WO2000077966A2 - System and method for internet-based business valuations - Google Patents

Abstract

A server system (16) that provides a user (12) with a business valuation over the internet (14).

Description

SYSTEM AND METHOD FOR INTERNET-BASED BUSINESS VALUATIONS

Related Applications

This application claims priority of Provisional Application No. 60/139,299 filed on

June 15, 1999 entitled "Methods and System for Internet-Based Business Valuations."

Field of the Invention

The present invention relates to an automated, intemet-based business valuation

system in which users can purchase accredited business valuation services on-line.

Back^ground of the Invention

Business valuations are used for a variety of reasons including estate planning,

issuing stock options, establishing an ESOP, and selling a company, among others. In 1997,

there were SI 10 billion in private company sales. Business transactions involving the sale,

purchase, or merger of these private companies typically requires some sort of business

^•• aluation to enable the purchasers and sellers to evaluate and negotiate purchase prices and

terms of the transaction. Business valuation services are typically provided by skilled

professionals, often associated with investment banking, valuation or accounting firms.

Over one-half of private companies have had their businesses valued at least once. The

typical professional business valuation report (meeting USPAP standards) requires at least

one month to produce and costs anywhere from S I 5,000 to S35,000.

The process utilized to perform a valuation involves: collecting data from the client,

processing the data, analyzing the data and drafting a report summarizing the analysis and

findings. Attempts to automate this process to date are limited to various valuation software There are a number of business valuation software packages. These packages focus

exclusively on manipulating financial data, do not consider all of the qualitative issues that

arc factored into a valuation, do not meet USPAP (Uniform Standards of Professional

5 Appraisal Practice) standards, and do not provide the required data to perform some of the

most meaningful valuation approaches, such as the market comparison approach.

These and other drawbacks exist with current systems.

Summary of the Invention

An object of the present invention is to overcome these and other drawbacks with

' ; current systems.

Another object of the present invention is to provide a system and method that

provides an automated business valuation web site where users may contract to purchase a

business valuation on-line.

Another object of the present invention is to provide a system and method that

provides an automated business valuation web site where users may contract to purchase a

business valuation on-line that conforms to the standards for business valuations set by the

Uniform Standards of Professional Appraisal Practice so that the report delivered is an

accredited business valuation.

Another object of the present invention is to provide a system and method that

0 interacts with a user requesting a business valuation to collect all of the information

necessary to prepare a business valuation in a secure, encrypted manner to maintain confidentiality of the information and in a uniform manner to facilitate the automated

production of the report, including artificial intelligence added into the report.

Another object of the present invention is to provide a methodology for delivering a

b sm ss valuation in a short time period (e.g., a few days due to standardization of data

: entry, collection of that information in an automated fashion, and production of the report).

According to these and other objects of the present invention, a system and method

are provided that facilitate the collection of all of the quantitative and qualitative information

required to value a business via a secure (encrypted data) and user-friendly Intemet-based

questionnaire. This information is downloaded, reviewed, verified and much of it is linked

i '.^: to the output report. Through the methodology of the invention, the non-value-added

activities involved in processing business valuations (e.g., data collection, report preparation,

and data dissemination) may be provided by the system described herein. Therefore,

performing the methodology in accordance with the invention allows outsourcing and/or

automation of non-value added activities and enables exclusive focus on the activities

15 requiring unique skill sets and judgment.

The present invention therefore allows business intermediaries such as accountants,

bankers, business brokers, financial planners, and lawyers to deliver world-class investment

banking services to their clients with no investment or training. The invention provides a

high value-added component that requires a unique skill set, and outsources the time-

0 intensive activities to these intermediaries, creating a new source of revenue for them.

Compared to a typical professional business valuation report (meeting USPAP standards) that requires about one month to produce and costs anywhere from SI 5,000 to

S35.000. a valuation report produced in accordance with the present invention may be

generated in five business days or fewer, requires about 8 man-hours, and may therefore be

priced at a fraction of the cost of comparable quality services. Moreover, the valuation

5 report produced with the system is superior to most on the market today.

To process a report, a company or its trusted financial advisor logs on to an Internet

web site associated with the system, and completes a very user-friendly online due diligence

questionnaire which contains a number of questions (e.g., about 100) covering all relevant

aspects of the business including financial, legal, sales and marketing, management,

i ' l facilities, competition, etc. The data is encrypted and sent to a database protected with

firewalls and stored until all questions have been answered. Clients can update a company

profile at any time. Also, to facilitate data entry, a user may exit data entry at any time and

return to complete additional questions. To assist the user in understanding what questions

are still left to be completed, each time the user exits the system, a report is generated listing

! 5 all of the questions remaining to be answered.

Once the profile is completed, a data file representing the profile is downloaded to a

processing site, decrypted, reviewed by a valuation expert, checked for errors and omissions,

and contact is made with the client to clarify questions. Much of the data is imported

directly into the valuation report.

10 The four most common valuation approaches may then be employed to determine the

valuation: (1) net asset value, (2) market comparison, including guideline company analysis, (3 ) announced merger transaction comparison, and (4) discounted cash flow. Predetermined

algorithms make all the computations to perform the net asset value approach. In

performing the market comparison approach, a professional analyst searches an analysis

database containing financial data for publicly traded companies. This database may

5 comprise a CD ROM database (e.g., provided by Standard & Poors) providing information

on over 13,000 public companies to find the most comparable public companies. By simply

entering the ticker symbol of the comparable companies, ratios and multiples used to

perform the market comparison approach may be automatically imported into the report. A

similar process may be followed using announced merger transactions. A discounted cash

n._' flow analysis may be performed after restating the company's cash flows to adjust for

private company and extraordinary expenses. The appropriate multiples, premiums and

discounts may be determined to derive the ultimate value range. In total, producing a report

may involve 1 to 2 hours of expert time and 6 to S hours of analyst time.

