(Part I of IV) This is a four-part article that sets forth best practices for estimating the company-specific risk premium. The identification and quantification of alpha—or the subject-specific risk component—is sometimes a controversial issue in the private company valuation. This discussion summarizes best practices on what is included in—or should be considered in—the analysis of this Ke alpha component (or unsystematic risk component). These best practices discussion is presented in four parts. The first part of the discussion focuses on the factors that analysts may consider in developing the alpha estimate when selecting a Ke for a private company valuation.…
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A Q&A with Joel Steckel The immediate economic impacts of the COVID-19 pandemic extend beyond their most visible manifestations in the shutting of businesses and the dramatic rise in unemployment. A more subtle consequence that has arisen in the marketplace pertains to companies’ reputations. Brands and the public’s perception of them are impacted not only by a firm’s own actions but also by the actions of other market players. To explore the issues around negative effects on consumers’ brand perception in more depth, Vice President Rene Befurt and Associate Anne Cai spoke with Analysis Group’s academic affiliate Joel Steckel about…
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Business Valuation in a COVID-19 World—Cost of Capital, Growth Rates, and Uncertainties Jim Hitchner, Managing Member of Valuation Products and Services (VPS), unveiled the first of a series of two-hour webinars that targets business valuation and litigation support professionals seeking an intermediate level program. This is a review of the first webinar titled “Business Valuation in a COVID-19 World—Cost of Capital, Growth Rates, and Uncertainties”. This article summarizes the issues discussed during this first webinar. [su_pullquote align=”right”]Resources: Best Practices in Business Valuation—A Practical Approach to Advanced Issues and Applications [/su_pullquote] On October 29, 2020, Jim Hitchner, Managing Member of Valuation…
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Valuation Considerations When PPP Has Been Used The Payroll Protection Program (PPP) is a program established in 2020 by the U.S. Congress entitled the Coronavirus Aid, Relief, and Economic Security Act known as the CARES ACT. This Act, which was in response to the President’s closing of the economy on March 13, 2020, was enacted to assist certain businesses, self-employed, sole proprietors, certain nonprofit organizations, and American Tribal businesses in continuing to pay their employees. In this article, the author addresses how a PPP loan should be treated when the entity is the subject of a valuation. A Little History…
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When is there a Duty to Corroborate Data? NACVA’s Standards Board (SDB) was formed in 2016 with the purpose to promulgate NACVA’s Standards, including the development of interpretations, amendments, restatements, and new releases of NACVA’s Standards as deemed necessary and prudent. While being able to influence the very rule governing one’s profession is an astute honor, the most rewarding role performed by the SDB is that of responding to questions that a member has asked or issues they are dealing with. This article addresses data reliability questions and issues, and how it relates to the NACVA standards. NACVA’s Standards Board…
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COVID-19’s Impact on Micro and Small Business Valuation As summer comes to an end, while COVID-19 remains a concern, business owners have resumed contemplating their succession and growth strategies. What have valuation analysts learned? In this article, the author shares additional questions that business valuation practitioners should be asking. The hysteria from the huge unforeseen social and economic changes arising from COVID-19 is starting to fade. For business valuators that means we are seeing our normal valuation processes and procedures, with modifications, are sufficient to value micro and very small businesses with revenues under 10 million dollars. These modifications mean…
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Conducting Financial Due Diligence and Quality of Earnings Analysis Financial due diligence and quality of earnings reports provide a third-party analysis of a target company’s current financial position and historical financial performance. When evaluating a potential business acquisition, it is crucial to understand the nature and magnitude of the business’ cash flows. Whether from the perspective of the buyer or seller, the earnings of the business are essential to determine an appropriate purchase price or multiple to be used in pricing the deal. Furthermore, it is in the best interest of both sides of a transaction to accurately represent and…
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For When a Client Wants to Buy a Business The authors in this article share a checklist developed and provided to firm clients contemplating buying a business. The following are key steps involved when a client wants to buy a business. Buyers and their advisors can use this list as a timeline and road map of the steps that are expected to occur, and what they should plan on doing. A companion posting for clients that want to sell a business can be found at: https://quickreadbuzz.com/2020/06/17/business-valuation-ed-mendlowitz-task-list/ The buyer needs to make sure the seller wants to sell. The seller saying…
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to Business Valuation for Attorneys Investors who hold publicly traded securities have the luxury of knowing the value of their investment at virtually any time. An internet connection and a few clicks of a mouse are all it takes to get an up-to-date stock quote. Of all U.S. companies, however, less than 1 percent are publicly traded, meaning that most companies are privately held. Investors in privately held companies do not have such a readily available value for their ownership interests. How are the values of privately held businesses determined when a couple’s assets are being divided in a divorce,…
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Popular Plans to Incentivize and Retain Talent Employees and executives can get added compensation in addition to their salaries. In some cases, these benefits could exceed the salary. Most of these benefits are contractual and, where there is a discretionary element, it is usually awarded by the board of directors. This article provides a round up listing of the more popular benefits. Not included are standard benefits covering most employees. Employees and executives can get added compensation in addition to their salaries. In some cases, these benefits could exceed the salary. Most of these benefits are contractual and, where there…
