Pre-Sale Accounting Best Practices for Buyers and Sellers In today’s market, it is especially important that prospective acquirers of emerging companies understand exactly what they are purchasing and how to allocate the purchase price among the assets acquired and liabilities assumed. This article discusses the importance of quality of earnings and impact on the acquisition price. As buyers tighten their purse strings in a volatile economy, parties on both sides of startup M&A deals must ensure they are prepared to effectuate the transaction from a financing perspective as well as address the related financial reporting and other accounting implications. This…
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Guidance from AICPA’s 2024 Accounting and Valuation Guide—Business Combinations There are various methods used to value intangible assets. The relief from royalty method is based on the premise that there are royalty savings if the acquiror acquires the asset instead of licensing it. The value of the asset is calculated as the present value of after-tax royalty savings over the economic life of the asset. This article delves into the available methods used to value brands. When a company acquires another company, the acquiror may need to perform a purchase price allocation. In essence, the purchase price allocation (PPA) analysis…
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Identification First! Few articles in the business valuation profession address the identification component of valuing goodwill, particularly personal or professional goodwill in the context of matrimonial dissolution matters. Current literature provides valuation professionals with techniques regarding the quantification or valuation exercise (e.g., cost approach, discounted cash flow, relief from royalty, etc.); however, this leaves professionals in some cases quantifying goodwill without determining what, if any, personal goodwill characteristics exist. This potential misstep may leave a valuation professional not addressing or identifying evidence to support that such an intangible asset exists. This article focuses on suggested practices to identify personal goodwill…
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(Part I of II) This is a two-part article that focuses on the situation where the target company is a private corporation, and the sellers are employee/shareholders. This discussion summarizes the taxation and valuation considerations related to a transaction where employee/shareholders are selling the private C corporation stock to a C corporation acquirer. Some of the taxation and valuation considerations also apply to the corporate acquirer’s purchase of the corporate subsidiary stock of a parent corporation seller. However, the principal focus of this discussion will be on valuation and taxation guidance related to the employee/shareholders’ sale of a closely held…
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Implementing the Practicability Exception under ASC 2016-01 An adverse economic consequence of COVID-19 that has made headlines is the significant impairment charges business entities have taken related to their non-financial assets, such as intangible assets and goodwill. Less notable has been the pandemic’s similar effect on an entity’s financial assets, including equity securities without readily determinable fair values. Fair value for these types of equity investments is measured in accordance with FASB Accounting Standards Update (ASU) 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which is codified within ASC 321, Investments in…
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The Art of Business Valuation: Accurately Valuing a Small Business This is a book review of The Art of Busines Valuation: Accurately Valuing a Small Business. This book is a guide and desk reference for valuing businesses under $10 million in revenues. The primary question answered in the book is: How do we as business valuators, business brokers, accountants, lawyers, owners, and other interested parties prepare, review, evaluate, or use an accurate business valuation for small and very small businesses in a difficult environment? A business valuation is not just a matter of applying techniques, it has to make sense.…
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Buyer and Seller Beware When a privately-held acquirer uses its stock to partly purchase a company, it is imperative that both the acquirer and the target in a transaction have support for, and a level of comfort with, the value assigned to the acquirer’s shares if they are being issued as part of the deal. It is especially important for the seller to conduct its own due diligence to better assess its risk exposure and understand the fair value of intangible assets. This article discusses procedures that sellers and buyers should consider before finalizing the terms. We are all familiar…
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Asset Values (Part III of III) This is the third of a three-part article that focuses on valuing nonprofit corporation assets. Valuation analysts are commonly engaged to provide fair market value guidance related to nonprofit business transactions. Nonprofit businesses are often involved in arms-length transactions. Common transactions include royalty payments for the use of intellectual property, royalty revenue earned by licensing intellectual property, sales of assets, and purchases of assets. If the subject transaction is between a nonprofit and a related party, the transaction is required to be a fair market value transaction. This series provides an example of certain…
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Asset Values (Part II of III) This is the second of a three-part article that focuses on valuing nonprofit corporation assets. Valuation analysts are commonly engaged to provide fair market value guidance related to nonprofit business transactions. Nonprofit businesses are often involved in arms-length transactions. Common transactions include royalty payments for the use of intellectual property, royalty revenue earned by licensing intellectual property, sales of assets, and purchases of assets. If the subject transaction is between a nonprofit and a related party, the transaction is required to be a fair market value transaction. This series provides an example of certain…