A company ordering a report directly is charged a predetermined fee, which may be

15 collected via credit card or invoice. In many cases a financial intermediary submits the data

on behalf of a client. The intermediary may review a draft report, adjust the multiples and

conclusion and put that intermediary's name on the cover for an additional fee. This service

entails an incremental hour or two of clerical time. The intermediary may then charge an

additional fee for the report, or simply bill hourly for its time to collect and input the data.

0 Therefore, a business intermediary may be in the valuation business with a product

that rivals that produced by the leading valuation firms or the big 5 accounting firms with no

- investment, no training, and no overhead.

Other objects and advantages of the present invention may be determined from the

following description of the invention.

Brief Description of the Figures

Fig. 1 depicts an overall flow diagram of a method of providing information to

generate a business evaluation according to one embodiment of the present invention.

Fig. 2 depicts a flow diagram of information provided to enable a business valuation

according to an embodiment of the present invention.

Fig. 3 depicts a flow diagram of input of company background information for

enabling a business valuation according to one embodiment of the present invention.

Fig. 4 depicts a flow diagram of input of information related to company ownership

for use according to one embodiment of the present invention.

Fig. 5 depicts a flow diagram of input of industry and competition information for

use according to one embodiment of the present invention.

Fig. 6 depicts a flow diagram of input of management and labor information input

for use according to one embodiment of the present invention.

Fig. 7 depicts a flow diagram of input of facilities and operation information for use

according to one embodiment of the present invention.

Fig. 8 depicts a flow diagram of input of sales and marketing information for use

according to one embodiment of the present invention.

Fig. 9 depicts a flow diagram of input of financial statement information for use according to one embodiment of the present invention.

Fig. 10 depicts a flow diagram of input of additional financial information for use

according to one embodiment of the present invention.

Fig. 1 1 depicts a flow diagram of input of legal and administrative information for

5 use according to one embodiment of the present invention.

Fig. 12 depicts a flow diagram of a process for using information input by a user

about a company and generating a business valuation report according to an embodiment of

the present invention.

Fig. 13 depicts a system for use in generating a business valuation report according

-. to an embodiment of the present invention.

Fig. 14 depicts an example of a comma delimited file generated from the data input

methodology of the present invention that has been converted to a spreadsheet.

Fig. 15 depicts a summary balance sheet generated from the system according to one

embodiment of the present invention.

If Fig. 16 depicts a chart comparing selected guideline companies against S&P 500 and

the S&P small cap companies as part of a methodology according to one embodiment of the

present invention.

Fig. 17 depicts a month-by-month break down of the indexed return for the guideline

companies compared to other standard indexes for use in determining the valuation of a

0 company according to one embodiment of the-present invention.

Fig. 18 depicts a screen generating output from a net asset value approach according to one embodiment of the present invention.

Fig. 19 depicts guideline company information for use by an analyst in determining

the value of a company according to an embodiment of a method of the present invention.

Fig. 20 depicts the comparison of market comparable companies to. the target

company for use by an analyst in an embodiment of a method according to the present

invention.

Figs. 21 and 22 depict output for use in the guideline company and guideline

transaction approach according to one embodiment of the present invention.

Fig. 23 depicts data for an income approach according to one embodiment of the

present invention.

Fig. 24 depicts a valuation summary sheet generated from the methodology of the

present invention.

Fig. 25 depicts major assumptions for the discounted cash flow according to an

embodiment of the present invention.

Fig. 26 depicts an example of a graphical user interface through which a user may

select from a plurality of radio buttons according to one embodiment of the present

invention.

Fig. 27 depicts an embodiment of a graphical user interface for use in the present

invention providing entry blank for the user to type in information according to the present

invention.

Appendix A depicts an example business valuation report according to one embodiment of the present invention.

Detailed Description of the Present Invention

The methodology of the invention may involve three basic steps. First, users (also

called clients herein) register or sign-in to a host system. Then, data is provided, by the user

about the company for whom a business valuation is to be performed. Then, a business

valuation report is generated.

Fig. 1 depicts a flow diagram of providing data input for a business valuation

according to an embodiment of the invention. In method 100, a registered user enters the

host site at step 102. .Alternatively, in step 104, a new user registers with the system.

Registration/sign-in may occur at a host system site. Users may be directed to that

site from a variety of sources, including related web sites. For example,

WWΛV. Virtual Adivsors.com. which contains information about an entity operating the host

site (e.g., Virtual Advisors), including valuation services, approach, fees, resumes, etc., may

link to the host site (e.g., wwwNirtualValuation.com . To register in step 104, the user or

Client selects a "User ID" and 'Tassword," register contact information, relationship to the

Company, and the Company's contact information. Next, in step 106, the user may select a

^" Project Code" (used to access the Project's profile later), and the "Valuation Service

Option," which may be "Standard" or "Custom." In step 108, the user may be sent to a

"Disclaimer" page where the user is asked to agree to certain legally binding terms that

govern the services offered. After the Client agrees to the terms in step 110, a "Payment

Information" page is presented in which the user may input payment information, such as credit card information. If a client prefers to pay by invoice, that client may contact the host

system to receive authorization and a password. At the time of registration, one-half of the

amount due may be charged. The balance is due upon delivery of the final report. If

^"Invoice" is selected, one-half of the amount due may be invoiced before the report is

1 processed. Finally, once the "Payment Information" page is completed, the Client is sent to

the "Instructions" page in step 1 12. Here, the client is given specific guidelines on how to

complete the due diligence questionnaire. Next, in step 1 18, the Client is taken to the "On-

Line Due Diligence Questionnaire," which may comprise a series of approximately 100

questions to provide the information used to perform the valuation. After step 118, the

i '.i method 1200 of Fig. 12 may be performed.

