1 valuation methodologies and evaluating valuation experts presented to the north carolina...
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Valuation Methodologies and Evaluating Valuation Experts
Presented to the
North Carolina Association of District Court Judges
by:T. Randolph Whitt, CPA, ABV
Kelly A. Schmid, CPA, CVA, ABV
Crisp Hughes Evans, LLP
April 10, 2003
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AGENDA
Evaluating a Valuation Expert Evaluating a Valuation Report Valuation Methodologies Valuation for Equitable Distribution -
Active v. Passive
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What Must be Valued? Pension and Retirement benefits - §50-20.1 Business interests operating as;
– C Corp– S Corp– General Partnership– Limited Partnership– Limited Liability Partnership– Sole Proprietorship
Other real and personal property
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Who are Valuators? Valuation Experts
– Credentialed experts (ASA, ABV, CVA, CFA, CBA, AVA)
• Educated in valuation theory
• Adhere to published business valuation standards which address financial analysis, industry analysis, economic analysis, report writing in addition to business valuation theory.
• Undergo examination, education and peer review of valuation reports to obtain designation.
– Accountants
• Core competencies of financial analysis and understanding of business operations
• May or may not understand business valuation theory
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Who are Valuators? Valuation Experts
– Economists
• Core competency of understanding of economic theory
• May or may not understand business valuation theory
– Industry Experts
• Core competency of understanding their industry
• Usually have no knowledge of business valuation theory
– Investment Bankers/Business Brokers
• Core competency of understanding the structure of a business transaction
• May or may not understand business valuation theory
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Evaluating an Expert
Education - in general and in business valuation
Qualifications (designations) and experience
Knowledge of business valuation theory Should not be an advocate for the client;
only an advocate of his opinion
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Evaluating an Expert’s Report
A well prepared valuation report will present the expert’s knowledge of:
• Industry
• National and Local Economies
• Subject Company
• Standard of Value
• Cost, Income and Market Approaches
• Discounts and Premiums
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Evaluating an Expert’s Report
Subjective Areas of Valuation Reports:
• Adjustments to the Balance Sheet and/or Income Statement
• Selection of Estimated Future Income Stream
• Calculation of Discount or Capitalization Rate– Risk factors
– Growth rate
• Selection of Valuation Methodology
• Selection of Guideline Companies or Transactions in the Market Approach
• Application of Discounts and Premiums
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Definition of Value Fair Market Value:
– Revenue Ruling 59-60 - “. . the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.”
– Is not equivalent to purchase price, replacement value, book value or the amount received in a sale of similar property.
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Definition of Value Fair Market Value:
– International Glossary of Business Valuation Terms – “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, where neither is under compulsion to buy or sell and when both have reasonable knowledge of the facts.”
– Business valuation organizations that adopted the International Glossary of Business Valuation Terms include the American Institute of Certified Public Accountants, American Society of Appraisers, National Association of Certified Valuation Analysts, Canadian Institute of Chartered Business Valuators, and the Institute of Business Appraisers.
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Valuation of Closely Held Business Interests
Definition:– Shares are owned by a relatively limited
number of stockholders, often held by one family.
– Shares not actively traded (usually)
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Valuation of Closely Held Business Interests
Valuation factors to consider (Rev Rul 59-60)• Nature of the business and the history of the
enterprise from its inception.
• Economic outlook in general and the condition and outlook of the specific industry in particular.
• Book value of the stock and the financial condition of the business.
• Earning capacity of the company.
• Dividend-paying capacity.
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Valuation of Closely Held Business Interests
Valuation factors to consider (continued)• Whether or not the enterprise has goodwill or other
intangible value.
• Sales of the stock and the size of the block of stock to be valued.
• Market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter
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Valuation Approaches
3 Approaches– Asset– Income– Market
All approaches must be considered, but various factors will influence which approach will be relied upon to value company.
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Valuation Approaches
Asset Approach– Estimate the value of a business by valuing the
tangible and intangible assets of the enterprise• Adjusted Net Assets Method
• Excess Earnings Method
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Valuation Approaches Income Approach
– Estimate the value of a business based on its future earnings stream
• Discounting: Projecting all expected future economic benefits and discounting each benefit back to a present value at a discount rate that represents the return on investment for that investment time.
