WHAT EVERY ATTORNEY NEEDS TO KNOW ABOUT BUSINESS VALUATION AND WHY

Transcription

1 NEEDS TO KNOW ABOUT BUSINESS VALUATION ALAN L. TOLMAS, CPA/ABV/CFF, ASA PRINCIPAL/FOUNDER SOLO & SMALL FIRM SECTION FEBRUARY 1, 2012 LUNCHEON MEETING

2 NEEDS TO KNOW ABOUT BUSINESS VALUATION When Might A Business Valuation Be Needed? Ø Death, if decedent held an ownership interest in a business Ø Gift of an ownership interest in a business Ø Charitable donation of an ownership interest in a business Ø Grant of an ownership interest in a business Ø Stock Option Plan Ø Employee Stock Ownership Plan (ESOP) Ø Employee Stock Purchase Plan (ESPP) Ø Business interests owned by a 401(k), SEP, IRA Ø C-Corp to S-Corp conversions Ø Purchase Price Allocation (IRC 1060; ASC Topic 805) Ø Impairment of Goodwill (ASC Topic 350) Ø Phantom Stock Plan Ø Stock Appreciation Rights (SAR) Plan Ø Merger & Acquisition Ø Marital dissolution Ø Shareholder dispute/oppression Ø Shareholder dissent Ø Partnership/LLC dissolution/dissociation Ø Buy/Sell Agreement Ø Probate Ø Bankruptcy T A X P U R P O S E S 1

3 NEEDS TO KNOW ABOUT BUSINESS VALUATION Standards of Value 1 Valuation Concepts - Investment Value. The value to a particular investor based on individual investment requirements and expectations. - Intrinsic Value. The value that an investor considers, on the basis of an evaluation and available facts, to be the real or true value that will become the market value when other investors reach the same conclusion. When the term applies to options, it is the difference between the exercise price or strike price of an option and the value of the underlying security. - Fair Value. This standard of value can refer to one defined by the Financial Accounting Standards Board ( FASB ) or utilized by courts and defined by state statute or established by precedent in case law. In the legal context, this standard of value frequently is utilized in dissent and oppression suits. Section (b) of the Texas Business Organizations Code provides that in computing the fair value of an ownership interest, consideration must be given to the value of the entity as a going concern without including in the computation of value any control premium, any minority ownership discount or any discount for lack of marketability. - Fair Market Value. The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. - Liquidation Value. The net amount that would be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either orderly or forced. - Orderly Liquidation Value. Liquidation value at which the asset or assets are sold over a reasonable period of time to maximize the proceeds received. - Forced Liquidation Value. Liquidation value, at which the asset or assets are sold as quickly as possible, such as at an auction. 1 Except for Fair Value, all of the standards of value discussed herein are defined in The International Glossary of Business Valuation Terms as adopted by the American Institute of Certified Public Accountants, the American Society of Appraisers, the National Association of Certified Business Valuation Analysts, The Canadian Institute of Chartered Business Valuators and the Institute of Business Appraisers. 2

4 NEEDS TO KNOW ABOUT BUSINESS VALUATION Premise of Value The premise of value is an assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation. - Going Concern. The assumption that the business is and will continue to be an ongoing operating business enterprise. This premise is sometimes referred to as value in continued use. - Assemblage of Assets. The assumption that the business and its assets are organized, but are not currently used to generate earnings. This premise is sometimes referred to as value in place. - Orderly Disposition (or Liquidation). The assumption is that the assets of the business will be disposed of individually and not used for existing business operations. This premise is sometimes referred to as value in exchange. - Forced Liquidation. The assumption is that the assets of the business will be disposed of individually and quickly. This premise is also sometimes referred to as value in exchange. Level of Value In determining the value of the equity of a business, the subject being valued may be the entire business, commonly referred to as the enterprise, a controlling ownership interest or a minority ownership interest. Equal ownership by two parties is neither a controlling ownership interest nor a true minority ownership interest, unless special rights have been conferred to one of the parties. The International Glossary of Business Valuation Terms defines control as: The power to direct the management and policies of a business enterprise. Significant prerogatives of control typically enjoyed by an ownership interest with control include, but are not limited to the ability to elect directors, declare the amount and timing of dividends or distributions, determine compensation, make investment decisions and possibly force liquidation. Conversely, a minority ownership interest typically has no say in the management and policies of a business enterprise. Generally, an ownership interest holding greater than 50 percent of the voting interest in a business is considered a controlling interest and one holding less than 50 percent of the voting interest in a business is considered a minority interest. However, it does not always follow that one holding greater than 50 percent of the voting interest is a controlling interest; control depends upon the rights and limitations attached to the ownership interests. For example, in a 3