Once a Client has registered, the user is allowed to access a Company profile as

many times as desired, although a limit may be placed on it (e.g., up to 90 days) through step

1 1 and step 1 16. Information provided by the user is encrypted as it is collected and sent to

the database where it is stored in a database protected with firewalls. Upon return, "ED,"

15 "Password" and "Project Code" are verified, and the "Due Diligence Questionnaire" is

populated with the data entered to that date on the Company from the stored encrypted

information.

Step 1 18, the Due Diligence Questionnaire, may comprise a nine-section, 105

question questionnaire. A series of graphical user interfaces may be provided, using

0 standard Web interfaces such as radio buttons, check boxes, pull-down menus and text

boxes, to make the data entry easy and efficient for the Client. The Client may then navigate through the questionnaire sequentially or may choose to fill out only certain sections or

questions during a particular session, and go back later to complete all of the questions.

More detail on the specific questions is provided below.

Examples of a graphical user interface used in the present invention are provided in

5 Figs. 26 and 27. Fig. 26 depicts an example graphical user interface providing a radio

buttons 50 for selection by the user of how the user rates employee morale at the company.

Additionally, to aid in the navigation between the various screens within the

questionnaire portion of the system, plurality of tab portions 52 may be disposed within the

graphical user interface. Tab portion 52A through 52H may correspond to each of the nine

i ' sections of the questionnaire as depicted in Fig. 26. Additionally, a tab 521 may be provided

that enables the user to contact the system with questions via e-mail, telephone or other

means of contact. A title of the section in which the user is operating may also be presented

as shown in element 58. Also, the question within the section may be depicted as shown in

element 59. The actual question is shown as element 60 and a plurality of options or

1 answers may be presented as section 62. Also, within the section, navigation may be aided

by providing previous question button 64 and next question button 68. Further, an end

session button 66 may be provided to enable the user to end the session at any time.

Additional navigation elements may be provided at the bottom of the graphical user interface

including links to various portions within the web site of the host system. Specifically, a

0 welcome link 72, existing client sign in link- 74, new client registration link 76, about the

firm link 78, contact us link 80, and back to top link 82 may be provided. Welcome link 72 .may take the user to the introductory page on the web site. Existing client sign in link 74

may take the user to the screen wherein an existing client may sign in. New client

registration link 76 may be provided to take the user to the screen wherein new clients may

register. About the firm 78 may take the user to a screen and/or separate web site that

provides information about the company that operates the host site. Contact us link 80 may

operate as tab 521 to enable a user to contact the host system with questions about how to

operate the system. And back to the top link 82 may be provided to take the user back to the

very introductory page of the questionnaire. As shown in Fig. 27, answer portion 62 may

also be a fill in type of graphical user interface as known in the art. In this embodiment, the

user is able to type in various portions of the screen to provide an income statement as

shown in Fig. 27.

Once a client has finished a particular "Session," "End Session" button 66 may be

selected to bring the user to an "End Session" page. This page has several functions. First,

the questions that have NOT been answered to date on that Project may be listed- This gives

the Client the ability to print the questions to aid them in collecting the remaining due

diligence information. The Client then may click on a.) the "Log-Out" button to prompt the

system to save the current data so that it can be accessed at a later time, or b.) the "Submit

Report" button to prompt the system to save and forward the data to be processed.

According to one embodiment of the present invention, nine separate sections may

be provided in which users are requested to provide information in order to assist the system

in determining the valuation of the company. Specifically, a method 200 may be provided as shown in Fig. 2 which comprises nine sections entered into the system. Although shown

in a particular order, it should be understood that the information may be provided in any

order and may actually be provided at different sessions as described herein.

The nine separate sections as shown in Fig. 2 may comprise company background

202, company ownership 204, industry and competition 206, management and labor 208,

facilities and operations 210, sales and marketing 212, financial statements 214, additional

financial information 216, and legal and administrative information 218. Fig. 3 comprises

an embodiment of the flow of information requested related to the company background

202. Specifically, this section may comprise nine questions related to the background of the

i 'J company. In step 302, the purpose of the valuation may be requested from the user. In one

embodiment, a plurality of options may be provided, including potential sale of the

company, sale of stock to management/employees, establish a value for options, warrants or

similar securities, repurchase of shares from minority shareholders, estate planning, gift tax,

desenter's rights, or employee stock ownership plan. Other options or a fill in the blank type

module may be provided.

Next, in step 304, the date as of which the company is to be valued is requested from

the user. In this step, it should be appreciated that the value of a company could be made as

of the present date, or as some previous date in the company's history for various purposes.

Therefore, question 304 may ask two different subparts. First, the user may be requested to

provide whether the value is to be determined from the most recent data or from a previous

date. If a previous date is desired, then the user is requested to input that date into the sj. stem.

Next, in step 306, the user is requested to provide information regarding the

percentage of capital stock to be valued. It should be appreciated that not all stock in a

company may be desired to be included in a valuation and therefore this information assists

the evaluator in determining the proper value requested by the user.

