1、Business Valuation,Valuation Methodologies Discounts and Premiums,Business Valuation: Common Uses of Business Valuation,Tax Estate/Gift Buy/Sell Agreements Bankruptcy and Litigation Liquidation or Reorganization Patent Infringement Partner Disputes Economic Damages Financial Reporting Purchase Price
2、 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,Employee Stock Ownership Plan (ESOP) Internal Revenue Codes (IRC) 743, IRC 40
3、9A, etc. Solvency and Fairness Opinions Damage Assessment Dissenting Shareholder Actions Marital Dissolutions,Business Valuation: Valuation Process,1.1 Proposal and Engagement Letter,1.3 Establish Valuation Date,1.2 Establish Standard of Value and Define Purpose,Ongoing Internal Review and Discussio
4、n with Other Professionals and Client,Ongoing Internal Review and Discussion with Other Professionals and Client,Income, Market, Net Asset Approaches,Signed Engagement Letter with Retainer,1.4 Data Gathering,2.1 Company and Industry Analysis,2.3 Adjustments and Recasts (Control),2.2 Analyze Historic
5、al Financial Statements,2.4 Financial Statements Analysis (Ratios, etc.),3.1 Implement Selected Valuation Methodologies,3.3 Final Internal Review and QC Process,3.2 Narrative Write-up of the Report,3.4 Finalize,Business Valuation: Standard of Value,Purpose Establish Purpose of the Engagement Estate/
6、Gift, Buy/Sell Agreements, etc. Standards of Value (i.e. Fair Market Value, Fair Value, etc.) Interest Being Valued (i.e. Enterprise, Equity, Marketable, Non-Marketable, Control, Minority, etc.) Valuation DateAgree on a Appropriate Valuation Date Utilize Data Subsequent to the Valuation Date Sometim
7、es can Consider Data After the Valuation Date if it was Foreseeable as of the Valuation Date,Business Valuation: Standards of Value,Common Standards of Value Fair Market Value (Tax): Fair market value applies to virtually all federal and state tax matters, including estate, gift, inheritance, income
8、 and ad valorem taxes as well as many other valuation situations. “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” I
9、RS Revenue Ruling 59-60 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 betwee
10、n 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.,Business Valua
11、tion: Gathering Data,Gathering Company Data Articles of Incorporation; Operating Agreement History and Background Products and Services Shareholders and Key Personnel Compensations and Responsibilities Organization/Corporate Structure Operations Customers/Clients, Target Markets and Suppliers Legal,
12、 Tax and Other Considerations Five Year Historical and Latest Interim Financial Statements Other Financial Information (A/R, A/P, Fixed Asset Ledger, etc. - if needed) Adjustments Projections (If applicable),Business Valuation: Analyzing Data,Researching Economic and Industry InformationU.S. Economy
13、Local EconomyTarget Industry Financial Statements AnalysisAdjustments and Recasts (Control Value) Extraordinary Items, Shareholders Perquisites (Personal Expenses), Fair Market Value Compensation and Rent, etc.Ratio and Trend Analysis Growth Rates, Liquidity, Leverage, Profitability, Efficiency, etc
14、.,Valuation Methodologies,Income Approach Market Approach Net Asset Approach,Business Valuation: Valuation Approaches,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
15、: Capitalization of Earnings/Cash Flow Analysis (Gordon Growth Model) Discounted Cash Flow Analysis (DCF)Dividend Discount Model (DDM),Business Valuation: Income Approach,Capitalization of Earnings Approach Single Period Discounted Cash Flow Analysis Simplest for Companies with Stable GrowthNext Yea
16、r Free Cash Flow to Firm (FCFF)Next Year Free Cash Flow to Equity (FCFE)Apply Appropriate Discount Rate,Business Valuation: Income Approach,Common Levels of ValueEnterprise Value: Free Cash Flow to Firm (FCFF) This is the total cash flow a 100% owner would receive assuming no debt NI + Depreciation
17、+/- Non-Cash Items + Interest Expense*(1-Tax) +/- Change in Working Capital CAPEX Weighted Average Cost of Capital (WACC)Equity Value: Free Cash Flow to Equity (FCFE) This is the cash flow a shareholder would expect to receive after interest and net borrowings Net Income + Depreciation +/- Non-Cash
18、Items +/- Change in Working Capital CAPEX +/- Net Borrowings Cost of Equity (higher than WACC for the levered company),Business Valuation: Income Approach,Discounted Cash Flow AnalysisMore General and Flexible Than Capitalized Earnings Method,Business Valuation: Weighted Average Cost of Capital,Weig