5 NEEDS TO KNOW ABOUT BUSINESS VALUATION limited partnership, the general partner typically has exclusive authority to management partnership matters, frequently including the discretion of determining the amount and timing of distributing partnership cash flow to the partners. Thus, one could hold a greater than 50 percent limited partnership interest and have little or no say over the partnership s business. Similarly, in a limited liability company that has granted powers to a manager, a member owning more than 50 percent of the voting interests may not have the authority to exert prerogatives of control typically expected of a greater than 50 percent ownership interest. The American Society of Appraisers defines marketability as: The capability and ease of transfer or salability of an asset, business, business ownership interest, security or intangible asset. It is well established within the valuation community that the benchmark for marketability is stock that is publicly traded on a major exchange with sufficient volume such that it can be converted into cash within a matter of days. Ownership interests in closely held businesses generally cannot be quickly and easily converted into cash relative to this benchmark, thus are considered non-marketable. It typically takes a minimum of three months to sell a closely held business and in many instances, may take up to a year or longer. Other factors that affect the marketability of an interest in a closely held business include, but are not limited to restrictions on transfer, the existence of a buy/sell agreement or rights of first refusal and whether the interest is a control or minority interest. A controlling interest in a closely held business is generally more marketable than a minority interest. Thus, in valuing an ownership interest in a business, it is necessary to determine the level of value; i.e. controlling or minority and marketable or non-marketable. A closely held business or an interest in one will be valued on one of the following levels: - Controlling, non-marketable. A discount for lack of marketability ( DLOM ) is applied to the enterprise value to derive a value on this basis. Application of a control premium may be appropriate, depending on the method used to derive the value of the enterprise. An interest in a closely held business may be the subject of a valuation on this basis for estate or gift tax, marital dissolution, buy/sell agreement, probate or merger and acquisition purposes among others. - Minority, non-marketable. Both a DLOM and a discount for lack of control ( DLOC ), also referred to as a minority discount, are applied to the enterprise value to arrive at this level of value. This level of value is probably the most frequently utilized basis of valuing an interest in a business. An interest in a closely held business may be the subject of a valuation on this basis for estate, gift or income tax, grant of stock or stock options, ESOPs or ESPPs, phantom stock or SAR plans, marital or corporate dissolution, owner buyouts, shareholder dissent or oppression, buy/sell agreement or probate purposes. 4

