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this, provide some formula in the initial agree-
ment, such as the increase or decrease in the
company's book value per share.
The tangible book value of an amuse-
ments operation is generally set by the
operation's last balance sheet. It is usually
the book value (net worth} of the business -
total assets less total liabilities adjusted for
any intangible assets such as goodwill and
deferred financing costs. Some operators
simply use the book value as reported by their
accountants.
If, for example, your book value is$400,000
and there are $50,000 worth of intangibles,
the net value is $350,000. Assuming there
are 100,000 shares of stock outstanding from
the operation, the tangible book value per
share is $3.50.
Going one step further, the adjusted
tangible book value uses the tangible book
value approach, but it adjusts for certain
assets which have values in excess of their
reported book value. The principal items that
should be adjusted are: inventory, bad-debt
reserves and plant and equipment.
The upward or downward adjustments
reflect the excess of the fair market value of
each asset above the value reported on the
operation's balance sheet.
For instance, suppose the coin-operated
amusements operation has the following
assets which are worth more than their
reported net book value of $520,000:
Inventory
Land&plant
Equipment
Excess value
Reported Net
Book Value
Fair
Market Value
$100,000
350,000
70,000
$130,000
500,000
120,000
$520,000
$750,000
$230,000
If the total net book value is $400,000, the
adjusted book value is $630,000 ($230,000
excess plus $400,000}. If there are $50,000
of intangibles, the adjusted tangible book
value is $580,000.
There is also that often-mentioned multiple
of earnings which is frequently used to place a
value on a going coin-operated amusements
operation. With the multiple of earnings
method, net income for the last year is deter-
mined and then capitalized using a price-
earnings multiple. A 15 percent capitalization
rate is often used which is equivalent to a
price-earnings multiple of 6.7 (1 divided by
0.15). If the amusements business has an
excellent growth rate, a low capitalization
rate should be used, say .5% (a multiple of 20).
In contrast, if the operation is stable, a
higher capitalization rate of 10% is used (a
multiple of 10). Whichever capitalization rate
and multiple you use, the resulting value is
then divided by the total number of shares
outstanding to get a value per share.
To illustrate, if last year's net income from
the operation was $100,000, the value of the
business would be $800,000 (using a price
earnings multiple of 8, which is a capital·
ization rate of 12.5%}. If there are 100,000
shares of common stock outst~nding, then
the value per share is $8.
Alternatively, some valuation analysts
simply compute the average price-earnings
multiples of comparable public companies
and then apply the multiple to the operation's
earnings.
When all is said and done, however, the
real value of any on-going business is its
future earning power. Accordingly, this
approach, more than any other, determines
the true value of a business.
The discounted earnings method projects
future earnings over a five- or ten-year period
and then calculates their present value using
a certain discount or present value rate (e.g.,
15%}. The total of each year's projected
earnings is the operation's value.
The basic principle underlying this method
is that a dollar earned in the future is worth
less than a dollar earned today. Thus, it is not
only the amount of projected income (or net
cash flow} that a company or operation is
expected to generate that determines its
value but also the timing of that income.
For example, your coin-operated amuse-
ments operation may be projecting an increase
in earnings from $100,000 todayto$500,000
in five years. In placing a value on the total
earnings for the five years, you must take the
present value of each year's projected earn-
ings. With a discount rate of 15 percent, the
present value of $500,000 of earnings re-
ceived five years from today is only $248,500
(fifth year present value factor of 0.497 times
$500,000}. A calculator or the present value
tables found in mostfinancial books will easily
compute the present value of each year's
projected earnings.
Unlike all other methods, the liquidation
value approach assumes that the business
ceases operation, sells all assets and pays all
liabilities. The net liquidation value (after
payment of all liabilities} is distributed to the
company's owners in proportion to their
percentage stock position in the coin-operated
amusements business.
This approach gives the absolute bottom
value for a coin-operated amusements busi-
ness, below which it would be better to liquidate
the business rather than sell it.
A simple way to determine the liquidation
value of any operation involves determining
how much each category of assets will be
worth in liquidation. Cash, for example, will be
worth 100 percent of its value if the operation
is liquidated. To illustrate:
Assets
The above percentages are only approxi·
mate and principally depend on: (1} the length
of time to sale (the longer you can wait, the
better) and (2) the salability of the assets.
Of course if the equipment were special·
ized, in-house built items, the liquidation value
might be considerably less, say 30 cents on
the dollar. The same would be true for lease-
hold improvements and the mix of the inven·
tory (raw materials is obviously more saleable
than work-in-process}. Also, the land and
buildings, if purchased or built many years
ago, may have a fair market value and liquidation
value far in excess of their reported book
value.
Since, like those old buildings, many assets
are undervalued, many valuation experts will
determine the value of each asset as if it had
to be replaced. Because of inflation and the
annual depreciation of capital assets, the
replacement value can be substantially
greater than the reported book value.
This valuation approach can be used when
determining the value of your coin-operated
amusements business for a planned sale to a
larger company which wants to get into your
line of business. In this case, your assets can
be worth substantially more than your ac-
countant's reported book value.
It is rarely that two parties can agree on
the value of a going business. If this is the
case, the stock's value can be determined by
an independent appraiser or a panel of
appraisers. However, before selecting any
appraiser, check his or her references and
review valuation reports that the appraiser
has previously prepared for others.
When that appraiser or appraisers deter-
mine a final value, they will usually use a
combination of some or all of the methods
already mentioned. Naturally, a so-called
"weight'' will be applied to each method, e.g.,
25 percent to tangible book value, 50 percent
to multiple of earnings value, and 25 percent
to discounted future earnings value.
Regardless of how the final value is arrived
at, it might be wise to remember that the ever-
vigilant Internal Revenue Service may be
reviewing that valuation (particularly when
valuing stock gifted to your children}. For-
tunately, their main requirement is that fair·
market value be determined on an arm's
length basis, so valuation details are important
Percent on
Liquidation
Reported
Book Value
Value
100%
$ 30,000
$ 30,000
Cash
Accounts
Receivable
Inventories
Land and
building
Equipment
Deferred
financing costs
Other assets
90%
50%
250,000
250,000
225,000
125,000
100%
60%
350,000
70,000
350,000
42,000
0%
10%
10,000
40,000
-0-
4,000
$1,000,000
$776,000
Less Liabilities
(600,000}
Net Liquidation value
$176,000