introduction to business valuation & understanding the engagement
DESCRIPTION
A thorough overview of the business valuation processTRANSCRIPT
BV Fundamentals for CPAs Part One June 2009
Business Valuation Fundamentals for CPAs –A Five-Part Webinar Series
Part One: Introduction to Business Valuation & Understanding the Engagement
Presenter
Jason Pierce CPA, CMA, CFM, CVA, CFFA
BV Fundamentals for CPAs Part One June 2009
DISCLAIMERThe Information contained in this presentation is only intended for general purposes.
It is neither intended nor should it be construed as either legal, accounting, and/or tax advice nor as an opinion provided by the Consultants’ Training Institute (CTI), the National Association of Certified Valuation Analysts (NACVA), the presenter or the presenter’s firm.
The material may not be applicable or suitable for the reader’s specific needs or circumstances.
Readers/viewers may not use this information as a substitute for consultation with qualified professionals in the subject matter presented here.
Lastly, all rights are reserved. No part of this work covered by the copyrights herein may be reproduced or copied in any form or by any means without the express permission of the presenter(s), the CTI or NACVA.
BV Fundamentals for CPAs Part One June 2009
Continuing Professional Education (CPE) Attestation for this WebinarProgram Level: Basic Delivery Method: Group-Internet-BasedPrerequisites: None CPE Credits: Two (2) hoursAdvanced Preparation: None Fields of Study: Specialized Knowledge & Applications
The presentation will include periodic online questions to assess continuous participation and to determine the program's effectiveness.
Registration is on a per-person basis and allows access to one phone line. For an additional fee, others from the same office may attend and listen to the presentation via a conference phone. However, under NASBA rules, where a group attends via a conference phone (where your participation cannot be measured), only one attendee, the primary registrant, may receive NASBA qualified CPE. All other attendees will receive CPE credit, which may qualify for CPE in your state based on its applicable rules, but will certainly be qualified CPE for purposes of recertifying a NACVA credential if you are a credentialed member of the Association.
The National Association of Certified Valuation Analysts is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN 37219-2417. Web site: www.nasba.org
BV Fundamentals for CPAs Part One June 2009
Jason specializes in litigation and business valuation Jason specializes in litigation and business valuation work at an RSM McGladrey network firm. He is a work at an RSM McGladrey network firm. He is a graduate of the University of Tennessee (BS) and the graduate of the University of Tennessee (BS) and the University of Alaska Anchorage (MBA). Jason is an University of Alaska Anchorage (MBA). Jason is an adjunct professor for Alaska Pacific University and adjunct professor for Alaska Pacific University and Danube University in a variety of subjects. He is a Danube University in a variety of subjects. He is a frequent instructor and technical reviewer for NACVA as frequent instructor and technical reviewer for NACVA as well as Alaska’s NACVA State Chapter president. Jason well as Alaska’s NACVA State Chapter president. Jason also volunteers his time for a number of non-profit also volunteers his time for a number of non-profit organizations, including the AICPA’s Financial Literacy organizations, including the AICPA’s Financial Literacy campaign. Recently, he was recognized as one of campaign. Recently, he was recognized as one of NACVA’s outstanding members.NACVA’s outstanding members.
Jason Pierce, CPA, CMA, CFM, CVA, CFFAJason Pierce, CPA, CMA, CFM, CVA, CFFA
BV Fundamentals for CPAs Part One June 2009
Evolution of Business ValuationEvolution of Business Valuation
How much is this business worth?How much is this business worth?