6 NEEDS TO KNOW ABOUT BUSINESS VALUATION - Controlling, marketable (as if freely traded). This level of value is most frequently used for mergers & acquisitions and might be used for C to S-Corp conversion, phantom stock or SAR plans, impairment of goodwill or purchase price allocation purposes. The use of marketable or as if freely traded in conjunction with a controlling interest is thought by many within the valuation community to be inappropriate because minority, not controlling blocks of public company stock are traded in the markets, and stock of closely held companies are not freely traded. - Minority, marketable (as if freely traded). This is the level of value of publicly traded stock and is rarely the basis used in an opinion of value of an ownership interest in a closely held business. It is most frequently the intermediate level of value derived in the process of determining value on a minority, non-marketable basis; i.e. the value derived after applying a DLOC to the enterprise value, to which a DLOM is applied. Adjustments to Earnings The Valuation Process After determining the appropriate level of value for the subject of the valuation, we must consider whether to make adjustments to reflect an enterprise s normalized earnings. The types of adjustments to be considered depend on the level of value of the subject of the valuation. Generally, if the subject of the valuation is to be valued on a control basis, adjustments may be appropriate to income or expenses that only the holder of such controlling interest would have authority to make. Certain other adjustments may be appropriate whether the interest being valued is on a controlling or a minority basis. A non-exhaustive list of the types of adjustments that may need to be made follows: Control Type Adjustments: - Owners compensation (to reflect what a hypothetical investor would pay management) - Owners perquisites, e.g. life insurance premiums, travel and entertainment expense - Rent paid to the owner or related parties if higher or lower than fair rental value - Expenses related to non-operating assets such as property taxes on a personal use condo Non-Control Type Adjustments: - Nonrecurring expenses such as items of gain or loss, earnings/loss from discontinued operations or impairment of goodwill - Income taxes for pass-through entities not subject to federal tax - Adjustments to make the subject s earnings measured on the same basis as a comparable company s such as accounting for inventory using FIFO versus LIFO 5

7 NEEDS TO KNOW ABOUT BUSINESS VALUATION Approaches to Value Income Approach. A way of determining an indication of value of a business, business ownership interest, security, or intangible asset using one or more methods that convert anticipated economic benefits into a single present value amount. The methods utilized in developing the income approach are commonly referred to as the discounted cash flow, the discounted future earnings and the capitalization of earnings methods. These methods are described below. Market Approach. A way of determining an indication of value of a business, business ownership interest, security, or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities or intangible assets that have been sold. Methods utilized in developing the market approach are the guideline public company method and the guideline transactions method. These methods are described below. Asset Based (or Cost) Approach. A way of determining an indication of value of a business, business ownership interest, security or intangible asset using one or more methods based on the value of the assets net of liabilities. The methods used under the asset based approach, the net asset method and the excess earnings method, are described below. The cost approach, used in valuing intangible assets, may use reproduction or replacement cost. Methods Within The Approaches Discounted cash flow (DCF) method. This method, used within the income approach, calculates the present value of future expected net cash flows using a discount rate. See discussion of Discount and Capitalization Rates below. Discounted future earnings method. Another method used within the income approach that calculates the present value of future expected economic benefits using a discount rate. The economic benefits utilized may be revenues, gross profit, operating income, earnings before interest, taxes, depreciation and amortization (EBITDA), earnings before interest and taxes (EBIT), earnings before taxes (EBT) or earnings (net income after taxes). Capitalization of earnings method. This method is used within the income approach whereby economic benefits for a representative single period are converted to value through division by a capitalization rate. The representative single period may be either historical or prospective. The underlying presumption being that the single period is representative of economic benefits growing at a stabilized rate. The single period may be economic benefits from the most recent fiscal year, the latest twelve months, an average of two or more prior historical periods or those expected in the next twelve months or fiscal year. 6

