BUSINESS VALUATIONS FOR BEGINNERS - Houston CPA · PDF fileBUSINESS VALUATIONS FOR BEGINNERS ... and the conclusion or calculated value ... Comparative common size financial statements

BUSINESS VALUATIONS FOR BEGINNERS

Presented by

Houston TSCPA Foundation 2016 Accounting Expo

AndJ. Richard Claywell, CPA, ABV, ASA, CBA, ICVS, CVA, CM&AA,

MAFF, CFD, ABARMay 16, 2016

281.488.7531 [email protected]

Application of VS Section 100

Mission Statement: To improve the consistency and quality of practice among AICPA members performing business valuations.

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Application of VS Section 100

AICPA members will be required to follow this standard when they perform engagements to estimate value that culminate in the expression of a conclusion of value or a calculated value.

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Application of SSVS#1

As described in this Statement, the term engagement to estimate value refers to an engagement or any part of an engagement (for example, a tax, litigation, or acquisition-related engagement) that involves estimating the value of a subject interest. 4


An engagement to estimate value culminates in the expression of either a conclusion of value or a calculated value.

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Valuation analysts should be aware of any governmental regulations and other professional standards applicable to the engagement.

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Jurisdictional Exception

If any part of this Statement differs from published governmental, judicial, or accounting authority, or such authority specifies valuation development procedures or valuation reporting procedures, 7


Jurisdictional Exception

then the valuation analyst should follow the applicable published authority or stated procedures with respect to that part applicable to the valuation in which the member is engaged. 8

Application of SSVS#1Overall Engagement ConsiderationsEstablishing an Understanding with the

ClientAssumptions and Limiting ConditionsScope Restrictions or LimitationsUsing the Work of Specialists in the

Engagement to Estimate Value9


Overall Engagement Considerations (Cont.)Professional CompetenceNature and Risks of the Valuation Services

and Expectations of the ClientsObjectivity and Conflict of Interest Independence and Valuation

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In determining whether he or she can reasonably expect to complete the valuation engagement with professional competence, the valuation analyst should consider, at a minimum, the following:

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Subject entity and its industrySubject interestValuation dateScope of the valuation engagement

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Governmental Regulations or other professional standards that apply to the subject interest or to the valuation engagement

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Scope of the valuation engagementPurpose of the valuation engagementAssumptions and limiting conditions

expected to apply to the valuation engagement

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Scope of the valuation engagementApplicable standard of value , and the

applicable premise of value (for example, going concern)Type of valuation report to be issued , intended use and users of the report, and restrictions on the use of the report1

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Nature and Risks of the Valuation Services and Expectations of the ClientThe proposed terms of the valuation

engagementThe identity of the client

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Nature and Risks of the Valuation Services and Expectations of the ClientThe nature of the interest and ownership

rights in the business, business interest, security, or intangible asset being valued, including control characteristics and the degree of marketability of the interest1

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Application of SSVS#1The procedural requirements of a

valuation engagement and the extent, if any, to which procedures will be limited by either the client or circumstances beyond the client’s or the valuation analyst’s control

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The use of and limitations of the report, and the conclusion or calculated valueAny obligation to update the valuation

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Objectivity and Conflict of InterestThe AICPA Code of Professional

Conduct requires objectivity in the performance of all professional services, including valuation engagements

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Objectivity and Conflict of InterestObjectivity is a state of mindThe principal of objectivity imposes the

obligation to be impartial, intellectually honest, disinterested, and free from conflict of interest

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Objectivity and Conflict of InterestIf necessary, where a potential conflict of

interest may exist, a valuation analyst should make the disclosures and obtain consent as required under Interpretation No. 102-2, “Conflicts of Interest,” under Rule 102, Integrity and Objectivity.2

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Independence and ValuationIf valuation services are performed for a

client for which the valuation analyst or valuation analyst’s firm also perform an attest engagement, the valuation analyst should meet the requirements of Interpretation No. 101-3,2

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Independence and ValuationInterpretation No. 101-3, “Performance

of Nonattest Services,” under Rule 101, Independence, so as not to impair the member’s independence with respect to the client.

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Application of SSVS#1Scope Restrictions or LimitationsA restriction or limitation on the scope of

the valuation analyst’s work, or the data available for analysis, may be present and known to the valuation analyst at the outset of the valuation engagement or may arise during the engagement2

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Scope Restrictions or LimitationsSuch a restriction or limitation should be

disclosed in the valuation report

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Using the Work of SpecialistsMay rely on the work of a third party

specialist (for example, a real estate or equipment appraiser).