It all starts with Alcohol and MoneyIt all starts with Alcohol and Money
BV Fundamentals for CPAs Part One June 2009
ARM 34ARM 34 Issued in 1920Issued in 1920 To determine the amount of “intangible value” To determine the amount of “intangible value”
lost by businesses previously involved in the lost by businesses previously involved in the alcoholic beverage industryalcoholic beverage industry
IntroducedIntroduced– GoodwillGoodwill– Capitalization of excess earningsCapitalization of excess earnings
Evolution of Business ValuationEvolution of Business Valuation
BV Fundamentals for CPAs Part One June 2009
Evolution of Business ValuationEvolution of Business Valuation
It all It all endsends with Death and Taxes with Death and Taxes
BV Fundamentals for CPAs Part One June 2009
Evolution of Business ValuationEvolution of Business Valuation
IRS Revenue Ruling 59-60IRS Revenue Ruling 59-60
Issued in 1959Issued in 1959 Regarded as single most important piece of valuation Regarded as single most important piece of valuation
literatureliterature Related to Gift and Estate TaxesRelated to Gift and Estate Taxes Outlined methods and factors to be used in valuing Outlined methods and factors to be used in valuing
closely held businessesclosely held businesses
BV Fundamentals for CPAs Part One June 2009
Rev. Rul. 59-60 Relevant FactorsRev. Rul. 59-60 Relevant Factors
1.1. The nature and history of the business.The nature and history of the business.2.2. The economic outlook in general and the condition and The economic outlook in general and the condition and
outlook of the specific industry in particular.outlook of the specific industry in particular.3.3. The book value of the stock and the financial condition of The book value of the stock and the financial condition of
the business.the business.4.4. The earnings capacity of the business.The earnings capacity of the business.5.5. The dividend-paying capacity of the business.The dividend-paying capacity of the business.6.6. Whether or not the business has goodwill or other Whether or not the business has goodwill or other
intangible value.intangible value.7.7. Sales of the stock and the size of the block of stock to be Sales of the stock and the size of the block of stock to be
valued.valued.8.8. The market price of stocks of corporations engaged in the The market price of stocks of corporations engaged in the
same or similar line of business having their stocks traded same or similar line of business having their stocks traded in a free and open market either on an exchanged or over-in a free and open market either on an exchanged or over-the-counter.the-counter.
BV Fundamentals for CPAs Part One June 2009
Evolution of Business ValuationEvolution of Business ValuationHistory of Internal Revenue Service
Pronouncements
(Similar to FASB 123r)
ARM 34Goodwill
Excess Earnings
1920's 1950's 1960's 1970's 1980's 1990's
Revenue Ruling 81-253Revenue Ruling 68-609
Revenue Ruling 65-193Revenue Ruling 66-49
Excess Earnings or Treasury Method, introduced a "formula"
to determine value for intangibles.
Revenue Ruling 59-60
Regarded as single most important piece of valuation
literatureOutlined methods & factors
Revenue Ruling 93-12
Amplified Rev. Rul. 59-60, recognized criteria for
determining discounts for lack of Marketability
Revenue Ruling 83-120
Guidelines for valuing Preferred Stock
Revenue Ruling 98-34
Revenue Ruling 77-287
Methodology - Compensatory Stock
Options
BV Fundamentals for CPAs Part One June 2009
Evolution of Business ValuationEvolution of Business Valuation
Financial Accounting Standards Board (FASB)Financial Accounting Standards Board (FASB)
Issuance of Financial Accounting Statements No.:
1995 – 123 Stock-Based Compensation – Revised in 2004
2001 – 141 Business Combinations – Revised in 2007
– 142 Goodwill & Other Intangible Assets
– 144 Impairment or Disposal of Long-lived Assets
BV Fundamentals for CPAs Part One June 2009
Professional & Regulatory BodiesProfessional & Regulatory Bodies
Internal Revenue Service (IRS)Internal Revenue Service (IRS)
Considered as a primary theoretician in the Considered as a primary theoretician in the field of valuation of closely held businesses.field of valuation of closely held businesses.
Note: Revenue Rulings Note: Revenue Rulings do notdo not have the force have the force of Law. of Law.
BV Fundamentals for CPAs Part One June 2009
Financial Accounting Standards Board
Significant Pronouncements
Professional & Regulatory Bodies
FASB 141R – Requirements for valuing identifiable intangible assets acquired, in a business combination.
FASB 142 – Measures of impairment testing of intangible assets.
FASB 123R – FASB 123R – Accounting for Stock-Based Compensation.
BV Fundamentals for CPAs Part One June 2009
The United States Department of Labor (DOL)The United States Department of Labor (DOL)
Issues regulations specifically pertaining to business valuations for Employee Stock Ownership Plans (ESOP’s)
Professional & Regulatory BodiesProfessional & Regulatory Bodies
BV Fundamentals for CPAs Part One June 2009
National Association ofNational Association ofCertified Valuation Analysts (NACVA)Certified Valuation Analysts (NACVA)
Founded in 1990 Approximately 6,000 professionals Mission is to provide resources to members and enhance their
status, credentials, and esteem in the field of performing valuations and other advisory services.