8 NEEDS TO KNOW ABOUT BUSINESS VALUATION Capitalization of dividends/distributions method. A method used within the income approach in which dividends or distributions for a representative single period are converted to value through division by a capitalization rate. As with the capitalization of earnings method, the underlying presumption is that the single period is representative of dividends/distributions growing at a stabilized rate. Guideline public company method. A method within the market approach whereby market multiples are derived from market prices of stocks of companies engaged in the same or similar lines of business, and that are actively traded on a free and open market. Guideline transactions method. Also known as the merger and acquisition company method, this method is used within the market approach whereby market multiples are derived from transactions of significant interests in companies engaged in the same or similar lines of business. Prior transactions involving interests in the company being valued are also considered guideline transactions. Net asset method. Also referred to as the accumulation of assets method or the adjusted net asset method, this method is used within the asset based approach whereby the value of the assets of the business are determined from which the value of the liabilities are subtracted. Excess earnings method. A specific way of determining a value indication of a business, business ownership interest, security or intangible asset determined as the sum of a) the value of the assets derived by capitalizing excess earnings and b) the value of the selected asset base. Also frequently used to value intangible assets. Discount and Capitalization Rates A discount rate is a rate of return used to convert a future monetary sum into a present value. Discount rates are derived from the return on stocks traded in public markets. A capitalization rate is simply a discount rate less the expected long-term rate of growth applicable to a security. For example, if the discount rate is 20 percent and the expected long-term rate of growth is 3%, the capitalization rate would be 17% (20% - 3% = 17%). Discount rates may be derived using the build-up method, the capital asset pricing model (CAPM), the Fama-French model or other methods. When valuing the market value of invested capital (both equity and debt), it is appropriate to use the weighted average cost of capital method (WACC). Derivation of discount and capitalization rates is a very deep subject and is beyond the scope of this presentation. 7

9 NEEDS TO KNOW ABOUT BUSINESS VALUATION Discounts & Premiums As mentioned in the Level of Value section above, discounts may be applied to indications of value of the enterprise developed under the various approaches to arrive at a conclusion on the appropriate basis for the subject being valued. The discounts most commonly applied are the DLOC and DLOM. The DLOC is generally applied to enterprise level indications of value to arrive at a value on a minority, marketable basis. Then the DLOM is applied to that value to arrive at a value on a minority, non-marketable basis. In valuing controlling interests of a closely held entity, a DLOM may be applicable but no DLOC would typically be applied for obvious reasons. A control premium is generally applicable to a controlling interest when the value indication is derived from the guideline public company method. With regard to application of a DLOM to controlling interests of a closely held entity, some in the valuation community are of the opinion that none is applicable, mainly because the holder of such interest has the ability to make distributions of available cash. Certain commentators state the prevailing school of thought in the valuation community is that a DLOM does apply but at a reduced level relative to what would otherwise apply to a minority interest. In valuing minority interests, a DLOC is usually applied except to indications of value derived using the guideline public company method within the market approach because the value indication returned is already at the minority level. Also, a DLOM is typically applied to the value at the minority, marketable level when valuing a minority interest. However, when indications of value a derived using the guideline transactions method, the magnitude of the DLOM must be reduced as there is already a DLOM captured in the value returned, albeit smaller since the transactions involve controlling, not minority interests. DLOC There are several resources available from which to determine the magnitude of a DLOC. They are: - FactSet s Mergerstat Review - Mergerstat / /BVR Control Premium Study - Closed-end funds - Partnership Profiles FactSet s Mergerstat Review reports data regarding transactions from merged and acquired companies. Among the data reported are premiums paid for controlling interests calculated by subtracting the price of the target s stock from the sale price. From this data, one can calculate implied discounts applicable to minority interests. These implied minority discounts serve as guidance in determining the magnitude of DLOC applicable. The Mergerstat / /BVR Control 8

