baria jaroudi, cpa/abv, cba, cva valuation manager · 5. outlines the approaches, methods, and...
TRANSCRIPT
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Baria Jaroudi, CPA/ABV, CBA, CVAValuation Manager
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• Organizations & Standards for valuations • Reasons for Business Valuations• Business Valuation Considerations• Approaches to Valuation• Value Drivers• Q&A
Presentation Summary
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• The act or process of determining the value of a business enterprise or ownership interest therein
• Valuing a bundle of rights
What is a Business Valuation?
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4Business Valuation Organizations & Standards
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Outlines the approaches, methods, and factors to be considered in valuing
shares of stock in closely-held corporations for federal tax purposes
Business Valuation Bible:IRS Revenue Ruling 59-60
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6Litigation, Strategic Purpose & Compliance are the Primary Reasons for Business Valuations
Litigation• Bankruptcy• Marital Dissolution• Damages
Strategic Purpose• Purchase/Sale of Business
or shares/merger
Compliance• Determination of Estate &
Gift Tax• Family Succession Planning• Employee Stock Ownership
Plans (ESOP)• Purchase Price Allocation
(PPA)• Goodwill Impairment Testing
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7One size does not fit all
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8What’s important in a valuation depends on who’s asking
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Valuation ExpertCPA
IRS Buyer
Seller Banker
How much can I get and how to minimize my tax liability now and in the future?
What are the long and short term tax
implications and planning opportunities?
Does the valuation meet current
regulations? How much can we get in
tax revenue?
How will the valuation impact my
loan covenants?
What is the valuation based on current regulations and deal structure?
How little can I pay in this transaction?
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• Type of entity to be valued• Purpose of valuation (examples)• Valuation Date• Standards of value• Premise of value• Level of value
Business Valuation Considerations
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10Standards of Value
Strategic value
Intrinsic value
Fair value
Fair market value
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11Premise of Value
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Control Value
“As If Freely-Traded”Marketability Minority Interest
Non-MarketableMinority Interest Value
Synergistic Value
Premium for Synergy
Minority Discount Premium for Control
Lack of Marketability Discount
Levels of ValueVARIES BY PU
RPOSE O
F THE VALUATION
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13Considerations
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Gift & Estate
M&A/ Strategic Litigation Compliance
Fair market value XFair value X XStrategic value XGoing concern X X X XLiquidation X X XControlling, marketable X X XNon-controlling, non-marketable X
14Approaches to Valuation
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15Rules of Thumb
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• Using “Rules of Thumb” as a primary valuation method• Rules of Thumb are only as good as the actual tie to
value• Not a generally accepted valuation method
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Approaches to Valuation
Valuation Approaches
Market ApproachIncome Approach Asset Approach
Capitalization of Cash Flow
Discounted Cash Flow
Guideline Public Company Method
Guideline Transaction
Method
Adjusted Book Value
Liquidation Value
Method
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• The key objective of the income based method is to determine the business value as a function of the economic benefit:
Measures cash flow associated with the ownership Value based on net present value of expected future income
streams from the ownership of the asset
Income Approach
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18Income Approach: Qualitative Factors
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Regulations Supplier Concentration
Management Depth
Market Position Competition
Location
Physical Facilities
Reputation
Efficiency or Inefficiency
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Discount Rate - an opportunity cost; the rate of return available to investors in the market on investments of comparable risk
Components of Discount Rate
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Risk free rate 2.50%Equity risk premium 5.90%Size premium 6.20%Company specific risk 6.00%Cost of equity 20.60%
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21Discount Rate
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22Types of risks
• Uncontrollable by organization
• Macro in nature
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Systematic Risk
Un-systematic Risk
• Controllable by organization
• Micro in nature
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• Show return from normal operations• Reveal public equivalent income stream
Normalizing Adjustments
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24Normalizing Adjustments
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Non-Recurring ControllingLitigation settlement XOwner compensation XDonation XBig Daddy's vacation home XHurricane XMoving expense X
25Income approach –See handout
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26Market Approach –See handout
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27Asset Approach –See handout
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The ability to convert the business ownership interest to cash quickly.
Control vs. minority interest can make a difference Ability to affect a sale Expected holding period can impact size of discount Restrictions on transferability can be significant Pool of potential buyers?
Discount of Lack of Marketability (DLOM)
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• Summary of approaches and methods• 18 methods to generate a DLOM• Both benchmark and analytical approaches• Recommendations and evaluations
Discount of Lack of Marketability IRS: Job Aid
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• Financial statement analysis• Company dividend policy• The nature of the company, its history, its industry position, and
its economic outlook• Company's management• Amount of control in transferred shares• Restrictions on transferability of stock• Holding period for stock• Company's redemption policy• Costs associated with making a public offering
Mandelbaum Factors
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• Compares the trading price of shares of publicly traded, closed-end investment funds to the net asset value per share of the same funds
Discount of Lack of Control (DLOC) or Minority Discount
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http://www.journalofaccountancy.com/issues/2009/jul/20091463.html
32Other Potential Adjustments
• Key person discounts• Blockage discounts• BIG tax discounts• Voting v. non-voting stock
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33Reconciliation–See handout
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The value of a company lies in the buyer’s view of its future. Financial results reflect only the past.
What Factors Drive A Company’s Value?
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35Value Drivers35
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• Valuation Engagement Detailed Report Summary Report
• Calculation Report Calculation Report
Types of Engagements
Conclusion of value
Calculation of value
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When you think of BV,
A Gratuitous Pitch for my firm
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think of B&V
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When you think of BV,
A Gratuitous Pitch for my firm
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think of B&V
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Thank you 4
Baria Jaroudi, CPA/ABV, CBA, CVAFVLS Manager
Briggs & Veselka [email protected]
713-366-8518
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