NACVA is the premier organization of professionals representing the dominant force in business valuation, financial forensics and the industry’s hottest growth niches.
Professional & Regulatory BodiesProfessional & Regulatory Bodies
BV Fundamentals for CPAs Part One June 2009
Professional & Regulatory BodiesProfessional & Regulatory BodiesNational Association ofNational Association of
Certified Valuation Analysts (NACVA)Certified Valuation Analysts (NACVA)
Pioneers in the industry providing the esteemed Certified Valuation Analyst (CVA), Accredited Valuation Analyst (AVA) and Certified Forensic Financial Analyst (CFFA) designations.CFFA Specialties include: Forensic Accounting Financial Litigation Business and Intellectual Property Damages Business Fraud Deterrence, Detection and Investigation Matrimonial Litigation Support
The industry’s foremost Continuing Professional Education organization through the Annual Consultants’ Conference, Consultants’ Training Institute, Online Learning Lecture Series and Tri-Annual State Chapter Meetings.
BV Fundamentals for CPAs Part One June 2009
Other Professional OrganizationsOther Professional Organizations
American Institute of Certified Public Accountants American Institute of Certified Public Accountants ** SSVS #1 SSVS #1
Appraisal Foundation - USPAP Appraisal Foundation - USPAP American Society of Appraisers American Society of Appraisers Institute of Business Appraisers Institute of Business Appraisers Institute of Management Accountants – SMA on BVInstitute of Management Accountants – SMA on BV Canadian Institute of Chartered Business ValuatorsCanadian Institute of Chartered Business Valuators
Professional & Regulatory BodiesProfessional & Regulatory Bodies
BV Fundamentals for CPAs Part One June 2009
Polling QuestionPolling QuestionPlease rate your experience in Please rate your experience in
the field of business the field of business valuation.valuation.
A. NoneA. None B. NominalB. Nominal C. ModestC. Modest D. SeasonedD. Seasoned E. ExtensiveE. Extensive
BV Fundamentals for CPAs Part One June 2009
Purposes of Business ValuationPurposes of Business Valuation
LitigationLitigation
Partnership Disputes
Dissenting Shareholders
Divorce
Wrongful Death
Patent Infringement
Wrongful loss of Property
BV Fundamentals for CPAs Part One June 2009
Purposes of Business ValuationPurposes of Business Valuation
Gift and Estate Estate/Retirement Planning – Transferring shares of a
closely held business to children
What happens if owners of a closely held business die before transferring ownership?
Universal Standard of value for gifts and estate is “Fair Market Value”
Defined by Rev. Rul. 59-60
BV Fundamentals for CPAs Part One June 2009
Financial ReportingFinancial Reporting
FASB: 141R, 142 FASB: 141R, 142 Value of Intangibles included in a Value of Intangibles included in a business combination/Impairmentbusiness combination/Impairment
123R 123R Valuation for Stock Options Valuation for Stock Options
Universal Standard of value for financial reporting is “Fair Value”
Defined by FASBS No. 157
Purposes of Business ValuationPurposes of Business Valuation
BV Fundamentals for CPAs Part One June 2009
Other Purposes of Business ValuationOther Purposes of Business Valuation
Tax PlanningTax Planning
Employee Stock Option Plans (ESOPS)Employee Stock Option Plans (ESOPS)
Comprehensive Financial AnalysisComprehensive Financial Analysis
Purposes of Business ValuationPurposes of Business Valuation
BV Fundamentals for CPAs Part One June 2009
Valuation ConceptsValuation Concepts
VALUATION VS. APPRAISAL
BV Fundamentals for CPAs Part One June 2009
Valuation ConceptsValuation Concepts
ADVOCATE VS. EXPERT
BV Fundamentals for CPAs Part One June 2009
Valuation ConceptsValuation Concepts
ART VS. SCIENCE
BV Fundamentals for CPAs Part One June 2009
Value of a BusinessValue of a Business
The value of an interest in a closely held The value of an interest in a closely held business is typically considered to be equal to business is typically considered to be equal to the future benefits that will be received from the future benefits that will be received from the business, discounted to the present at an the business, discounted to the present at an appropriate discount rate.appropriate discount rate.