Next, in step 308, the user is requested to provide information regarding the

percentage of voting interest in the company that value of shares represents. In step 310, the

user is requested to provide information regarding the marketability of the valued shares.

The choices presented may include total liquidity, partial liquidity, or illiquid, for example.

Next, in step 31 1, the user may be requested to provide information regarding the

year the company was established. In step 312, the user may be requested to select the

economic code that best describes the company's economic sector. According to one

embodiment, a plurality of predetermined codes may be provided that have been established

by the system that help assist the user in determining in which field the company operates.

Next, in step 314, the user is requested to input the industry sector code within that

particular economic code. In step 316, the primary SIC code is requested. In step 318, a

narrative of the company business is requested from the user. In one embodiment, no more

than 50 words may be requested to limit the amount of information required to be input by

the user.

Fig. 4 represents an embodiment of the flow of information requested relating to

company ownership 204. In this embodiment, in step 402, the number of shares outstanding is first requested. Next, in step 404, the number of shares held in treasury is requested.

Next, in step 406, the number of shares under option are input. If there are no shares under

option, then the user moves down to step 410. If shares are held under option, then in step

4U$. information regarding those grants is requested. In this embodiment, the following

5 information may be requested. For each grant, the number of shares, the strike price, and the

expiration date may be requested through various data entry fields provided in a graphical

user interface as described in greater detail below. Next, in step 410, the number of current

shareholders is requested. In step 412, a table is provided that requests information

regarding the ownership and role of the largest shareholders. A predetermined number of

i _' ^'-/ shareholders may be selected in order to limit the number of inputs required. For example,

the three largest shareholders may be requested. In this table, the following information may

be requested about the three largest shareholders: total number of shares, number of voting

shares, number of non-voting shares, and role. Within the role section, various

predetermined selections may be provided, including chairman/CEO, other senior

15 management, or non-active owner.

Next, in step 414, various special shareholder conditions are requested from the user.

The following are potential special shareholder provisions that the user may select: super

majority voting requirements, transfer restrictions, obligations or rights to sell upon death,

disability or other enumerated events, dividend and distribution rights and preferences,

0 liquidation rights or preferences, piggyback or other registration rights, tag along or drag

along rights or obligations, or a blank other field in which the user may input any other types of provisions. In step 416, information about the last stock sale may be requested from the

user. For this last sale, the transaction price per share is requested and the percentage of

company that sale represented. In step 418, the user is requested to provide any information

regarding offers to purchase the company. If there has been a legitimate offer to buy the

5 company, then the user is requested to provide the date of the offer, the valuation of the offer

for 100% of the common stock, and any special circumstances or considerations relating to

that proposed purchase.

After company ownership information has been input, industry and competition

information 206 may be requested through a series of questions as depicted in Fig. 5, for

i j example. First, in step 502, the number of competitors may be requested from the user.

Competitors may be determined to be significant competitors and not just all potential

competitors. In step 504, the bases of competition within the primary market for the

company may be rated. In this embodiment, six different categories may be provided and

within each category, the user may be requested to select from a range of values (e.g., 1

15 equals most important aspect of competition - 6 equals least important). The six different

categories may include price, service, delivery, quality of product/service, technology, and

customer relations. Next, in step 506, the user is asked to evaluate the barriers to entry for

the particular company's competitors. Three different areas are provided in which the user

is requested to rate the barriers to entry (e.g., 1 equals greatest barrier, 3 equals weakest).

0 These three areas may comprise technology, capital, and labor. In step 508, the user is asked

to provide information relating to the average annual growth rate of the company's primary market. Two categories may be requested. The historical data relating to the last five years

and the projected data relating to the next five years. Next, in step 510, information relating

to the availability of substitutes in the company's primary market is requested from the user

and the user may be requested to select from three options, including readily available,

5 moderate level of availability, and not available.

Next, in step 512, the user is requested to identify publicly traded companies in the

same business. The user may do so by typing in the name, or the stock market symbol under

which the company is publicly traded. In step 514, the cyclically of the industry is

requested from the user. The user may be provided various selections relating to how

'. '.' cyclical the nature of the company's industry is. In step 516, the user is requested to select

which of the seasons experience the highest level of revenues. If no season is particularly

higher in revenue, then the user is provided the option to select that the revenues are not

seasonal. Next, in step 518, the company's cost position relative to its competition is

requested. This information may comprise selecting from three choices: lower cost

15 structure, comparable cost structure, and higher cost structure. Next, in step 520, the

importance of proprietary technology is input by the user. Two choices may be requested

from the user: the importance of proprietary technology to the industry as a whole, and then

separately the importance of proprietary technology to the company itself.

In step 522, information relating to competitive dynamics is input. The user may be

0 provided pull down choices of yes, no, maybe, and don't know related to each of a series of

statements. These statements may comprise the following: price competition is increasing, there is an increase in the number of competitors in our market, there is an increase in

competition from imports, the market of our products is becoming more global, the industry

is consolidating, larger companies are capturing greater marketshare, and the most

successful companies today are the same ones that were the leaders five years ago. Next, in

step 524, the impact of regulation on the markets is requested and the user may select from

three choice: high, medium, and low. Next, in step 526, the user identifies the Company's

primary opportunities for growth in the future (e.g., new products, new geographic locations,

acquisitions, greater sales to existing customers, and greater sales to new customers in the

same market).

The next section may comprise information relating to management and labor of the

company 208. In this section, in 602, personal data for the top executives may be requested.

