Business Valuations

Report
Presentation:
Business Valuations
Presenter:
Kenneth Domboski
© 2012 EAC Valuations, LLC
03/15/2012
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Business Valuation Introduction
Reasons for a Business Valuation
Standards of Value
Revenue Ruling 59-60
Valuation Methodology
Discounts
Q&A
© 2012 EAC Valuations, LLC
03/15/2012
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“The act or process of determining the value of a
business enterprise or ownership interest therein.”
*International Glossary of Business Valuation.
*IRS Business Valuation Guideline 2006.
© 2012 EAC Valuations, LLC
03/15/2012
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What are
“Business Valuations?”
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ASSET APPRAISAL
◦ Real Estate
◦ Machinery & Equipment
◦ Intangible Assets
BUSINESS VALUATION
◦ Complete Business Enterprise Valuation
© 2012 EAC Valuations, LLC
03/15/2012
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Reasons for
Business Valuations
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Sale of business or part interest
Ownership Disputes
Financing
Life Insurance
Buy-Sell Agreements
Employee Stock Ownership Plans
Condemnation
Divorce
Estate Planning
Change of Business Structure
Recapitalization
© 2012 EAC Valuations, LLC
03/15/2012
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New & Growing
Businesses
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Estate Planning
Key Person Insurance
Succession Planning
Buy/Sell Agreements
Partnership Dissolution
Estate and Gift Taxes
SBA Financing
Sale of Business
© 2012 EAC Valuations, LLC
03/15/2012
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Established Business or
Public Company
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Corporate Planning
ASC 350 Goodwill Impairment
Testing (Step 1)
Mergers & Acquisitions
Privatization of Company
Public Offering
Restructuring
© 2012 EAC Valuations, LLC
03/15/2012
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Primary Purposes
of Appraisals
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Financial Reporting
◦ FASB 141
◦ FASB 142
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Buy/Sell Agreements
Succession Planning
Financing
© 2012 EAC Valuations, LLC
03/15/2012
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Buy/Sell Agreements
Succession Planning
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Generally Requires Business Valuation
◦ Determine Market Value of the Business
Enterprise
May be Advantageous to Appraise Real Estate
and/or Machinery & Equipment
© 2012 EAC Valuations, LLC
03/15/2012
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SBA Requirements
for Business Valuation
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Loan Amount over $350,000.00
Change in Ownership
© 2012 EAC Valuations, LLC
03/15/2012
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SOP 50-10(5)
Business Valuation
“Determining the value of a business (Not including real
estate which is separately valued through an appraisal) is
the key component to the analysis of any loan application
for a change of ownership. An accurate business valuation
is required because the change in ownership will result in
new debt unrelated to business operations and create “blue
sky” or goodwill. A Business valuation assists the lender and
the buyer in making the determination that the seller’s
asking price is supported by historic operations.”
© 2012 EAC Valuations, LLC
03/15/2012
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Business Valuation
Guidelines
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For loans less than $350,000, a lender may do
its own valuation of the business begin sold to
identify whether the seller is requiring a price
that is not supported by the business’s
historical performance.
For loans of $350,000 or more, the lender must
obtain an independent business valuation from
a qualified source.
The lender may not use a business valuation
provided by the seller or the buyer to meet
these requirements.
© 2012 EAC Valuations, LLC
03/15/2012
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Business Valuation
Guidelines
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The lender may use a going concern appraisal to
meet these requirements if:
◦ The loan proceeds will used to purchase a special use
property;
◦ The appraisal is performed by an appraiser experienced
in the particular industry; and
◦ The appraisal allocates separate values to the individual
components of the transaction including land, building,
equipment and the business (Blue Sky).
© 2012 EAC Valuations, LLC
03/15/2012
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Standards of Value
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Market Value (Fair Market Value)
Fair Value (FASB Definition)
Fair Value (Legal Definition)
© 2012 EAC Valuations, LLC
03/15/2012
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Fair Market Value
Revenue Ruling 59-60
“ The price at which the property would change hands
between a willing buyer and a willing seller, neither being
under compulsion to buy or sell and both having
reasonable knowledge of relevant facts.”
© 2012 EAC Valuations, LLC
03/15/2012
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RR 59-60 Factors
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The nature of the business and its history since
inception
The economic outlook in general and the
condition and outlook of the specific industry in
particular
The book value of the stock and the financial
condition of the business
The earning capacity of the company
The dividend paying capacity
© 2012 EAC Valuations, LLC
03/15/2012
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RR 59-60 Factors Cont.
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Whether or not the enterprise has goodwill or
other intangible value
Sales of stock and the size of the block of stock
to be valued
The market price of stocks of corporations
engaged in the same or in a similar line of
business having their stocks actively traded in a
free and open market, either on an exchange or
over- the-counter
© 2012 EAC Valuations, LLC
03/15/2012
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Fair Value
(FASB Definition)
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820-10-30-2
Fair Value – is defined in this subtopic as the
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.