19、hted Average Cost of Capital (WACC)WACC = Weight of Equity (Cost of Equity) + Weight of Debt (Cost of Debt * (1-Tax) + Weight of Preferred Security (Cost of Preferred Security)Provides Overall Cost of Capital to Whole CompanyAssumes Constant Debt to Capital Over Time,Business Valuation: Weighted Ave
20、rage Cost of Capital,Cost of Equity: Capital Asset Pricing Model (CAPM)Simple CAPM For larger publicly-traded companies Re = Rf + B(Rm Rf)Risk Free Rate (Rf) Risk free rate as of the valuation date (20-year U.S. Treasury) Equity risk premium (Source: Ibbotson/Morningstar) Size adjustments often are
21、appropriate (Source: Ibbotson/Morningstar and Duff & Phelps Risk Premium Reports) Beta is a systematic risk measure,Business Valuation: Weighted Cost of Capital,Cost of Equity: Build-up For smaller closely-held companies Inputs are same as CAPM except for the application of industry risk premium ins
22、tead of Beta coefficient Industry risk premium based on Morningstar (Ibbotson) YearbookGenerally similar to CAPM after adjustments for size and specific risks,Business Valuation: Weighted Cost of Capital,Cost of Equity and LeverageCompanies with More Debt Relative to Equity are Riskier and Have High
23、er Costs of Equity Beta (B) Beta is a measure of the sensitivity of the movement in returns on a particular stock to movements in returns on some measure of the market (i.e. S&P 500, etc.) Published and calculated betas typically reflect the capital structure of each respective company at market val
24、ues Unlevered beta is the beta a company would have if it had no debt Lever the beta for the subject company based on one more assumed capital structureThe result will be a market-derived beta specifically adjusted for the degree of financial leverage of the subject company,Wd = Weight of Debt We =
25、Weight of Equity Wc = Weight of Capital,Business Valuation: Weighted Cost of Capital,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 DateAfter Tax Cost of Debt Cost of Debt x (1 Target Companys Ta
26、x 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,Business Valuation: Other Notes About Income Approach,Other Notes on Income ApproachGenerally on a Control, Marketable BasisLeve
27、ls of ValueSynergy Level Cash FlowControl Level Cash FlowMinority Level Cash FlowPublicly-Traded Company Derived Discount RateMinority and Marketable Level Discount RateMany Consider it to be Appropriate for Control Level,Business Valuation: Market Approach,Publicly-Traded (Guideline) Comparable Com
28、pany Analysis The Guideline Publicly Traded Company Method indicates the value of the subject company by comparing it to publicly-traded companies in similar lines of business Valuation Multiples Vary Based on Industry and States of Growth Problem is that there are rarely perfect matches Equity Mult
29、iples Fair Market Value of Equity (Stock Price x Outstanding Number of Shares) Common Equity Level Multiples Price / Earnings (P/E) Price / Tangible Book Value (P/B),Business Valuation: Market Approach,Publicly-Traded (Guideline) Comparable Company Analysis Enterprise Multiples Enterprise Value = (S
30、tock Price x Outstanding Number of Shares) + Total Debt/Preferred Securities Cash and Short-Term Investments Common Enterprise Level Multiples EV / Revenue EV / EBITDA EV / EBIT,Business Valuation: Market Approach,Publicly-Traded (Guideline) Comparable Company Analysis Other Multiples EV / R # of Ph
31、ase I, Phase II and Phase III products in pipeline Early Stage Biotechnology EV / # of Licenses and Rights Shell Company, etc Appropriate Multiple Depends on Company Characteristics,Business Valuation: Market Approach,Market Transaction (M&A) Approach In the Guideline Merged and Acquired Company Met
32、hod, the value of the business is indicated based on multiples paid for entire companies or controlling interests. Public Market Transaction Approach Public Buyer or Seller Transactions Control ValuePrivate Market Transaction Approach Private to Private Transactions Control ValueCommon Transaction D
33、atabase MergerStat, Pratts Stat, Biz Comps, Capital IQ,Business Valuation: Market Approach,Market Approach AdjustmentsMost Companies Differ from the Subject CompanyNeed to Adjust for Differences between Market Comparables and Subject CompanyCommon Adjustments are Based on: Size Growth Rate Profitabi
