9-25-07 Valuations in Family B

8/6/2019 9-25-07 Valuations in Family B

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VALUATION OF

YOUR FAMILY BUSINESS

UT Center for Family Business

Mini-Forum

9/25/07

Jeffrey S. Denning, CPA, ABVGilmore, Jasion & Mahler, Ltd.

1715 Indian Wood Circle, Suite 100Maumee, Ohio 43537

[email protected]

J. Stephen Schult, CPAGilmore, Jasion & Mahler, Ltd.

1715 Indian Wood Circle, Suite 100

Maumee, Ohio 43537419.794.2000

[email protected]

David C. Krock, Esq.Eastman & Smith, Ltd.

One SeaGate, 24th Floor

Toledo,Ohio 43604419.241.6000

[email protected]


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I. Why do I need to know

the value of my business? Steve

II. Steps of the valuation process Jeff

III. Reasons to have your company

formally valued Dave

IV. Questions


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Revenue Ruling 59-60 defines fair market value as:

The price at which the property would change

hands between a willing buyer and a willing seller

when the former is not under any compulsion to

buy and the latter is not under any compulsion tosell, both parties having reasonable knowledge of

relevant facts.

Most Common Standard of Value


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1. Mergers and Acquisitions

- Many businesses are overbought- You need to know at what point to walk away

2. Selling Your Business

- Most owners have unrealistic expectations of the

value of their business

3. Divorce/Litigation

- Extreme differences of opinion regarding value of

the business

Common Reasons for Business Valuations


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4. Buy-sell Agreements

- Good buy-sell agreements (BSAs) can helpprevent future problems/issues

5. Gifting of Stock

- Report of a certified appraiser required with gift

tax return

6. Estate Tax/Life Insurance Planning

- The value of a closely-held business is usually

the largest component of an estate

- Estate taxes could force the sale of the business

Common Reasons for Business Valuationscontinued


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7. Other

- ESOPs- Goodwill impairment

- Family limited partnerships

- Stock option plans

Common Reasons for Business Valuationscontinued


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Steps of the Valuation Process

How

Why

Who

What

When


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Understand the Reason/Purpose

for Valuation

Who is client?

Desired outcome

Who will use/rely on the valuation

A misunderstanding here would jeopardize the

assignment

May not be applicable for a variety of purposes


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Determine the Appropriate Standard

of Value

Fair market value

Appropriate for:

- Estate, gift & income tax

- Often in BSAs

- Divorce (but)


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Fair Market Value Considerations

The nature of the companys business and its

history since its inception

The outlook for the economy in general and

the companys industry in particular

The financial condition of the company and the

value of its underlying net assets

The past earnings and future earning capacity

of the company


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Fair Market Value Considerationscontinued

Prior transactions involving the companys stock

and the size of the block to be valued The ability of the company to distribute earnings

Whether the company has goodwill or other

intangible value

The price of stock actively traded in a free and

open market for comparable companies in the

same or similar line of business


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Determine the Subject Interest to

be Valued continued

100% controlling interest Degree of control

Review BSAs

Other restrictive agreements

Again, avoid misunderstandings


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Other Information

Site visit, interviews

Industry research market & customers

Guideline public companies

Comparable transactions


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Other Information continued

Consolidators

Private equity groups

Economic outlook

Competition


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Consider Valuation Approaches& Methods

Income approach

Market approach

Asset approach


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Income Approach

Most appropriate for businessesanticipating future earnings

Cap of cash flows method, or

DCF (discounted cash flow) method

Historical results analyzed & adjusted to

help estimate future cash flow Investors buy tomorrows cash flow

Cap rate or multiple


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Market Approach

Market approach appropriate for all types if

comparable and sufficiently similar in purposeand circumstance

Apply guideline company multiples (adjusted)

to subjects cash flows, or

Comparable deals, or

Bona fide offers, or

Past transactions in subjects stock


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Market-based Approach Guideline

Public Company Method

Finding sufficiently similar public companies Comparison to subject company

Application of valuation multiples (adjusted)

Pro- specifically referred to in Rev. Ruling 59-60

Con- difficult to find adequate sample


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Market-based Approach Merger &

Acquisition Method

Actual sales of comparable companies

Useful for valuations of controlling interests

Not as useful for minority interests

- Difficulty in quantifying minority discount

- Uncertainty over motivation of parties


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Market-based Approach Past

Transactions

Actual arms length sales within a reasonabletime before or after the valuation date are the

best criteria of value

Such transactions are rare yet should always

be investigated


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Asset Approach

Most appropriate for:

Asset holding companies

Real estate entities

Marginally profitable businessesPurchase accounting


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Asset-based Approach Liquidation

Value

Business is worth more dead than alive

Floor value for controlling interests

May not be applicable for minority

interests who do not have the power tocause liquidation


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Reconcile Various Indications of Value

from Approaches

Adjust in reconciling

Average methods; or

Select most appropriate


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Apply Discounts or Premiums

Lack of control

Lack of marketability

Lack of liquidity (controlling)

Depends on method used to arrive at value Key person discount


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Benefits of Control

Appoint or change management

Determine compensation and perquisites

Set operational and strategic policy

Liquidate, or recapitalize the company

Register companys debt or equity for an IPO


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Lack of Marketability

The level of discount to be applied to a specific

interest is dependent on many factors. Some

of those factors include:

Expected appreciation

Dividend capacity

Probable holding period

Prospects for liquidity


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Lack of Marketability continued

Degree of control in the block of stock

Restrictions on the transferability

Companys stock redemption policy


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Write Report

Levels of service

Reports

Oral Report

Testimony


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Complete Appraisal

A complete appraisal complies with

binding USPAP standards. Also

complies with any ASA and other

organizations standards.

Normally includes 15-20 pages of text and

5-10 pages of financial statements.

Levels of Business Valuation Services


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Complete Appraisal continued

Commonly used for assistance in

acquisitions, large divorce cases and for

major assets in estate or gift returns.

Levels of Business Valuation Servicescontinued


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Calculation

The objective of a calculation is to provide an

approximate indication of value based upon theperformance of limited procedures agreed upon

by the appraiser and the client.

A calculation is not an appraisal. USPAPstandards do not apply.

Usually includes an income approach and a

cover letter. May include an adjusted

balance sheet.



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Calculation continued

Most of the effort centers on financialcalculations and analysis

Occasionally used in divorce if the

numbers are very small. May be used in a

buy-sell agreement. Commonly used forsmall gift tax returns.



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QUESTIONS ?


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6Reasons To Have Your Company

Formally Valued

Assist owner with determination to sell or transfer

business

Consideration of corporate structure to effectuate

efficient transfer of assets to next generation and

at the same time maintain control

Ownership disputes following transfers

Buy-sell agreements

Business planning

Employee retention


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Assistance with Determination to Sell

or Transfer

Why sell?- No successors

- Lack energy, desire or drive to continue

- Deliberate control of family net worth

- Freeze techniques


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Corporate Structure Considerations

& Control

Maintaining control may be important Valuation discounts

What to do when plan isnt working


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Ownership Disputes Among Existing

Owners orFollowing Transfers

Predetermined terms

Employee shareholders vs.

non-employee shareholders


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Business Planning

Employee retention

- Retention of key employees

Stock options

Phantom stock options

Direct sale of sharesFuture acquisitions of shares


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QUESTIONS ?

Documents

9-25-07 Valuations in Family B