Expected Benefit
=Required Return
=Present Value
Expected Benefit
Return
BV Fundamentals for CPAs Part One June 2009
This simple definition of value raises several problems:This simple definition of value raises several problems:
Whose definition of “benefits” applies?Whose definition of “benefits” applies? Future projections are extremely difficult to make Future projections are extremely difficult to make
and get two opposing parties to agree.and get two opposing parties to agree. What is the appropriate discount rate?What is the appropriate discount rate? How long of a benefit stream should be included in How long of a benefit stream should be included in
the determination of value?the determination of value?
Value of a BusinessValue of a Business
BV Fundamentals for CPAs Part One June 2009
2 Things to Remember:2 Things to Remember:
1.Almost everyone will have an opinion of value!!1.Almost everyone will have an opinion of value!!
2. The term “value” means different things to 2. The term “value” means different things to different people.different people.
Value of a BusinessValue of a Business
BV Fundamentals for CPAs Part One June 2009
Polling QuestionPolling Question
Polling QuestionPolling QuestionHow many others in your How many others in your
firm/company provide firm/company provide business valuation or business valuation or litigation services?litigation services?
A. 0 – 5A. 0 – 5 B. 6 – 10B. 6 – 10 C. 11 – 25C. 11 – 25 D. 25 or moreD. 25 or more
BV Fundamentals for CPAs Part One June 2009
Overview of the Valuation ProcessOverview of the Valuation Process
Step 1: Understanding the Engagement (Session 1)Step 1: Understanding the Engagement (Session 1) Step 2: Financial/Economic/Industry Analysis Step 2: Financial/Economic/Industry Analysis
(Session 2)(Session 2) Step 3: Valuation Approaches (Sessions 3 and 4)Step 3: Valuation Approaches (Sessions 3 and 4) Step 4: Discounts & Premiums (Session 5)Step 4: Discounts & Premiums (Session 5) Step 5: Sanity Checks Step 5: Sanity Checks Step 6: Value & Delivery Step 6: Value & Delivery
BV Fundamentals for CPAs Part One June 2009
Overview of the Valuation ProcessOverview of the Valuation Process
DeterminePurpose & Client
Standard of Value
Interest to be Valued
Value & Delivery
Discounts & Premiums
Valuation Approaches
Financial, Economic &
Industry AnalysisUnderstanding the
Engagement
Sanity Checks
Weightings
Selecting Approach
esPurchase
Justification
Rules of Thumb
Minority/Control
Mergerstat
Big Tax
Income
Capitalization of Income/Cash Flow
Discounted Cash FlowWACC
Economic/Industry
Global/National/Local Analysis
Trade PublicationsInternet/Web Sites
Valuation Date
Premise of Value
Type of Report
Report
Calculation of ValueSummary Report
Oral Report
Other Approaches
Subsequent Events
Marketability
Restricted Stock Studies
Pre IPO StudiesAsset
Adjusted Net AssetsExcess Earnings
Market Completed Transactions
Public Guideline CompanyFinancial
Site Visit Reliability of InformationNormalizing Adjustments
Benefit Stream
AnalyzeLimiting Conditions
Experience & QualificationsLegal & Regulatory Requirements
Professional Standards
Building the Valuation Pyramid
Step 1: Covered Today (Lucky you!!)
