1. Business Valuations
What should I know?

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

3. WHEN VALUTIONS ARE NEEDED

4. 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

5. SELECTING A VALUTION PROFESSIONAL

6. 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  

7. 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

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

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

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

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

12. DETERMINING THE SCOPE OF THE PROJECT

13. 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

14. 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

15. GENERAL VALUATION PROCESS

16. 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

17. ASSESSING THE VALUATION

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

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

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

26. 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

27. 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

28. 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

29. 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

30. 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

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

32. 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

33. 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

34. 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

35. 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

36. Conclusion
Questions
Contact Information
Kaci Howell
Director of Valuation Services
Weaver
(832)

37. 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.