Business owners contemplating retirement should obtain a business valuation to determine the value of the business and whether the other resources will provide financial security. The conversation and successful engagement also requires that the valuation analyst understand the owner’s motivating factors, or the qualitative information. Obtaining the right price is important, but holding out for a larger value and deeming all other values lower than that needed as a “deal breaker” can be self-defeating to the owner seeking financial security; there are other ways to obtain the security. Further, quibbling over a smaller amount can potentially undermine the long term…
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Discounted Cash Flow (DCF) valuation is simple at its core, yet often intimidates many says Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University. You need one only theory to value companies that is based on the equation that the value of an asset is the value of the expected cash flows over its lifetime, adjusted for risk and the time value of money. To learn how to strip away the layers of complexity built into valuation over the decades and return to this simple equation, click the link below. [button color=”blue” link=”http://www.wallstreetoasis.com/blog/discounted-cashflow-valuations-dcf-academic-exercise-sales-pitch-or-investor-tool” target=”_blank”…
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and the Process for the Valuation of a Closely Held Business (Part 1 of 2) Assessing shareholder value for either publicly held or privately held companies are two sides of the same coin. The U.S. capital markets have undergone significant changes in the past several years. This development in turn has had an impact on how these two types of companies are valued. Valuing public companies can be rather straightforward; valuing a closely held or private company is more challenging. In this series, the author will explore some of the methodologies available for valuing a closely held—or private—business.
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Particular challenges can arise in goodwill impairment valuation and accounting when a company acquires a business located in another country. When goodwill accounting standards are strictly applied, under U.S. GAAP or IFRS, the differences between write-offs taken in one country versus another should be minimal. This article delves into some of the notable differences in goodwill impairment conclusions worldwide. Greg Forsythe, CFA, ASA, director at Deloitte Financial Advisory Services LLP discusses methods to minimize these differences. To learn more about the minimizing goodwill impairment differences globally, click here. Image courtesy of Apple’s Eyes Studio/FreeDigitalPhotos.net
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The proper usage of company management-prepared projections when applying the Income Approach—Discounted Cash Flow Method—is an ongoing issue for any valuation analyst, especially as it relates to shareholder appraisal rights actions. The Delaware Chancery Court regularly provides guidance as to the proper usage of management projections when applying the Discounted Cash Flow Method within a dissenting shareholder appraisal rights action. This article highlights several historical and recent Delaware Chancery Court decisions, and it provides insights into the valuation analyst’s role in properly utilizing management projections when applying the Income Approach—Discounted Cash Flow Method—within a dissenting shareholder appraisal rights action.
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Thoughts from Experienced Litigation and Business Valuation Professionals Entering the Industry In this article, seasoned BV and litigation support professionals John DelGrego and Heidi Walker share why litigation can be invaluable to a BV professional. The co-authors also expound on the professional perils and high expectations placed by the Tax Court on expert witnesses. Expert witnesses must be objective, current on the law, and persuasive.
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In this article, Peter Rahe describes how he presents the subject of market multiples to attorneys. He also raises important questions about business valuation multiples.
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A Drop-Dead Plan for the Unprepared In this article, Edward Mendlowitz shares his views regarding the importance of having a buy-sell agreement. He proposes a “drop-dead plan” or method that, while imperfect, addresses how owners can arrive at an initial value that does not necessarily require a Conclusion of Value, especially if the owners are not related. Significantly, Mendlowitz stresses the importance of securing an agreement that addresses major life events to get the process started.
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Evolving Accounting Standards for CPAs Wiley author Joanne Flood reviews three significant Accounting Standards Updates (ASU). First, she reviews ASU 2014–08, issued in April 2014. This ASU focuses on Reporting [for] Discontinued Operations. This ASU changes the criteria for determining which disposals can be presented as discontinued operations. In the remaining portion of the article, she summarizes changes brought about by ASU 2014–10, Elimination of Certain Financial Reporting Requirements, including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, and ASU 2014–15, Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
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Business valuation (BV) liability claims are not as frequent compared to other litigation risks faced by practitioners. On the other hand, there are BV-related liability claims that exist, especially in cases where a valuation report was used to guide financial decisions by businesses, lending services, regulatory agencies, and others, according to Frank Vinluan, in the January 21 issue of FVS News. One of the best ways valuators can reduce their risk of a lawsuit starts with the engagement letter. Engagement letters can help limit a valuator’s exposure by clearly establishing the expectations of work to be performed, the purpose…
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Ninth Circuit Court of Appeals Reverses U.S. Tax Court On December 5, 2014, the Ninth Circuit Court of Appeals “reversed and remanded for recalculation of value” a Tax Court Memo decision in Estate of Natale B. Giustina, Deceased, v. Commissioner (No. 12-71747). The case involves the valuation of a 41.128 percent partnership interest in Giustina Land and Timber Company Limited Partnership and raises important questions regarding the proper underlying assumptions to use probability weighting.
