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#. Attorney’s Guide to Financials and Business Valuations May 21, 2013 New Orleans, Louisiana Presented By: Vanessa Brown Claiborne, CPA/ABV, ASA 2.

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Presentation on theme: "#. Attorney’s Guide to Financials and Business Valuations May 21, 2013 New Orleans, Louisiana Presented By: Vanessa Brown Claiborne, CPA/ABV, ASA 2."— Presentation transcript:

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2 Attorney’s Guide to Financials and Business Valuations May 21, 2013 New Orleans, Louisiana Presented By: Vanessa Brown Claiborne, CPA/ABV, ASA 2

3 I.Introduction to Business Valuations II.What to Look for When Reviewing a Business Valuation III.Using Valuations in Your Case: Why and How 3

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5 Business valuation appraisers follow the following standards and guidelines: –American Institute of Certified Public Accountant’s Statements of Standards for Valuation Services No. 1 (“SSVS”); –The Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice (“USPAP”); –The ethics and standards of the American Society of Appraisers; and –The Internal Revenue Service’s business valuation development and reporting guidelines. 5

6 Revenue Ruling 59-60 –Outlines the approaches, methods, and factors to be considered in valuing shares of stock in closely-held corporations for federal tax purposes. Revenue Ruling 65-192 –Extended the concepts in Revenue Ruling 59- 60 to income and other tax purposes as well as to business interests of any type. 6

7 1.Engagement Agreement 2.Checklist 3.Site Visit 7

8 Rule 201A, Professional Competence, of the AICPA Code of Professional Conduct, states that a member shall “undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence.” 8

9 In determining to accept an assignment, an evaluator considers, at a minimum, the following: –Subject entity and its industry –Subject interest –Valuation date –Scope of the valuation engagement Purpose of the valuation Assumptions and limiting conditions Applicable standard of value Type of valuation report –Government regulations 9

10 Other factors to be considered –Objectivity and Conflict of Interest –Independence and Valuation –Establishing an Understanding with the Client –Assumptions and Limiting Conditions –Scope Restrictions and Limitations 10

11 A basic information checklist includes the following: –Historical financials of the company –Debt schedule –Schedule of fixed assets –Lease agreements for facilities or equipment –Any existing contracts –List of shareholders with shares outstanding –Budgets or projections –Details on any transactions with a related party –Company documents –Other information including list of locations, customers, competitors, suppliers, contingent liabilities, and regulations 11

12 When performing a site visit, the appraiser should try to derive an answer to the following: –How does the company perceive itself? Strengths, weaknesses, prospects, market, etc. –How does the company see the industry? Influential factors, trends, growth, competition, etc. –Management and management compensation Personal expenses, market rate compensation, etc. 12

13 1.Reasons for a Business Valuation 2.Analyzing Qualitative Factors 3.Valuation Process 13

14 Merger/Acquisition/Fairness Opinions Family Succession Planning/Estate and Gift Taxes Employee Share Ownership Plans (ESOP) Buy-Sell Agreements Executive Compensation (Options/SARS) Stock Repurchase or Recapitalization Fair Value Accounting Income Tax 14

15 Relevant economic data (Global, National, Local) Industry factors Competition Regulation Product or service lines Supplier relationships Market position Management and employees Adequacy of physical facility Operating efficiencies and inefficiencies 15

16 National Economic Data Regional and Local Economic Data 16

17 Markets Channels of Distribution Technology Sources of Industry Information 17

18 Existing Competition Potential Competition 18

19 Present Regulation Potential Changes in Regulatory Environment 19

20 Existing Lines Opportunities for Related Lines Patents, Copyrights, Trademarks Relative Profitability of Lines Service or Warranty Obligations 20

21 Continuity Degree of Exclusivity Contractual Relationships 21

22 Reputation Geographic Scope Method of Marketing and Distribution Pricing Policies Customer Base Customer Relationships Market Continuity, Growth Opportunities and Weaknesses 22

23 Size and Composition of Work Force Key Employees Other Employees Compensation Personnel Policies, Satisfaction, Conflict, and Turnover 23

24 Condition Heat, Light, Plumbing, and Other Systems Size Continuity of Occupancy 24

25 Physical Plant Accounting and Other Controls 25

26 Gather company data Site visit Research economic and industry information Analyze company financial statements Tests of valuation Discounts, premiums, and value conclusion 26

27 The attorney is responsible for the following: –Definition of standard of value –Determination of applicability of legal agreements of valued interests –Decision on who the client will be –Reading the valuation report and asking questions 27

28 1.Fair Market Value 2.Fair Value 3.Investment Value 4.Intrinsic Value 28

29 The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts (ASA BVS definition) 29

30 Has two different contexts: –Fair value for legal purposes Usually defined by various authorities an statutes –Fair value for financial reporting purposes 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 (FASB ASC 820, formerly SFAS 157) 30

31 Specific value to a particular investor based on individual investment requirements –This extremely small and limited market is typically characterized by a premium because of the unique synergies the perceived particular buyer would realize as a result of acquiring the asset 31

32 Amount an investor considers to be “real” worth of an item based on evaluation of available facts; may be above or below fair market value 32

33 There are several valuation approaches in valuing a company: 1.Market approach 2.Income approach 3.Asset approach 33

34 Previous sales of or offers for the Company’s stock Sales of similar companies Sales of stock of publicly traded companies Rules of thumb 34

