- 26 -
annually. Based on his assumptions, Mr. Lax determined that
Johnco's pretax income would be negative for all 10 years. Thus,
he concluded that Johnco could not produce sufficient cash-flow
to finance $5 million15 of an assumed $7 million purchase price.
Next, Mr. Lax valued Johnco using a market approach in which
he multiplied Johnco's earnings before interest and taxes (EBIT)
by a multiple derived from a comparison to public companies (the
EBIT method). For purposes of comparison, Mr. Lax selected two
large, publicly traded, limited partnerships (the partnerships),
which controlled 1,153,000 and 5,904,000 acres of timberland,
respectively, of which approximately 70 percent was located in
Georgia, Florida, and other parts of the South. Mr. Lax
determined that the price/EBIT ratio of the partnerships was
between 7.1 and 8.4, meaning that a partnership unit traded at
7.1 to 8.4 times its EBIT. When applied to Johnco's EBIT, these
multiples suggested a range in value between $1 million and
$1,150,000 before adjustment for lack of marketability. However,
we are not persuaded that the two partnerships constitute useful
comparables for Johnco, as they controlled timberland that was
respectively 213 and 1,092 times larger than the Timber Property.
Mr. Lax also identified certain characteristics of Johnco
that he thought detracted from its marketability: (1) History of
low earnings and cash-flow; (2) concentration of asset value in
15 We note that a $7 million purchase financed using 75
percent debt and 25 percent equity would imply $5.25 million in
debt and $1.75 million in equity, not $5 million in debt as used
by Mr. Lax in his report.
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