Business Valuations What should I know?

Overview When valuations are needed Selecting a valuation professional Determining the scope of the project General valuation process Assessing the valuation

WHEN VALUTIONS ARE NEEDED

When Needed Whenever value is transferred, altered, or disputed Examples Gift and estate tax purposes Equity based compensation Marital disputes Mergers and acquisitions Minority shareholder disputes Purchase price allocations Goodwill impairment analysis Buy-sell agreements Employee stock ownership plans (ESOPs) Stock option valuation Management buyouts Lost profit analyses

SELECTING A VALUTION PROFESSIONAL

Credentials Accredited Senior Appraiser (ASA) or Accredited Member (AM) American Society of Appraisers Accredited in Business Valuation (ABV) American Institute of CPAs Certified Valuation Analyst (CVA) National Association of Valuation Analysts Certified Business Appraiser (CBA) Institute of Business Appraisers  

ASA and AM College degree Professional references 123 hours training courses Case study Submission of client valuation reports 5 years (ASA) or 2 years (AM) valuation experience

ABV College degree Professional references 75 hours training courses Case study 150 hours valuation experience Must be a CPA

CVA College degree Professional references 45 hours training courses Case study 2 years valuation experience

CBA College degree Professional references 45 hours training courses Case study Submission of client valuation reports 2 years valuation experience

Relevant Experience Industry Purpose of engagement Financial reporting Tax Litigation Type of interest or asset being valued Business interest Intangible asset

DETERMINING THE SCOPE OF THE PROJECT

Engagement Types Valuation Calculation Arrives at an independent conclusion of value Applies all applicable approaches and methods that are deemed necessary Calculation Arrives at a calculation of value Limited procedures May not represent the actual value of the interest

Report Types Valuation Engagements Calculation Engagement Detailed report Summary report Oral report No difference in relation to the development and procedures (i.e. due diligence, research, etc.) utilized in the engagement Calculation Engagement Calculation report

GENERAL VALUATION PROCESS

Valuation Process Provide information request Review documents received in response to information request Perform industry and economic research Create valuation models and determine appropriate methodologies Conduct management interview Determine appropriate valuation assumptions Prepare draft valuation schedules Discuss analysis with management and finalize schedules

ASSESSING THE VALUATION

Standard of Value Identify and define Dependent upon purpose of valuation Reference authority dictating value Examples Fair market value for estate and gift tax Fair value for financial reporting Fair value for shareholder oppression case Investment value for transaction

Fair Market Value Revenue ruling 59-60 defines fair market value as: “ … 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.” Estate and gift tax valuations

Fair Value Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (ASC 820) defines fair value as: “[T]he price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." Goodwill impairment and purchase price allocation valuations

Other Values Investment value Miscellaneous Value to a specific investor based upon a known set of circumstances Miscellaneous Many different terms (i.e. fair value, fair market value, value, etc.) Dependent upon the statutes under which the case is being tried or the regulations under which the project is being performed

General Considerations Nature of the business and its history Economic and industry outlook Financial condition of the business Earning capacity of the business Competitive landscape Risks specific to the business

Business Specific Risks Customer concentration Supplier concentration Access to capital Geographic concentration Concentration of service or product offerings Management depth Other qualitative and quantitative factors

Valuation Approaches Income approach Market approach Asset approach All approaches must be considered but are not required to be relied upon

Income Approach Present worth of anticipated future net cash flows generated by a business or asset Discounted cash flow method Capitalization of earnings method

Key Issues Future cash flows Discount rate Discrete projections until stable cash flows generated Makes sense compared to history and industry data Discount rate WACC Cost of equity Appropriate for cash flows Accounts for all risks

Market Approach Compares subject interest to other similar interests for which a value has been determined Guideline public company method Guideline transaction method Subject company transaction method

Key Issues Comparables Adjustments for differences Multiples Never perfect Similar operations, exposures to risks, etc. Quantitative Size Profitability Growth Multiples Liquidity Revenue, EBITDA, net income, etc. Qualitative Geographic diversity Product diversity Production, reserves, etc. Management depth Timing

Asset Approach Value of company is the sum of the value of the assets held less liabilities owed Considered a “floor” to value Adjusted net asset value method

Key Issues Value of each asset and liability Intangible assets Book value may not reflect market value Individual appraisals may be required Intangible assets May not be included Valuation of intangible assets typically require projections of future cash flows

Reconciliation of Values Consider the benefits and drawbacks of each method Weight accordingly

Level of Value Dependent upon purpose of valuation and the specific characteristics of the subject interest being valued Control vs non-control Control premium Discount for lack of control (DLOC) Marketable vs non-marketable Discount for lack of marketability (DLOM) Strategic Strategic premium

Control Premium/DLOC Greater than 50% ownership does not necessarily equate to control Dictated by the characteristics of the subject interest as detailed in the organizational documents A stronger company would likely have a lower control premium than a weaker company Minimal quantitative data to support

DLOM Reflects the detriment of restrictions associated with the interest being converted to cash Lack of a public market Restrictions on transfer Various empirical studies Put option models Volatility Holding period

Summary Events and reasons why a valuation may be needed Credentials within the valuation profession Types of engagements and reports General valuation process Key factors in assessing the valuation performed

Conclusion Questions Contact Information Kaci Howell Director of Valuation Services Weaver (832)320-3201 kaci.howell@weaver.com

Disclaimer of Liability Weaver provides the information in this presentation for general guidance only, and it does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information included herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax information is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.