10 NEEDS TO KNOW ABOUT BUSINESS VALUATION Premium Study is similar in the data reported in FactSet s Mergerstat, but the criteria for selecting the transactions reported and the price of the target s stock are slightly different. Closed-end funds generally trade at a discount 2 from the sum total of the net asset values of their underlying investments. Because shares of closed-end funds are actively traded in public markets and are easily and quickly convertible into cash, it can be assumed that the discounts to net asset value are attributable to investors lack of control. By relating the similarity of closedend fund s underlying investments to those of the entity being value, one can establish a benchmark to be used as guidance in determining the applicable DLOC. Partnership Profiles reports data on sales of limited partnership interests in publicly registered partnerships that trade in secondary markets. As with closed-end funds, these interests trade at discounts to the pro rata share of the net asset value of the partnerships underlying property. Although general consensus is that some of the discount is attributable to lack of marketability, it is thought the majority of the discount is attributable to investors lack of control. Thus, these discounts can be related to an interest being value by comparing attributes of the publicly registered partnerships to the subjects entity. DLOM Restricted stock studies and pre-ipo studies are the two most common resources from which benchmark DLOMs are determined. In recent years, valuation experts for the IRS have challenged taxpayers experts with regard to DLOMs based on both types of studies in Tax Court with varying degrees of success. Restricted stock studies compare the actual prices paid for restricted (or letter) stock to the prices of identical shares of publicly traded stock with no trading restrictions. The difference between the price paid for the restricted stock and the stock with no trading restrictions represents the discount. Numerous studies of restricted stock have been performed over the last 40 years. The size of the average and median discounts of these studies have trended down from approximately 35 percent to less than 20 percent in the most recently performed studies. This decline has been attributed in large part to the reduction in the minimum holding period of unregistered shares of publicly traded stocks from 2 years to 6 months under SEC Rule 144. Pre-IPO studies compare the prices of stock in transactions occurring prior to an IPO to the price of identical stock issued in an IPO. The difference between the prices of stock issued in an IPO and the prices of stock in pre-ipo transactions represents the discount. Average and median discounts from pre-ipo studies have not varied much over the years 2 Some closed-end funds trade at a premium, usually for short periods of time and those occurrences are relatively infrequent. 9

11 NEEDS TO KNOW ABOUT BUSINESS VALUATION Other resources and methods utilized in determining a DLOM include, but are not limited to LEAPS and PIPES transactions, the QMDM method, the NICE method and option pricing theory. Discussion of these is beyond the scope of this presentation. Other Discounts Other discounts that may be applicable in certain situations are: - Discount for key person dependence - Discount for key customer dependence - Discount for key product dependence - Discount for obsolescence of technology or facilities - Discount for built-in gains Synthesis of Approaches After developing the approaches to value and applying discounts to the indications of value returned, the valuation analyst must give appropriate weight to each indication of value in arriving at a conclusion of value. In theory, all approaches should return approximately the same indications of value. In practice, this rarely happens. Reasonable tests or sanity checks should be performed to ensure the conclusion of value makes economic sense. Conclusions of value may be stated as either a single amount or as a range of values. 10

12 NEEDS TO KNOW ABOUT BUSINESS VALUATION Valuation Credentials & Issuing Organizations (in the United States) Designation Issuing Organization Accredited Senior Appraiser (ASA) American Society of Appraisers (ASA) Accredited in Business Valuation (ABV) American Institute of Certified Public Accountants Certified Business Appraiser (CBA) Institute of Business Appraisers (IBA) Certified Valuation Analyst (CVA) National Association of Certified Valuation Analysts Types of Business Valuations Appraisal (ASA) Valuation (AICPA, IBA, NACVA) Limited Appraisal (ASA) Calculation (ASA, AICPA, IBA, NACVA) Types of Business Valuation Reports Comprehensive Written Business Valuation Report (ASA) 3 Detailed Report (AICPA, IBA, NACVA) Summary Report (AICPA, IBA, NACVA) Appraisal Report (USPAP) Restricted Use Appraisal Report (USPAP) Oral Report (ASA, AICPA, IBA, NACVA, USPAP) 3 ASA allows a report less comprehensive in content provided it complies with the minimum content required by Standard 10.2 of USPAP (Uniform Standards of Professional Appraisal Principles). 11