The following information may be requested from the top four executives of the company:

name, age, years with the company, years in the industry, years of college/graduate school,

years until planned retirement, capability relative to peers in the industry, and total

compensation, including salary, bonuses, profit sharing, benefits and any other

compensation. Next, in step 604, the total number of employees for the company is

requested and broken down between salaried and hourly employees. In step 606, the user is

requested to describe whether or not a labor union has been organized for the workers. In

608, the user is asked to provide information as to whether any work stoppages have

occurred, such as through labor strikes or- walkouts. In step 610, the user is asked to

evaluate the company morale of employees, choosing between various options (e.g., excellent, good, acceptable and poor). Next, in step 612, the user is asked to rate the

turnover in the company's labor force relative to the local labor market and industry norms,

choosing between three choices of below average, average, and above average. Next, in step

(5 ! 4. the availability of qualified labor is chosen by the user between readily available,

moderate availability, and difficult to find. Next, in step 616, the user is asked to provide

the number of members of the Board of Directors. And in step 618, the number of

independent directors from that list is provided.

The user then inputs information relating to facilities and operations 210, as shown in

Fig. 7. First, in step 702, the headquarters location is input, including city, state, and

country. In step 704, the number of physical facilities is requested. That may comprise

requesting the physical facilities that are significant to the business or have significant

economic value. Next, in step 708, detailed information relating to the facilities are

requested. This information may comprise the following: the function, location, size in

square feet, capacity, the condition of the facility, the net book value, the current market

value, ownership of the facility, annual lease payments, or planned expansion at the facility.

The function may enable the user to choose whether it is an aclm-inistrative office, a

manufacturing facility, etc. The ownership may request information as to whether the

facility is owned, leased, or rented or otherwise used pursuant to some other type of

arrangement. If planned expansion is in the works, then the user in that section is requested

to provide the cost and square footage of the planned expansion. This information is

requested from each of the major facilities of the company. Next, in step 708, a company equipment profile is requested describing the

company's equipment as one of new, adequate, or outdated. Next, in step 710, the user is

requested to estimate the difference between the book value of equipment and its cuαent

market value. In step 712, the user is requested to provide an evaluation of the computer

: systems, including both computer hardware and computer software, choosing between the

options of new, adequate, or outdated. In step 714, the value of nonoperating assets is input

by the user, including a breakdown as follows: excess land-market value, excess land-book

value, investments, excess cash, or other nonoperating assets. In step 716, the user is

requested to provide the number of suppliers that the company uses.

! ' Next, in step 718, the user is requested to input the amount of reliance on that top

supplier. Specifically, the user is requested to identify what percentage of purchases that

company made from the top supplier over the last 12 months, as well as providing

information relating to the percentage purchased from the top 5 suppliers total over the last

12 months. In step 720, the user is requested to indicate what percentage of its total

15 purchases are made under long term contracts. Finally, in this section, in step 722, the user

is requested to provide information relating to the availability of alternative supply sources,

including readily available, moderately available, and hard to find as the options.

Next, sales and marketing information 212 is input through four questions as shown

in Fig. 8. First, the approximate number of company's customers is requested in step 802.

0 In step 804, the split in revenue based on different customer longevity levels is requested

from the user. Specifically, over the last 12 months, the user is requested to estimate the total percentage of revenues from the company's top customer, the total revenues from the

top five customers, and the total percentage of revenue from new customers. In step 806,

revenues from customers of various types is requested. Specifically, in one embodiment, the

user may be requested to estimate the percentage of total revenues from international

customers, government entities, and long term contract sales. In step 808, the user may be

requested to estimate the importance of brand equity to the success of the company from

choices of very important, important, and not important.

Next, in step 214, financial statement information is provided. Step 214 may

comprise 1 1 questions as shown in Fig. 9, for example. In step 902, the user may be

requested to provide information regarding the nature of a company's financial statements.

Specifically, the question may ask whether the company's financial statements are reviewed,

compiled, or audited. Next, if the statements are audited, the user is requested to state

whether the auditor's opinion is unqualified or not. In step 904, the user is questioned as to

w hether or not an internal control warning has ever been issued to the company within the

last 12 months from its independent accounting firm. In step 906, the user is requested

whether or not the company's tax returns have been audited in the last 3 years by either the

IRS or state. In step 908, the user is requested to input the date of the last fiscal year end

financial statement. In step 910, the user is requested to input the revenue recognition

accounting method used by the company (cash method or accrual). In step 912, the user is

requested to provide what type of inventory valuation method is used — LIFO or FIFO.

In step 914, detailed income statement information is requested from the user, including the last three years fiscal year ending numbers. A table may be provided through

which the user inputs the fiscal year ending dates as well as the following information: net

revenues, costs of goods sold, gross profit, selling expenses, general and administrative

expenses, operating income, interest expense, other expenses (income), profit before taxes,

taxes, net income, capital expenditures, depreciation/amortization expense, expenditures on

R&D/product development, and pre-tax non-recurring extraordinary gains/(losses). In step

916, if the company had any non-recurring/extraordinary gains or losses, a description of

that information and the nature and amounts are input from the user. In step 918, the user is

requested to provide a balance sheet for the last three fiscal year ending statements. This

information may include the following: cash and cash equivalents, accounts receivable,

inventory, other current assets, total current assets, property, plants and equipment,

accumulated depreciation, net property plant and equipment, land, intangibles and other long

term assets. This information may then be totaled through an automated form system.

