To Receive CPE Credit

Transcription

1 May 14, 2014 I Purchased a Company... But What Did I Buy??? Rand Gambrell, CPA, ABV, CFE, CFF, CVA Director Forensics & Valuation Services rgambrell@bkd.com experience expertise // Elevate your understanding of key forensics concepts with guidance from BKD Forensics Institute. To Receive CPE Credit Individual Attendee o Participate in entire webinar o Answer polls when they are provided Group Attendees o Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address o All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar o Answer polls when they are provided If all eligibility requirements are met, each participant will be ed a CPE certificate within 15 business days of live webinar 2 1

2 Fun with Music Trivia 3 Example Financial Statements of Target Balance Sheet Income Statement Current Assets Cash $ 1,000 Sales $ 25,000 Receivables 2,500 Cost of Sales 10,000 Inventory 5,000 Gross Margin 15,000 8,500 SG&A 8,000 Fixed Assets, net 10,000 Depreciation 1,000 Total Assets $ 18,500 Operating Income 6,000 Current Liabilities Other Expense 1,000 Payables $ 1,200 Accrued Liabilities 800 Pre-Tax Income 5,000 Line of Credit 1,500 3,500 Income Taxes 1,750 Long-Term Debt 5,000 Net Income $ 3,250 Total Liabilities 8,500 EBITDA $ 7,000 Stockholders' Equity $ 10,000 Purchase Price $ 28,000 Liabilities & Equity $ 18,

3 Why Do Companies Buy Other Companies? Sell our products to their customers Add our technology to improve their products Acquire their talent pool (employees) Leverage their reputation Make more $$$, in other words 5 Example Financial Statements of Target Purchase Adjusted Balance Sheet Unadjusted Adjustments (Fair Value) Current Assets Cash $ 1,000 $ - $ 1,000 Receivables 2,500-2,500 Inventory 5,000-5,000 8,500-8,500 Fixed Assets, net 10,000 2,500 12,500 Intangible Assets - 10,500 10,500 Total Assets $ 18,500 $ 13,000 $ 31,500 Current Liabilities Payables $ 1,200 $ - $ 1,200 Accrued Liabilities Line of Credit 1,500-1,500 3,500-3,500 Long-Term Debt 5,000-5,000 Total Liabilities 8,500-8,500 Stockholders' Equity $ 10,000 $ 13,000 $ 23,000 Liabilities & Equity $ 18,500 $ 13,000 $ 31,

4 So... What Did We Buy...? Net Working Capital $5,000 Fixed Assets (Buildings & Machinery) $12,500 Which leaves $10,500 of... what??? 7 Intangible Assets Definition: Nonphysical assets that grant rights & privileges, & have value for the owner o o Accounting Standards Codification ( ASC ) 805 & Internal Revenue Code ( IRC ) 197 provide guidance on various types of intangible assets Under ASC 805, an intangible asset is recognized apart from goodwill if it is separable from the entity, or if it arises from contractual or other legal rights IRC 197 specifies categories of intangible assets, including goodwill, patents, copyrights & similar items, customer-based intangibles & supplier-based intangibles The economic life for these assets may be different under ASC805 & IRC

5 Common Intangible Assets Trademarks/Trade Name Technology Backlog Noncompete Agreements Customer Relationships Assembled Workforce 9 Common Valuation Methodologies Cost to recreate Relief from royalty Differential method (or with & without ) Multiperiod excess earnings method 10 5

6 Intangible Asset #1 Trade Name 11 Trade Name (Relief from Royalty) Year 0 Year 1 Year 2 Year 3 Terminal Sales $ 25,000 $ 26,250 $ 27,563 $ 28,941 $ 30,388 Royalty Rate 2.0% Income Taxes 35.0% (175) (184) (193) (203) (213) Royalty Savings Periods PVIF 15.0% Present Value Terminal Value 2,018 Sum of Values $ 3,081 Amortization Benefit 528 Fair Value (Rounded) $ 3,600 Amortization Benefit Discount Rate 15.0% Tax Rate 35.0% Period (Years) 15 $

