FAC771 Business Valuation And Quantificiation Of Damages

There were a number of issues that had to be addressed for the valuation, including:

1.Ticket booking.  All HMHCL tickets (season tickets or individual games) had to be booked through Mr. Dartmouth’s booking agency, Hockey Unlimited, at a $0.50 per ticket charge to the HMHCL.  Mr. Lafleur and Mr. Tango noted that other teams in the league were charged $0.30 per ticket for ticket booking.  With a total of 240.000 paid admissions per regular season, excluding playoffs, the estimated lost revenue to HMHCL is estimated as $48,000 (240,000 tickets x $ 0.20 per ticket).  Another issue was that Hockey Unlimited was slow in sending money for tickets sold to the HMHCL, resulting in large receivables, even at year end.  Other teams received their ticket funds in 30 days.

2.Television broadcast rights.  The HMHCL had entered into an agreement with Athletic Network to show the games from 2008-2013.  The revenue to the HMHCL was $500,000 per hockey season.  However, the television audiences were very large and other networks had approached the HMHCL about the period the 2014 fiscal years onward.  As a result, the HMHCL signed the Athletes Network a new contract of $1,000,000 revenue per year starting in 2014 fiscal year until 2018.  

This new contract was not disclosed to Seneca & Finch by Mr. Dartmouth.  He told S&F to assume the same broadcast rights for 2014 to 2018 fiscal years.  The information on the new contract came from finding a copy of the new 2014-2018 contract in the back of the file on ticket booking fees; it had been misfiled and was not intended for the valuation team to see.  You subsequently contact the Athletic Network and determine that the revenue will increase to $1,000,000 per year in the year ending May 31, 2014.

3.Lease for the arena.  Mr. Dartmouth’s own company, Halifax Arenas Limited (HAL), rented the arena to the HMHCL.  The rent was $33,000 per game for 10,000 seats.  There was a $50,000 annual charge for 2,000 square feet of office space for the team and the ticket office on the ground floor.  Playoff games were at the same $33,000 rate.  The average rental for the league was $22,000 per game for an average of 11,000 seats.  Thus the HMHCL was charging 50% more than the league average and the per-seat per game rental cost was $3.30 per seat vs. $2.00 per seat with the league average.  An outside arena specialist hired by S&F estimated that the fair market rental for the Halifax Arena would be $28,000 per game for 30 games, or $840,000 per season, being $150,000 less than being paid by HMHCL to Mr. Dartmouth’s Halifax Arena Limited.  The difference is $5,000 per game.

4.Ice refinishing machine (“Zamboni”).  There was a problem about the ice refinishing capacity of the Halifax Arena.  The Halifax Arena had an old Zamboni ice-refinishing machine that was not reliable for resurfacing the ice between periods.  Mr. Dartmouth required the HMHCL to lease its own Zamboni machine.  The machine a new Zamboni machine on a five-year operating term for HMHCL games at a cost of $30,000 per year.  It was used by the HMHCL for 200 hours per year to prepare ice for practices and games.[ The Zamboni ice resurfacing machine was electrically powered so the operating costs were not an issue for the HMHCL as the electricity was paid by the HAL and included in the per-game fee.]  However, the HMHCL Zamboni machine was **also** being used for 200 hours in each of fiscal 2012 and 2011 by Halifax Arenas for its own events.  It was being used by HAL to clean the ice for figure skating shows, children’s hockey and when the arena was open for pleasure skating.  The Halifax Arena’s own Zamboni machine was not reliable and damaged the ice.  No compensation was being paid to the HMHCL for this HAL use of the HMHCL ice cleaning Zamboni.  You are advised that in an arm’s length situation, that HAL would normally reimburse the HMHCL, as its tenant, for Hal’s 50% use of the annual operating use of the HMHCL’s Zamboni machine.

The partner has asked you to prepare provide calculations to support the following:

1.Normalized earnings.  Normalizing earnings by adjusting for discretionary or non-arm’s length items (take an average of the three years to determine normalized earnings);

2.Maintainable earnings.  Maintainable earnings are determined by further adjusting the normalized earnings for significant foreseeable changes in a company’s business, either changes that have occurred or will occur;

3.Price earnings multiple.  Select a Price Earnings Multiple that reflects the industry with an appropriate, say 15% adjustment downward for a private company and a further discount of 10% for the shares of Mr. Lafleur and Mr. Tango as they are minority shareholders.

4.Estimated value.  Determine value **on an earnings basis** of the company by multiplying the normalized maintainable earnings by the selected price earnings multiple.

5.Goodwill.  Determine goodwill of the HMHCL by taking the Estimated Value (4) and subtracting the Net book Value of the company (being assets – liabilities).

Question 1

Question 2

Question 3

Question 4

Estimated value is shown below:

Question 5

Value of the Goodwill has been shown below:

Goodwil = Estimated value – net book value of the company

= 19,425,000 – Average (830000, 2489500, 3177300)

= 19425000 – 2165600

= 17259400

Appendix/ Supportings