24. Business valuation. The Branson Trucking Company was started by three brothers in Columbus, Ohio in 1987. In 1992, Dave James came into the company pri- marily for marketing and growth purposes. Soon Dave showed that he was effective at increasing business and making deals that caused the company to grow signifi- cantly. 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 2005, the three Branson brothers and Dave James each owned 25 percent of the stock of the Branson Trucking Company. By the late-2000s, two of the Branson brothers wanted to bring their children and spouses into the trucking company. The role that these family mem- bers would play in the business created significant dis- cussions and some strife. Dave James in particular was opposed to bringing in additional family members. Dave threatened to leave the company, and some of the Bransons thought this 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 stock in the company at its fair value. At the end of 2017, Dave James resigned from the trucking company. Branson Trucking Company is a closely held com- pany that does not trade in any market. The only stock sales have been directly from the company to the original holders of the stock. Below are income statements and retained earnings statements for the Branson Trucking Company for the years 2013-2017. The Branson Trucking Company financial statements are prepared by the Black & Blue CPA Group directly from Branson's accounting data. This accounting firm also prepares all of the Branson Trucking Company's tax returns. The financial statements are prepared di- rectly from Branson Trucking's accounting data and are not audited by any accounting firm. Dave James received severance pay of $150,000. He is currently employed in a similar marketing po- sition with another company earning $175,000 a year. During the 2013-2017 time period, the average price earnings ratio for similar trucking firms that were traded in open markets were 8, 12, 15, 11, and 14, respectively, for the five-year period. After Dave James left the company, Branson Trucking's net in- come for the years 2018 and 2019 was $650,000 and $890,000, respectively. Below is an appraisal report of the Branson Trucking Company's assets as of December 31, 2017. At that time the firm's total liabilities were $5,100,000. Required: You are hired as a forensic accounting expert to prepare a business valuation. More spe- cifically, you are to determine the fair value of Dave James's 25 percent ownership interest in the Bran- son Trucking Company at the time of his departure. Prepare the valuation report using the assumption of either (a) or (b) below: [Note: Ask your instructor which assumption you are to use; do not use both (a) and (b). Ideally, one- half of the class should use assumption (a) and the other should use assumption (b), and then compare the valuations.] a. Assume you have been hired by Dave James to prepare the valuation report. Additional requirements: Explain the reasoning for applying any premiums or discounts you use in the valuation, and why you used a specific percentage amount. Also, explain why you did not use certain premiums or discounts that other business valuators might use. Discuss limitations, if any, in your report about your valuation of this business. Appraiser Report: Dan Willens, Appraiser 4610 E. Washington Street Columbus, Ohio 43218 At your request, I have appraised the assets of the Branson Trucking Company as of December 31, 2017. In arriving at my valuations of these assets, I used in- dustry trade data, accepted valuation methods, and other sources of information, as I deemed appropri- ate under the circumstances. Below is a summary of the results: Branson Trucking Company Fair Market Value of Assets December 31, 2017 Current Assets: Cash & Cash Equivalents Accounts Receivable (net) Inventory, Parts, and Supplies Prepaid Expenses Fixed assets: Land Buildings & Fixtures Rolling Stock Long-Term Investments: Bonds of other firms Common Stock of other firms Total Asset Value $324,000 230,000 365,000 141,000 $1,060,000 750,000 2,920,000 4,730,000 8,400,000 340,000 700,000 1,040,000 $10,500,000 UNAUDITED STATEMENTS Branson Trucking Company Income Statement For the Year Ended December 31, 2013 Sales Less Sales Allowances Net Sales Cost of Sales Gross Profit Operating Expenses Operating Income (Loss) Other Income: Gain (Loss) on Sale of Assets Income (Loss) Before Taxes Income Taxes Net Income (Loss) Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31, 2013 Beginning Retained Earnings Net Income for the year Retained Earnings UNAUDITED Branson Trucking Company Sales Less Sales Allowances Net Sales Cost of