Baria Jaroudi, CPA/ABV, CBA, CVA Valuation Manager

Transcription

1 1 Baria Jaroudi, CPA/ABV, CBA, CVA Valuation Manager

2 2 Presentation Summary 2 Organizations & Standards for valuations Reasons for Business Valuations Business Valuation Considerations Approaches to Valuation Value Drivers Q&A

3 3 What is a Business Valuation? 3 The act or process of determining the value of a business enterprise or ownership interest therein Valuing a bundle of rights

4 4 Business Valuation Organizations & Standards 4

5 Business Valuation Bible: IRS Revenue Ruling Outlines the approaches, methods, and factors to be considered in valuing shares of stock in closelyheld corporations for federal tax purposes

6 Litigation, Strategic Purpose & Compliance are the Primary Reasons for Business Valuations 6 6 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

7 7 One size does not fit all 7

8 What s important in a valuation depends on who s asking 8 8 What are the long and short term tax implications and planning opportunities? CPA Valuation Expert What is the valuation based on current regulations and deal structure? Does the valuation meet current regulations? How much can we get in tax revenue? IRS Buyer How much can I get and how to minimize my tax liability now and in the future? How will the valuation impact my loan covenants? Banker Seller How little can I pay in this transaction?

9 Business Valuation Considerations 9 9 Type of entity to be valued Purpose of valuation (examples) Valuation Date Standards of value Premise of value Level of value

10 10 Standards of Value 10 Strategic value Intrinsic value Fair value Fair market value

11 11 Premise of Value 11

12 12 Levels of Value 12 Synergistic Value Minority Discount Control Value As If Freely-Traded Marketability Minority Interest Non-Marketable Minority Interest Value Premium for Synergy Premium for Control Lack of Marketability Discount VARIES BY PURPOSE OF THE VALUATION

13 13 Considerations 13 Gift & M&A/ Estate Strategic Litigation Compliance Fair market value X Fair value X X Strategic value X Going concern X X X X Liquidation X X X Controlling, marketable X X X Non-controlling, non-marketable X

14 14 Approaches to Valuation 14

15 15 Rules of Thumb 15 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

16 16 Approaches to Valuation 16 Valuation Approaches Income Approach Market Approach Asset Approach Capitalization of Cash Flow Discounted Cash Flow Guideline Public Company Method Guideline Transaction Method Adjusted Book Value Liquidation Value Method

17 17 Income Approach 17 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

18 Income Approach: Qualitative Factors Regulations Supplier Concentration Physical Facilities Efficiency or Inefficiency Market Position Competition Reputation Management Depth Location

19 19 Components of Discount Rate 19 Discount Rate - an opportunity cost; the rate of return available to investors in the market on investments of comparable risk Risk free rate 2.50% Equity risk premium 5.90% Size premium 6.20% Company specific risk 6.00% Cost of equity 20.60%

20 20 20

21 21 Discount Rate 21

22 22 Types of risks 22 Systematic Risk Un-systematic Risk Uncontrollable by organization Macro in nature Controllable by organization Micro in nature

23 23 Normalizing Adjustments 23 Show return from normal operations Reveal public equivalent income stream

24 24 Normalizing Adjustments 24 Litigation settlement Owner compensation Donation Big Daddy's vacation home Hurricane Moving expense Non-Recurring X X X Controlling X X X

25 25 Income approach See handout 25

26 26 Market Approach See handout 26

27 Asset Approach See handout 27 27

28 Discount of Lack of Marketability (DLOM) 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?

29 Discount of Lack of Marketability IRS: Job Aid Summary of approaches and methods 18 methods to generate a DLOM Both benchmark and analytical approaches Recommendations and evaluations

30 30 Mandelbaum Factors 30 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

31 Discount of Lack of Control (DLOC) or Minority Discount Compares the trading price of shares of publicly traded, closed-end investment funds to the net asset value per share of the same funds

32 32 Other Potential Adjustments 32 Key person discounts Blockage discounts BIG tax discounts Voting v. non-voting stock

33 33 Reconciliation See handout 33

34 What Factors Drive A Company s Value? The value of a company lies in the buyer s view of its future. Financial results reflect only the past.

35 Value Drivers 35 35

36 36 Types of Engagements 36 Valuation Engagement Detailed Report Summary Report Conclusion of value Calculation Report Calculation Report Calculation of value

37 37 A Gratuitous Pitch for my firm 37 When you think of BV, think of B&V

38 38 A Gratuitous Pitch for my firm 38 When you think of BV, think of B&V

39 39 39

40 40 Thank you 4 Baria Jaroudi, CPA/ABV, CBA, CVA FVLS Manager Briggs & Veselka Co. bjaroudi@bvccpa.com