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Asset Values (Part I of III) This is a three-part article that focuses on valuing nonprofit corporation assets. Valuation analysts are commonly engaged to provide fair market value guidance related to nonprofit business transactions. Nonprofit businesses are often involved in arms-length transactions. Common transactions include royalty payments for the use of intellectual property, royalty revenue earned by licensing intellectual property, sales of assets, and purchases of assets. If the subject transaction is between a nonprofit and a related party, the transaction is required to be a fair market value transaction. This series provides an example of certain steps and procedures…
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Best Practices: Thought Leadership in Valuation, Damages, and Transfer Price Analysis This fall, Robert F. Reilly and Robert P. Schweihs published Best Practices: Thought Leadership in Valuation, Damages, and Transfer Price Analysis. The book celebrates the 50th anniversary of Willamette Management Associates and is intended to present thought leadership. The topics selected for inclusion are topics that the authors felt did not already enjoy thought leadership discussion in the current literature. As the authors note: “we were not satisfied with the breadth or depth of the available literature in [many of the topics covered]. We usually concluded: Someone should write…
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Considerations for Fair Market Value Healthcare enterprises are increasingly relying on intangible assets to enhance their ability to provide timely, quality professional medical services to patients. Trade secrets are one such class of intangible asset that may be owned by a healthcare enterprise. A trade secret is any information that has economic value and is not generally known by the public. Technical and specialty research may be considered the “work-in-progress” of patents, copyrights, trademarks, or other intangible assets, and this research usually entails the use of trade secrets, i.e., special “know how” that is often protected (or padlocked), in contrast…
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The Value of a Business is Not Always What it Seems (Part II of II) Personal goodwill is taxed at the individual capital gains tax rate, not the higher corporate income tax rate. Therefore, a credible personal goodwill calculation can amount to significant tax savings. One that is not adequately defensible invites risk of an audit. Every personal goodwill calculation is unique to each business, and the management interview is crucial. In this second part of the article, the author discusses issues that arise valuing identifiable intangible assets if goodwill is derived by first valuing personal goodwill, questions to ask…
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Valuation of Intangible Assets Valuation practitioners may want to spend a few hours reading a recent U.S. Tax Court case where the valuation of intangible assets was squarely addressed. This QuickRead article highlights the facts and three issues addressed in the decision.
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Asset Accumulation Illustrative Example The previous discussion in this series, part III, described the typical methodology and application of the asset accumulation (AA) method of the asset-based business valuation approach. This discussion presents an illustrative example of an AA method business valuation analysis.
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Why it Shouldn’t be A Dirty Word in the Valuation of Physician Practices The topic of goodwill in a physician practice acquisition continues to be hotly debated. There are very different viewpoints from reputable appraisers on how to value physician practices and whether hospitals can pay for goodwill in an acquisition. I often hear healthcare professionals involved in acquisitions say, “Hospitals can’t pay for goodwill.” However, there is no legal or financial reason why goodwill cannot be considered in a physician practice acquisition. This article discusses the merits of considering and including goodwill in the valuation of a physician practice.
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The Tax Rules Were Never Friendlier, But Changes May be on the Way The biggest loophole in the tax code may soon be coming to an end—at least according to the messages sent by the Obama administration and its recent budget proposals. The American Taxpayer Relief Act of 2012 (ATRA) set a whole new tone for most estate plans when it took the dreaded estate tax off the table. However, it is no secret that the IRS has been making a concerted effort to recapture some of the revenues lost from property transfers by way of gift or upon death.…
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The Appraisal Practice Board of the Appraisal Foundation released The Valuation of Customer-Related Assets. As Karolina Calhoun, senior financial analyst with Mercer Capital, explains, the non-authoritative best practices guidance elaborates on valuation approaches and methodologies that can be used to measure fair value of customer-related intangible assets. To read the full article in Mercer Capital’s Financial Reporting Blog, click: Appraisal Foundation Releases Final Guidance on Fair Value Measurement of Customer-Related Assets. This article is republished from Mercer Capital’s Financial Reporting Blog. It is reprinted with permission. To subscribe to the blog, visit: http://mercercapital.com/category/financialreportingblog/.
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The Case of Trademarks and Brands Since the adoption of fair value accounting governed by SFAS 141 (in 2001) and IFRS 3 (in 2004), hundreds of thousands of different intangible assets have been valued, audited, and reported in financial statements of public companies all over the world. After fifteen years of fair value accounting, the debate about the accuracy of such values and their relevance for readers is no less controversial than at its beginning. This is a pity because, in its essence, fair value data is an excellent resource for corporate finance professionals to understand more about the value…
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With the rise of technology and professional service firms, the U.S. marketplace is shifting from one which supplies goods to one which supplies ideas. Taryn E. Burgess, financial analyst with Mercer Capital, explains there is a growing gap in the balance sheet reflecting this shift from physical assets to intangible ideas. To read the full article in Mercer Capital’s Financial Reporting Blog, click: Our Economy Has Changed. Should Our Accounting Standards? This article is republished from Mercer Capital’s Financial Reporting Blog. It is reprinted with permission. To subscribe to the blog, visit: http://mercercapital.com/category/financialreportingblog/.