Introduction to Business Valuation
Items of Note • Business valuations are as much Art as Science • When considering Business Valuations, focus on the inputs and subjective elements of the process • What are the key variables?
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Reasons to Perform a Business Valuation • Financial Reporting • •
Business Combination Goodwill Impairment
• Intangible Asset Valuations • Mergers, Acquisitions & Other Transactions • ESOP’s • Gift & Estate Taxes
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Reasons to Perform a Business Valuation • Buy-Sell Agreements • Marital, Partnership & Corporate Dissolution • Damage Cases • Bankruptcy Reorganizations and Insolvency Determination
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Subject of the Valuation • Business interest • • •
Debt v. Equity Controlling v. Minority Common v. Preferred
• Intangible Asset • •
Patent, Trademark Customer List
• Goodwill
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Purpose of the Business Valuation “I have seen literally hundreds of business appraisals that missed the target because the appraiser failed to match the appraisal methodology to the purpose for which it was being done, or because the client attempted to use the appraisal for some purpose other than the intended one.” Shannon Pratt The Cadence Group
Purpose of the Business Valuation • No single valuation methodology is universally applicable to all appraisal purposes
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Standard of Value • • • • •
Fair Market Value Market Value Investment Value Intrinsic Value Book Value
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Premise of Value • Going Concern • Liquidation Value • •
Orderly Liquidation Fire Sale
• Highest & Best Use
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Valuation Date • Value Fluctuates - only effective for a specific date • Generally speaking, ignore subsequent events
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Navigating the Process • What to Expect • •
Requests for Documents Management Interview
• How to Manage the Process • • • •
Pick a Lead Delegate Communicate Evaluate
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Appraisal Considerations – IRS Revenue Ruling 59-60 • • • • • • • •
Nature & History of Business Economic Outlook (General & Industry) Book Value and Financial Condition Earning Capacity Dividend Paying Capacity Goodwill/Intangible Asset Value Sales of the Stock & Block Size Market Price of Similar Stocks The Cadence Group
Approaches to Value • Income Approach • Market Approach • Asset (Cost) Approach
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Income Approach • Premise is that Value = Present Value of Future Cash Flows • •
Discounted Cash Flow Capitalization of Cash Flow
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Income Approach • Projection of Future Cash Flows • • • • • • • • •
Budgets/Projections Historical Cash Flows Normalization/Control Adjustments Margins New Products Life-Cycle Taxes Etc., Etc., Etc. Subjective Elements The Cadence Group
Income Approach • Discount Rate • • • •
Comparable Risk Build-up Method CAP/M Subjective Elements
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Market Approach • • • •
Transactions in Subject Publicly Traded Comparables Private Transactions What is “Similar”?
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Market Approach • Metrics • • • • • • • •
Price to Earnings Price to Cash Flow Price to Sales Price to Book MVIC to Earnings MVIC to Cash Flow MVIC to Sales MVIC to Book
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Asset Approach • Mark to Market • •
Orderly Liquidation Fire Sale
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Discounts & Premiums • • • • •
Marketability Discount Minority Interest Discount Control Premium Key Person Discount Blockage Discount
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Case Study – Real Estate Holding Company • Real Estate Holding Company • • • • •
Limited Liability Company Purpose is a Gift of a Minority Interest for Gift Tax Purposes Owns Raw Land, An Apartment Complex – Held for 20 years Rental Income/Cash Flow December 31 Valuation Date
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Case Study – Real Estate Holding Company •
What is the standard of value?
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Case Study – Real Estate Holding Company • •
What is the standard of value? What other information would be necessary?
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Case Study – Real Estate Holding Company • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on?
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Case Study – Real Estate Holding Company • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used?
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Case Study – Real Estate Holding Company • • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used? When evaluating the appraisal, what key elements should you consider?
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Case Study – Real Estate Holding Company • • • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used? When evaluating the appraisal, what key elements should you consider? What discounts would you expect to apply?
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Case Study – Real Estate Holding Company • • • • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used? When evaluating the appraisal, what key elements should you consider? What discounts would you expect to apply? What subjective elements are inherent that could insert bias?