Liability information may also be input in the same step, including accounts payable,

accrued expenses, short term borrowings, other current liabilities, total current liabilities,

deferred taxes, long-term borrowings, other long-term liabilities, and this information may

then be totaled to provide total liabilities. Shareholders equity may also be provided in the

balance sheet including paid-in capital, retained earnings, total shareholders equity and then

total liabilities and equity. Next, in step 920, summary fiscal information may be input into

a balance sheet from the most recently available statements prior to the evaluation date.

This includes current assets, P P&E, other assets, liabilities and shareholders' equity, total assets, current liabilities, borrowings, other liabilities, shareholders equity and total liability

to generate a complete summary fiscal information sheet. In step 922, projected current year

end numbers may be input, including net revenues, gross profit, operating income, interest

expenses, extraordinary income, pretax income, depreciation, capital expenditures, and

5 change in operating working capital.

Next, in step 216, additional financial information is input by the user through a

plurality of steps, as for example, the steps provided in Fig. 10. In step 1002, significant

short term loan entity information is provided. Specifically, this information requests data

about the company's two most significant short-term lenders, including the name of the

i u financial institution, the type of financial institution, the length of the relationship, the

current boπowing rate, and the amount of the borrowing facility. Next, in step 1004, the

long term repayment entities are described. Specifically, for each of the three largest notes

issued by the company on a long term basis, the principal balance, maturity by month and

year, the interest rate, and the timing of payments are provided. Next, in step 1006, the user

15 is requested to provide information about whether the company has a factoring relationship.

If the user does have a factoring relationship, then the following information may be

requested: the average monthly factor balance, the amount of factor reserve, the advance

rate, and whether or not there is recourse or not.

Next, in step 1008, the user is requested to input the annual capital lease expenses for

0 the company in terms of the dollar amount.' Next, in step 1010, the user inputs the market

value of inventories. Specifically, the user is asked the following question: "If inventories w ere to be reflected on the books at their true market value, how much would the value

increase or decrease relative to its book value?" In step 1012, the user is requested to input

the age of accounts receivable. This information may include a statement of the percentage

of accounts receivable under 30 days old, percentage of accounts receivable over 30 days

old. but within industry norms, and a percentage of accounts receivable outside of industry

norms. Similarly, in step 1014, information regarding the accounts payable is provided,

including percentages over 30 days old, past due, and outside of industry norms. In step

1016, the user inputs the experience the company has had with collecting on bad debts,

w hether it is high, accurate, or low. Next, in 1018, the user is asked to input how much is in

reserve for bad debts. In step 1020, the user provides information relating to the income to

non-employee shareholders. If there is such income, then the amount for the most recently

completed fiscal year is provided and the projected total amount for the current fiscal year is

provided.

In step 1022, the user provides information relating to private company expenses,

including excess compensation, cars, boats or homes, travel, entertainment, and other

expenses that would not be incurred by a third party owner seeking to maximize profits. In

step 1024, narrative related to insider transactions is provided, including information relating

to loans, to or from management or shareholders, personal ownership of company assets,

and contracts with affiliated businesses. In step 1026, the company's federal tax rate is

supplied and in step 1028 the company state tax rate is supplied. In step 1030, the net

operating loss carry forwards is provided. Specifically, the user may be provided with the following question: "What is the dollar amount of the company's existing net operating loss

carry forwards not reflected as a deferred tax asset?" In step 1032, the user is requested to

provide information relating to how many years until the net operating loss carry forward

expires.

5 Next, as shown in Fig. 1 1 , Legal and Administrative information 218 may be

requested from the user.

In step 1102, the user is requested to state the legal form in which the company is

organized selected from either sole proprietorship, partnership, S corporation, C corporation,

or a limited liability corporation. In step 1104, the state of incorporation is input. In step

i u 1 1 OS, the user is asked to identify any key patents and/or trademarks owned by the company.

In step 1 1 10, information regarding environmental audits performed within the last three

years. Specifically, the question asks whether the company has had any phase 1

environmental audits in the last three years, and if so, an estimate of the company's financial

exposure for possible fines is provided. In step 1114, the company is asked to estimate its

'.5 exposure to current and/or future litigation including potential exposure, probability of the

claim being adversely settled, and the most likely exposure.

In step 1116, the user is asked to estimate the exposure to any significant liabilities

not reported in the company's financial statements for workers compensation, product

liability, etc. not identified in the previous question. In step 1118, the user inputs

0 information into a table providing insight into- any pending disputes/fine/claims with various

regulatory bodies. For each potential agency that the disputer fine is identified in the possible amount, including the following agencies: IRS, EPA, EEOC, NLRB, OSHA, INS,

and DOL. In step 1 120, the user is asked to identify whether they are adequately insured in

a number of areas, including property, casualty, product liability, key man life, OND, health,

title, and business interruption. In step 1 122, employee retirement plan information is

5 provided, including identifying whether an employee retirement plan is in place, and if so,

following information about the plan: if it is a 401K, profit sharing, defined benefit or other

plan and the annualized cost to the company. If the plan is a defined benefit plan, the

question also asks how much the plan is overfunded or underfunded. In step 1124, other

information is provided in a catch-all type questions, such as is there anything we should

j know that has not been asked that would have a material impact on the company's value.

Once the data has been downloaded and decrypted, it is ready for processing, as in

method 1200, shown in Fig. 12. Data is stored in a valuation database in step 1202. In step

! 204, data is pulled into a Work-in Progress (WIP) file that acts as a database for that

particular project's report production. The system uses this file to pull the Company's data

5 into the various Valuation Model files. In step 1206, the WTP is reviewed to allow an

analyst and valuation expert to: 1) determine the Company's business and industry, which

guides them in selecting comparable public companies and comparable transactions; 2)

check for glaring errors or omissions in the data; and 3) begin to understand the subjective

aspects of the Company that impact value.

