Valuation: Packet 2 Relative Valuation, Asset-based valuation and Private Company Valuation
2021-01-21 Business Valuation Essentials for Attorneys final
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1/21/2021 1 Business Valuation Essentials For Attorneys Evan M. Levine, ChFC Nainesh Shah, CFA 2 2 1 2
Transcript of 2021-01-21 Business Valuation Essentials for Attorneys final
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Business Valuation Essentials For Attorneys
Evan M. Levine, ChFCNainesh Shah, CFA
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…What’s the Question?
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Overview• Why?
• Purpose• Premise• Level• Standards
• How?• Qualitative and Quantitative Analysis
• When?• Impact of subsequent events on a valuation• COVID -19
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Overview• What?
• Approaches and Methods
• discounts and premiums to business value
• Report Writing
• Who?
• Professional Organizations
• IRS
• Courts: Legal Cases
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Purpose for Business Valuation• Tax valuations
• ESOP• Succession planning
• M&A : Merger and acquisition• Selling or buying of a business• Employee buy-in situations
• Financial Accounting• Goodwill assessments• Intellectual property valuations
• Litigation• Shareholder dispute resolution• Insurance claims or settlements• Divorce
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Premise of Value1. Going concern
2. Assets Valuation
3. Liquidation
• orderly
• forced
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Levels of Value• Minority v. Control
• Marketable v. Non-Marketable
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Standards of Value a) Fair market valueb) Fair valuec) Investment (strategic) valued) Intrinsic (fundamental) value
IRS Revenue Ruling 59-60 • Issued in 1959• Regarded as the single most important piece of
valuation literature• Outlined methods and factors to be used in valuing
closely held businesses• Involved itself with Estate and Gift Taxes• Provided for a series of valuation formulas or methods
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IRS Revenue Ruling 59-60:“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.”
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• Qualitative Analysis• Quantitative Analysis
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Qualitative Analysis• Economic Environment
• Industry background
• Company background
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Economic Environment• Macro-environment
• National
• Regional & Metropolitan
• International elements
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Industry Background1. Economic data
2. Industry Information
• Structure
• Trends
• Life cycle
• Seasonality
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Company Background1. Site visit and discussions with management
2. History and nature
3. Economic data
• cost structure
• pricing power
• margin analysis
4. SWOT analysis
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Quantitative Analysis • Financial statements
1. Source
• audited/reviewed/compiled/tax returns/internal
2. Number of years to obtain
3. Common size
4. Trend analysis
5. Ratios
6. Comparative analysis
a) Specific company
b) Industry averages
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Adjustments to Financial Statements
1. Normalizing
a) Control v. non-control
b) Discretionary
c) Reasonable compensation analysis
d) Extraordinary/non-recurring
2. Operating v. non-operating items
3. Off-balance sheet and unrecorded items
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Benefits Streams and Selection
1. Appropriate time periods
2. Appropriate income/cash flow
3. Growth assumptions
4. Pass-through entities
• tax effecting of the benefit stream
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Defining the Engagement • Valuation date and its importance
• Known and Knowable
• COVID-19
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Valuation ApproachesA. Income approach
B. Market approach
C. Asset Approach
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Income Approach1. General theory
2. Defining applicable income/cash flow
3. Sources of data
4. Capitalization/discount rates
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Income Approach Commonly used methods:
a) Capitalized cash flow method (CCF)
• Gordon Growth Model (constant growth model)
b) Discounted cash flow method (DCF),
• Gordon Growth Model (two stage model)
c) Dividend paying capacity
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Market Approach
1. General theory
2. Commonly used methods
a) Transactions in subject company’s stock
b) Transactions/sales of companies similar tosubject
(1) Guideline public companies
(2) Guideline merged and acquired companies
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Asset Approach
1. General theory
2. Sources of data
3. Commonly used methods
a) Book value
b) Adjusted net asset method
c) Excess earnings method
• Reasonable rate method
d) Liquidation method (forced or orderly)
4. Identifying and valuing intangible assets
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Sanity Checks1. General theory
2. Sources of data
3. Commonly used methods
a) Industry formulas (“Rules of Thumb”)
b) Justification of purchase
4. Reconciliation of indicated values
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Discounts, Premiums, and other Adjustments
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Discounts• Discount for Lack of Control (DLOC)
• Discount for Lack of Marketability (DLOM)
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Valuation Report• Professional Standards
• Detailed analysis
• Conclusion of Value vs Calculation of Value
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Groups Involved in the Valuation Space
• Professional Organizations
• AICPA
• NACVA
• ASA
• IBA
• Regulators
• Courts
• DATABASE PROVIDERS
• APPRAISERS
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Valuation Report
• Professional Standards
• Detailed analysis
• Conclusion of Value vs. Calculation of Value
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…..Re-cap
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For More Information Contact:
Evan Levine
516-240-6161
www.completeadvisors.com
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Questions?
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