03/15/2012 © 2012 EAC Valuations, LLC1 Presentation: Business Valuations Presenter: Kenneth Domboski

© 2012 EAC Valuations, LLC 103/15/2012

EAC VALUATIONS, LLC

Presentation:Business Valuations

Presenter:Kenneth Domboski

© 2012 EAC Valuations, LLC 2

Business Valuation Introduction Reasons for a Business Valuation Standards of Value Revenue Ruling 59-60 Valuation Methodology Discounts Q&A

Outline

03/15/2012

© 2012 EAC Valuations, LLC 3

“The act or process of determining the value of a business enterprise or ownership interest therein.”

03/15/2012

*International Glossary of Business Valuation.*IRS Business Valuation Guideline 2006.

Business Valuations


ASSET APPRAISAL◦ Real Estate◦ Machinery & Equipment◦ Intangible Assets

BUSINESS VALUATION◦ Complete Business Enterprise Valuation

What are“Business Valuations?”


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


Estate Planning Key Person Insurance Succession Planning Buy/Sell Agreements Partnership Dissolution Estate and Gift Taxes SBA Financing Sale of Business

New & Growing Businesses


Corporate Planning ASC 350 Goodwill Impairment

Testing (Step 1) Mergers & Acquisitions Privatization of Company Public Offering Restructuring

Established Business orPublic Company


Financial Reporting◦ FASB 141◦ FASB 142

Buy/Sell Agreements Succession Planning Financing

Primary Purposesof Appraisals


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


SBA Requirementsfor Business Valuation

Loan Amount over $350,000.00 Change in Ownership


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.”


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.


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).


Standards of Value

Market Value (Fair Market Value) Fair Value (FASB Definition) Fair Value (Legal Definition)


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.”


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


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


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.


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.


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



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.






Income Based


Value Estimate Determing a value indication of a business based on the value

of the assets net liabilities.

Asset Based



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.






Income Based


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



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.



In the absence of appropriate comparable market transactions, we use:

Guideline Company Approach Compares certain business barometers from

similar companies to value the subject


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


Other Discounts

Key Person Discount Blockage Portfolio Discount Voting vs. Nonvoting Stock


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


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


Questions & Answers


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


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


Service Matrix


Contact Information

EAC Valuations, LLCKenneth Domboski

487 Devon Park Drive, Suite 206Wayne, PA 19087-1877(610) 687-5855 ext. 103

www.eacvaluations.com

Documents

03/15/2012 © 2012 EAC Valuations, LLC1 Presentation: Business Valuations Presenter: Kenneth Domboski