© 2012 EAC Valuations, LLC
03/15/2012
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Fair Value
(Legal Definition)
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Fair Value, is often used in court cases to
compensate a party for the involuntary use of an
asset, such as eminent domain, where there is
no reasonable assumption of a fair market value
transaction.
© 2012 EAC Valuations, LLC
03/15/2012
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Business Valuation
Methodology
Valuation Approaches
Income Based
Value Estimate
Determining a value indication
of a business using one or
more methods that convert
anticipated economic benefits
into a present single amount.
© 2012 EAC Valuations, LLC
03/15/2012
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Business Valuation
Methodology
Income Approach
 Measures the current value of future cash flows
generated by the subject business
 Variables used to develop and support discount
rates or capitalization rates:
◦ Revenue projections
◦ Expenses
◦ Capital expenditure forecasts.
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There are several variations of an income based
approach, which underscores the need for a
qualified business valuation expert.
© 2012 EAC Valuations, LLC
03/15/2012
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Business Valuation
Methodology
Valuation Approaches
Income Based
Asset Based
Value Estimate
Determining a value indication
of a business using one or
more methods that convert
anticipated economic benefits
into a present single amount.
Value Estimate
Determing a value indication
of a business based on the
value of the assets net
liabilities.
© 2012 EAC Valuations, LLC
03/15/2012
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Business Valuation
Methodology
Asset Based Approach
 Focuses on the value of the underlying assets of
a business
◦ Real estate
◦ Machinery
◦ Equipment.
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This approach to value is useful for businesses
that are considered “asset rich”; possessing
undervalued real estate or a great deal of
machinery and equipment.
© 2012 EAC Valuations, LLC
03/15/2012
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Business Valuation
Methodology
Valuation Approaches
Income Based
Asset Based
Market Based
Value Estimate
Determining a value indication
of a business using one or
more methods that convert
anticipated economic benefits
into a present single amount.
Value Estimate
Determing a value indication
of a business based on the
value of the assets net
liabilities.
Value Estimate
Determining a value indication
of a business by using one or
more methods that compare
the subject to similar
businessess that have been
sold.
© 2012 EAC Valuations, LLC
03/15/2012
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Business Valuation
Methodology
Market Based Approach
 Studies transactions in the current marketplace
 Identifies transactions that are comparable to
the business that is the subject of the valuation
 Depends on:
◦ Appropriate comparable transactions
◦ Adequate information from the publically traded
guideline companies.
© 2012 EAC Valuations, LLC
03/15/2012
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Business Valuation
Methodology
In the absence of appropriate comparable market
transactions, we use:
Guideline Company Approach
 Compares certain business barometers from
similar companies to value the subject
© 2012 EAC Valuations, LLC
03/15/2012
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Discounts
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Lack of Marketability
Derived from the fact that there is generally no
ready market for the equity interest in a closely
held enterprise.
Lack of Control
Related to the fact that a minority owner in a
closely held enterprise has very few rights
relative to the operation of that enterprise
© 2012 EAC Valuations, LLC
03/15/2012
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Other Discounts
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Key Person Discount
Blockage
Portfolio Discount
Voting vs. Nonvoting Stock
© 2012 EAC Valuations, LLC
03/15/2012
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Everything
You Should Know
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Define the Project
Understand the Standard of Value
Involve the Appraiser Early on
Distinguish Between a Business Appraisal and a
Real Estate Appraisal
Establish a Reasonable Time Frame
Insist on an Appraisal Firm with Experience and
Credentials
© 2012 EAC Valuations, LLC
03/15/2012
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Everything
You Should Know
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Know the Primary Business Valuation Methods
Consider the Appraisal as a First Line of Defense
Litigation Support Issues
Expect the Best
© 2012 EAC Valuations, LLC
03/15/2012
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Questions & Answers
© 2012 EAC Valuations, LLC
03/15/2012
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Our Legacy
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Founded in 1971 – Independent Firm
Over 9,600 Assignments Completed Since
Company Inception
175 Years Combined Veteran Industry
Knowledge
Three Appraisal Disciplines
Appraisal Experience Across Hundreds of
Industries
© 2012 EAC Valuations, LLC
03/15/2012
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Our Legacy Cont.
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National & International Appraising Expertise
(FASB/IASB)
International Financial Reporting Compliance
(IFRS/IAS)
Fortune 100 - 500 Client Portfolio and Privately
Held Businesses
USPAP Compliant Valuations/Reports
Global Network of Industrial & Commercial Data
Sources
© 2012 EAC Valuations, LLC
03/15/2012
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Service Matrix
© 2012 EAC Valuations, LLC
03/15/2012
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Contact Information
EAC Valuations, LLC
Kenneth Domboski
487 Devon Park Drive, Suite 206
Wayne, PA 19087-1877
(610) 687-5855 ext. 103
www.eacvaluations.com
© 2012 EAC Valuations, LLC
03/15/2012
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