1

Baria Jaroudi, CPA/ABV, CBA, CVAValuation Manager

2

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

Presentation Summary

2

3

• The act or process of determining the value of a business enterprise or ownership interest therein

• Valuing a bundle of rights

What is a Business Valuation?

3

4Business Valuation Organizations & Standards

4

5

Outlines the approaches, methods, and factors to be considered in valuing

shares of stock in closely-held corporations for federal tax purposes

Business Valuation Bible:IRS Revenue Ruling 59-60

5

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

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

6

7One size does not fit all

7

8What’s important in a valuation depends on who’s asking

8

Valuation ExpertCPA

IRS Buyer

Seller Banker

How much can I get and how to minimize my tax liability now and in the future?

What are the long and short term tax

implications and planning opportunities?

Does the valuation meet current

regulations? How much can we get in

tax revenue?

How will the valuation impact my

loan covenants?

What is the valuation based on current regulations and deal structure?

How little can I pay in this transaction?

9

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

Business Valuation Considerations

9

10Standards of Value

Strategic value

Intrinsic value

Fair value

Fair market value

10

11Premise of Value

11

12

Control Value

“As If Freely-Traded”Marketability Minority Interest

Non-MarketableMinority Interest Value

Synergistic Value

Premium for Synergy

Minority Discount Premium for Control

Lack of Marketability Discount

Levels of ValueVARIES BY PU

RPOSE O

F THE VALUATION

12

13Considerations

13

Gift & Estate

M&A/ Strategic Litigation Compliance

Fair market value XFair value X XStrategic value XGoing concern X X X XLiquidation X X XControlling, marketable X X XNon-controlling, non-marketable X

14Approaches to Valuation

14

15Rules 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

Approaches to Valuation

Valuation Approaches

Market ApproachIncome Approach Asset Approach

Capitalization of Cash Flow

Discounted Cash Flow

Guideline Public Company Method

Guideline Transaction

Method

Adjusted Book Value

Liquidation Value

Method

16

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

Income Approach

17

18Income Approach: Qualitative Factors

18

Regulations Supplier Concentration

Management Depth

Market Position Competition

Location

Physical Facilities

Reputation

Efficiency or Inefficiency

19

Discount Rate - an opportunity cost; the rate of return available to investors in the market on investments of comparable risk

Components of Discount Rate

19

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

21Discount Rate

21

22Types of risks

• Uncontrollable by organization

• Macro in nature

22

Systematic Risk

Un-systematic Risk

• Controllable by organization

• Micro in nature

23

• Show return from normal operations• Reveal public equivalent income stream

Normalizing Adjustments

23

24Normalizing Adjustments

24

Non-Recurring ControllingLitigation settlement XOwner compensation XDonation XBig Daddy's vacation home XHurricane XMoving expense X

25Income approach –See handout

25

26Market Approach –See handout

26

27Asset Approach –See handout

27

28

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?

Discount of Lack of Marketability (DLOM)

28

29

• Summary of approaches and methods• 18 methods to generate a DLOM• Both benchmark and analytical approaches• Recommendations and evaluations

Discount of Lack of Marketability IRS: Job Aid

29

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

Mandelbaum Factors

30

31

• Compares the trading price of shares of publicly traded, closed-end investment funds to the net asset value per share of the same funds

Discount of Lack of Control (DLOC) or Minority Discount

31

http://www.journalofaccountancy.com/issues/2009/jul/20091463.html

32Other Potential Adjustments

• Key person discounts• Blockage discounts• BIG tax discounts• Voting v. non-voting stock

32

33Reconciliation–See handout

33

34

The value of a company lies in the buyer’s view of its future. Financial results reflect only the past.

What Factors Drive A Company’s Value?

34

35Value Drivers35

36

• Valuation Engagement Detailed Report Summary Report

• Calculation Report Calculation Report

Types of Engagements

Conclusion of value

Calculation of value

36

37

When you think of BV,

A Gratuitous Pitch for my firm

37

think of B&V

38

When you think of BV,

A Gratuitous Pitch for my firm

38

think of B&V

39

39

Thank you 4

Baria Jaroudi, CPA/ABV, CBA, CVAFVLS Manager

Briggs & Veselka Co.bjaroudi@bvccpa.com

713-366-8518

40