145 CASE STUDY 27 :1 Reksdross quest Business Valuation of Branson Trucking Company Limited and box Lester Heitger , Ph. D. , CPA of Moha Compu ors ) , and others ..` LEARNING OBJECTIVES do you understand detail . After completing and discussing this case , you should be able to 'S ( read AS S from . Develop a business valuation plan . Analyze the differences between a plaintiff and defendant valuation report `e put in place to Business valuation . The Branson Trucking Company was started by three broth - leaknesses in the ers in Columbus , Ohio in 1977 . In 1982 , Dave James came into the company primarily for marketing and growth purposes . Soon Dave showed that he was effective at increasing business and making deals that caused the company to grow significantly . Within 10 years , Branson trucking was one of the major regional carriers in the central Midwest .* Over the years , the Branson brothers gave stock options to Dave James to keep him happy with the firm and to reflect his contributions to the firm's growth and general success . Dave exercised these options over time , and by 1995 , the anuary ! ! . three Branson brothers and Dave James each owned 25 percent of the stock of the Branson Trucking Company . Inskrit Word By the late - 1990s , two of the Branson brothers wanted to bring children and their spouses into the trucking business . The role that these new family members would play in the business created significant discussions and some* strife . Dave James in particular was opposed to bringing in family members . Dave threatened to leave , and some of the Bransons thought that was a good idea . After several months of negotiations , it was agreed that Dave James would receive one year's severance pay , and the three Branson brothers would buy his illcover- stock in the company at its fair value . At the end of 201 1 , Dave James resigned from the trucking company . Branson Trucking Company is a closely held company that does not trade " Step. in any market . The only stock sales have been directly from the company to the Original holders of the stock . Below are income statements for the Branson Truck- Forch ing Company for the years 2007 - 201 1 . The Branson Trucking Company financial statements are prepared by the Black & Blue CPA Group directly from Branson's146 Case Studies in Forensic Accounting and Frau accounting data. This accounting firm also prepares all of the Branson Truck- ing Company's tax returns. The financial statements are prepared directly from Branson Trucking's accounting data and are not audited by any accounting firm. Dave James received severance pay of $125,000. He is currently employed in a similar marketing position earning $135,000 a year. During truck 8 the 2007-2011 time period, the average price earnings ratio for similar trucking firms that were traded in open markets were 9, 11, 12, 10, and 8, respectively, for the five year period. Branson Trucking Company's net income for the years 2012-2 $450,000 and $690,000, respectively, for the two year period. Below is an ap 12-2013 was praisal of the Branson Trucking Company's assets as of December 31, 2011. At that time the firm's total liabilities were $5, 100,000. You are hired as a forensic accounting expert. Prepare a business valuation for the Branson Trucking Company at the time that Dave James left the busine Operating Income (Lass) Determine what the shares of Dave James were worth at the time of his depar- Other Income ture from the company. What limitations, if any, will you list in your repo Can (loss) on Sale of Assets connection with your valuation of this business? Would your valuation of the business or of the value of Dave James's share in the business change depending rome floss) Before Taxes on whether you were hired as an expert by Dave James or the Branson Family: Income Taxes Dan Willens, Appraiser Net income (Loss 4610 E. Washington Street Columbus, Ohio 43218 At your request, I have appraised the non-financial assets of the Branson Truck- ing Company as of December 31, 201 1. In arriving at my valuations of these assets I used industry trade data, expert evaluations, and