BUSINESS APPRAISAL PROCESS

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ABusiness Appraisal is an investigation into the law of probabilities withrespect to Business value. Through theAppraiser’s experience, training, and integrity, the Appraiser is able toproject the activities of buyers and sellers in the marketplace into anestimation of price-value. In reachinga conclusion, comparison of Businesses usually involves adjustments due to theindividuality and uniqueness of each Business.

ABusiness Appraisal cannot be guaranteed, nor can it be proven. The opinion of value can, however, besubstantiated and the final opinion is the result of a thorough professionalanalysis of a large amount of data. AnAppraisal must not be considered absolute but should be used as a startingpoint of documented value by analysis of the assets and financials that may beused as a basis of negotiations between concerned parties, whatever theirinterests.

TheAppraisal process as followed in the preparation the report is an orderlyprocedure for arriving at an estimate of value. By following this procedure, the Appraiser begins with apreliminary study of the issues and defines the basis from which the opinion ofvalue is to be made. Once the data hasbeen collected, a systematic approach is taken to analyzing the data andselecting appropriate valuation methodologies.

Inassignments to estimate fair market value, the ultimate goal of the Business Appraisal process is a supportedconclusion that reflects the Appraiser’s study of all influences on the valueof the company being appraised.Therefore, the Appraiser studies the Business from variousperspectives. Various questions areraised and answered through research of the industry and the financialcapabilities of the subject Business.Some of the questions researched may be found in the supporting datasection of the report.

Thevarious Appraisal approaches are interrelated, and each involves gathering andanalyzing specific pieces of data relating to the company being analyzed. From the analysis, the Appraiser derivesseparate indications of value, of which one or more may be used in determiningthe final value.

Tocomplete the Appraisal process, the Appraiser integrates the information drawnfrom market research, analysis of data, and from numerous Appraisal techniquesto form a conclusion. This conclusionmay be an estimate of value or a range in which the value may fall. An effective integration depends on anAppraiser’s skill, experience, and judgment.

ELEMENTS OF BUSINESS APPRAISAL

Every Appraisal method and technique must complywith and is limited to the following elements if the final results are to beconsidered significant.

Element 1

What areasonable buyer will pay a reasonable seller.

The term“reasonable” in this context is used in the economic sense. The buyer

andseller are each assumed to be comparing alternative investments and when

theeconomic incentive to purchase is equal to the economic incentive to sell, a

deal ismade.

Element 2

ForAppraisal purposes, a Business is defined as an organized method of

producing revenues routinely over a period of time.

Thevalue of a Business is divided into two (2) components:

1. The asset value represents the value of machinery, equipment, buildingsand

land, usable stock andother legal rights.

2. The intangible Business value of a Business represents the premium valuea

buyer will pay the sellerfor organization and historically recorded cash flows.

Additionally, the intangible value may be broken up into various values

representing items such as, customer list, covenant not to compete,goodwill and

anyother item documented by seller or buyer CPA.

Element 3

Accuracydepends up the standard use of terms, methods, and disclosure of

information.

TheBusiness Appraisal report is only as good as the data it is based upon.

Thereport makes adjustments for minor mistakes in judgment or interpretation

ofquestions; however, accounting or financial data is taken at face value.

Element 4

Allestimated values are limited by time and adjustments may be made as

changesoccur over time.

Anysales price is subject to change as the market conditions change. Therefore,

the suggestedvalue-price is valid only for a short time relative to the size and scale

of a givenBusiness, in a given industry, and in a given market. Documentation of

the data usedin the report will provide the basis for analyzing how this data will

changeover time.

FAIR MARKET VALUE

The single most important market factor to impactthe value of a Business is the supply and demand of an equally desirablesubstitute that is available in the marketplace. According to the element of substitution, the value of a thing(Business) tends to be determined by the cost of acquiring an equally desirablesubstitute. A buyer will pay no morefor a Business than the cost of purchasing a similar Business. This concept is the basis of fair marketvalue and is the overriding methodology in this Appraisal report.

There are three approaches to determining the valueof any Business:

1. The cost approach, which considers the cost of purchasing orproducing the

Business.

2. The income approach, which is a financial analysis consisting ofcapitalizing

an income stream based onthe cost of money and a risk rate that reflects

current market conditions.

3. The market data approach, which values the Business based oncurrent sales

in the marketplace for thesame or similar Businesses.

In the Business Appraisal report you will find asmany methods, under each approach, as is reasonably applicable to valuing thesubject Business. In order to arrive ata supportable value, the Appraiser will chose those methods that would bestapply to the purchase of the subject Business as reflected by the marketplace.

