Why VCs and Private Equity Pros are Sensitive to IRC 409A Valuations Rand Curtiss weighs in on why IRC 409A option-related valuations for small businesses do not solve real business problems for them. They set minimum exercise prices, asserts Curtiss—but that’s all they do.
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What is Considered Good Business Sense Today May Be Considered a Breach of Fiduciary Duty Tomorrow. Pay Special Attention to Fairness Opinions. Are your clients risking liability as they complete their daily tasks? What is considered good business sense today may be considered a breach of fiduciary duty tomorrow. That possibility is increasing. Business appraisers should pay special attention to fairness opinions. Bill Bavis explains why.
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Earnout Variables Often Account for 15 to 25 percent of Purchase Price in many Middle Market Acquisitions. Here are Tips for Structuring Them Carefully Earnouts typically appear in a large number of middle-market deals, usually accounting for 15 to 25 percent of the total purchase price. While an earnout can to be an elegant solution to “close the gap” between seller and buyer, the fact is earnouts are complicated and subject to a number of limitations. Ron Stacey explains some issues surrounding earnouts, including their appeal, shortcomings, possible structures, appropriate metrics, duration, tax treatment, and value.
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Buyers and Sellers Have Different Relative Negotiation Advantages, and the Letter of Intent in an Engagement Helps Define Terms. Here’s How. While perhaps not the longest or most expensive document among those found in the in the M&A process, the letter of intent (LOI) may well be the most important, particularly to the seller. The LOI sets the tone for the transaction and serves as the road map for the due diligence and the definitive agreements. Ron Stacey explains.
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Choosing an Appropriate Weighted Average Cost of Capital Definition Sometimes Depends On Context Valuation principles generally hold that the value of a business is largely a function of return on invested capital and growth, writes J. Richard Claywell, since these are the primary drivers of free cash flow. But how does this cash flow relate to the asset and liability values on the balance sheet?
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Unreported Income Can Be Detected By Direct and Indirect Methods; Indirect Methods Examine Cash Inflows and Outflows. Here’s How. Joe Epps, CPA/CFF/ABV, CFE, CVA, explains how a forensic accountant goes about searching for unreported income—a commonly required practice in divorce and bankruptcy cases, contract disputes, and fraud investigations. The direct method is simply reviewing financial statements for the information they provide and taking it at face value. But there are also indirect methods: One indirect method of searching for unreported income is to compare all identifiable cash sources (cash inflows) and all identifiable cash uses (cash outflows). Find out more.
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Difficulties Sometimes Complicate a Valuation Engagement. Here’s How to Anticipate and Derail Potential Disasters With Solid Upfront Client Conversations Conversations with clients are critical to ensure both owner and appraiser are in agreement about standards in a final report, the length of time the process will take, what the final report will look like, and how much it costs. In this second installment in a two-part series, Rand Curtiss takes us through common objections prospects challenge appraisers with and suggests savvy responses to each. Be sure to read part one HERE.
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Buyers and Sellers Need to Negotiate Delivery Targets for Working Capital and Agree on a Fair Market Value for Fixed Assets. Valuation principles generally hold that the value of a business is largely a function of return on invested capital and growth, writes Ron Stacey, since these are the primary drivers of free cash flow. But how does this cash flow relate to the asset and liability values on the balance sheet?
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Arbitration Panels Don’t Know Everything a Financial Expert Does. But That Doesn’t Mean You Should Even Consider Talking Down to Them. Arbitration is somewhat similar to a bench trial, but experts need to present opinions somewhat differently than if they were testifying in a jury trial—and this is particularly true with experts testifying on financial issues such as economic damages. Joe Epps explains why.
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Consider Three Types of Private Preferred Stock Transactions, Each with Varying Degrees of Relevance to an Indication of Fair Value: Simple, Strategic, and Tranched Preferred Financing Last year, the AICPA issued guidance on evaluating private transactions with regards to their relevance in estimating the Fair Value of other securities within an enterprise via the back-solve method. The McLean Valuation Services Group recaps that guidance and explains what it should mean in practice. Appraisers need to carefully follow specific criteria and they need to exercise reasonable judgment.
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There Are Different Standards. They Have Different Places in Various Appraisals. Here’s Why. Jim Hitchner considers various responses to the query: “When valuing an operating company, is it necessary to mention USPAP in addition to SSVS 1 when talking about the standards adhered to?” Good question. There were lots of answers from various valuators in a recent discussion. Here’s Jim’s take on it all.
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The “Market” is Not Always Right When it Comes to Value, Especially in M&A Transactions The mergers and acquisitions market began a slow recovery this last year after a sharp downturn in 2009. Was the slowdown caused by banks reducing lending activity, cash hoarding by businesses, economic uncertainty, or the simple failure of buyers and seller to agree upon price? Michael Blake takes a look at how value is variously defined—“fair market value,” “fair value,” “investment value,” and “market value”—and offers an assessment of what may prove to be the primary market M&A activity drivers going forward.
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Marvell Technology Group Sold Billions of Semiconductors Developed at Carnegie Mellon University Jad Mouawad reports in the New York Times that Carnegie Mellon University said it was awarded $1.17 billion by a federal jury in Pittsburgh on Wednesday in a unanimous verdict that found the Marvell Technology Group had sold billions of semiconductors using technology developed at the university without a license.
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The Weighted Average Method of Estimating Expected Future Earnings is Based on the Average or Arithmetic Mean. Here’s Why that’s Important. Companies that are growing in revenue need to be valued regularly, and they need to be valued with their future growth in mind. The weighted average approach is a valuable tool. But Richard Claywell suggests caution in using it to extrapolate large projections of future revenue. Why? Partly because it’s quite often typical for fast-growing companies to experience their most dramatic growth during their early years—and it’s important to focus on current market conditions more than past or imagined…
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Credibility is the Critical Driver of Value for an Expert. Stay on Top With These Best Practices. John Marcus provides guidelines successful expert witnesses abide by: Trust no one, read everything, spend more time thinking and less time computing, and be true to yourself. Here’s why these best practices matter.
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To Close Deals, Find the Best Buyer, and Clearly Demonstrate Value Company owners planning to sell need to convince buyers that the premium they’re asking for is legitimate, necessary, and justified. Ron Stacey offers tips on how to validate value to potential buyers.
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Added Ammunition Support Appraisal Assumptions Sherry Smith offers a look at data sources that can deepen and add credibility to valuations, M&A offers, and more. Pepperdine Private Capital Markets Survey, Sageworks, and a number of Secondary Markets for Private Companies (SecondMarket, Sharespost, and Triago) all offer illuminating information.
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Federal Cases Examine Bankruptcy, Valuation Standards The Court of Appeals for the Eleventh Circuit weighs in on penalties for “gross valuation misstatement” in Gursthaw v. Commissioner, and the U.S. Bankruptcy Court for the Eastern District of Tennesee rules on the value of mortgage liens In re: Williams.
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Calculating Discounts Accurately Depends a Lot on Company Specifics. Here’s What You Need to Know Dennis Bingham and KC Conrad provide a thorough look at options for calculating a discount for lack of marketability (DLOM), including restricted stock studies, pre-IPO studies, theoretical and option pricing models, discounted cash flow (DCF), Mandelbaum factors, and more.
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Business Owners Need to Establish Clear Guidelines for Future Buyouts with Their Partners John Markel explains that it’s critical for partners to put together a buy-sell agreement that establishes in specific detail the standard of value, the level of value, and acceptable methods for funding a buyout. Here’s why.