34、lity Leverage Other Company Specific Factors Discounts and Premiums,Business Valuation: Reconciling Items,Reconciling Items and Adjustments Appropriate Weighting Value Conclusions from Different Approaches Non-Operating Assets/Liabilities and Excess Working Capital/Cash Pass-Through Entity Tax Adjus
35、tments Adjustment for Discounted Cash Flow Analysis and Publicly-Traded Guideline Comparable Company Analysis Depends on Hypothetical Buyer (C-Corp.? S-Corp.?, etc.) Interest-Bearing Debt and Contingent Liabilities Discounts and Premiums Apply to Equity Level Lack of Marketability and Minority Disco
36、unts, Key Person Discount and Control Premium, etc.,Discounts and Premiums,Control Premium Lack of Control/Minority Discounts Lack of Marketability/Illiquidity Discounts Others Discounts,Business Valuation: Lack of Marketability Discounts,Let the Fireworks Begin! Often subject to wide disparity amon
37、g practitioners Determination based on analogy Data sources problematic Reasonable range,Business Valuation: Lack of Marketability Discounts,Lack of Marketability Discounts (LOM) Marketability (liquidity) is valuable. Other things equal, investors will pay more for the more liquid (marketable) asset
38、 The discount for lack of marketability is the largest money issue in many, if not most, disputed valuations of minority interests in closely-held, private companies The U.S. Tax Court normally allows discounts for lack of marketability for non-controlling interests in closely held companies, but th
39、e 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, re
40、levant to the subject at hand; simple averages are insufficient,Business Valuation: Lack of Marketability Discounts,Lack of Marketability Discounts The highest discount that the Tax Court has allowed purely for lack of marketability is 45%, and most discounts have been considerably less The ESOP dis
41、counts for lack of marketability are generally low because most ESOP stock has a “put” right to sell the stock back to the sponsoring company, thus enhancing its liquidity and value. Dissenting shareholder and shareholder oppression cases are quite mixed on the matter of discount for lack of marketa
42、bility There is little case law on discount for lack of marketability in divorce cases, and what exists is also quite mixed If the standard of value is clearly stated as fair market value, then a discount for lack of marketability is appropriate,Business Valuation: Lack of Marketability Discounts,La
43、ck of Marketability/Illiquidity Discount for Minority Interest Restricted Stock Studies Restricted stocks are, by definition, stocks of public companies that are restricted from public trading under SEC Rule 144 Although they cannot be sold on the open market, they can be bought by qualified institu
44、tional 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 Stud
45、ies: McConaughy, SEC Institutional Investor, Gelman, Trout, Moroney, Maher, Standard Research Consultants, Siber, FMV Opinion, Management Planning, Johnson, Columbia Financial Advisors Studies,Business Valuation: Lack of Marketability Discounts,Restricted Stock StudiesGeneral Findings Show that rest
46、ricted shares are worth less than unrestricted shares generally ranging from 10 to 30%. Discounts as high as 55% have been observed Discounts are larger for smaller companies and companies with more volatile stocks and more debt These data are most appropriate for valuing restricted stocks and are d
47、ifficult 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
48、of the discount,Business Valuation: Lack of Marketability Discounts,Pre-IPO Stock Studies A pre-IPO transaction is a transaction involving a private company stock prior to an Initial Public Offering (IPO)The pre-IPO studies compare the price of the private stock transaction with the public offering
49、price. The percentage below the public offering price at which the private transaction occurred is a proxy for the discount for lack of marketability The application of pre-IPO studies heavily debated and criticized because comparisons are apples to oranges The dates of the transaction differ at a time when the company is changing rapidly (in the year before the IPO) Discounts are very large Discounts/premium should be based on specific to the subject case and not past court cases,Business Valuation: Lack of Marketability Discounts,