The Internal Revenue service established RevenueRuling 59-60 as the standard for the Appraisal of closely held companies. The following summarizes the key factors toconsider:

1. History and Nature of the Business.

2. Economic Outlook.

3. Book Value.

4. Earning Capacity of the Enterprise.

5. Dividend Paying Capacity of the Enterprise.

6. Goodwill and Intangible Assets.

7. Recent Sales of Stocks.

8. Market Value of Comparable Companies.

COST APPROACH

In considering the cost approach, remember that thecost of something does not necessarily determine its selling price. This is true in a rapidly changing market,which is highly affected by technological changes or variances in supply anddemand. This is especially true if acompany is very young and has not yet established enough of a track record tomake a confident analysis of the future performance.

Also, in the case of a Business, all seriouspractitioners of Business Appraisal agree that book value is not necessarily anadequate proxy for representing the underlying net asset value of a Businessfor Appraisal purposes, much less for representing the value of the Businessitself. However, book value is a figurethat is available for almost all Businesses.Furthermore, it is a value that different Businesses have arrived at by somemore or less common set of rules, usually some variation within the scope ofgenerally accepted accounting elements (GAAP).Also, each asset or liability number that is a component of book valueas shown in the financial statements represents a specific set of obligationsthat can be identified in detail by referring to the company’s records,assuming that the bookkeeping is complete and accurate. Therefore, book value usually provides themost convenient starting point for an asset value approach to the Appraisal ofa Business interest.

The nature and extent of adjustments that should bemade to book value for the Business Appraisal depend on many factors. One, of course, is the purpose for theAppraisal. Another, which is frequentlya limiting factor, is the availability of reliable data on which to base theadjustments both for the subject company and for other companies which might becompared in the course of the Appraisal.

One concept for fixed assets is value of use,the value of the operating assets to the owner/user, or buyer who will use itin a similar manner. Value in use isthe value that includes consideration for the unique relationship of the itemto a particular Business such as the subject.There is a value for an item, which is already in place and is ready touse in a going Business. The valuemight be the item’s retail price, plus applicable taxes, freight, andinstallation charges. The summation ofthese costs, after proper deductions for depreciation and obsolescence, is the valuein use of that item. This value maybe different from its fair market value to a buyer who may not use theequipment at its present location. Adefinition for value in use is as follows:

Thevalue of an economic good to its owner/user is based on the production

privacies in income; utility or amenity form) of the economic good to aspecific

individual. This is a subjectivevalue, however, and may not necessarily

represent the market value.

The Appraiser, therefore, will have to subjectivelyestimate the value in use of the subject’s assets based on pastexperience with assets of a similar nature.

INCOME APPROACH

The income approach is especially meaningful ifassets are used to produce income, such as in the Appraisal of a Business. However, it still takes root from the marketdata approach because it is an analysis of what the current market is paying bydetermining a comparable return that can be capitalized into a comparablepurchase price.

MARKET DATA APPROACH

In other types of Appraisals, mainly real estate,the market data approach indisputably will always yield the most accurateresults. It is a true representation ofthe current marketplace because it is what the market is paying for the same orsimilar asset. In the case of aBusiness, using public or private comparable sales price-to-earnings orincome-to-sales ratios require close attention to the factors that make thecomparison realistic which are:

Comparing Similar Business Types, sales levels, discretionaryearnings and asset

values.

The comparison starts witha similar Business type.

Comparing Business saleslevels that are as similar as possible to the Business being Appraised.

Using a comparison ofDiscretionary Earnings -- profit on the tax return means very little -- the sumof all the add backs will determine Discretionary Earnings and that is thenumber the Business Appraiser looks to compare. (Some comparables use Discretionary Cash Flow as well) None use tax return profit.

The Business Appraiser also must compare the asset values ofthe Comparables

anduse the comparables that most closely compare to the Business being

Appraised.

The market data approachcan be very useful when analyzing data drawn from the market as to what typesof ROI (return of investment) ratios are customary, or data based onPrice-to-Earning ratios that buyers are willing to pay in order to purchase acertain type of Business.

Stock Price Data from PubliclyTraded Companies

It can be argued that theuse of stock prices of publicly-owned companies to estimate the market value ofprivately held companies is a source of comparable data. However, many Business Appraisers realizethat to estimate the market value of a privately held Business by using thisdata is seriously flawed in several respects:

1. Publicly held companies, whose stock is listed on the major exchanges,

are usually much largerthan the closely-held Businesses that are being

appraised. This difference is size raises seriousquestions as to whether

the two are, in fact,comparable.

2. Prices of publicly traded stock reflect the sale of very fractional

ownership interests. On the other hand, the Appraiser’s objectiveis

usually to estimate themarket value of a major ownership interest,

frequently, one hundredpercent ownership of the closely held Business.

