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When appraisals are needed The rules we follow Different meanings of value under varying conditions Information typically required of you and your client Valuation methods
When does your client need an appraisal? Estate & gift valuation FLP/FLLC Divorce M&A Shareholder buy-in/buy-out/split-ups Dissent/(oppression?) Commercial damages/Lost profits Financial reporting
BV Standard &/or Credentialing Organizations
American Institute of Certified Public Accountants (AICPA)
National Association of Certified Valuation Analysts (NACVA)
Institute of Business Appraisers (IBA) American Society of Appraisers (ASA) The Appraisal Foundation Canadian Institute of Chartered Business Valuators
(CICBV) Internal Revenue Service (IRS)
Professional Accreditation Reference ListAIBA Accredited by IBA (Institute of Business Appraisers)AM Accredited Member (American Society of Appraisers)ASA Accredited Senior Appraiser (American Society of Appraisers)AVA Accredited Valuation Analyst (National Association of Certified Valuation Analysts)BVAL Business Valuator Accredited for Litigation (Institute of Business Appraisers)CBA Certified Business Appraiser (Institute of Business Appraisers)CBI Certified Business Intermediary (International Business Brokers Association)CBV Chartered Business Valuator (The Canadian Institute of Chartered Business
Valuators)CFA Chartered Financial Analyst (CFA Institute)CFFA Certified Financial Forensic Analyst (National Association of Certified Valuation
Analysts)CPA/ABV Certified Public Accountant Accredited in Business Valuations (American Institute
of Certified Public Accountants)CVA Certified Valuation Analyst (National Association of Certified Valuation Analysts)FASA Fellow of the American Society of Appraisers (American Society of Appraisers)FCBI Fellow Certified Business Intermediary (International Business Brokers
Association)FCBV Fellow of the Canadian Institute of Chartered Business ValuatorsFIBA Fellow of the Institute of Business Appraisers (Institute of Business Appraisers)MCBA Master Certified Business Appraiser (Institute of Business Appraisers) Adapted from The Lawyers Business Valuation Handbook.
Assumptions & Limiting Conditions These are important to note Varies by engagement Should be noted in appraiser’s engagement letter
Sources of Authority for Definition of Value
1. Statutory law
2. Legally binding rules and regulations
3. Contractual definitions of value
4. Case law
5. Direction from the court (for example, Bernier v. Bernier)
6. IRS guidance
Definitions of ValueFair Market Value
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 relevant facts.
...the most commonly used and mis-used definition of value
Definition from the International Glossary of Business Valuation Terms, as adopted by the American Institute of Certified Public Accountants, the American Society of Appraisers, the Canadian Institute of Chartered Business Valuators, the National Association of Certified Valuation Analysts, and The Institute of Business Appraisers; February 2000.
Definitions of Value
Fair Value (Chapter 293-A, 293-A:13.01 Definitions)
The value of equity immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable.
A shareholder is entitled to dissent from, and obtain payment of the fair value of his shares in the event of, upon the occurrence of certain corporate actions
Judicial Dissolution 293-A:14.30 Grounds for Judicial Dissolution (b) In a proceeding by a shareholder if it is established that:
(i) The directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened or being suffered, or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally, because of the deadlock. (ii) The shareholders are deadlocked in voting power and have failed, for a period that includes at least 2 consecutive annual meeting dates, to elect successors to directors whose terms have expired. (iii) The directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal or fraudulent. (iv) An agreement under the provisions of RSA 293-A:7.32(a)(7) binding on all the shareholders so provides.
“...the corporation may elect or, if it fails to elect one or more shareholders may elect to purchase all shares owned by the petitioning shareholder at the fair value of the shares” (293-A:14.34 Election to Purchase in Lieu of Dissolution)
Definitions of Value
The specific value of an investment to a particular investor based upon individual investment requirements; distinguished from market value, which is impersonal and detached.
Information typically required of you or your client
Financial Internally generated or CPA prepared
Legal Documents often govern marketability, transferability, etc.
Operating Gain insight from management interview
Owners & Management
Invaluable sources of information Eliciting answers from a sit-down interview v. through
Does the company exist? Another piece of the puzzle Observable company values and culture
Identify positioning of Company Threats & opportunities
Competition? New market opportunities?