Sales Gross Profit $17,281,000 562,000 Income Statement For the Year Ended December 31, 2014 Operating Expenses Operating Income (Loss) Other Income: Gain (Loss) on Sale of Assets Income (Loss) Before Taxes Income Taxes Net Income (Loss) Retained Earnings Net Income Less Dividends Retained Earnings $20,321,000 768,000 Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31, 2014 $16,719,000 12,617,000 4,102,000 4,886,000 (784,000) $1,456,000 (196,000) $1,260,000 588,000 (196,000) $(196,000) $19,553,000 12,977,000 6,576,000 6,894,000 (318,000) 671,000 353,000 15,000 $338,000 $1,260,000 338,000 1,598,000 120,000 $1,478,000 For the Year Ended December 31, 2015 Sales Less Sales Allowances Net Sales Cost of Sales Gross Profit Operating Expense Operating Income (Loss) Other Income: Gain (Loss) on Sale of Assets* Income (Loss) Before Taxes Income Taxes Net Income (Loss) * Switched from ACR (tax) depreciation to straight-line depreciation. Retained Earnings Net Income Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31, 2015 Less Dividends Retained Earnings UNAUDITED Branson Trucking Company Sales Less Sales Allowances Net Sales Cost of Sales Gross Profit $22,149,000 883,000 Operating Expenses Operating Income (Loss) Income Statement For the Year Ended December 31, 2016 Other Income: Gain (Loss) on Sale of Assets Income (Loss) Before Taxes Income Taxes Net Income (Loss) Retained Earnings Net Income $21,266,000 14,122,000 7,144,000 6,452,000 692,000 Less Dividends Retained Earnings $1,478,000 660,000 2,138,000 400,000 $1,738,000 $29,258,000 1,186,000 Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31, 2016 254,000 946,000 286,000 $660,000 $28,072,000 20,346,000 7,726,000 6,488,000 1,238,000 254,000 1,492,000 665,000 $827,000 $1,738,000 827,000 2,565,000 500,000 $2,065,000 For the Year Ended December 31, 2017 Sales Less Sales Allowances Net Sales Cost of Sales Gross Profit Operating Expenses Operating Income (Loss) Other Income: Gain (Loss) on Sale of Assets Income (Loss) Before Taxes Income Taxes Net Income (Loss) Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31, 2017 Retained Earnings Net Income $34,610,000 2,407,000 Less Dividends Retained Earnings $32,203,000 21,677,000 10,526,000 8,738,000 1,788,000 344,000 2,132,000 960,000 $1,172,000 $2,065,000 1,172,000 3,237000 800,000 $2,437,000 24. Business valuation. The Branson Trucking Company was started by three brothers in Columbus, Ohio in 1987. In 1992, Dave James came into the company pri- marily for marketing and growth purposes. Soon Dave showed that he was effective at increasing business and making deals that caused the company to grow signifi- cantly. 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 2005, the three Branson brothers and Dave James each owned 25 percent of the stock of the Branson Trucking Company. By the late-2000s, two of the Branson brothers wanted to bring their children and spouses into the trucking company. The role that these family mem- bers would play in the business created significant dis- cussions and some strife. Dave James in particular was opposed to bringing in additional family members. Dave threatened to leave the company, and some of the Bransons thought this 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 stock in the company at its fair value. At the end of 2017, Dave James resigned from the trucking company. Branson Trucking Company is a closely held com- pany that does not trade in any market. The only stock sales have been directly from the company to the original holders of the stock. Below are income statements and retained earnings statements for the Branson Trucking Company for the years 2013-2017. The Branson Trucking Company financial statements are prepared by the Black & Blue CPA Group directly from Branson's accounting data. This accounting firm also prepares all of the Branson Trucking Company's tax returns. The financial statements are prepared di- rectly from Branson Trucking's accounting data and are not audited by any accounting firm. Dave James received severance pay of $150,000. He is currently employed in a similar marketing po- sition with another company earning $175,000 a year. During the 2013-2017 time period, the average price earnings ratio for similar trucking firms that were traded in open markets were 8, 12, 15, 11, and 14, respectively, for the five-year period. After Dave James left the company, Branson Trucking's net in- come for the years 2018 and 2019 was $650,000 and $890,000, respectively. Below is an appraisal report of the Branson Trucking Company's assets as of December 31, 2017. At that time the firm's total liabilities were $5,100,000. Required: You are hired as a