but the formulas that are used in order to calculate the expenses for subsequent years on the CashFlow sheet should be deleted and replaced by nil values. The Salaries & Wages expense for owner managed businesses should also be carefully considered. For business valuation purposes, it is important that the amounts that are included in expenses are market related given the role that the owner intends to fulfil in the business. The salary that the owner wishes to earn from the business should not form part of this expense line item because it will distort the business valuation that is calculated. Instead, the annual cash flow after debt repayment (estimated annual net disposable income) should be added to the owner's market related salary in order to determine the projected gross earnings (before income tax) that the owner would be able to earn from the business. The annual cash flows after debt repayment are calculated in row 26 to 28 on the Valuation sheet. Note: Non-cash expense items like depreciation on property, plant & equipment should not be included in the cash flow projections quite simply because these items are accounting entries and not related to the cash that is generated by a business.
Working Capital
The working capital of a business consists of inventory, debtors and creditors balances. The movements in these balances form part of the operating cash flow of a business and are therefore included in the calculation of our annual cash flow projections. In order to calculate the movements in working capital, users therefore need to enter the estimated start-up balances (for existing businesses) and annual closing balances for each of the working capital account groups (inventory, debtors and creditors). Note that the estimated closing creditor balances need to be entered as negative values. When this template is used to calculate an estimated business valuation for an existing business or a business that is acquired as a going concern, the start-up working capital balances should be easy to determine (based on the business accounts or acquisition agreement). If the template is however used to calculate a valuation for a business with no previous trading history, the start-up balances should be nil and the closing working capital balances for each projection year should be estimated. We recommend applying an estimated "days" factor to the appropriate income statement items in order to calculate an accurate estimate of the appropriate working capital closing balances. For example, the closing inventory balance for each year can be calculated by dividing the cost of sales amount of the appropriate year by 365 and multiplying the result by the estimated days of inventory that is kept on hand. Similarly, debtors closing balances can be calculated by dividing the turnover amount of the appropriate year by 365 and multiplying the result by the number of days' sales that is expected to be outstanding at the end of each year. Debtor trading terms and the ratio of cash and credit sales should also be considered in determining this estimate.
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Note: For businesses that are being acquired, the loan amount should be the amount of debt financing that will be used to finance the business acquisition. For start-up businesses, the loan amount should equal the amount of financing that will be available in order to finance the initial business activities. For existing businesses, the loan amount can either be the outstanding amount on existing loan facilities or can be calculated by using the business's existing debt / equity ratio.
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If additional expense items have been added on the Assumptions sheet, you may notice that not all the expense items are included in the cash flow projections. The additional expenses have to be added to the cash flow projections by inserting the appropriate number of additional rows anywhere between the existing expense rows and copying the formulas in column A to G from one of the existing rows. Note that the descriptions of the expense items below the empty rows will change after inserting the new rows but all the appropriate descriptions are included after copying the formulas. The order in which expense items are displayed on the CashFlow sheet is exactly the same as the order in which expense items are included on the Assumptions sheet. If you therefore delete some of the expenses from the list on the Assumptions sheet, the row below the last expense item on the CashFlow sheet will contain the "Add new expense items above this row" text. You therefore need to delete this row and all the other rows below it in the Expenses section so that only valid expense items are included on the cash flow projections. Note: We recommend that you review the completeness of expense items on the cash flow projections by ensuring that the last expense item on the Assumptions sheet is included on the CashFlow sheet. Note: The cash outflow relating to the repayment of loans is not included on the cash flow forecast because it is included in the calculation of the weighted average cost of capital (WACC) which is used as the discount rate in calculating the NPV and estimated business valuation.