0 In step 1208, the system may then contact the user (e.g., by phone or E-mail) to

verify the accuracy of any data that does not appear to be logical or which seems to suggest further explanation.

In step 1210, the WIP is updated with information from the review of step 1208. In

step 1228, a report template is updated with the linked WTP. According to one embodiment

of the present invention, the WIP file is stored as a "web data" type of file. The report

s> stem monitors for storage of such files to a certain directory. When a web data file is

stored in the directory, the report system pulls that data into a report template. The report

template may be a spreadsheet program file that links cells to corresponding cells in the WIP

file. Because every WTP file and every report are standard, the association of data between

those files may be "hard-coded" or otherwise associated. At this point, the report template

comprises common entries that are common to all business valuations (e.g., text, styling,

etc.) and user-provided and derived company data. Next, analysis data is to be added to the

report.

In step 1212, an analyst searches its in-house databases to select the appropriate

comparable public companies. After entering the ticker symbol of those companies selected,

the system then automatically links the data from third party databases to the Report

Template. In step 1216, this data is input into the report template. In step 1214, prior

company sale transactions are reviewed to determine comparable transactions that provided

a value for a company. In step 1218, selected data is imported into the report. Discount

rates for the income approach are selected in step 1220 and then input into the report

template in step 1222. In step 1224, text in the WIP is formatted and indexed for inclusion

in the report. An updated report template with linked WIP is then generated in step 1226. A draft report is then generated in step 1230.

This Report Template represents a 95% complete Report. Both the analysts and

valuation experts review the Report Template for accuracy and validity. The valuation

experts then select the final set of Assumptions for the calculations of all four methodologies

and the final estimated market value. These include, in step 1232, selecting multiples and

discounts/premiums. The final product is reviewed for accuracy and validity and then

printed in step 1234. The final report may then be sent to the client for review. With the

"Standard Service," in step 1238 the final color print of the Report is shipped to the Client

via an overnight mail service or via electronic mail, for example. The invoice detailing the

balance owed to the system, if appropriate, is sent along with the Report and a copy of the

terms agreed to by the Client.

With the "Custom Service," in step 1236 a draft of the Report is sent to the Client for

review. After review, in step 1240, the Client may provide changes (e.g., fax, e-mail, or

mail) to the system for inclusion in the Final Report. Once these changes are implemented,

in step 1242 the final color print of the Report is shipped or otherwise transmitted along with

the invoice detailing the balance owed to the system and the terms of the service.

The report generated, as for example shown in Appendix A, conforms to the Uniform

Standards of Professional Appraisal Practice promulgated by the Appraisal Foundation.

Therefore, the report is an accredited business valuation.

A system may be provided to enable a user to input the information and have

analysis performed to generate a business evaluation report. Specifically, Fig. 13 depicts one embodiment of such a system 10. System 10 may comprise a plurality of user systems

12 connected either directly to an adviser server system 16 or through Internet 14 to the

adviser server system 16. Adviser server 16 may connect to one or more database systems

I S. Additionally, adviser server system 16 may be connected over the internet to one or

5 more analysis data systems 20 having one or more database systems 22. User systems 12

may comprise any system through which a user may input information, such as through a

graphical user interface. In one embodiment, user system 12 may comprise a personal

computer, digital personal assistant, cellular phone, or other information input device that

may be connected over the internet or directly connected to a server system.

i Server system 16 may comprise a plurality of modules to provide the functionality

described herein. Specifically, a log-in registration module 22 may be provided to interact

with users to receive and issue user name and passwords and to verify and authenticate

users. Additionally, a data entry module 24 may oversee input and receipt of all of the

information provided in the various questions described with reference to Figs. 2 through 11

i 5 above. It should be appreciated that data entry module 24 may present each question on a

separate graphical user interface screen. It should also be appreciated that in one

embodiment, data encryption module 26 may be provided that encrypts each answer as it is

input so that each answer is encrypted and stored as the user moves through the various

questions in the system. In this way, if at any time the user is disconnected from the system

0 or otherwise is unable to complete the question system, complete encrypted and secure

information has been recorded to maintain the privacy of the user system. Also, a WIP file generation module 28 may be provided. Specifically, WIP file

generation module 28 may generate the work-in-progress (WTP) file described with

reference to Fig. 12 above. Additionally, analysis module 30 may be provided that enables

the user to perform various tasks in order to analyze the data to generate the business

valuation report. Specially, analysis module 30 may provide the functionality that allows an

analyst to review comparable data from different publicly traded companies to determine

various data within the business valuation report system. A report generation module 32

may also be provided that generates a report from the data provided by the user and the data

provided from the analyst through the system. Also, a report output module 34 may be

provided that generates a report, prints it out, and then distributes it to the user, either

electronically or in printed format.

As shown in Fig. 13, database 18 may be redundant or replicated to provide greater

data security or may be distributed across various networks. In one embodiment, database

I S may comprise a user input database 36 and an analysis database 38. User input database

36 is the location within the database where all of the information input by the user is stored.