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Using the Work of Specialists Should note in the assumptions and

limiting conditions the level of responsibility, if any, being assumed by the valuation analyst for the work of the third party specialist

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Using the Work of Specialists May be included in the valuation

analyst’s report at the option of the valuation analyst

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Types of Valuation ReportsValuation EngagementRequire more procedures than does the

calculation engagementExpress the results of the valuation as a

conclusion of value: either a single amount or a range3

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Types of Valuation ReportsPerform when:The engagement calls for the valuation analyst to estimate the value of a subject interest andThe valuation analyst estimates the value and is free to apply the valuation 3

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Types of Valuation ReportsPerform when:The engagement calls for the valuation analyst to estimate the value of a subject interest and

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Types of Valuation ReportsPerform when:The valuation analyst estimates the value and is free to apply the valuation approaches and methods he or she deems appropriate in the circumstances. 3

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Types of Valuation ReportsDetailed Report- conclusion of valueSummary Report-conclusion of value

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Types of Valuation Reports (Cont.)Calculation EngagementRequire less procedures than does the

valuation engagement

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Types of Valuation Reports (Cont.)Calculation EngagementExpress the results of the procedures as a

calculated value: either a range or a single amount

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Types of Valuation Reports (Cont.)Calculation EngagementPerform when:The valuation analyst and the client agree on the valuation approaches and methods the valuation analyst will use and

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Types of Valuation Reports (Cont.)Calculation Engagement

The valuation analyst calculates the value in compliance with the agreement. Calculation Report-calculated value

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Hypothetical ConditionsHypothetical conditions affecting the

subject interest may be required in some circumstances

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Hypothetical ConditionsHe or she should indicate the purpose for

including the hypothetical conditions and disclose these conditions in the valuation or calculation report

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Valuation EngagementIn performing a valuation

engagement, the valuation analyst should:

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Valuation EngagementAnalyze the subject interestConsider and apply appropriate valuation approaches and methodsPrepare and maintain appropriate documentation

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Analysis of the Subject InterestNature of the subject interestScope of the valuation engagementValuation dateIntended use of the valuationApplicable standard of value4

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Analysis of the Subject Interest (Cont.)Applicable premise of valueAssumptions and limiting conditionsApplicable governmental regulations or

other professional standardsFinancial and nonfinancial information4

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Application of SSVS#1Nonfinancial InformationThe valuation analyst should, as

available and applicable to the valuation engagement, obtain sufficient nonfinancial information to enable him or her to understand the subject entity, including its:4

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Application of SSVS#1Nonfinancial Information

Nature, background, and historyFacilitiesOrganizational structureManagement team (may include officers, directors, and key employees)

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Application of SSVS#1Nonfinancial Information

Classes of equity ownership interests and rights attached thereto

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Nonfinancial Information (Cont.)Products or Services, or bothEconomic environmentGeographical marketsIndustry marketsKey customers and suppliers


Nonfinancial Information (Cont.)CompetitionBusiness risksStrategy and future plansGovernmental or regulatory environment


Ownership InformationDetermine the type of ownership interest

being valued and ascertain whether that interest exhibits control characteristics


Ownership InformationAnalyze the different ownership interests

of other owners and assess the potential effect on the value of the subject interestUnderstand the classes of equity

ownership interests and rights attached thereto

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Ownership InformationUnderstand the rights included in, or

excluded from, each intangible asset

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Ownership Information (Cont.)Understand other matters that may affect

the value of the subject interest, such as:For a business, business ownership interest, or security:

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Ownership Information (Cont.)Shareholder agreements, Partnership agreements, Operating agreements, Voting trust agreements, Buy-sell

agreements, 54


Ownership Information (Cont.)For an intangible asset: Legal rights, Licensing agreements, Sublicense agreements, Nondisclosure agreements,

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Ownership Information (Cont.)For an intangible asset: Development rights, Commercialization or exploitation rights, and Other contractual obligations

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Financial InformationHistorical financial information (including annual and interim financial statements and key financial statement ratios and statistics) for an appropriate number of years

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Application of SSVS#1Financial Information

Prospective financial information (for example, budgets, forecasts, and projections)Comparative summaries of financial statements or information covering a relevant time period5

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Application of SSVS#1Financial Information

Comparative common size financial statements for the subject entity for an appropriate number of years

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Application of SSVS#1Financial Information (Cont.)

Income tax returns for an appropriate number of yearsInformation on compensation for owners including benefits and personal expensesInformation on key man or officers’ life insurance6

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Financial Information (Cont.)Management’s response to inquiry regarding:Advantageous or disadvantageous contracts

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Application of SSVS#1Financial Information (Cont.)

Management’s response to inquiry regarding:Contingent or off-balance-sheet assets or liabilitiesInformation on prior sales of company stock6

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Subsequent EventsThe indication of conditions that were not

known or knowable at the valuation date, including conditions that arose subsequent to the valuation date. The valuation would not be updated to reflect those events or conditions. 6

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Subsequent Events (Cont.) In situations in which a valuation is

meaningful to the intended user beyond the valuation date, the events may be of such nature and significance as to warrant disclosure (at the option of the valuation analyst) 6

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Application of SSVS#1 In a separate section of the report in order

to keep users informed-Such disclosure should clearly indicate that information regarding the events is provided for informational purposes only and does not affect the determination of value as of the specified valuation date.