13 ALAN L. TOLMAS, CPA/ABV/CFF, ASA Alan L. Tolmas, Principal and Founder of Texas Financial Forensics, LLC, is a Certified Public Accountant and holds the Accredited in Business Valuation and Certified in Financial Forensics designations awarded by the AICPA. He also holds the Accredited Senior Appraiser designation awarded by the American Society of Appraisers. He is the immediate past President of the Estate Planning Council of North Texas and is a past President of the Dallas Fort Worth Chapter of American Society of Appraisers. Mr. Tolmas values businesses, interests in businesses and intangible assets as well as performs forensic accounting, including asset tracing, investigations of hidden assets, misappropriation of assets, evaluations of internal control and measures economic losses. He provides expert witness testimony in these areas as well. Mr. Tolmas has been trained in the interdisciplinary collaborative law process and serves as a neutral allied professional. Additionally, he has provided third opinions where opinions of opposing experts were widely divergent and has been jointly retained by opposing parties as well as served as court appointed valuation expert in litigated matters. Prior Experience: Senior Vice President at Business Valuation Advisors, LLC, a firm specializing in valuation and litigation consulting Senior Manager at Hill Schwartz Spilker Keller, LLC, a firm specializing in valuation and litigation consulting CFO of Concord Companies, a real estate and construction company Controller of Intervest Companies, a real estate development and management company Public accounting experience with Kenneth Leventhal & Company (merged with Ernst & Young) Education: Bachelor of Science in Business Administration Master of Science in Accounting (Taxation) Professional Memberships: American Institute of Certified Public Accountants American Society of Appraisers Collaborative Law Institute of Texas University of Texas at Dallas University of North Texas Dallas Estate Planning Council Estate Planning Council of North Texas Professional Licenses: Certified Public Accountant (State of Texas) Real Estate Broker (State of Texas) Professional Accreditations: Accredited Senior Appraiser (American Society of Appraisers) Accredited in Business Valuation (American Institute of Certified Public Accountants) Certified in Financial Forensics (American Institute of Certified Public Accountants) 12

14 2/1/12 WHAT EVERY ATTORNEY NEEDS TO KNOW ABOUT BUSINESS VALUATION BY ALAN L. TOLMAS, CPA/ABV/CFF, ASA DBA SOLO AND SMALL FIRM SECTION TAKEAWAYS 1. Why You Need to Know 2. Valuation Concepts 3. Appraisal Process WHY DO YOU NEED TO KNOW? Recognize Situations in Which a Client May Need a Valuation Counsel Clients in Tax, Divorce, M&A, Equity Comp, Corporate, Disputes In Litigation, for Effective Direct and Cross Examination 1

15 2/1/12 WHY YOU NEED TO KNOW? When Might My Client Need A Valuation? Estate Tax Gift of Ownership Interest Charitable Donation of Ownership Interest WHY YOU NEED TO KNOW? When Might My Client Need A Valuation? Granting Stock or Stock Options Phantom Stock or SAR Plan ESOP or ESPP WHY YOU NEED TO KNOW? When Might My Client Need A Valuation? C-Corp to S-Corp Conversion Divorce Mergers & Acquisitions 2

16 2/1/12 WHY YOU NEED TO KNOW? When Might My Client Need A Valuation? Shareholder Dispute/Oppression Shareholder Dissent/Derivative Action Partnership/LLC Dissolution WHY YOU NEED TO KNOW? When Might My Client Need A Valuation? Buy/Sell Agreement or Buyout Probate Bankruptcy VALUATION CONCEPTS Standards of Value Investment Value Present value of an asset to a particular investor Intrinsic Value Real or True value of the asset Fair Value Normally considered to be a pro rata share of a business enterprise Fair Market Value Willing & able hypothetical buyer & seller No compulsion to buy or sell Reasonable knowledge of relevant facts Orderly Liquidation Value Assets sold piecemeal over reasonable period of time Forced Liquidation Value Assets sold piecemeal as quickly as possible Value 3

17 2/1/12 VALUATION CONCEPTS Premise of Value Going Concern Continue as an ongoing operating enterprise Assemblage of Assets Business and assets are organized No earnings being generated Value Liquidation Orderly Forced VALUATION CONCEPTS Level of Value Controlling interest Enterprise value with no discounts applied Controlling, non-marketable interest Reflects a discount for lack of marketability Minority, marketable interest Reflects a discount from controlling interest Publicly traded stock Minority, non-marketable interest Reflects a discount from minority, marketable interest basis Basis on which minority interest would typically be valued unless otherwise specified, e.g. fair value Value VALUATION PROCESS Level of Value Does subject interest have control of the enterprise? Controlling Interest Value Minority Interest Value Controlling, Non-Marketable Interest Value Is subject interest readily marketable? Minority, Marketable Interest Value Minority, Nonmarketable Interest Value 4

