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03/15/2012 © 2012 EAC Valuations, LLC1 Presentation: Business Valuations Presenter: Kenneth Domboski.

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Presentation on theme: "03/15/2012 © 2012 EAC Valuations, LLC1 Presentation: Business Valuations Presenter: Kenneth Domboski."— Presentation transcript:

1 03/15/2012 © 2012 EAC Valuations, LLC1 Presentation: Business Valuations Presenter: Kenneth Domboski

2  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

3 “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.

4 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?”

5 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

6 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

7 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

8 03/15/2012 © 2012 EAC Valuations, LLC8  Financial Reporting ◦ FASB 141 ◦ FASB 142  Buy/Sell Agreements  Succession Planning  Financing Primary Purposes of Appraisals

9 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

10 03/15/2012 © 2012 EAC Valuations, LLC10 SBA Requirements for Business Valuation  Loan Amount over $350,000.00  Change in Ownership

11 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.”

12 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.

13 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).

14 03/15/2012 © 2012 EAC Valuations, LLC14 Standards of Value  Market Value (Fair Market Value)  Fair Value (FASB Definition)  Fair Value (Legal Definition)

15 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.”

16 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

17 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

18 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.

19 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.

20 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

21 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.

22 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

23 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.

24 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

25 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.

26 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

27 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

28 03/15/2012 © 2012 EAC Valuations, LLC28 Other Discounts  Key Person Discount  Blockage  Portfolio Discount  Voting vs. Nonvoting Stock

29 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

30 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

31 03/15/2012 © 2012 EAC Valuations, LLC31 Questions & Answers

32 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

33 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

34 03/15/2012 © 2012 EAC Valuations, LLC34 Service Matrix

35 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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