1. Forensic and Investigative Accounting
Chapter 17
Business Valuations
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2. Valuation and Appraiser Accreditations
Business appraisers have traditionally come from either a finance or accounting background.
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3. Valuation and Appraiser Accreditations
The following certifications are offered:
Accredited Senior Appraiser (ASA) and Accredited Member (AM) awarded by the American Society of Appraisers (ASA).
Certified Business Appraiser (CBA) awarded by the Institute of Business Appraisers (IBA).
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4. Valuation and Appraiser Accreditations
Certified Valuation Analyst (CVA) awarded by the National Association of Certified Valuation Analysts (NACVA).
Accredited in Business Valuation (ABV) awarded by the American Institute of Certified Public Accountants (AICPA).
Chartered Financial Analyst (CFA) awarded by the Association for Investment Management and Research (AIMR).
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5. Engagement Agreements
An engagement agreement is necessary in any valuation or client-related undertaking because it:
Clearly sets forth the expectations of the business valuator and client.
Reduces the chance for misunderstanding and, therefore, the risk of malpractice litigation and claims against the business valuator.
Increases the likelihood of the valuator being paid, since it establishes a clear obligation on behalf of the client.
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6. Engagement Agreements
The following specifics need to be considered in drafting an engagement agreement:
Identify the client.
Specify the interest, date, purpose, and intended use of the valuation.
Define the standard of value.
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7. Engagement Agreements
Assign responsibility for fees and costs.
Price the engagement.
Specify responsibility for real estate and other appraisal costs.
Obtain a retainer.
Protect against the use and misuse of forecasts by clients.
Include indemnification language.
Include other terms and conditions.
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8. Purposes for Obtaining Business Valuations
Tax purposes.
Divorce distributions.
Liquidations.
Employee stock ownership plans (ESOPs).
Lost profit analyses.
Mergers and acquisitions.
Minority shareholder distributions.
Buy-sell agreements.
Bankruptcies.
Recapitalizations.
Management buyouts.
Allocations of purchase price.
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9. General Types of Valuations
Asset-based approach—This type of valuation is used to value asset-intensive businesses such as retail and manufacturing. The focus is on what the equipment and real estate are worth.
Income approach—This type of valuation is useful for service companies. The focus is on how much money a buyer can make from the business.
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10. General Types of Valuations
Market approach—This type of valuation looks at what the market is paying for similar businesses and is used to value many different types of businesses. The focus is on the marketplace: what others have paid for similar companies.
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11. Forensic and Investigative Accounting
Standards of Value
Fair market value.
Fair value—100 percent controlling interest value.
Fair value—minority interest and marketable value.
Fair value—minority interest but nonmarketable.
Investment value.
Intrinsic value.
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12. Forensic and Investigative Accounting
Income Approach
Capitalization of income method.
Discounted future income method.
Discounted future cash flow method.
Capitalization of excess earnings method.
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13. Forensic and Investigative Accounting
Market Approach
Guideline (public company) method.
Market data method.
Past transactions method.
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14. Forensic and Investigative Accounting
Cost Approach
Book value (not really a valuation method).
Adjusted book value (adjusted net asset value).
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15. Gathering Initial Information
Goals of pre-engagement phone contact include:
Develop trust and rapport.
Gain a brief understanding of the business.
Determine who will be responsible for gathering information.
Explain the valuation process and timing.
Determine methods of corresponding with the client.
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16. Discerning What Data Is Required
Request forecasts of future financial results.
Review articles on industry-related valuation issues.
Request client information prior to company interviews.
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17. Spreading Financial Statements
Financial spreadsheet reports include:
Actual and common-sized income statements.
Actual and common-sized balance sheets.
Financial statement ratios.
Trend statements.
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18. Analyzing Financial Statements for Trends and Risks
The purpose of analyzing a company’s historic financial statements is to provide information about these factors that are crucial in the preparation of a valid valuation:
Trends and what they say about the possible future.
How well or how poorly a company performs compared to industry peers.
Key elements of company strategy.
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19. Income Statement Profitability Analysis
Income statement profitability analysis helps valuators determine the following:
Judgments about the historic performance of the company and the variability of results.
Results against which to assess management’s strengths and weaknesses, and how this would impact an investor’s perception of the shares as an investment, and their associated risk.
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20. Income Statement Profitability Analysis
An objective basis for comparing a company’s performance relative to its industry peers.
Insight into a company’s economics and how the business achieves its net profit on a given level of revenues.
Clues concerning the internal and external forces that affect the business, and what this suggests about risk, future threats, and opportunities.
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21. Income Statement Analysis
Revenues
Past trends.
Growth rates.
Variability in individual annual results.
Overall observed results.
Identification of the appropriate questions.
Gross profits
Components of goods sold.
Calculation of goods sold.
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22. Income Statement Analysis
Operating expenses.
Operating profits.
Other income and expense.
Pretax profitability.
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23. Business Valuation Standards
Uniform Standards or Professional Appraisal Practice (USPAP) from The Appraisal Foundation
Code of Professional Conduct from the American Institute of Certified Public Accountants (AICPA)
Statement of Financial Accounting Standards No. 157 from the Financial Accounting Standards Board (FASB)
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24. Features of the Standards
Independence.
Fee not contingent on appraised value.
Limiting conditions.
Professionals participating in the assignment.
Information sources used.
Report content.
Data collection and analysis.
Methodology.
Reconciliation of findings of value.
Adjustments to valuation findings.
Conclusion of value.
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25. Forensic and Investigative Accounting
Report Content
Purpose and scope of the assignment.
Standard of value used.
Identification of the specific interest being valued.
Specific valuation date used.
Relevant state law governing the entity.
Scope of the valuation report.
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26. Organization of the Report
Front pages
Cover sheet (with company name and valuation date)
Transmittal letter
Table of contents
Introduction
Company information
Financial condition
Valuation methodology
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27. Organization of the Report
Valuation conclusion
Exhibits
Limiting conditions
Definitions of valuation terms
Qualifications of the valuation professionals who worked on the report
Common size balance sheets of the company
Common size income statements of the company
Ratio analysis of the company
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28. Standards of Valuation
The are a number of standards that may be applied to valuation engagements
The Uniform Standards of Professional Appraisal Practice (USPAP)
Codifies many common sense standards of professional appraisers
American Institute of Certified Public Accountants (AICPA)
Issues more general standards of valuation as it relates to the braod activities of CPAs
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29. Statement of Financial Accounting Standards No. 157
This standard address the issue of “fair Value Measurements”
It defines Fair Value
Establishes a framework for measuring value in in GAAP
Relates fair value to publications issued by the FASB Concepts Statements No. 2, No. 6, and No. 7
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30. Guidelines for Preparing to Testify
Review and update your resume.
Know and understand the facts of the case.
Anticipate and prepare answers for expected difficult questions at deposition and cross examination.
Understand all information and calculations in the expert report.
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31. Guidelines for Preparing to Testify
Carefully prepare for deposition testimony.
Be certain there are no conflicts of interest.
The expert must testify so that court can clearly understand the issues in the expert’s testimony.
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