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Note: When you calculate a business valuation over a period as long as 5 years, you should be prudent in the assumptions that are used in compiling annual cash flow projections. This principle is especially important in relation to the capital expenditure that is included in the cash flow projections - it is important to recognize that the condition of fixed assets deteriorates over time and that some assets may have to be replaced after a certain period has elapsed. Also, if your cash flow projections include a significant increase in turnover, you should ensure that you provide for the acquisition of additional capital assets if the capacity of existing assets is insufficient in order to achieve the projected levels of turnover. The Valuation sheet includes the following business valuation calculations:
The WACC is the weighted average cost of the capital that is used to finance the business and is expressed as an annual percentage. For the purpose of this template, the WACC calculation consists of capital in the form of equity and debt. The debt amount that is included in the WACC calculation is the same as the loan amount that is entered in cell B44 on the Assumptions sheet. The equity amount that is included in the WACC calculation is calculated by deducting the debt amount from the business acquisition price that is entered in cell B43 on the Assumptions sheet. In order to calculate the WACC of the business, we need to calculate the percentage of the business acquisition funding that can be attributed to each source of financing, apply these percentages to the cost that is associated with each financing component and sum the calculated result. The percentage of the acquisition price that is financed by debt and equity is calculated in cells C7 and C8 and the cost of each component is included in cells D7 and D8. Note that the cost of debt and the cost of equity (or required return on equity) are specified in cells B45 and B47 on the Assumptions sheet. The WACC of the business is calculated by multiplying the percentages in cells C7 and C8 by the costs in cells D7 and D8 and adding up the resulting percentages in cells E7 and E8 in order to display the WACC in cell E9. The WACC is the minimum annual return on investment that is required in order to cover the cost of the capital that is used to finance a business. For the purpose of a discounted cash flow calculation, the WACC is used as a discount rate in a Net Present Value (NPV) calculation in order to determine whether the estimated annual return on investment from the business provides an adequate return for the providers of debt financing (banks or other financial institutions) and contributors of equity (owners or shareholders). Note: The WACC calculation is subjective in nature because even though the cost of debt of a business is usually determined by the costs (interest) charged by financial institutions, the required return on equity is determined by the shareholders of the business. The shareholders of one business may be satisfied with a return on equity of 20% per year, but the shareholders of another business may only be satisfied with 25% per year.
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The value that is returned by the NPV calculation is also important because it indicates the value by which the investment return exceeds or falls short of the required investment return. The NPV calculation can therefore be used effectively in conjunction with the IRR calculation because the one calculation indicates the value of an excess or shortfall in investment return (NPV) while the other calculation indicates the annual projected investment return in percentage terms (IRR). The NPV calculation consists of three components, namely the WACC, the annual cash flow projections and the business acquisition price (or initial capital outlay). If changes are made to any of these components, the NPV calculation result will change. The WACC is calculated in the cell range from cells A7 to E9 on the Valuation sheet, the annual cash flow projections are compiled on the CashFlow sheet and the business acquisition price (the initial capital outlay) is entered in cell B43 on the Assumptions sheet.
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Copyright
This template remains the intellectual property of www.excel-skills.com and is protected by international copyright laws. Any publication or distribution of this template outside the scope of the permitted use of the template is expressly prohibited. In terms of the permitted use of this template, only the distribution of the template to persons within the same organisation as the registered user or persons outside the organisation who can reasonably be expected to require access to the template as a direct result of the use of the template by the registered user is allowed. Subsequent distribution of the template by parties outside of the organisation is however expressly prohibited and represents an infringement of international copyright laws.
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Business Valuation
Assumptions www.excel-skills.com
Start-up Turnover
Estimated Annual Turnover Annual Increase %
Year 1
3,250,000
Year 2
Year 3
Year 4
Year 5
10.0% 33.0% 24,000 60,000 3,000 6,000 4,000 15,000 12,000 8,000 6,000 10,000 4,500 36,000 2,000 5,500 17,000 120,000 11,000 245,000 13,000 5,800 28,000 18,000 5,000 8.0% 150,000 240,000 (100,000) 170,000 260,000 (110,000) 1,000,000 800,000 8.5% 5 20.0% 190,000 300,000 (120,000) 35.0%
5.0% 35.0%
5.0% 38.0%
5.0% 38.0%
Gross Profit %
Estimated Gross Profit %
Expenses
Accounting Fees Advertising & Marketing Bank Charges Cleaning Expenses Computer Expenses Consumables Electricity & Water Entertainment Equipment Hire Insurance Legal Fees Motor Vehicle Expenses Postage Printing & Stationery Professional Fees Rent Repairs & Maintenance Salaries & Wages Security Subscriptions Telephone & Fax Training Uniforms Add new expense items above this row Annual Increase % 7.0% 200,000 330,000 (130,000) 10.0% 220,000 365,000 (145,000) 250,000 10.0% 245,000 405,000 (150,000) 300,000
Working Capital
Inventory Debtors Creditors
Capital Expenditure
Annual Capital Expenses
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