BV Fundamentals for CPAs Part One June 2009
Overview of the Valuation ProcessOverview of the Valuation Process
DeterminePurpose & Client
Standard of Value
Interest to be Valued
Value & Delivery
Discounts & Premiums
Valuation Approaches
Financial, Economic &
Industry AnalysisUnderstanding the
Engagement
Sanity Checks
Weightings
Selecting Approach
esPurchase
Justification
Rules of Thumb
Minority/Control
Mergerstat
Big Tax
Income
Capitalization of Income/Cash Flow
Discounted Cash FlowWACC
Economic/Industry
Global/National/Local Analysis
Trade PublicationsInternet/Web Sites
Valuation Date
Premise of Value
Type of Report
Report
Calculation of ValueSummary Report
Oral Report
Other Approaches
Subsequent Events
Marketability
Restricted Stock Studies
Pre IPO StudiesAsset
Adjusted Net AssetsExcess Earnings
Market Completed Transactions
Public Guideline CompanyFinancial
Site Visit Reliability of InformationNormalizing Adjustments
Benefit Stream
AnalyzeLimiting Conditions
Experience & QualificationsLegal & Regulatory Requirements
Professional Standards
STEP 2: Financial Economic & Industry Analysis
Covered in Session 2: (Stick around, this group is just getting started)
BV Fundamentals for CPAs Part One June 2009
Overview of the Valuation ProcessOverview of the Valuation Process
DeterminePurpose & Client
Standard of Value
Interest to be Valued
Value & Delivery
Discounts & Premiums
Valuation Approaches
Financial, Economic &
Industry AnalysisUnderstanding the
Engagement
Sanity Checks
Weightings
Selecting Approach
esPurchase
Justification
Rules of Thumb
Minority/Control
Mergerstat
Big Tax
Income
Capitalization of Income/Cash Flow
Discounted Cash FlowWACC
Economic/Industry
Global/National/Local Analysis
Trade PublicationsInternet/Web Sites
Valuation Date
Premise of Value
Type of Report
Report
Calculation of ValueSummary Report
Oral Report
Other Approaches
Subsequent Events
Marketability
Restricted Stock Studies
Pre IPO StudiesAsset
Adjusted Net AssetsExcess Earnings
Market Completed Transactions
Public Guideline CompanyFinancial
Site Visit Reliability of InformationNormalizing Adjustments
Benefit Stream
AnalyzeLimiting Conditions
Experience & QualificationsLegal & Regulatory Requirements
Professional Standards
Step 3: Valuation Approaches
This is the nuts and bolts – Sessions 3 & 4
BV Fundamentals for CPAs Part One June 2009
Overview of the Valuation ProcessOverview of the Valuation Process
DeterminePurpose & Client
Standard of Value
Interest to be Valued
Value & Delivery
Discounts & Premiums
Valuation Approaches
Financial, Economic &
Industry AnalysisUnderstanding the
Engagement
Sanity Checks
Weightings
Selecting Approach
esPurchase
Justification
Rules of Thumb
Minority/Control
Mergerstat
Big Tax
Income
Capitalization of Income/Cash Flow
Discounted Cash FlowWACC
Economic/Industry
Global/National/Local Analysis
Trade PublicationsInternet/Web Sites
Valuation Date
Premise of Value
Type of Report
Report
Calculation of ValueSummary Report
Oral Report
Other Approaches
Subsequent Events
Marketability
Restricted Stock Studies
Pre IPO StudiesAsset
Adjusted Net AssetsExcess Earnings
Market Completed Transactions
Public Guideline CompanyFinancial
Site Visit Reliability of InformationNormalizing Adjustments
Benefit Stream
AnalyzeLimiting Conditions
Experience & QualificationsLegal & Regulatory Requirements
Professional Standards
Step 4: Discounts and Premiums
Session 5: Don’t be Scared of heights, see you then!
BV Fundamentals for CPAs Part One June 2009
Overview of the Valuation ProcessOverview of the Valuation Process
DeterminePurpose & Client
Standard of Value
Interest to be Valued
Value & Delivery
Discounts & Premiums
Valuation Approaches
Financial, Economic &
Industry AnalysisUnderstanding the
Engagement
Sanity Checks
Weightings
Selecting Approach
esPurchase
Justification
Rules of Thumb
Minority/Control
Mergerstat
Big Tax
Income
Capitalization of Income/Cash Flow
Discounted Cash FlowWACC
Economic/Industry
Global/National/Local Analysis
Trade PublicationsInternet/Web Sites
Valuation Date
Premise of Value
Type of Report
Report
Calculation of ValueSummary Report
Oral Report
Other Approaches
Subsequent Events
Marketability
Restricted Stock Studies
Pre IPO StudiesAsset
Adjusted Net AssetsExcess Earnings
Market Completed Transactions
Public Guideline CompanyFinancial
Site Visit Reliability of InformationNormalizing Adjustments
Benefit Stream
AnalyzeLimiting Conditions
Experience & QualificationsLegal & Regulatory Requirements
Professional Standards
Step 5: Sanity Checks
Making sure we have it together before we reach the top
BV Fundamentals for CPAs Part One June 2009
Overview of the Valuation ProcessOverview of the Valuation Process
DeterminePurpose & Client
Standard of Value
Interest to be Valued
Value & Delivery
Discounts & Premiums
Valuation Approaches
Financial, Economic &
Industry AnalysisUnderstanding the
Engagement
Sanity Checks
Weightings
Selecting Approach
esPurchase
Justification
Rules of Thumb
Minority/Control
Mergerstat
Big Tax
Income
Capitalization of Income/Cash Flow
Discounted Cash FlowWACC
Economic/Industry
Global/National/Local Analysis
Trade PublicationsInternet/Web Sites
Valuation Date
Premise of Value
Type of Report
Report
Calculation of ValueSummary Report
Oral Report
Other Approaches
Subsequent Events
Marketability
Restricted Stock Studies
Pre IPO StudiesAsset
Adjusted Net AssetsExcess Earnings
Market Completed Transactions
Public Guideline CompanyFinancial
Site Visit Reliability of InformationNormalizing Adjustments
Benefit Stream
AnalyzeLimiting Conditions
Experience & QualificationsLegal & Regulatory Requirements
Professional Standards
Step 6: Now put it
all together
and ship it off !!
