Valuation Basics Presented by: Michael Yi, ASA, CPA Newport Valuations, Inc. 23 Corporate Plaza, Ste 150 Newport Beach, CA 92660 949-706-1313 Myi@newportvaluations.com Your logo here 1 Overview Introductions Process Standard of value Valuation approaches Premiums and discounts 2 Valuation Process Trustee hires appraiser Appraiser obtains and analyzes information Management interview Value the subject company Submit and review draft report with Trustee Finalize appraisal report 3 1
Information Needed Information from management: Financial statements Non-recurring or discretionary expenses Company forecasts Recent stock transaction data Other (competitors, customers, suppliers, products, etc.) Industry, economic, and market data 4 Standard of Value Two regulatory agencies dictate standard: Internal Revenue Service (IRS) Department of Labor (DOL) Required ESOP standard: Fair Market Value 5 Standard of Value, contd. Fair market value as defined by Revenue Ruling 59-60, ERISA 3(18) (B) and Proposed U.S. Department of Labor Regulation Section 2510.3-18 (b)(2), 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. The hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well-informed about the asset and the market for that asset. 6 2
Standard of Value, contd. Revenue Ruling 59 60: Nature & History of Business Economic Outlook and Industry Condition Value of Tangible Assets and Financial Condition of Business Earnings Capacity Dividend Paying Capacity Presence of Goodwill & Intangible Assets Size of Company and Size of block of stock being valued Transactions of Similar Businesses, Private & Public 7 Stakeholders Invested Capital = Debt and Equity Equity = Shareholders 8 Relative Levels of Value Enterprise Value Nonmarketable, Minority Interest Value 9 3
Valuation Analysis Economic environment Industry analysis Company analysis Market Analysis 10 Economic Environment: Global National Regional Local 11 Industry Analysis: Impact of the economy on industry Industry trends Industry outlook Growth expectations 12 4
Company Analysis Non-Financial Factors: History Products or services Markets and customers Seasonal or cyclical factors Competition Suppliers Management Employees 13 Company Analysis Financial Factors: Historical and Forecasted: Growth Profitability Returns Liquidity Leverage/Capitalization 14 Valuation Approaches: Income approach Market approach Asset-based approach 15 5
Income Approach Discounted Cash Flow (DCF) Method: Estimated future returns are discounted to present value at an appropriate rate of return for the investment Free cash flow, usually 5 years Weighted Average Cost of Capital (Discount Rate) Capitalization of Earnings Method (single period) 16 Income Approach- DCF 17 Market Approach Public Co. Select comparable public companies Obtain market multiples Adjust multiples for risk factors Select appropriate multiples Apply to subject company financial data 18 6
Market Approach M&A Select comparable transactions Obtain transaction multiples Adjust multiples for risk factors Select appropriate multiples Apply to subject company financial data 19 Asset-Based Approach: Assets and liabilities are restated from historical cost to fair market value 20 Premiums And Discounts: Control premium: A controlling interest has more rights than a minority interest Can set compensation Select board members Set the strategic direction Market data From transactions between public companies Often includes a strategic (synergistic) component 21 7
Premiums And Discounts: Lack of marketability Closely held equity interests do not have the same liquid market as publicly traded stock do; therefore, they are worth less 22 DLOM in an ESOP context: Internal Revenue Code (IRC) Section 409(h)(1)(B) Participants are granted a put right exercisable against the employer upon leaving the company; Upon exercise, they receive fair market value for their vested shares per the terms of the employers Plan document 23 DLOM in an ESOP context, contd: Proposed U.S. Department of Labor Regulation Section 2510.3-18(b)(2) require that such put rights are to be taken into account in reducing the discount for lack of marketability Put right creates a market for the shares and must be taken into consideration 24 8
Other Considerations Repurchase obligation Synthetic equity Various other stakeholders (preferred stock) Non-operating assets Contingent considerations 25 Value Conclusion The three approaches to value are weighted to arrive at a value conclusion Factors taken into consideration: Quality of the data Quantity of available data (number of public companies or M&A transactions) Overall reliability of the value conclusion 26 Takeaways: Increase Profits, not necessarily increase in Revenue Value is a function of future cash flow and risk Higher future cash flow Higher value Higher risk Lower value, and vice versa 27 9
Questions? Michael Yi, ASA, CPA Newport Valuations, Inc. 23 Corporate Plaza, Ste 150 Newport Beach, CA 92660 949-706-1313 Myi@newportvaluations.com 28 10