Professional Documents
Culture Documents
Economic Damages
Financial Reporting
Purchase Price Allocation, Impairment Testing and Stock Options and Grants, etc. Strategic Planning/Transaction
Value Enhancement
Business Plan/Capital Raising Strategic Direction, Spin-Offs, Carve Outs, etc. Acquisitions, Due Diligence
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Ongoing Internal Review and Discussion with Other Professionals and Client
2.2 Analyze Historical Financial Statements 2.3 Adjustments and Recasts (Control) 2.4 Financial Statements Analysis (Ratios, etc.)
Ongoing Internal Review and Discussion with Other Professionals and Client
3.1 Implement Selected Valuation Methodologies
Income, Market, Net Asset Approaches
3.4 Finalize
Purpose
Establish Purpose of the Engagement
Estate/Gift, Buy/Sell Agreements, etc. Standards of Value (i.e. Fair Market Value, Fair Value, etc.) Interest Being Valued (i.e. Enterprise, Equity, Marketable, NonMarketable, Control, Minority, etc.)
Valuation Date
Agree on a Appropriate Valuation Date
Utilize Data Subsequent to the Valuation Date Sometimes can Consider Data After the Valuation Date if it was Foreseeable as of the Valuation Date
Liquidation Value: Orderly; forced. Fair Value (Financial Reporting): Can vary but it is generally similar to Fair market value with some exceptions.
The amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. - FASB 157
Fair Value (Litigation): Fair value may be the applicable standard of value in a number of different situations, including shareholder dissent and oppression matters, corporate dissolution and divorce.
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Adjustments
Projections (If applicable)
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Target Industry
Valuation Methodologies
Income Approach
Market Approach Net Asset Approach
Income Approach
The Income Approach is a valuation technique that provides an estimation of the value of an asset based on the present value of expected cash flows. The various forms:
Capitalization of Earnings/Cash Flow Analysis (Gordon Growth Model) Discounted Cash Flow Analysis (DCF) Dividend Discount Model (DDM)
CF1
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CF2 + (1+r)
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CFn + (1+r)n +
Cash Flow Terminal Cash Flow Discount Rate (Weighted Average Cost of Capital) or (Cost of Equity) Long-term Growth Rate
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Generally similar to CAPM after adjustments for size and specific risks
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Bu (Unlevered Beta)
= 1 + ( 1 - t ) W d / We
Wd = Weight of Debt We = Weight of Equity Wc = Weight of Capital
BL (Relevered Beta)
= Bu ( 1 + ( 1 - t ) Wd / Wc )
The result will be a market-derived beta specifically adjusted for the degree of financial leverage of the subject company
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Cost of Debt
Cost of Debt Based on Subject Companys Credit Rating and Borrowing Rate (i.e. Prime rate + 1%, BBB, BB, B-, Prime Rate, etc.) at Valuation Date After Tax Cost of Debt Cost of Debt x (1 Target Companys Tax Rate) Debt to Capital Ratio Control Value: Target/Optimal or Industry Average Debt to Capital Ratio Lack of Control/Minority Value: Company Specific Debt to Capital Ratio
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Publicly-Traded Company Derived Discount Rate Minority and Marketable Level Discount Rate
Many Consider it to be Appropriate for Control Level
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Equity Multiples
Fair Market Value of Equity (Stock Price x Outstanding Number of Shares) Common Equity Level Multiples
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Control Value
Private Market Transaction Approach Private to Private Transactions Control Value Common Transaction Database MergerStat, Pratts Stat, Biz Comps, Capital IQ
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The U.S. Tax Court normally allows discounts for lack of marketability for non-controlling interests in closely held companies, but the size of the discounts varies greatly from one case to another
Need to carefully study the recent case law in the relevant jurisdiction
The quality of the expert evidence and testimony presented in the Tax Court makes a big difference in the outcome
The Tax Court expects good empirical evidence, relevant to the subject at hand; simple averages are insufficient
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Although they cannot be sold on the open market, they can be bought by qualified institutional investors. Thus, the restricted stock studies compare the price of restricted shares of a public company with the freely-traded public market price on the same date
Price differences are attributed to liquidity Many feel the discounts are a reliable guide to discounts for LOM Empirical Studies: McConaughy, SEC Institutional Investor, Gelman, Trout, Moroney, Maher, Standard Research Consultants, Siber, FMV Opinion, Management Planning, Johnson, Columbia Financial Advisors Studies
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These data are most appropriate for valuing restricted stocks and are difficult to apply to private companies
The value of the studies is that the comparisons are apples to apples (i.e. liquid stock value vs. illiquid stock value of the same company at the same time). Restrictions have been relaxed and discounts have dropped Statistical studies can explain at best 1/3 of the discount
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Discounts are very large Discounts/premium should be based on specific to the subject case and not past court cases
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Other Studies
Modified put option model (i.e. Finnerty and Chaffee) Modified cost of capital total beta (McConaughy and Covrig) Private Company Discount by Koeplin, Sarin & Shapiro, Journal of Applied Corporate Finance Winter 2000.
Find approximately a 30% discount. Perhaps the best study, but limited sample size makes it difficult to apply to a specific case.
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Control Premium
Other things equal, an interest with control is worth more than one that lacks control
An amount by which the pro rata value of a controlling interest exceeds the pro rata value of a noncontrolling interest in a business enterprise that reflects the power of control often associated with takeovers of public companies
Some suggest that valuations of controlling interests be adjusted upward if they are based on publicly-traded stock prices which are minority interests Hubris and synergy may explain premia Not needed if cash flows are estimated at the control level
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Control Premium
Common Prerogatives of Control
Elect directors and appoint management Determine management compensation and perquisites Set policy and change the course of business Acquire or liquidate assets Select people with whom to do business and award contracts Make acquisitions Liquidate, dissolve, sell, leverage or recapitalize the company Sell or acquire treasury shares Register the companys stock for a public offering Declare and pay dividends Change the articles of incorporation or bylaws or operating agreement
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Swing Vote Potential Depending on distribution of the stock, a minority, swing block could have the potential to gain a premium price over a pure minority value
Interest of 50% - Discount from lack of control value should be less for the interest with some control prerogatives and a little greater for the interest without the control prerogatives Many experts feel that publicly-traded stocks generally sell at a control value
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Other Discounts
Key Person Discount
Measure potential negative impact to the projected cash flows in the absence of Key Personnel
Block Discount
A large interest may be less liquid than a smaller one
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Other Discounts
Voting vs. Non-Voting
If a company has both voting and nonvoting classes of stock, there may be a price difference between the two, usually in favor of the voting stock Based on level of influence by the voting shareholders, restrictive agreements, state laws and policies and the total number of block of shares between voting and non-voting Empirical studies indicates premium for voting shares Lease, McConnell and Mikkelson Study 5.4% Robinson, Rumsey and White Study 3.5% ~ 4.5% OShea and Siwicki Study 3.5% Houlihan Lokey Howard & Zukin Study 3.2% (average), 2.7% (median)
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