BV Fundamentals for CPAs Part One June 2009
Understanding the EngagementUnderstanding the Engagement
Ready for our 1Ready for our 1stst Engagement? Engagement?
Valuation is a Valuation is a PICNIC PICNIC !!!!!!
PP Purpose of the ValuationPurpose of the Valuation
I I Identify the Client
CC Check for conflict of Interest
N N Need to deliver final product
II Interest to be valued
C C Confidence
BV Fundamentals for CPAs Part One June 2009
Understanding the EngagementUnderstanding the Engagement
Business FairGift & Value
Estate
ConsultantIntrinsic (Seller) (Buyer) StrategicValue Value
Divorce FairValue
Fair MarketValue
Consultant
ValueFair Market
Combination
PurposeDefines Value
BV Fundamentals for CPAs Part One June 2009
Polling QuestionPolling Question
Polling QuestionPolling QuestionWhat is your favorite picnic What is your favorite picnic
food?food? A. HamburgersA. Hamburgers B. Hot DogsB. Hot Dogs C. BratwurstC. Bratwurst D. Fried ChickenD. Fried Chicken
BV Fundamentals for CPAs Part One June 2009
Client & PurposeClient & Purpose
ADVOCATE VS. EXPERT
BV Fundamentals for CPAs Part One June 2009
Standard of ValueStandard of Value
We will introduce three “standards of value”We will introduce three “standards of value”
Fair Market ValueFair Market Value
Fair ValueFair Value
Strategic/Investment ValueStrategic/Investment Value
BV Fundamentals for CPAs Part One June 2009
Fair Market Value (FMV)Fair Market Value (FMV)
The IRS has defined FMV in Revenue Ruling The IRS has defined FMV in Revenue Ruling 59-60 as follows:59-60 as follows:
““The price at which the property The price at which the property would change hands between a willing buyer would change hands between a willing buyer and a willing seller, when the former is not and a willing seller, when the former is not under any compulsion to buy and the latter us under any compulsion to buy and the latter us not under any compulsion to sell, both parties not under any compulsion to sell, both parties having reasonable knowledge of the relevant having reasonable knowledge of the relevant facts.”facts.”
BV Fundamentals for CPAs Part One June 2009
Fair Market ValueFair Market Value
The “Break Down”The “Break Down” The PriceThe Price – expressed in terms of cash equivalents – expressed in terms of cash equivalents Property Property – Business, tangible & intangible property– Business, tangible & intangible property Hypothetical buyer & hypothetical sellerHypothetical buyer & hypothetical seller – creates a market – creates a market
placeplace Arms length transaction in an open and unrestricted market – Arms length transaction in an open and unrestricted market –
no funny businessno funny business– No CompulsionsNo Compulsions– No forced saleNo forced sale
Having reasonable knowledge – Having reasonable knowledge – Understand industry, Understand industry, economics, and business.economics, and business.
BV Fundamentals for CPAs Part One June 2009
Fair ValueFair Value
Fair Value can have several meanings depending Fair Value can have several meanings depending on the purpose of the valuationon the purpose of the valuation
BV Fundamentals for CPAs Part One June 2009
Fair ValueFair Value
Statutory ValueStatutory Value
In most states, fair value, is the In most states, fair value, is the statutory standard of value statutory standard of value applicable in cases of dissenting applicable in cases of dissenting stockholders’ valuation rights.stockholders’ valuation rights.
BV Fundamentals for CPAs Part One June 2009
Fair ValueFair Value
In the states that have adopted the Uniform Business In the states that have adopted the Uniform Business Corporation Act, the definition of fair value is:Corporation Act, the definition of fair value is:
““Fair value,” with respect to a dissenter’s shares, means Fair value,” with respect to a dissenter’s shares, means the value of the shares immediately before the the value of the shares immediately before the effectuation of the corporate action to which the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action depreciation in anticipation of the corporate action unless exclusion would be inequitable.unless exclusion would be inequitable.
BV Fundamentals for CPAs Part One June 2009
Fair ValueFair Value
Fair value is also the standard of value used by Fair value is also the standard of value used by the Financial Accounting Standards Board the Financial Accounting Standards Board (FASB) in its pronouncements pertaining to (FASB) in its pronouncements pertaining to business valuation.business valuation.
There are two different definitions for standards There are two different definitions for standards of value under FASB:of value under FASB:
BV Fundamentals for CPAs Part One June 2009
Fair Value – for Financial ReportingFair Value – for Financial Reporting
SFAS No. 157SFAS No. 157Fair Value: the price that would be received toFair Value: the price that would be received to sell sell an asset or an asset or paidpaid to transfer a liability in an orderly to transfer a liability in an orderly transaction between transaction between market participantsmarket participants at the at the measurement datemeasurement date
Sell or Paid = considered an exit price in the most Sell or Paid = considered an exit price in the most advantageous marketadvantageous market
Market Participants: Independent; Knowledgeable, Market Participants: Independent; Knowledgeable, Willing and AbleWilling and Able
BV Fundamentals for CPAs Part One June 2009
We all know 157 = 123 and FASB agrees:We all know 157 = 123 and FASB agrees:
SFAS No. 157 says it does not apply to SFAS No. 157 says it does not apply to accounting for employee stock options and accounting for employee stock options and
other share bases payments (SFAS No 123R)other share bases payments (SFAS No 123R)
Fair Value – for Financial ReportingFair Value – for Financial Reporting
BV Fundamentals for CPAs Part One June 2009
Fair value is defined in FASB Statement 123R, as:Fair value is defined in FASB Statement 123R, as:
““the amount at which an asset (or liability) could the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a be bought (or incurred) or sold (or settled) in a
current transaction between willing parties, that is, current transaction between willing parties, that is, other than a forced liquidation sale.”other than a forced liquidation sale.”
Fair Value – for Financial ReportingFair Value – for Financial Reporting
BV Fundamentals for CPAs Part One June 2009
Fair Value – Marital Fair Value – Marital
Fair value may also relate to a value in divorce.Fair value may also relate to a value in divorce.
Many states have specific definitions of fair Many states have specific definitions of fair value with regard to marital dissolution.value with regard to marital dissolution.
Make sure you understand the case law for your Make sure you understand the case law for your state.state.
BV Fundamentals for CPAs Part One June 2009
Strategic / Investment ValueStrategic / Investment Value
The value to a particular investor based on The value to a particular investor based on individual investment requirements and individual investment requirements and
expectations.expectations.
““Value to the Holder”Value to the Holder”
BV Fundamentals for CPAs Part One June 2009
Standards of ValueStandards of Value
Valuation take away:Valuation take away:Based on the standards of value’s previously discussed there are Based on the standards of value’s previously discussed there are
numerous opportunities in valuation.numerous opportunities in valuation.
Gift and EstateGift and Estate Fair Market ValueFair Market Value
Intangible Assets in Business Intangible Assets in Business CombinationsCombinations
Fair ValueFair Value
Stock OptionsStock Options Fair ValueFair Value
DivorceDivorce Fair Market Value / Fair ValueFair Market Value / Fair Value
Other Valuation Opportunities: M&A, Strategic Planning, ESOP’sOther Valuation Opportunities: M&A, Strategic Planning, ESOP’s
BV Fundamentals for CPAs Part One June 2009
Polling QuestionPolling Question
Polling QuestionPolling QuestionWhat percentage of your What percentage of your
firm/company’s business is firm/company’s business is derived from BV services derived from BV services (including litigation support (including litigation support related to the BV services?)related to the BV services?)
A. 0 – 10%A. 0 – 10% B. 11 – 24%B. 11 – 24% C. 25 – 50%C. 25 – 50% D. 51 – 74%D. 51 – 74% E. 75% or moreE. 75% or more
BV Fundamentals for CPAs Part One June 2009
Premise of ValuePremise of Value
After a standard of value has been determined, After a standard of value has been determined, the valuator must determine the appropriate the valuator must determine the appropriate premise of value.premise of value.
BV Fundamentals for CPAs Part One June 2009
Premise of ValuePremise of Value
Book ValueBook Value
Going Concern ValueGoing Concern Value
Liquidation ValueLiquidation Value
BV Fundamentals for CPAs Part One June 2009
Premise of Value – Book ValuePremise of Value – Book Value
The difference between total assets and total The difference between total assets and total liabilities as they appear on the balance sheet. liabilities as they appear on the balance sheet. Also known as Shareholder’s Equity.Also known as Shareholder’s Equity.
Adjusted book value – would adjust assets & Adjusted book value – would adjust assets & liabilities recorded at cost to their current liabilities recorded at cost to their current market values.market values.
BV Fundamentals for CPAs Part One June 2009
Premise of Value – Going ConcernPremise of Value – Going Concern
The value of a business enterprise that is The value of a business enterprise that is expected to continue to operate into the future.expected to continue to operate into the future.
The intangible elements of Going Concern Value The intangible elements of Going Concern Value result from factors such as having a trained result from factors such as having a trained work force, customer list, and systems and work force, customer list, and systems and procedures in place.procedures in place.
BV Fundamentals for CPAs Part One June 2009
Premise of Value – Liquidation ValuePremise of Value – Liquidation Value
The net amount that would be realized if the The net amount that would be realized if the business is terminated and the assets are sold business is terminated and the assets are sold piecemealpiecemeal
A liquidation can be:A liquidation can be:
Orderly Orderly oror
ForcedForced
BV Fundamentals for CPAs Part One June 2009
Limiting ConditionsLimiting Conditions
Designed to Protect the Valuation AnalystDesigned to Protect the Valuation AnalystExamples include:Examples include:1. We have relied up financial information & representations provided by 1. We have relied up financial information & representations provided by
managementmanagement2. Provision for subsequent event:2. Provision for subsequent event:
This valuation reflects facts and conditions existing at the date of This valuation reflects facts and conditions existing at the date of this this valuation. Subsequent events have not been considered, and we valuation. Subsequent events have not been considered, and we have have no obligation to update our report for such events and conditions.no obligation to update our report for such events and conditions.3. No financial interest in client3. No financial interest in client
See SSVS #1 for listing of recommended disclosuresSee SSVS #1 for listing of recommended disclosures
BV Fundamentals for CPAs Part One June 2009
Polling QuestionPolling Question
Polling QuestionPolling QuestionHave you taken any business Have you taken any business
valuation related training valuation related training prior to this webinar prior to this webinar series?series?
A. YesA. Yes B. NoB. No
BV Fundamentals for CPAs Part One June 2009
Qualifications & ExperienceQualifications & Experience
Follow Professional StandardsFollow Professional Standards
Be aware of legal & regulatory requirementsBe aware of legal & regulatory requirements
Have confidenceHave confidence
Don’t be afraid to use a mentorDon’t be afraid to use a mentor
BV Fundamentals for CPAs Part One June 2009
Questions to ask YourselfQuestions to ask Yourself
Am I qualified?Am I qualified? Do I have any conflicts of interest?Do I have any conflicts of interest? Do I understand the purpose and users of the Do I understand the purpose and users of the
valuation report?valuation report? Do I understand the industry?Do I understand the industry? Am I familiar with professional standards?Am I familiar with professional standards? Did I identify limiting conditions and/or scope Did I identify limiting conditions and/or scope
restrictions?restrictions?
BV Fundamentals for CPAs Part One June 2009
Recommended Resources for Your Libraryavailable through NACVA at Discounted Prices…PPC’s Guide to Business Valuation
Valuation: Measuring and Managing the Value of Companies
Valuing a Business: The Analysis & Appraisal of Closely Held Companies
Valuing Small Businesses & Professional Practices
How to Value Over 100 Closely Held Businesses
Business Valuation and Taxes—Procedure Law & Prospective
The Market Approach to Valuing Businesses
BV Fundamentals for CPAs Part One June 2009
Conclusion to Part 1Conclusion to Part 1
QUESTIONS?
BV Fundamentals for CPAs Part One June 2009
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