35 Discounted cash flow method Leveraged buyout model Capitalization of earnings method Excess earnings method 35

36 Liquidation model Net asset value 36

37 Levels of Value Synergistic Premium Control Premium/Minority Discount Lack of Marketability Discount Layered Discounts or Discounts on Top of Discounts 37

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39 Reflects the value to a specific buyer Synergistic buyer can pay more due to perceived earnings benefit from a merger Not appropriate consideration in determining “Fair Market Value” 39

40 Appointment or removal of management or determination of their compensation Setting policy or changing the course of business Acquisition or liquidation of assets Acquisitions of other companies Liquidation, dissolution, sale, or recapitalization of the company Registering the company’s stock for an IPO Forcing the sale of the stock of the Company Determination of the amount and timing of any dividends to shareholders Amendments to the Articles of Incorporation 40

41 Securities of privately owned companies are not readily tradable on an established exchange and may require a discount for their lack of marketability. Control blocks of stocks are generally more readily marketable than minority blocks. 41

42 When going to the next entity level, does asset allocation change or can it be changed by the manager of that entity? –Probably not. When going to the next entity level, does the manager have the ability to affect performance/timing of sales? –Probably not. Does the manager have the ability and intention to pay distributions? –Perhaps What if the entity owns other assets in addition to its investment in the entity? –Discounts may apply to that portion of the assets. 42

43 Lack of Marketability exists at all ownership levels. Lack of liquidity is taken into account at the asset holding entity. Is it greater at the Tier 1, 2, etc. level? –Possibly, if there are distributions or likelihood of asset liquidation. 43

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46 Valuation Engagement –Detailed Report –Summary Report Calculation Engagement –Calculation Report 46

47 According to SSVS, a valuation analyst performs a calculation engagement when –(1) the valuation analyst and the client agree on the valuation approaches and methods the valuation analyst will use and the extent of procedures the valuation analyst will perform in the process of calculating the value of a subject interest (these procedures will be more limited than those of a valuation engagement) –(2) the valuation analyst calculates the value in compliance with the agreement. The valuation analyst expresses the results of these procedures as a calculated value. The calculated value is expressed as a range or as a single amount. A calculation engagement does not include all of the procedures required for a valuation engagement 47

48 1.The Report 2.Basic Elements of the Report 3.Business Valuation Math 4.Traits to Expect in a Business Appraiser 5.Premise of Value 6.Standards of Value 7.Factors Specific to U.S. Gift and GST Returns 48

49 Cover of the Report Math Signatories Standards Assumptions 49

50 Subject entity Valuation date Standard of value Appraisers Clear indication of value 50

51 A business valuation goes beyond the math It’s the assessment of a business’s hard and intrinsic assets to determine its moneymaking power in the hands of the same owner or a new owner years from now 51

52 Independence/objectivity Confidentiality Technical competence Experience Industry awareness 52

53 Going Concern –Value in continued use or as a going concern business enterprise Value as an Assemblage of Assets –Value in place, as part of a mass assemblage of assets, but not in current use in the production of income & not a going-concern business enterprise Value as an Orderly Disposition –Value in exchange, on a piecemeal basis; assumes assets will enjoy normal exposure to their appropriate secondary market Value as a Forced Liquidation –Value in exchange, on a piecemeal basis; assumes assets will experience less than normal exposure to their appropriate secondary market 53

54 Discussed earlier 54

55 A gift tax return must meet adequate disclosure requirements in order for the statute of limitations to start Two ways to meet disclosure requirements are: –Description Safe Harbor –Appraisal Safe Harbor 55

56 To satisfy this requirement, the following information is required: –The financial data used in valuing the interest –Any restrictions taken into consideration –Detailed descriptions of any discounts –For transfers valued using the asset value method: The undiscounted FMV of 100% The pro-rata portion of the entity subject to the transfer The FMV of the transferred property –For transfers of an entity that directly or indirectly holds interest in another entity, a detailed description of the method used to determine FMV. 56

57 To meet the requirements, the taxpayer must –Engage a Qualified Appraiser –Submit a Qualified Appraisal 57

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59 Property Settlement Squeeze-out of Minority Shareholder Tax Litigation Shareholder or Partner Litigation 59

60 Earnings before interest expense, taxes, depreciation and amortization Net income +interest expense on long term debt + income taxes +depreciation and amortization EBITDA 60

61 (“TEV”) = equity + long term debt Pricing multiple = (Equity + LT debt)/EBITDA Equity = pricing multiple x EBITDA – LT debt. 61

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65 “Discounting” versus “Capitalizing” Components of a Discount Rate Relationship between Discount Rates and Capitalization Rates 65

66 Discounting is a procedure that converts an expected future return, or a series of expected future returns, to a present value using a discount rate. Capitalizing is a procedure that converts a single flow of returns to an indication of value. 66

67 The discount rate is the expected total rate of return required to attract capital to the particular investments. Components –Risk-Free Rate of Return –Premium for Risk –Premium for Illiquidity 67

68 The cost of equity, either debt or equity, is different from one buyer to another. For an individual buying a sole proprietorship from another individual, each would have about the same cost of capital. For a public company, the cost of capital would be somewhat less than the typical small entrepreneur. 68

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70 1.Wholesaler 2.Exploration & Production Company 3.Equipment rental 70

71 Wholesaler 71

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76 Exploration and Production 76

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81 Offshore Service Vessels 81

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86 Vanessa Brown Claiborne, CPA/ABV, ASA Chaffe & Associates, Inc. 201 St. Charles Ave. Suite 1410 New Orleans, LA 70170 86

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