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Highlights the “Good” and “Bad” Hindsight Debate Many predictions are doomed to fail whereas hindsight is undefeated. Predicting the future is very difficult due to the countless permutations that can occur. By contrast, anyone can observe what happened after the fact. Not surprisingly, it can be tempting to focus on the reliability of hindsight over the (typically) more relevant contemporaneous projections when performing assessments as of a prior date. This article addresses the “good” vs. “bad” hindsight debate within the context of COVID-19 and its implications to other matters. Introduction/Summary Many predictions are doomed to fail whereas hindsight is undefeated.…
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Time to Revisit this Tool If you think Monte Carlo simulations are too complex to use in business valuation, you are not alone. There are three main reasons valuators shy away from using Monte Carlo analysis: 1) they do not totally understand it, 2) it involves statistical analysis and most would prefer not to relive their college statistics class, and 3) it is difficult to explain, especially to a jury. A recent survey by Business Valuation Resources (BVR), which was ongoing as of the date this article was written, indicates 51 percent of the respondents (82 respondents to date) use…
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In a SPAC Merger Transaction The fair value of equity consideration issued in a merger involving a public company is generally calculated as the product of the quoted price for the individual equity instrument times the quantity issued (commonly referred to a “P times Q”). However, if the merger involves a special purpose acquisition company (SPAC), determining “P” can be subjective and may result in different interpretations of U.S. GAAP fair value between the valuation specialist and the parties involved in the deal. Introduction The fair value of equity consideration issued in a merger involving a public company is generally…
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Caused by the COVID-19 Pandemic Business leaders, tax practitioners, and attorneys are considering how to address the serious challenges that may arise from disruptions in commercial activities due to business closures, travel restrictions, and stay-at-home orders that were put in place in many countries around the world in order to reduce the spread of COVID-19. This is also impacting transfer pricing systems, which is the focus of this article. Among the multitude of questions that business professionals will have to deal with will be how to manage losses attributable to these extraordinary events within their intercompany transfer pricing systems. Business…
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and “Voodoo” Economic Forecasts? One of the issues facing the business valuation community as well as business owners is the newly created accounting metric called “EBITDAC”, which stands for Earnings Before Interests, Taxes, Depreciation, Amortization, and Coronavirus. This is a non-GAAP accounting metric used by some companies today to raise more debts from lending institutions by adjusting or recasting their financial statements to account for lost earnings incurred due to the coronavirus. The author asks what coronavirus add-backs are defensible under this new normal? One of the issues facing the business valuation community as well as business owners is the…
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The Court Opens to Tax-Affecting In Estate of Jones, the court addressed the tax affecting issue along with several other issues discussed in the valuation world today, including the proper approach for valuing an operating timber business (income vs. asset-based), the reliability of management projections, and the appropriate discount for lack of marketability. For the first time in 20 years, a valuation expert who tax-affected the earnings of a pass-through entity has had a receptive audience in the Tax Court. This article summarizes this controversy and highlights the valuation issues. In Estate of Jones,[1] the court addressed the tax affecting…
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Procedures and Bankruptcy Code Changes for CPAs and Consultants A business or individual facing financial distress can utilize three types of federal bankruptcies to attempt to resolve their financial difficulties. This article provides an overview of the differences and when each would be used. Keep in mind that bankruptcy is a legal proceeding and must be handled by an attorney. However, business and financial advisors need to have a good understanding of the process, when a bankruptcy is necessary, and which type is most applicable. Advisors need to be able to take a dispassionate view and assist in advising a…
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Their Potential Impact on Valuing a Construction Contractor Construction claims may impact the value of a construction company. In this article, the author discusses the issues that arise and the methodologies that may impact the valuation. A construction claim is a demand made by the contractor to the owner for additional revenue for construction work performed on a construction project which is beyond the terms of the contract. Simply stated, a construction claim is a change order that has not been settled or negotiated between the owner and contractor. If the construction claim cannot be settled or negotiated, then most…
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For When a Client Wants to Sell Their Business The authors in this article share a checklist developed and provided to firm clients contemplating a sell of their business. Following are the steps involved when a client wants to sell their business. Buyers can also use this list as a timeline and road map of the steps that are expected to occur and what is expected of them. ❏ Be sure client wants to sell ❏ Be doubly sure client wants to sell. Them saying it does not make it so. Many prospective sellers start the process but do not…
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Repurchase Obligation Liability There are certain valuation aspects that are unique to employee stock ownership plan (ESOP) sponsor company valuation engagements. The ESOP repurchase obligation is one of those aspects. There is a diversity of practice in the valuation profession as to how to treat the repurchase obligation for sponsor company valuations performed for ESOP administration purposes. There are several alternatives that may be appropriate depending on the facts and circumstances of the assignment, and the analyst’s interpretation of the fair market value standard of value for ESOP administration engagements. This discussion provides a hypothetical ESOP sponsor company valuation to…