Valuing Complex Ownership Structures

Here’s How To Understand the Set-Up and Then Make Pre-Valuation Adjustments

Valuation gets tricky when it involves complex ownership structures. Rand Curtiss explains how to approach the appraisal of companies that own interests in other companies, companies that charge fees to affiliated companies, and groups of companies that have several owners each holding different ownership percentages.

Over the past few years, I have fielded many questions about a subject that is not often covered in appraisal courses and literature: assignments involving multiple entities and owners.  Examples include:

1.   Companies that own interests in other companies

2.   Companies that charge fees to or transact with affiliated companies
3.   Groups of companies with similar owners but different percentages
4.   (Get out the Excedrin®*…) situations with all these complexities and more!

I have three points to make:

1.   It is imperative to understand, document, and verify these complexities before starting regular valuation analysis.   The key is to identify the relevant income, expense, cash flows, assets, and liabilities of each entity and interest to be valued.  If an interest is to be transacted, you need to do this on a pre- and post-transaction basis.
2.  These complexities are NOT something that AIBA (Accredited by Institute of Business Appraisers) or CBA (Certified Business Appraiser) applicants are expected or required to handle in demonstration reports.  In those, simplify the facts.  For help, call IBA headquarters or your regional governor.
3.   Some accounting topics that may be relevant are the difference between consolidated and consolidating statements, alternative methods of accounting for investments in other companies, and the tax ramifications. Intermediate accounting texts explain these, but the best source is the company accountant. 

So what do you do with an Excedrin case? I use a two-step procedure:

1.   Understand the setup
2.   Make pre-valuation adjustments

Understand the Setup
Bill, Joe, and others jointly own a restaurant and a company that leases the facilities to it.  Joe wants to buy out Bill.  The others will not be affected.

1.   Draw boxes representing each entity in an organization chart hierarchy (owning company on top, owned company on the bottom).  Make several copies of it.
2.   Above the boxes, list the owners and their percentage interests.  Highlight those that are to be valued.
3.   Using a copy of the basic chart, identify the income, expense, and cash flows between entities (and owners, if applicable).
4.   On a third copy, list relevant asset and liability relationships.
5.   Make sure the diagrams do not double-count or omit any income, expense, cash flow, assets, or liabilities.
6.   Review them with your client, their accountant and advisors.  This is where you can learn about the accounting treatments.

Here are my charts.  There are two for the first one: current and desired ownership.

Chart 1A: Current Ownership

Restaurant Company	Building Company
Joe 40%          Bill 40%      Others 20%	Joe 40%          Bill 40%      Others 20%

Chart 1B: Desired Ownership

Restaurant Company	Building Company
Joe 80%               Others 20%	Joe 60%               Others 40%

Chart 2: Inter-Company Transactions

Restaurant Company	Building Company
Rent Expense	Rent Income

Chart 3: Inter-Company Assets

Restaurant Company	Building Company
Joe 40%          Bill 40%      Others 20%	Joe 40%          Bill 40%      Others 20%

Chart 1B: Desired Ownership

Restaurant Company	Building Company
Lease Liability	Building AssestLease Asset

 Make Pre-Valuation Adjustments

1.   Review and confirm the valuation parameters: standard, date, premise, level, and interest to be valued.
2.   Determine whether pre-valuation adjustments are needed and make them.  In this case, we must have the real estate appraised (based on contractual rent).
3.   Again, confirm everything.

Now you have separate business units to value using normal techniques, and you are sure that you have properly accounted and adjusted for all income, expense, cash flows, assets and liabilities.  Include these charts in your report.

**Excedrin is a registered mark of Novartis AG.

ByRand M. Curtiss, MCBA, FIBA, ASA, ASA

Rand M. Curtiss, MCBA, FIBA, ASA, ASA is the President of Loveman-Curtiss, a business appraisal firm located in Shaker Heights, Ohio.