Common Analyst Misconceptions The first article in this series provided an introduction to valuation analysts (analyst) regarding the need to integrate and use the Asset-based Approach to value going-concern businesses and securities. This second installment addresses common analyst misconceptions regarding the use of the Asset-based Approach to value both asset holding companies and operating companies.
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Mergers and acquisitions (M&A) have continued growing since 2008’s financial crisis. Through the first three months of 2016, the value of worldwide M&A totaled nearly $750 billion. Cross-border M&A activity totaled $308 billion—accounting for a quarterly record-high 41% share of global M&A value. As in previous years, M&A in industries with hefty intangible assets—such as pharmaceuticals and technology, media and telecom—dominated deal making.[1]
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IP Valuation—Beyond the Income and Cost Approach Valuation analysts (“analysts”) are often asked to value debtor company intellectual property (IP) within a business bankruptcy context. Some of the bankruptcy reasons to value IP include the assessment of the following: the debtor’s solvency, a secured creditor’s collateral and protection, the fairness of a Section 363 IP asset sale or license, the debtor’s rejection of its IP licenses (and the implications of that rejection on the IP licensees) under Bankruptcy Code Section 365(n), and the reasonableness of a plan of reorganization. Many analysts immediately think of applying income approach or cost approach…
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on Business Valuations in Litigation In this article, Paul Fullerman, CPA, CVA, discusses techniques which can assist the accredited valuation professionals performing a business valuation.
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Tax Controversy Insights In matters argued before the U.S. Tax Court, valuation professionals are frequently asked to provide opinions related to the value of closely held businesses and of fractional ownership interests in closely held businesses. This discussion relates to a recent appeal of a U.S. Tax Court decision involving such valuation issues. The case in question is Natale B. Giustina v. Commissioner. In this case, the Tax Court’s selection of the method for valuing a fractional ownership interest in a closely held business was appealed to the United States Court of Appeals for the Ninth Circuit. The Appeals Court…
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In Appraising Outpatient Enterprises Healthcare related outpatient enterprises provide services that do not require hospital admission and may be performed outside the premises of a hospital. Similar to valuation of any business, valuations of outpatient enterprises should include consideration of the three general approaches to valuation (i.e., the income approach, the market approach, and the asset/cost approach). The specific valuation methods selected under each engagement will be guided by the facts and circumstances surrounding the hypothetical transaction of the subject property interest (e.g., availability of data, nature of the current transactional marketplace). This article focuses on utilizing a market approach…
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An In-Depth Series on Healthcare Valuation, Part 2 of 4 This article focuses on utilizing an income approach to value outpatient enterprises, while subsequent articles in this topic series will address the use of a market approach and an asset/cost approach to value outpatient enterprises.
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Beware of the Limitations of Hospital Transaction Databases The market approach is one of three established valuation approaches. In this approach the valuation analyst will look for comparable companies. In this article the authors caution against the outright use of databases as a means of developing a Conclusion of Value for a hospital. Independent verification is time-consuming and essential. The authors discuss five common mistakes seen using the market approach.
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Part I: Three of the 12 Reasons a Valuation Is Needed in Chapter 7, 9, and 11 This two-part article summarizes the various types of intellectual property that valuation analysts (“analysts”) may encounter within a commercial bankruptcy controversy, lists the generally accepted intellectual property valuation approaches, and presents the reasons why analysts may be asked to value intellectual property within a commercial bankruptcy environment. In Part I, Mr. Reilly identifies three of the 12 reasons why a valuation is needed in a bankruptcy proceeding.
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A Primer on the Approaches and Issues Involved in Valuing Trademarks Valuation analysts are often called on to perform valuation, damages, and transfer price analyses of trademark-related intangible property for various purposes. This discussion describes the valuation of trademarks within the context of both financial accounting and income tax accounting (in particular, tax-related intercompany transfer pricing) and summarizes the generally accepted trademark analysis approaches and methods. And, this discussion presents three examples, using different analytical methods, to illustrate the analysis of trademarks.