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A Case Study, Part 2 of 2 In this second part of the article, Dr. Allyn Needham examines post-Till cases from the northern and western districts of Texas, highlights the problems encountered using the Formula Approach, and tests whether the Contract Approach may have provided a better approach and reduced the incidence of litigation where a cramdown is proposed. Ultimately, Dr. Needham proposes that despite the problems presented by the Formula Approach, the Contract Approach is not a panacea for Chapter 11 bankruptcy matters. Business valuators practicing in this area must understand case precedent and recognize the limits of the…
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A Case Study, Part 1 of 2 In the Till decision, the U.S. Supreme Court selected the Formula Approach to provide a straightforward, familiar, and objective method for determining the cramdown interest rate to be paid on secured claims in Chapter 13 cases, minimizing the need for potentially costly additional evidentiary proceedings. Many bankruptcy courts have found this decision instructive and directive for Chapter 11 matters. However, the application of the Formula Approach for determining the cramdown interest rate on secured claims in Chapter 11 matters has not made for a straightforward approach, nor has it eliminated sometimes lengthy and…
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Federal Reserve officials have expressed growing optimism at the December meeting that the U.S. economy is steadily recovering. As the price of oil continues to fall and with payrolls growing, there is a good possibility that 2015 will experience higher economic growth than currently forecast. However, the weakness of the global economy and the anemic response of foreign governments could weigh on domestic growth. If variable loan rates increase and credit becomes more expensive and harder to get, how will it effect the engagements of BV professionals? Find out more from the New York Times’ coverage of the Federal Open…
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Restrictions on Distributions and Impact on DLOM…Who Else Will Follow? In 2009 Nevada Senate Bill 350 was passed into law. This law authorized the creation of two new business entities: the Restricted LLC and Restricted LP. The bill also allowed for the conversion of existing entities into one of the above types. In this article, Eric J. Barr provides an overview of these two entities and raises questions regarding why someone might want to form such an entity and whether the IRS will respect the statutory restrictions given that under IRC 2704, the government retains the right to disregard certain…
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“Rome was not built in a day,” but efforts are underway to do it faster for international valuation standards. At the recent World Congress of Accountants, Sir David Tweedie, chair, International Valuation Standards Council, outlined the challenges facing the valuation profession when he stated and questioned the following: “The profession developed as secondary specialization by experts working in different types of asset classes. It led to a fragmentation by asset type. Skills are regarded as technique rather than as a profession. What are the accepted qualifications? Lack of recognition by regulators, other professions, and prospective recruits.” Globally accepted professional standards…
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Fifth Circuit Affirms District Court and $83 Million in Unpaid Taxes and Interest Owed by Donees The Fifth Circuit recently affirmed the district court’s decision and the imposition of unpaid taxes and interest on donees of shares sold at less than fair market value to the company owed by relatives of the donor. As Joe Brophy explains, this case illustrates the pitfalls of deathbed planning involving asset transfers below market value.
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In a recent valuation, Apple has been crowned the most valuable company on the planet, and second place wasn’t even close. After its stock hit a record high recently, Apple was valued at $700 billion. That’s $300 billion more than the runner-up, Exxon Mobile. It’s hard to wrap your head around these kinds of numbers, but imagine the enormity that is Google. Even with that kind of influence, Google is still worth only half as much as Apple. When CEO, Tim Cook, took the company’s reins from the late Steve Jobs, many were in doubt as to whether the…
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At some point in a business valuation analyst’s career, an attorney or pro se party will call asking for a business valuation and perhaps even to retain your services. A good starting point is Business Valuation in Divorce: Case Law Compendium, 2nd ed. This edition is 584 pages long and provides a comprehensive court case digest that emphasizes similarities and differences in the treatment of goodwill (professional and personal), discounts, fair value, tax-affecting, and other significant issues. This is a must-have resource for those already practicing in this area and for those embarking in their valuation career.
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Lessons to be learned by Valuators from Cavallaro v. Commissioner Cavallaro v. Commissioner holds some valuable lessons for valuation experts. Following a tax-free merger of two companies owned between different family members, the children of the petitioners (and owners of one of the companies, pre-merger) received 81 percent of the stock in the merged entity. Differences arose between one set of accountants and Hale & Dorr, the law firm that assisted the founders with estate planning. The key issue was whether valuable technology was owned by the company controlled by the parents or the company owned by the children. The…