© 2012 EAC Valuations, LLC 103/15/2012
EAC VALUATIONS, LLC
Presentation:Business Valuations
Presenter:Kenneth Domboski
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Business Valuation Introduction Reasons for a Business Valuation Standards of Value Revenue Ruling 59-60 Valuation Methodology Discounts Q&A
Outline
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“The act or process of determining the value of a business enterprise or ownership interest therein.”
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*International Glossary of Business Valuation.*IRS Business Valuation Guideline 2006.
Business Valuations
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ASSET APPRAISAL◦ Real Estate◦ Machinery & Equipment◦ Intangible Assets
BUSINESS VALUATION◦ Complete Business Enterprise Valuation
What are“Business Valuations?”
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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
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Estate Planning Key Person Insurance Succession Planning Buy/Sell Agreements Partnership Dissolution Estate and Gift Taxes SBA Financing Sale of Business
New & Growing Businesses
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Corporate Planning ASC 350 Goodwill Impairment
Testing (Step 1) Mergers & Acquisitions Privatization of Company Public Offering Restructuring
Established Business orPublic Company
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Financial Reporting◦ FASB 141◦ FASB 142
Buy/Sell Agreements Succession Planning Financing
Primary Purposesof Appraisals
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Generally Requires Business Valuation◦ Determine Market Value of the Business
Enterprise May be Advantageous to Appraise Real Estate
and/or Machinery & Equipment
Buy/Sell AgreementsSuccession Planning
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SBA Requirementsfor Business Valuation
Loan Amount over $350,000.00 Change in Ownership
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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.”
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Business ValuationGuidelines
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.
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Business ValuationGuidelines
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).
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Standards of Value
Market Value (Fair Market Value) Fair Value (FASB Definition) Fair Value (Legal Definition)
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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.”
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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
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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
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Fair Value(FASB Definition)
820-10-30-2Fair 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.
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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.
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Business ValuationMethodology
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
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Business ValuationMethodology
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.
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Business ValuationMethodology
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
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Business ValuationMethodology
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.
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Business ValuationMethodology
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
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Business ValuationMethodology
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.
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Business ValuationMethodology
In the absence of appropriate comparable market transactions, we use:
Guideline Company Approach Compares certain business barometers from
similar companies to value the subject
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Discounts
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
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Other Discounts
Key Person Discount Blockage Portfolio Discount Voting vs. Nonvoting Stock
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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
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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
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Questions & Answers
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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
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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
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Service Matrix
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Contact Information
EAC Valuations, LLCKenneth Domboski
487 Devon Park Drive, Suite 206Wayne, PA 19087-1877(610) 687-5855 ext. 103
www.eacvaluations.com
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