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03/15/2012 © 2012 EAC Valuations, LLC1 Presentation: Business Valuations Presenter: Kenneth Domboski
Business Valuation Introduction Reasons for a Business Valuation Standards of Value Revenue Ruling 59-60 Valuation Methodology Discounts Q&A 03/15/2012 © 2012 EAC Valuations, LLC2
“The act or process of determining the value of a business enterprise or ownership interest therein.” 03/15/2012 © 2012 EAC Valuations, LLC3 *International Glossary of Business Valuation. *IRS Business Valuation Guideline 2006.
03/15/2012 © 2012 EAC Valuations, LLC4 ASSET APPRAISAL ◦ Real Estate ◦ Machinery & Equipment ◦ Intangible Assets BUSINESS VALUATION ◦ Complete Business Enterprise Valuation What are “Business Valuations?”
03/15/2012 © 2012 EAC Valuations, LLC5 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 Reasons for Business Valuations
03/15/2012 © 2012 EAC Valuations, LLC6 Estate Planning Key Person Insurance Succession Planning Buy/Sell Agreements Partnership Dissolution Estate and Gift Taxes SBA Financing Sale of Business New & Growing Businesses
03/15/2012 © 2012 EAC Valuations, LLC7 Corporate Planning ASC 350 Goodwill Impairment Testing (Step 1) Mergers & Acquisitions Privatization of Company Public Offering Restructuring Established Business or Public Company
03/15/2012 © 2012 EAC Valuations, LLC8 Financial Reporting ◦ FASB 141 ◦ FASB 142 Buy/Sell Agreements Succession Planning Financing Primary Purposes of Appraisals
03/15/2012 © 2012 EAC Valuations, LLC9 Generally Requires Business Valuation ◦ Determine Market Value of the Business Enterprise May be Advantageous to Appraise Real Estate and/or Machinery & Equipment Buy/Sell Agreements Succession Planning
03/15/2012 © 2012 EAC Valuations, LLC10 SBA Requirements for Business Valuation Loan Amount over $350,000.00 Change in Ownership
03/15/2012 © 2012 EAC Valuations, LLC11 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.”
03/15/2012 © 2012 EAC Valuations, LLC12 Business Valuation Guidelines 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.
03/15/2012 © 2012 EAC Valuations, LLC13 Business Valuation Guidelines 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).
03/15/2012 © 2012 EAC Valuations, LLC14 Standards of Value Market Value (Fair Market Value) Fair Value (FASB Definition) Fair Value (Legal Definition)
03/15/2012 © 2012 EAC Valuations, LLC15 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.”
03/15/2012 © 2012 EAC Valuations, LLC16 RR 59-60 Factors 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
03/15/2012 © 2012 EAC Valuations, LLC17 RR 59-60 Factors Cont. 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
03/15/2012 © 2012 EAC Valuations, LLC18 Fair Value (FASB Definition) 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.
03/15/2012 © 2012 EAC Valuations, LLC19 Fair Value (Legal Definition) 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.
03/15/2012 © 2012 EAC Valuations, LLC20 Business Valuation Methodology Value Estimate Determining a value indication of a business using one or more methods that convert anticipated economic benefits into a present single amount. Income Based Valuation Approaches
03/15/2012 © 2012 EAC Valuations, LLC21 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. There are several variations of an income based approach, which underscores the need for a qualified business valuation expert.
03/15/2012 © 2012 EAC Valuations, LLC22 Business Valuation Methodology Value Estimate Determining a value indication of a business using one or more methods that convert anticipated economic benefits into a present single amount. Income Based Valuation Approaches Value Estimate Determing a value indication of a business based on the value of the assets net liabilities. Asset Based
03/15/2012 © 2012 EAC Valuations, LLC23 Business Valuation Methodology Asset Based Approach Focuses on the value of the underlying assets of a business ◦ Real estate ◦ Machinery ◦ Equipment. 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.
03/15/2012 © 2012 EAC Valuations, LLC24 Business Valuation Methodology Value Estimate Determining a value indication of a business using one or more methods that convert anticipated economic benefits into a present single amount. Income Based Valuation Approaches Value Estimate Determing a value indication of a business based on the value of the assets net liabilities. Asset Based 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. Market Based
03/15/2012 © 2012 EAC Valuations, LLC25 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.
03/15/2012 © 2012 EAC Valuations, LLC26 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
03/15/2012 © 2012 EAC Valuations, LLC27Discounts 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
03/15/2012 © 2012 EAC Valuations, LLC28 Other Discounts Key Person Discount Blockage Portfolio Discount Voting vs. Nonvoting Stock
03/15/2012 © 2012 EAC Valuations, LLC29 Everything You Should Know 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
03/15/2012 © 2012 EAC Valuations, LLC30 Everything You Should Know Know the Primary Business Valuation Methods Consider the Appraisal as a First Line of Defense Litigation Support Issues Expect the Best
03/15/2012 © 2012 EAC Valuations, LLC31 Questions & Answers
03/15/2012 © 2012 EAC Valuations, LLC32 Our Legacy 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
03/15/2012 © 2012 EAC Valuations, LLC33 Our Legacy Cont. 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
03/15/2012 © 2012 EAC Valuations, LLC34 Service Matrix
03/15/2012 © 2012 EAC Valuations, LLC35 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
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