forensic accounting expert to prepare a business valuation. More spe- cifically, you are to determine the fair value of Dave James's 25 percent ownership interest in the Bran- son Trucking Company at the time of his departure. Prepare the valuation report using the assumption of either (a) or (b) below: [Note: Ask your instructor which assumption you are to use; do not use both (a) and (b). Ideally, one- half of the class should use assumption (a) and the other should use assumption (b), and then compare the valuations.] a. Assume you have been hired by Dave James to prepare the valuation report. Additional requirements: Explain the reasoning for applying any premiums or discounts you use in the valuation, and why you used a specific percentage amount. Also, explain why you did not use certain premiums or discounts that other business valuators might use. Discuss limitations, if any, in your report about your valuation of this business. Appraiser Report: Dan Willens, Appraiser 4610 E. Washington Street Columbus, Ohio 43218 At your request, I have appraised the assets of the Branson Trucking Company as of December 31, 2017. In arriving at my valuations of these assets, I used in- dustry trade data, accepted valuation methods, and other sources of information, as I deemed appropri- ate under the circumstances. Below is a summary of the results: Branson Trucking Company Fair Market Value of Assets December 31, 2017 Current Assets: Cash & Cash Equivalents Accounts Receivable (net) Inventory, Parts, and Supplies Prepaid Expenses Fixed assets: Land Buildings & Fixtures Rolling Stock Long-Term Investments: Bonds of other firms Common Stock of other firms Total Asset Value $324,000 230,000 365,000 141,000 $1,060,000 750,000 2,920,000 4,730,000 8,400,000 340,000 700,000 1,040,000 $10,500,000 UNAUDITED STATEMENTS Branson Trucking Company Income Statement For the Year Ended December 31, 2013 Sales Less Sales Allowances Net Sales Cost of Sales Gross Profit Operating Expenses Operating Income (Loss) Other Income: Gain (Loss) on Sale of Assets Income (Loss) Before Taxes Income Taxes Net Income (Loss) Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31, 2013 Beginning Retained Earnings Net Income for the year Retained Earnings UNAUDITED Branson Trucking Company Sales Less Sales Allowances Net Sales Cost of Sales Gross Profit $17,281,000 562,000 Income Statement For the Year Ended December 31, 2014 Operating Expenses Operating Income (Loss) Other Income: Gain (Loss) on Sale of Assets Income (Loss) Before Taxes Income Taxes Net Income (Loss) Retained Earnings Net Income Less Dividends Retained Earnings $20,321,000 768,000 Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31, 2014 $16,719,000 12,617,000 4,102,000 4,886,000 (784,000) $1,456,000 (196,000) $1,260,000 588,000 (196,000) $(196,000) $19,553,000 12,977,000 6,576,000 6,894,000 (318,000) 671,000 353,000 15,000 $338,000 $1,260,000 338,000 1,598,000 120,000 $1,478,000 For the Year Ended December 31, 2015 Sales Less Sales Allowances Net Sales Cost of Sales Gross Profit Operating Expense Operating Income (Loss) Other Income: Gain (Loss) on Sale of Assets* Income (Loss) Before Taxes Income Taxes Net Income (Loss) * Switched from ACR (tax) depreciation to straight-line depreciation. Retained Earnings Net Income Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31, 2015 Less Dividends Retained Earnings UNAUDITED Branson Trucking Company Sales Less Sales Allowances Net Sales Cost of Sales Gross Profit $22,149,000 883,000 Operating Expenses Operating Income (Loss) Income Statement For the Year Ended December 31, 2016 Other Income: Gain (Loss) on Sale of Assets Income (Loss) Before Taxes Income Taxes Net Income (Loss) Retained Earnings Net Income $21,266,000 14,122,000 7,144,000 6,452,000 692,000 Less Dividends Retained Earnings $1,478,000 660,000 2,138,000 400,000 $1,738,000 $29,258,000 1,186,000 Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31, 2016 254,000 946,000 286,000 $660,000 $28,072,000 20,346,000 7,726,000 6,488,000 1,238,000 254,000 1,492,000 665,000 $827,000 $1,738,000 827,000 2,565,000 500,000 $2,065,000 For the Year Ended December 31, 2017 Sales Less Sales Allowances Net Sales Cost of Sales Gross Profit Operating Expenses Operating Income (Loss) Other Income: Gain (Loss) on Sale of Assets Income (Loss) Before Taxes Income Taxes Net Income (Loss) Branson Trucking Company Statement of Retained Earnings For the Year Ended December 31, 2017 Retained Earnings Net Income $34,610,000 2,407,000 Less Dividends Retained Earnings $32,203,000 21,677,000 10,526,000 8,738,000 1,788,000 344,000 2,132,000 960,000 $1,172,000 $2,065,000 1,172,000 3,237000 800,000 $2,437,000