That information may be encrypted as described. Also, analysis database 38 may comprise

the information used by an analyst to determine other information, such as information

regarding publicly traded companies. Specifically, this database may include the Standard

and Poor's database related to over 13,000 publicly traded companies to be used to

determine comparable valuations for their companies. It should be appreciated that rather

than having that information stored in a database directly connected to a server system 16, it may accessible over the Internet. Therefore, analysis data system 20 and database system 22

connected thereto may be provided so that server system 16 may access the information

without actually having to have it stored locally.

As described in Fig. 12, from the database, a work-in-progress file^, is created.

5 According to one embodiment, between steps 1202 and 1204, the following steps may be

provided. Specifically, the data stored in the virtual valuation database 1202 may be

encrypted. Therefore, the encrypted file (which may be encrypted in PGP format may be

decrypted and saved as a comma delimited file). An example of a comma delimited file

generated from data input by user of the system is provided in Fig. 14.

'.^■ Specifically, the information is separated into the fields input by the user (including

subscriber information, project company information, valuation payment, and other payment

information) by commas in the sequence of steps 202 to 218. Further, within each step, the

answers to the questions are provided in sequence as well. The comma delimited file may

then be extracted through an automation process that extracts the fields into a Microsoft™

5 Excel or other spreadsheet program according to predetermined cells.

Figs. 15-25 depict various data generated through the present invention that enables

the analyst to determine comparative values for companies through the comparative value,

comparative merger and acquisition task, and other tasks described herein. A sample output

report that is generated is included in Appendix A. That report demonstrates the detail of the

0 analysis performed and through the automation of the present invention, the ease with which the approach of the present invention generates a complete and thorough analysis of the

value of a business.

Other embodiments and uses of the invention will be apparent to those skilled in the

art from consideration of the specification and practice of the invention disclosed herein.

The specification and examples should be considered exemplary only. The scope of the

invention is only limited by the claims appended hereto.

Claims

CLAIMSWhat is claimed is:

1. A server system for selling business valuations on-line comprising:

transaction means for processing a purchase transaction to evaluate a business from a

5 user system connected to the server system over a network;

user input means for interacting over the network with the user system to request

input of information regarding the business to be valued; and

storage means for storing the collected information from the user system for use in

generating a business valuation according to the purchase transaction.

-. ■.' 2. The system of claim 1 further comprising encryption means for encrypting

the collected information from the user system.

3. The system of claim 2 wherein the user input means interacts with the user

system through a series of questions and wherein the encryption means encrypts each

response upon receipt and provides the encrypted response to the question to the storage

15 means for storage.

4. The system of claim 1 wherein the business valuation is an accredited

business valuation meeting the standards of the Uniform Standards of Professional Appraisal

Practice.

5. The system of claim 1 further comprising work file generation means for

0 generating a work file from the information received from the user and presenting that

information to a business analyst to value the business.

6. The system of claim 5 further comprising:

analysis data means for providing analysis data related to other businesses to assist

an analyst in evaluating a business; and

report update means for updating the report with information from the analysis data

means.

7. The system of claim 6 further comprising a report generation means for

generating a business valuation based on the information from the user and the analysis data

supplied by the analyst.

8. The system of claim 1 wherein the user input means collects information in a

plurality of sections.

9. The system of claim 9 wherein the user input means presents a plurality of

questions within each of the plurality of sections.

10. The system of claim 1 wherein the questions comprise at least one question

related to company background, company ownership, competitors, management, facilities,

sales, financial statements, and legal and administrative aspects of the business to be valued.

11. The system of claim 1 further comprising delivery means for delivering the

report to the user based on the purchase transaction.

12. A user system for purchasing a business valuations on-line comprising:

transaction means for inputting a purchase transaction information that is transmitted

to a server system over a network to purchase-a business valuation; and

user input means enabling a user to input information regarding the business to be valued.

13. The system of claim 12 wherein the user input means interacts with the user

system through a series of questions.

14. The system of claim 12 wherein the user input means collects information in

a plurality of sections.

15. The system of claim 14 wherein the user input means presents a plurality of

questions within each of the plurality of sections.

16. The system of claim 12 wherein the questions comprise at least one question

related to company background, company ownership, competitors, management, facilities,

sales, financial statements, and legal and ad- ini strati vε aspects of the business to be valued.

17. A method for selling accredited business valuations on-line comprising the

steps of:

processing a purchase transaction to evaluate a business from a user system

connected to the server system over a network;

interacting over the network with the user system to request input of information

regarding the business to be valued; and

storing the collected information from the user system for use in generating a

business valuation according to the purchase transaction.

18. The method of claim 17 -further comprising the step of encrypting the

collected information from the user system.

19. The method of claim 18 further comprising the steps of: interacting with the user system through a series of questions;

encrypting each response upon receipt;

storing each encrypted response after each question and before the next question is

presented.

5 20. The method of claim 17 further comprising the steps of:

generating a work file from the information received from the user; and

presenting that information to a business analyst to value the business.

21. The method of claim 20 further comprising the steps of:

providing analysis data related to other businesses to assist an analyst in evaluating a

I i^') business; and

updating a report template with information from the analysis data means.

22. The method of claim 21 further comprising the step of generating an

accredited business valuation based on the information from the user and the analysis data

supplied by the analyst.

15 23. The method of claim 17 further comprising the step of collecting information

related to the busmess being valued in a plurality of sections.

24. The method of claim 23 wherein each section comprises a plurality of

questions.

25. The method of claim 24 wherein the questions comprise at least one question

0 related to company background, company ownership, competitors, management, facilities,

sales, financial statements, and legal and ad-ministrative aspects of the business to be valued.

26. The method of claim 17 further comprising the step of delivering the report to

the user based on the purchase transaction.