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Case Study – Software Company • Start-up Software Company • • • • • •
Web-based Software as a Service Provider Purpose is to evaluate a Buy-Out Offer Very Few “Hard” Assets Explosive Revenue/Headcount Growth over past 2 years Has not yet broken even/Negative Cash Flow “Current” valuation date
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Case Study – Software Company •
What is the standard of value?
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Case Study – Software Company • •
What is the standard of value? What other information would be necessary?
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Case Study – Software Company • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on?
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Case Study – Software Company • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used?
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Case Study – Software Company • • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used? When evaluating the appraisal, what key elements should you consider?
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Case Study – Software Company • • • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used? When evaluating the appraisal, what key elements should you consider? What discounts would you expect to apply?
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Case Study – Software Company • • • • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used? When evaluating the appraisal, what key elements should you consider? What discounts would you expect to apply? What subjective elements are inherent that could insert bias?
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Case Study – Small Medical Practice • Small Medical Practice • • • • •
Purpose is Divorce Very Few “Hard” Assets Two Doctors, One Owns, Other is a new Doctor/Employee Established practice/good reputation Valuation date is date of separation
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Case Study – Small Medical Practice •
What is the standard of value?
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Case Study – Small Medical Practice • •
What is the standard of value? What other information would be necessary?
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Case Study – Small Medical Practice • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on?
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Case Study – Small Medical Practice • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used?
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Case Study – Small Medical Practice • • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used? When evaluating the appraisal, what key elements should you consider?
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Case Study – Small Medical Practice • • • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used? When evaluating the appraisal, what key elements should you consider? What discounts would you expect to apply?
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Case Study – Small Medical Practice • • • • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used? When evaluating the appraisal, what key elements should you consider? What discounts would you expect to apply? What subjective elements are inherent that could insert bias?
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Case Study – Manufacturing Company • Established Manufacturing Company • • • •
Purpose is Buy-Sell Agreement Manufacturers various plastic molded products One customer accounts for 70% of revenues Valuation date is December 31 each year
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Case Study – Manufacturing Company •
What is the standard of value?
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Case Study – Manufacturing Company • •
What is the standard of value? What other information would be necessary?
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Case Study – Manufacturing Company • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on?
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Case Study – Manufacturing Company • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used?
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Case Study – Manufacturing Company • • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used? When evaluating the appraisal, what key elements should you consider?
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Case Study – Manufacturing Company • • • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used? When evaluating the appraisal, what key elements should you consider? What discounts would you expect to apply?
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Case Study – Manufacturing Company • • • • • • •
What is the standard of value? What other information would be necessary? What should the management interview focus on? What approach(es) would you expect to be used? When evaluating the appraisal, what key elements should you consider? What discounts would you expect to apply? What subjective elements are inherent that could insert bias?
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About Cadence – Our Value Proposition The Cadence Group is a Utah-based compliance and advisory firm. We pride ourselves on providing high-quality, interactive service to our clients. We achieve this high level of service through our value proposition, which focuses on the following attributes: • Experience – Providing high-level expertise through seasoned professionals. With experienced personnel, our projects are completed proficiently while reducing the time and overhead costs associated with on-the-job training, coaching, reviewing and revising the work of less-experienced staff. • Flexibility – Enabling clients to determine how to best use our services. We can either perform all the related tasks necessary to complete each phase of an engagement, we can coach and review work performed or provide clients with a combination of each. We continuously work with our clients to understand the engagement requirements, timing restrictions and desired deliverables to ensure a successful outcome. • Efficiency – Ensuring engagements are effectively managed and skillfully executed. Our clearly defined objectives, relevant experience and cost-sensitive organizational structure allows our clients to receive requested services in a timely and cost-effective manner.
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About Cadence – Our Services The Cadence Group provides enterprise risk management services. We specifically focus on business processes, financial reporting and compliance services in the areas of finance, accounting and information technology. Our services include: 1. Enterprise and IT Risk Management 2. Internal Audit Services 3. Financial Reporting and Technical Accounting 4. Sarbanes-Oxley 404 Readiness Services 5. Privacy Advisory Services
6. PCI Compliance Services 7. Service Organization Control Reporting (previously SAS 70 Audits) 8. Business & Intangible Asset Valuation Services
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Phone 801 337 3917 • Fax 866 326 6612 www.thecadencegroup.com