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Issues and Opportunities This article discusses some of the issues in using the Pratt’s Stats transaction data, which can be used to develop multiples in a Market Approach or to develop a private market discount rate used in an Income Approach. The information presented is relevant to both business brokers/intermediaries and business appraisers.
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Problems and solutions The Guideline Transaction Method (GTM) remains a viable option for valuing businesses; the question is whether it is being properly applied. In this article, Eric Barr proposes that despite the recent negative press, the GTM can provide valuable insight.
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The impact on shareholder value Knowing the value of a business and delivering real value to a client company entails far more than using EBITDA multiples or going along with a rule of thumb to keep the peace. As professionals, valuators must be far more rigorous in their engagements, and focus on delivering value. The obligation to identify, measure, manage, and mitigate the risks are their responsibility. In this candid analysis, Dr. Carl Sheeler shares some insights, based on his 1,000+ engagements, where he has found problems that led to disputes, misalignment of expectations, and company-specific risks that impair value…
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When the usual approaches won’t work Technology and innovation expert and professor, Tim Swift, proposes an alternative to the traditional Market, Income, and Cost approaches to valuing a patent portfolio.
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Understanding the nature and risk of expected cash flow This discussion summarizes the interrelatedness of the weighted average cost of capital and the weighted average return on assets within the context of a purchase price allocation for financial reporting purposes. Failure to understand this fundamental relationship can lead to inaccurate estimates of value for the acquired assets and, therefore, inaccurate reported asset values and amortization expense on the financial statements of the acquirer. The WACC can be viewed as a weighted average of the required rates of return for the individual assets of the acquired company. The selected intangible asset…
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In defense of the Discounted Cash Flow Method Richard R. Conn challenges criticism of the Discounted Cash Flow Approach and premise that the Market Approach is superior to an Income-Based Approach, even when there is more just superficial observations. The author proposes that “ it is important to realize that the circumstances in which the DCF Method indicates a different value than the market price should be very rare and unique. If the legal community is finding a multitude of expert valuation opinions where the DCF conclusions are at odds with the market evidence, then those litigators have a valid…
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Focus on shareholder disputes (slip opinions) Ruggiero v. Ruggiero is a New York Slip Opinion (cannot cite as authority) that is a classic battle of valuation experts. The opinion highlights how a New York State judge reached her decision and also provides an opportunity to deliberate and consider what can go wrong when a buy-sell agreement is either not in existence or is considered dated. Breidbart v. Wiesenthal, another New York State Slip Opinion (cannot cite as authority), addresses how a dissolved partnership interest in New York State is valued. Although the decision is unique to New York State and the…
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Important factors to consider in making tax adjustments to pass-through income Damodaran recently wrote about the potential devaluation of dividend-paying stocks if the preferred dividend tax rate were to climb back up to the ordinary rate. This could inspire valuation experts to make a tax adjustment reducing untaxed Pass-Through Entity (PTE) income to equate it with corporately taxed income that qualifies for tax preference at the shareholder level. Before making this tax adjustment, the valuation expert should consider several factors.
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A Quick Initial Assessment of an Appraisal Assignment Can Help Determine Which Approach and Which Tools to Use. Here’s Why That Matters. Appraisers have a large toolkit. When we pursue certifications, the tests we have to pass and our demonstration reports show that we know how to use tools properly, and certifications demonstrate our competency. In the real world, we are also in this profession to make a profit. Profits reward us for both competency and efficiency. Rand Curtiss explains how to be both effective and efficient.
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Critically Assess Underlying Data and an Appropriate Method for Value Determination Richard Claywell regularly reviews business valuations that seem to consider the asset, market, and income approaches in forming an opinion, but that never explain or justify a weighting methodology used to arrive at a final value conclusion. Here’s why that’s a mistake.