7 Intangible Asset #2 Noncompete Agreement 13 Noncompete Agreement (With & Without) Year 0 Year 1 Year 2 Year 3 Year 4 Net Cash Flow With NCA $ 7,000 $ 7,350 $ 7,718 $ 8,104 $ 8,509 Without NCA 5,513 5,789 6,078 8,509 Reduction in Cash Flow $ 1,837 $ 1,929 $ 2,026 $ - Periods PVIF 15.0% Present Value of Cash Flows $ 1,713 $ 1,564 $ 1,429 $ - Sum of Present Values $ 4,706 Amortization Benefit $ 807 $ 5,513 x Probability of Competing 25.0% Fair Value of NCA (Rounded) $ 1,400 Amortization Benefit Discount Rate 15.0% Tax Rate 35.0% Period (Years) 15 $

8 Intangible Asset #3 Customer Relationships 15 Customer Relationships (Multiperiod Excess Earnings) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Sales $ 25,000 $ 26,250 $ 27,563 $ 28,941 $ 30,388 $ 31,907 Survivorship 100.0% 75.0% 56.3% 42.2% 31.7% 23.8% Net Sales 19,688 15,518 12,213 9,633 7,594 Cost of Sales 40.0% 7,875 6,207 4,885 3,853 3,038 Gross Profit 11,813 9,311 7,328 5,780 4,556 SG&A 36.0% 7,088 5,586 4,397 3,468 2,734 Royalty 2.0% Total Expenses 7,482 5,896 4,641 3,661 2,886 Taxable Income 4,331 3,415 2,687 2,119 1,670 Income Taxes 35.0% (1,516) (1,195) (940) (742) (585) Net Income 2,815 2,220 1,747 1,377 1,085 Asset Charges Working Capital 1.2% Fixed Assets 5.0% Non-Compete 0.8% Net Cash Flow 1,430 1, Periods PVIF 15.0% Sum of Present Values $ 3,678 Amortization Benefit 630 Fair Value (Rounded) $ 4,

9 Example Financial Statements of Target Purchase Adjusted Balance Sheet Unadjusted Adjustments (Fair Value) Current Assets Cash $ 1,000 $ - $ 1,000 Receivables 2,500-2,500 Inventory 5,000-5,000 8,500-8,500 Fixed Assets, net 10,000 2,500 12,500 Intangible Assets - 10,500 10,500 Total Assets $ 18,500 $ 13,000 $ 31,500 Current Liabilities Payables $ 1,200 $ - $ 1,200 Accrued Liabilities Line of Credit 1,500-1,500 3,500-3,500 Long-Term Debt 5,000-5,000 Total Liabilities 8,500-8,500 Stockholders' Equity $ 10,000 $ 13,000 $ 23,000 Liabilities & Equity $ 18,500 $ 13,000 $ 31, So... What Did We Buy...? Previously Unallocated Balance: $10,500 o $ 3,600 Trade Name o $ 1,400 Noncompete Agreement o $ 4,300 Customer Relationships o $ 9,300 Identified Intangible Assets o $ 1,200 Residual (Goodwill) o $ 10,

10 Does This Stuff Have Real World Applications? 19 Trade Name Infringement (With & Without) Year 0 Year 1 Year 2 Year 3 Year 4 Net Cash Flow With Name $ 15,000 $ 15,750 $ 16,538 $ 17,365 $ 18,233 Without Name 3,938 8,269 13,024 18,233 Reduction in Cash Flow $ 11,812 $ 8,269 $ 4,341 $ - Periods PVIF 18.0% Present Value of Cash Flows $ 10,874 $ 6,451 $ 2,870 $ - Sum of Present Values $ 20,195 Amortization Benefit $ - 20,195 x Probability of Loss 100.0% Value of Trade Name (Rounded) $ 20,

11 Questions 21 BKD Forensics Institute Upcoming Schedule Analytics & Unstructured Data: Harnessing the Power of Big Data for Investigations o Wednesday, May 21, 2014 o 11:30 a.m. 12:30 p.m. CST o Presented by Jeremy Clopton, CPA, CFE, ACDA Top 10 Practical Tips in Working with Experts o Wednesday, May 28, 2014 o 11:30 a.m. 12:30 p.m. CST o Presented by Angela Morelock, CPA, CFE, CFF, ABV, CrFA Register at bkd.com/fi 22 11

12 Continuing Professional Education (CPE) Credits BKD, LLP 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 submitted to the National Registry of CPE Sponsors through its website: The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars. 23 CPE Credit Up to 1 CPE credit will be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at training@bkd.com 24 12

13 Thank you for attending. Learn more at bkd.com/fi. 13