3. Selecting appropriate publicly traded companies is tantamount to guess

work, and, thus, cannot berelied upon.

4. The price to earnings ratio represents the ratio of a current stock to an

earnings-per-share figurethat can be from a few weeks to several

months old.

5. Probably the greatest fallacy of attempting to use publicly traded stock

prices to estimate thevalue of a closely held Business lies in the

psychology of theinvestor. The potential for a closelyheld Business is almost always concerned with the anticipated performance ofthe Business itself.

Of course, it is sometimesargued that the trend of stock prices of a publicly held company is stronglyinfluenced by the company’s performance.However, it is demonstrable that, whereas this does tend to be true inthe long run, there are many influences on stock that tend to be of short-termnature, and that strongly influence stock prices while bearing relativelylittle long-term relationship to the company’s performance. Therefore, usingthe prices of publicly traded stocks is not recommended as a means ofestimating the value of closely held Businesses.

ComparableTransactions

Still another source of market data is, of course,information on actual sales of companies, such as the subject, in theAppraiser’s local community. It isunlikely, however, that there will be enough information available on salessimilar to the subject to provide a statistically sound basis for estimatingthe Business’s market value. However,as mentioned above, when analysis based on research on potential buyers forthis kind of investment is made, important insight into what a buyer is willingto pay for a particular Business can assist the Appraiser in determining anaccurate opinion of value. Thisanalysis must include such factors as industry risk, the local and nationaleconomy, competition, barriers to entry, and the future potential of Greetingand Name.

CORRELATION OF METHODS

It isimportant to note that under guidelines set by the “The Uniform Standards ofProfessional Evaluation Practice” (Standards Rule 9-5), the Internal RevenueService (Revenue Ruling 59-60), as well as most Appraisal societies, theAppraiser is required to use all approaches for which reliable data isavailable and applicable. The use of asmany approaches and methods within these approaches is useful to the extentthat it will establish a range of values for the entity being appraised.

RevenueRuling 59-60 (in Section 3, “Approach to Valuation”) recognizes the fact thatappraising is not an exact science:“(a) sound Appraisal will be based upon all the relevant facts, but theelement of common sense, informed judgment and reasonableness must enter intothe process of weighting those facts and determining their aggregatesignificance.”

Sometimesit will be obvious that the analyst should rely on a single approach, such asmethods under the cost approach whereby earnings are insignificant to the valueof the assets. An example of this wouldbe a new enterprise with little or no longevity or profits, where projectionswould be meaningless. Another examplewould be a company that has longevity, but insignificant profits, and would bea candidate for liquidation. In othercases, it may be apparent that several methods would be appropriate for thefinal value conclusion. When this isthe case, the Appraiser must look to the real world to determine which methodor methods should receive the most weighting.

Servicecompanies can represent a significant problem to the Appraiser in that thereare few assets that would give a buyer confidence should the Business somedayfail. In any case, risk is the mostimportant factor to consider in an Appraisal.As stated earlier, and acknowledged in Revenue Ruling 59-60, value isbased on anticipated expectations of the buyer as to future performance. In other words, what a company did in thepast has no significance to its value if the trend is not anticipated in thefuture.

Although assets play animportant role in risk calculations, one must remember that earnings and theanticipation of an increasing income stream are the overriding factor in thepurchase of a Business. The process ofelimination and an analysis of methods both suggest that Discretionary Incomeis clearly the most representative of current market value.

May 03,2008

JohnSmith

1234Market Street

Pittsburgh,PA 15200

Mr. JohnSmith:

Thisreport contains the documents and data we have used to appraise NAME OFBUSINESS. The suggested value-price isthe sum of tangible assets and intangible Business value.

ASSETVALUE

Thetangible asset price or asset value represents the current estimatedvalue of the following:

1. Inventories for resale orconsumption.

2. Equipment and vehicles.

3. Leasehold improvements.

4. Transferable rights and privilegesuncontrolled by scarcity.

Theestimated current asset value of the company is: $242,000.

INTANGIBLEBUSINESS VALUE

Theintangible asset price of Business value represents the currentestimated value of the following:

1. Establishing a customer base whichwill continue to trade with this company

after being sold.

2. Securing a location, designing andconstructing a floor plan and securing and

installing equipment.

3. Management systems in place andproducing cash flow.

4. Proprietary rights or limitedissue permits.

5. Training and available consultingtime.

Theestimated current intangible value of the company is: $80,000.

ESTIMATEDCURRENT MARKET VALUE

TheBusiness Appraisal report with supporting documentation offers several values;therefore, our single value-price conclusion is the average of the documentedvalues.

Theestimated current market value of the company is: $322,000.

Respectfullysubmitted,

ThomasD. Atkins

BusinessAppraiser and Consultant