Business Valuation of a Swimming School for Refinancing

Doeren Mayhew was retained to provide a business valuation for purposes of refinancing an existing loan. The initial loan was utilized for financing the purchase of the swimming school, as well as the construction of a specialized building containing an indoor swimming pool. Revenues of the subject company were nearly $2 million at the time of the valuation. The subject company specializes in swimming lessons for children aged four months to 12 years old, and also provides open family swim sessions, competitive swimming and quick-learn swimming programs.

Working with a Real Estate Appraiser

The subject entity being valued owned both the business, as well as the real property, where the business operated. It was established the best approach to determine a value for this entity, which held both the operating business as well as real property, was to utilize both a business appraiser and a real estate appraiser. As the business appraiser, Doeren Mayhew was tasked with determining a value for the business operations which consisted mainly of working capital, personal property and goodwill. The real estate appraiser was tasked with determining a value for the real property only. Adding the values determined by the business appraiser and the real property appraiser resulted in a total value for the entity.

Two key assumptions need to be made when utilizing a business appraiser and a real estate appraiser to value one entity to ensure no value is double counted or omitted. First, the real estate appraiser should value the property as if it were “dark.” This means the value determined by the real estate appraiser would not consider any personal property or goodwill, as those will be included in the value determined by the business appraiser. Second, the business appraiser should value the business as if the property was leased by an unrelated third party under an arms-length lease. As the business owner owns both the business and the real property, they can determine what amount of rent expense to pay themselves, if any. Therefore, a reasonable or fair market rent expense needs to be determined and accounted for in the business expenses.

Doeren Mayhew has an in-house real property appraisal team which could have appraised the real property. However, the subject property was not located near one of Doeren Mayhew’s offices and therefore a local real estate appraiser was selected. The business valuation team at Doeren Mayhew has a significant amount of experience working with real estate appraisers on multi-discipline engagements. This experience allows us to ensure the assets are valued appropriately and that no assets are double-counted or omitted.

Approaches Used in The Business Valuation

The business valuation required research related to the economic and industry-specific conditions related to the company. Specific factors considered were trends in consumer discretionary spending, condition of the local real estate market, trends in interest rates, and trends in local employment and household income.

Among other documents, Doeren Mayhew reviewed income tax returns and internal financial statements, and relied upon input from the client in order to analyze the cash flow of the company. Throughout the engagement, Doeren Mayhew met with the business owner to discuss operations and financial condition of the business and had frequent communication via email to address specific questions.

The three primary approaches to value a business (asset, income and market) were reviewed and utilized in this engagement. Specific factors or adjustments considered within each approach based on the nature of the business were are as follows:

1. Asset Approach – The adjusted book value method was utilized taking into consideration the appraised value of the real estate.
2. Income Approach – A capitalization of earnings method was used. This method considered the various risk components of the subject company including the management structure, local economic conditions, conditions of the local real estate market and the historical financial results of the business.
3. Market Approach – The guideline transaction method was used by gathering information from DealStats on similar companies that have recently been bought or sold.

Doeren Mayhew provided a summary valuation report to the client in order to refinance an existing loan. A final valuation report was provided within 7 business days of receiving the information required. The valuation report was prepared in accordance with the SBA’s standard operating procedures per SBA SOP 50 10 5(J) and in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP).