valuations of closely held businesses - tucker & meltzer llc€¦ · common errors (cont’d) ......
TRANSCRIPT
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Valuations of Closely
Held Businesses
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Purpose of a Valuation
Estate Planning
FLP, Gift, Trust
Corporations
ESOP, M&A, Options, FAS, Buy-Sell
Litigation
Damages, Minority Interests, Disputes
Family Law
Divorce, Alimony
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Valuation Roles
Valuation Expert
Consultant
Rebuttal Expert
Neutral Appraiser
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Standards of Value
Fair Market Value
The price at which the property would change hands between a
willing buyer and a willing seller, when the former is not under any
compulsion to buy and the latter is not under any compulsion to
sell, both parties having reasonable knowledge of relevant facts.
(Rev, 59-60). Used in gift and estate tax, ESOPs, marital
dissolution cases, and financial acquisitions.
Fair Value (Legal Context)
Applies to specific circumstances. Can be different from state to
state based on statutes and case law. Used in dissenting
shareholder cases, shareholder oppression cases, and certain
fraudulent conveyance cases.
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Standards of Value
Investment Value
Specific value is an investment to a particular investor based on
individual investment requirements. Reflects circumstances of a
particular buyer. Used in mergers and acquisitions involving
strategic buyers.
Fair Value (Accounting Context)
Defined in SFAS No. 141, 142, and 157 as the amount at which
that asset or liability could be bought or sold in a current
transaction between willing parties, that it, other than in a forced or
liquidation sale. Not to be confused with Fair Value in a Legal
Context.
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Levels of Value
The level of value considers ownership characteristics
such as the degree of control or lack of control
assumed as well as the degree of marketability
assumed.
Synergistic, Marketable
Control, Marketable
Non-Controlling, Marketable
Non-Controlling, Non-Marketable
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Valuation Approaches
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Valuation Approaches
Asset-Based Approach
Income Approach
Market Approach
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Asset Based Methods
Adjusted Net Asset Value Method
Balance sheet is adjusted to reflect fair market value of assets and liabilities, on a going concern basis
Liquidation Value (Orderly or Forced)
Balance sheet is adjusted to reflect fair market value of assets and liabilities, assuming liquidation of the business
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Income Methods
Capitalization of Earnings
Uses historical benefit stream
Discounted Cash Flow
Uses projected benefit stream
Excess Earnings
A hybrid approach that is not commonly used
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Market Methods
Guideline Publicly Traded Company
Uses multiples from comparable publicly traded companies
Guideline Comparative Transactions
Uses multiples from private or public transactions involving comparable companies
Subject Company Prior Transactions
Arms length?
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Valuation Synthesis
Valuation methods utilized should
be reconciled and appropriately
weighted resulting in a valuation
conclusion
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Adjustments,
Subjective Areas, and
Common Errors
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Discounts
Discount for Minority Interest (DMIN)/
Discount for Lack of Control (DLOC)
Discount for Lack of Marketability (DLOM)
Other
Key Man Discounts
Blockage Discounts
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Levels of Value - Discounts
Synergistic Value
Control Value
Non-Controlling,
Marketable Value
Non-Controlling, Non-
Marketable Value
Control
Premium
Minority Interest
Discount
Marketability
Discount
Strategic
Premium Fundamental
Adjustment
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Subjective Valuation Areas
Normalization Adjustments
Related Party Transactions
Excessive Compensation
Benefit Streams
Net Income, EBIT, Net Cash Flow
Discount Rates
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Subjective Valuation Areas (cont’d)
Growth Rates
Capitalization Rates (Multiples)
Control Issues (DLOC/DLOM)
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Common Errors
Failure to clearly identify and adhere to
the applicable standard of value
Reliance on Rules of Thumb as a
primary valuation method
Indiscriminate use of Price/Earnings
Multiples
Failure to make normalization
adjustments when valuing a controlling
interest
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Common Errors (cont’d)
Failure to match capitalization rate with
earnings base
Not adjusting for market compensation for
the owner.
Failure to apply tax rates correctly
Failure to understand and apply the
appropriate standards (USPAP, AICPA, IRS,
etc.)
Utilizing an inappropriate premise or
standard of value based on the valuation –
specific facts and circumstances
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Common Errors (cont’d)
Failing to consider the guideline
public company method when valuing
smaller companies
Creating new valuation theories
Creating new valuation methods
Failing the competency standards
Justifying the unjustifiable
Applying boiler plate too thickly
Diluting the opinion with caveats
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Goodwill Issue
Enterprise or Corporate Goodwill
Brand – Name Recognition
Larger Organizations
Longevity of Enterprise
Personal Goodwill
Key Man Issue
Unique Know How
Rainmaker
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Working with a
BV Expert
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Selecting a BV Expert
Curriculum Vitae
Credentials
Education and Training
Experience
Communications Skills
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Credentials
ASA – American Society of Appraisers
ABV – American Institute of CPAs
CVA – National Association of Certified
Valuation Analysts
CBA – International Business Brokers
Association
For more information: http://www.nacva.com/pdf/08_1stQtr_chart_x1a.pdf
http://www.nacva.com/pdf/08_1stQtr_chart_x1a.pdf
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Litigation
Objective Initial Assessment
Valuation, Economics
Guide Through Process
Offense and Defense Positions
Mediation
Valuation Report
Stand-alone Report Versus Rebuttal Report
Expert Witness Testimony
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Advocacy
The attorney is an advocate for the
client. The valuation expert is an
advocate for their report.
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Case Study
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Adjusted Net Asset Value
ABC Company Balance Sheet
Assets Actual Adjustments Adjusted
Cash $100 $100
Receivables 500 -50 450
Inventory 400 -75 325
Current Assets $1,000 -$125 $875
Machinery & Equipment 250 -50 200
Real Estate 650 400 1050
Total Assets $1,900 $225 $2,125
Liabilities
Accounts Payable 400 400
Bank Debt 350 350
Total Liabilities $750 $0 $750
NET ASSET VALUE $1,150 $225 $1,375
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Capitalization of Earnings
ABC Company Profit & Loss Statement
Revenues $3,500
Cost of Sales 2750
Gross Profit $750
SG&A Expense 500
Operating Profit $250
Income Taxes -100
Net Income
$150
Add Backs:
Excess Compensation 100
Net Cash Flow $250
Divided By 20% Capitalization Rate
INDICATED VALUE $1,250
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Comparable Transaction Method
ABC Company Comparable Transactions
Price to Revenue Net Income
Company 1 40% 5.10
Company 2 55% 4.60
Company 3 37% 4.20
Company 4 42% 6.00
Company 5 39% 4.50
Median 40% 4.60
ABC Company $3,500 $250
ABC VALUE = $1,400 $1,150
INDICATED VALUE Average $1,275
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Valuation Synthesis
ABC Company Valuation Synthesis
Valuation Method
Indicated
Value Weighting
Weighted
Value
Net Asset Value $1,375 20% 275
Capitalization of Earnings $1,250 40% 500
Comparable Transactions $1,275 40% 510
Total Value $1,285
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Application of Discounts
ABC Company
Control Marketable $1,285
DMIN 15% -193
Minority Marketable $1,092
DLOM 30% -328
Minority Non-Marketable $765
Combined Discount 40.5%
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Contact Us
S. G. Brooke Tucker, ASA
Managing Director
O 410-472-0370
F 410-472-0371
2403 Benson Mill Road
Sparks, MD 21152
Mark W. Norris, CPA/ABV, CVA, CFFA, ASA
Director
O 443-519-0007
F 410-522-5889
2400 Boston Street, Suite 102
Baltimore, MD 21224
Anne R. Meltzer, CPA/ABV
Managing Director
O 410-998-2085
F 410-654-8514
816 Queens Park Drive
Owings Mills, MD 21117
Jennifer Poland Rosenberg, CPA
Associate
O 410-925-6656
Robin Duffy, CPA
Associate
O 443-695-2767