How does Management’s interpretation compare to industry outlooks? Does management predict a “hockey stick” compared to an
industry that is rapidly approaching obsolescence?
Local Skilled employees Access to resources Access to customers
In litigated matters:
If appropriate, it can facilitate document collection when both sides understand why we are requesting specific information
Electronic documents For better or worse?
Document discovery Establish at the outset of engagement
Approaches to Business Valuation Three Approaches
Asset Approach Income Approach Market Approach
Revenue Ruling 59-60
Code Sec. 2031 1959-1 CB 237 – IRC Sec 2031 When market quotations are not available, must
consider all other available financial data, as well as all relevant factors affecting fair market value. No general formula may be given that is applicable to the many different valuation situations arising in the valuation of such stock.
Consists of a review of the individual assets and liabilities of the company.
Method most appropriate for the following businesses: Real estate holding companies Investment companies Finance companies Manufacturing companies heavily invested in fixed
Adjusted Net Asset Value Method Obtain or develop balance sheet on accrual basis Determine which assets and liabilities may require
additional valuation to determine FMV Machinery & Equipment Real Estate
Identify any off balance sheet actual or contingent assets or liabilities
Construct a market value based balance sheet using the adjusted values
Income Approach Derive value for companies producing cash flows
Discounted Cash Flow (DCF) for variable cash flows over several periods
Capitalized Cash Flow (CCF) for stable cash flow during single period
Discount and Capitalization Rates
Pratt's Stats™S Corps versus C Corps Median Operating Profit Margin By Revenue Range and Business TypeSale dates from 1/1/2002 - 7/2006 Copyright 2006 Business Valuation Resources, LLC (BVR).
Profit Margin for S Corps #
Profit Margins for C Corps #
$0 - $1,000,000 13.8% 853 2.5% 365
$1,000,001 - $10,000,000 7.4% 430 0.4% 535
$10,000,001 - $50,000,000 7.3% 97 1.4% 247
> $50,000,000 5.8% 40 5.9% 231
Guideline Company Method Comparable specific public companies are used to
calculate pricing multiples for the subject company Requires financial and qualitative screening Adjustments as needed
Transaction Method Derives pricing multiples derived from actual sales of
similar companies used to find value indication of subject company. Databases Finding truly comparable transactions
Need to be careful what each database includes…
Item in Profit and Loss Statement: DatabaseMedian Multiple
Assets included by application of
Less: all expenses except interest, taxes, depreciation & amortization, and owner's comp (50)$
Equals: Earnings before interest, taxes,depreciation & amortization, and owner's comp. ("EBITDOW") BIZCOMPS 1.8 50$ 90$
Fixed assets, goodwill
Less: depreciation (3)$
Equals: Earnings before interest, taxes, and owner's comp. ("EBITOW") IBA 2.6 47$ 122$
Fixed assets, a/r, inventory (?), goodwill
Add back depreciation, deduct owner's compensation (26)$
Equals: Earnings before interest, taxes, depreciation & amortization ("EBITDA") Pratt's Stat's 5.8 21$ 122$
Fixed assets, inventory, goodwill
Less: depreciation & amortization,interest, taxes (12)$
Equals net income after tax S&P 500 22.1 9$ 199$
Less size and lack of marketability discount -35%
129$ All operating assets & liabilities
Comparative Application of Multiples--BIZCOMPS, IBA, Pratt's Stats, S&P 500 P/E
Reconciliation of Value
Asset Approach Income Approach Market Approach
Discounts for Minority Interests
Based on level of control & transferability of interest Consider (among other things):
Transferability restrictions (shareholder agreements, operating agreements, By-Laws, etc.)
Cash distributions Holding period Volatility Other shareholders Likely buyers Market for interest
www.fannonval.com James Hitchner, Financial Valuation, 2nd Edition Shannon Pratt, Valuing a Business, 5th Edition Shannon Pratt, The Lawyers Business Valuation
Handbook: Understanding Financial Statements, Appraisal Reports, and Expert Testimony.
The Use and Application of Transaction Data, Nancy Fannon and Heidi Walker
The Comprehensive Guide to the Valuation of Subchapter S corporations, Nancy Fannon