18 2/1/12 VALUATION PROCESS Normalizing Adjustments Controlling Interest Minority Interest +/- Compensation Related Party Rent Fringe Benefits Travel & Entertainment Income/Expense Related to Personal Use Assets +/- Nonrecurring Gain/Loss Discontinued Operations Impairment Loss Accounting Differences Taxes on Pass-Through Entities VALUATION PROCESS APPROACHES & METHODS Income Approach Discounted Future Earnings Discounted Cash Flow Capitalized Earnings VALUATION PROCESS DISCOUNT & CAPITALIZATION RATES Discount Rate Derived From Publicly Traded Stocks Build-Up Method Capital Asset Pricing Model 5

19 2/1/12 VALUATION PROCESS DISCOUNT & CAPITALIZATION RATES Capitalization Rate Discount Rate 20% Long-Term Expected Growth Rate -3% Capitalization Rate 17% VALUATION PROCESS APPROACHES & METHODS Market Approach Guideline Public Company Guideline Transactions VALUATION PROCESS APPROACHES & METHODS Asset Based Approach Net Asset Method Excess Earnings Method 6

20 2/1/12 VALUATION PROCESS APPROACHES & METHODS Market Approach Guideline Public Company Guideline Transactions Income Approach Discounted Future Earnings Discounted Cash Flow Capitalized Earnings Asset Approach Net Asset Method Excess Earnings Method VALUATION PROCESS Discounts & Premiums Discount For Lack of Control Control Premium Discount for Lack of Marketability Mergerstat Review Mergerstat/BVR CPS Closed-End Funds Partnership Profiles Restricted Stock Studies Pre-IPO Studies LEAPS/PIPES QMDM/NICE Option Pricing Valuation Adjustments VALUATION PROCESS Guideline Transaction Method Asset Based (Cost) Approach Income Approach Guideline Public Company Method Controlling Interest Value Control Premium Minority Interest Discount Minority, Marketable Interest Value?? Discount for Lack of Marketability Discount for Lack of Marketability Controlling, Nonmarketable Interest Value Minority Nonmarketable Interest Value 7

21 2/1/12 VALUATION PROCESS SYNTHESIS OF APPROACHES Market Approach Guideline Public Company Guideline Transactions Income Approach Discounted Future Earnings Discounted Cash Flow Capitalized Earnings Equity Valuation Asset Approach Net Asset Method Excess Earnings Method VALUATION CREDENTIALS (US) Accredited Senior Appraiser (ASA) American Society of Appraisers (ASA) Accredited in Business Valuation (ABV) American Institute of Certified Public Accountants (AICPA) Certified Business Appraiser (CBA) Institute of Business Appraisers (IBA) Certified Valuation Analyst (CVA) National Association of Certified Valuation Analysts (NACVA) TYPES OF APPRAISALS Appraisal (ASA, IBA) Valuation (AICPA, NACVA) Limited Appraisal (ASA) Calculation (ASA, AICPA, IBA, NACVA) 8

22 2/1/12 TYPES OF REPORTS Comprehensive Written Business Valuation Report (ASA) Detailed Report (AICPA) Summary Report (AICPA) Appraisal Report (USPAP) Restricted Use Appraisal Report (USPAP) Oral Report (ASA, AICPA, IBA, CVA, USPAP) SUMMARY Multiple Reasons Business Valuations May Be Needed Standard, Premise and Level of Value Effect Ultimate Value Business Valuation Requires Many Assumptions Business Valuation May Be As Much An Art As A Science Use Care In Selecting an Appraiser Alan L. Tolmas, CPA/ABV/CFF, ASA Principal/Founder atolmas@texff.com 9