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Calculation Engagement In performing a calculation engagement,

the valuation analyst should consider, at a minimum, the following:

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Calculation EngagementIdentity of the clientIdentity of the subject interestWhether or not a business interest has

ownership control characteristics and its degree of marketability

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Calculation EngagementPurpose and intended use of the

calculated valueIntended users of the report and the

limitations on its useValuation date

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Calculation EngagementApplicable premise of value

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Calculation Engagement (Cont.)Applicable standard of valueSources of information used in the

calculation engagementValuation approaches or valuation

methods agreed upon with the client70


Calculation Engagement (Cont.)Subsequent events, if applicableThe quantity, type, and content of

documentation are matters of the valuation analyst’s professional judgment.

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Non-operating Assets and Excess Operating AssetsWhen the subject interest is a business,

business ownership interest, or security, the valuation report should identify:

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Non-operating Assets and Excess Operating AssetsAny related non-operating assetsNon-operating liabilitiesExcess or deficient operating assets and Their effect on the valuation7

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Representation of the Valuation AnalystEach written report should contain the

representation of the valuation analystThe representation is the section of the

report wherein the valuation analyst summarizes the factors that guided his or her work during the engagement7

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Representation of the Valuation AnalystExamples of these factors include the

following:

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Representation of the Valuation AnalystThe analyses, Opinions, and Conclusion of value Assumptions and limiting conditions,

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Representation of the Valuation AnalystAnd they are the personal analyses,

opinions, and conclusion of value of the valuation analyst

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Conclusion of Value Should present a reconciliation of the valuation analyst’s estimate or various estimates of the value of the subject interest.

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Conclusion of Value Should include the following or similar statements in addition to a discussion of the rationale underlying the conclusion of value:

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Conclusion of Value A valuation engagement was performed, including the subject interest and the valuation date.The date of the valuation report is included.

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Conclusion of Value (Cont.)The analysis was performed solely for the purpose described in this report, and the resulting estimate of value should not be used for any other purpose.The valuation engagement was 8

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Conclusion of Value (Cont.)The valuation engagement was conducted in accordance with the Statement(s) on Standard for Valuation Services of the AICPA.A statement that the estimate of value resulting from a valuation 8

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Conclusion of Value (Cont.)A statement that the estimate of value resulting from a valuation engagement is expressed as a conclusion of value.

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Conclusion of Value (Cont.)The scope of work or data available for analysis is explained, including any restrictions or limitations.A statement describing the conclusion of value, either a single amount or a range.8

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Conclusion of Value (Cont.)A statement describing the conclusion of value, either a single amount or a range.The conclusion of value is subject to the assumptions and limiting conditions and to the valuation

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Conclusion of Value (Cont.)The conclusion of value is subject to the assumptions and limiting conditions and to the valuation analyst’s representation.

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Conclusion of Value (Cont.)The report is signed in the name of the valuation analyst or the valuation analyst’s firmThe valuation analyst has no obligation to update the report or the conclusion of value for information 8

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Conclusion of Value (Cont.)The valuation analyst has no obligation to update the report or the conclusion of value for information that comes to his or her attention after the date of the report.

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IRS Notice 2006-96

IRS Qualified AppraisalAn appraisal will be treated as a qualified appraisal within the meaning of § 170(f)(11)(E) if the appraisal complies with all of the requirements of § 1.170A-13(c) of the existing regulations

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Industry AnalysisMichael Porter’s Five Forces of Industry

AnalysisRivalry Between IncumbentsThreat of New EntrantsThreat of SubstitutesSupplier PowerBuyer Power

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Pass Through Entities

Delaware Open MRI Radiology Associates, P.A. v. Howard B. Kessler, et al.

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Standards of Value

Fair Market ValueValue in exchange

Fair Value Investment Value Intrinsic Value

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Premise of Value

Going ConcernLiquidationForcedOrderly

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Asset Approach

Book ValueAdjusted Book ValueLiquidation Value

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Market Approach

Several Private Transaction DatabasesNot all earnings are defined the sameEliminate OutliersSkewnessKurtosis

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Market Approach

Revenue MultipleEarnings MultipleRevenues with Earnings MultipleUse of Averages

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Income Approach

Capitalization of Earnings/Cash FlowsNormalize Financial StatementsDevelop Discount and Capitalization RateMarketability Discount, if applicableMinority Interest Discount if applicable

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Income Approach

Discounted Cash Flows/EarningsNormalize Financial StatementsProjectionsDevelop Discount and Capitalization RateMarketability Discount, if applicableMinority Interest Discount if applicable9

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Any Questions?99

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BUSINESS VALUATIONS FOR BEGINNERS - Houston CPA · PDF fileBUSINESS VALUATIONS FOR BEGINNERS ... and the conclusion or calculated value ... Comparative common size financial statements