other sources of valuations, as I Beginning Retained Earnin deemed appropriate under the circumstances. Below is a summary of the results: Net Income for the year Retained Earnings Current Assets: Cash $218,000 Accounts Receivable (net) 610,000 Inventory and Supplies 165,000 Prepaid Expenses 141,000 $1,134,000 Fixed assets: Land 650,000 Building & Fixtures 2,920,000 Rolling Stock 4,230,000 7,800,000 Investments: Bond Sinking Fund 340,000 Common Stock of other firms 650,000 990,000 Total Asset Value $9,924,000Business Valuation of Branson Trucking Company 147 ason rectly nuing UNAUDITED nployed in Branson Trucking Company 307-2011 Income Statement that were For the Year Ended December 31, 2007 five year $17,281,000 013 was Sales Less Sales Allowances 562,000 (1 1.A Net Sales $16,719,000 Cost of Sales 12,617,000 Gross Profit 4,102,000 Operating Expenses 4,886,000 Operating Income (Loss) (784,000) Other Income: Gain (Loss) on Sale of Assets 588,000 Income (Loss) Before Taxes (196,000) Income Taxes 0 Net Income (Loss) $(196,000) Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31, 2007 Beginning Retained Earnings $1,456,000 Net Income for the year (196,000) Retained Earnings $1,260,000748 Case Studies in Forensic Accounting and Fraud Auditing* UNAUDITED Branson Trucking Company Income Statement For the Year Ended December 37 , 2008 Sales $20 , 327 , 000 Sales Less Sales Allowances 768, 009 Less . Net Sales Net : Cost of Sales $79, 553, 000 Cost Gross Profit 12, 977, 000 Operating Expenses 6, 576, 000 Operating Income ( Loss ) 6, 894, 000 Other Income :" ( 378, 000 ) Gain ( Loss) on Sale of Assets Income ( Loss ) Before Taxes 57 7 , 000 Income Taxes 353, 000 Net Income ( Loss ) 15, 000 $3 38, 000 Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31 , 2008 Retained Earnings Net Income $7 , 260, 000, 338, 000 Less Dividends 7. 598, 000 Retained Earnings 120, 000 $1, 478, 000Business Valuation of Branson Trucking Company\\ 149 UNAUDITED Branson Trucking Company Income Statement For the Year Ended December 37 , 2009 Sales $22, 149, 000 Less Sales Allowances 883, 000 Net Sales Cost of Sales $21 , 266 , 000 Gross Profit 14 , 122, 000 Operating Expenses 7, 14 4, 000 Operating Income ( Loss ) 6 , 452 , 000 692, 000 Other Income : Gain ( Loss ) on Sale of Assets* 254, 000 Income ( Loss) Before Taxes 946, 000 Income Taxes 286, 000 Net Income ( Loss ) $660, 000 * Switched from ACR ( tax) depreciation to straight- line depreciation. Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31 , 2009 Retained Earnings $7 , 478, 000 Net Income 660, 000 2, 138 , 000 Less Dividends 400, 000 Retained Earnings $7, 738, 000Case Studies in Forensic Accounting and Fraud Auditing 750 UNAUDITED Branson Trucking Company Income Statement For the Year Ended December 37 , 2070 $29 , 258, 000 Sales 1, 786, 000 Less Sales Allowances Net Sales $28 , 072, 000 Cost of Sales 20, 346, 00.0 Gross Profit 7 . 726, 000 Operating Expenses 6, 488, 000 Operating Income ( Loss ) 1 , 238 , 000 Other Income :" Gain ( Loss ) on Sale of Assets 254 , 000 Income ( Loss ) Before Taxes 1 , 492 , 000 Income Taxes 665, 000 Net Income ( Loss) $827, 000 Branson Trucking Company Statement of Retained Earnings For the Year Ended December 37 , 2070 Retained Earnings 57, 738, 000 Net Income 827, 000 2 , 565, 000 Less Dividends 500, 000 Retained Earnings $2, 065, 000Business Valuation of Branson Trucking Company 1 757 $29 258,000 UNAUDITED Branson Trucking Company 6786. 0 0 0 Income Statement For the Year Ended December 31 , 2017 $34 , 570, 000 Sales Less Sales Allowances 2 , 407, 000 Net Sales $32, 203, 000 Cost of Sales 27 , 677, 000 Gross Profit 10, 526, 000 }3 8 MM Operating Expenses 8, 738, 000 Operating Income ( Loss) 1 , 788, 000 Other Income ; Gain ( Loss ) on Sale of Assets 344, 000 Income ( Loss ) Before Taxes 2 , 132, 000 Income Taxes 960, 000 Net Income ( LOSS ) $7, 17 2, 000 Branson Trucking Company Statement of Retained Earnings $1. 738, 000 For the Year Ended December 37 , 2071 0.00 128 Retained Earnings $2 , 065 , 000 2.565, 000 Net Income 1, 172, 000 3 , 237000 500, 000 52.065, 00 0 Less Dividends 800, 000 Retained Earnings $2, 437, 000