• Capitalization: Dividing a single historical or projected economic benefit by a capitalization rate that represents the discount rate less the expected long-term growth rate.
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Valuation Approaches Market Approach
– Estimate the value of a business by direct comparison to comparable guideline companies and similar investment that have been sold.
• Guideline publicly traded company: Relating market value multiples for public company stocks to the subject company.
• Guideline merger and acquisition : Relating value multiples from sales of entire companies to the subject company.
• Prior transactions, offers and buy-sell agreements
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Asset Approach Adjusted Net Assets Method
– Valuation analyst restates all of the assets and liabilities of the subject company from their historical cost basis to fair market value.
– The fair market value of the assets minus the fair market value of the liabilities equals the fair market value of the business owners’ equity.
– Value indication is typically that of 100 percent of the equity, on a marketable, controlling ownership interest basis.
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Asset Approach
Adjusted Net Assets Method-Advantages– Easy to understand– Especially relevant in tangible asset intensive
business if valuing controlling ownership– Liquidation value may exceed going-concern
value
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Asset Approach Adjusted Net Assets Method-Disadvantages
– Expensive and difficult to get reliable market-derived data for valuation of many assets and liabilities
– Valuation of intangibles and contingent items may be considered speculative
– Of questionable relevance in many going-concern premise valuations, especially minority interests
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Asset Approach Excess Earnings Method
– Method is embodied in Revenue Ruling 68-609
– A derivation of this method is often used to value professional practices
– A “normalized” level of economic earnings is estimated by “adjusting” the professional’s salary to comparable market salaries
– Value indication derived from this method is on a marketable, controlling ownership interest basis
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Asset Approach Excess Earnings Method-Advantages
– Seemingly simplistic– Widely used in family law courts, especially for
professional practices and small service businesses
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Asset Approach Excess Earnings Method-Disadvantages
– Wide disagreement on implementation– No empirical basis available for developing or supporting
capitalization rate applicable to excess earnings– Does not provide mechanics for incorporating expected
growth– Not widely used by financial community– IRS position (per RR68-609) is use “only if no better
method is available”
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Income Approach Income Statement Analysis and Normalization
– Purpose is to better understand and interpret the earning power of the subject company
– Adjustments generally fall into three categories:• Differences in accounting practices• Nonrecurring events, discontinued operations, or other aspects
of past operations that may not represent future earning power• Discretionary items (management perquisites, bonuses, etc.);
Only done for valuations of controlling ownership interests
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Income Approach
Project future economic income• Free Cash flow: Earnings before interest and taxes
(EBIT) + Depreciation - Capital Expenditures - Change in Working Capital + Deferred Taxes
• Accounting earnings: net income, net operating income, earnings before interest and taxes (EBIT)
• Payouts: dividends, partnership withdrawals, S Corp distributions
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Income Approach
Selection of projected earnings stream– If debt is included in what is being valued, the income
stream to be used is Earnings Before Interest and Taxes (EBIT) or Net Cash Flow to Overall Invested Capital, which ignore capital structure and tax position
• A weighted average cost of capital (WACC) discount rate is used
• Resulting value is referred to as “Market Value of Invested Capital”
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Income Approach
Selection of projected earnings stream (con’t)– If debt is not included in what is being valued,
the income stream to be used is Net Income or Net Cash Flow to Equity
• A cost of equity discount rate is used
• Resulting value is referred to as “Market Value of Equity”.
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Income Approach Discount and Capitalization Rates
– The expected rate of return that would be required to attract an investor to invest in the subject company
• Instead of investing in available alternative investments that are comparable in terms of risk and other investment characteristics
– The discount or capitalization rate is the “cost of capital” for that particular investment.
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Income Approach Discount Rate
– Must be appropriate for the definition of economic income in the numerator
– Components: • Risk free rate (U.S. Treasury obligations)
• + Premium for risk (additional rate of return expected for investing in non-Treasury securities)
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Income Approach Capitalization Rate
– Must be appropriate for the definition of economic income in the numerator
– Components: • Risk free rate (U.S. Treasury obligations)• + Premium for risk (additional rate of return expected
for investing in non-Treasury securities)• - Projected sustainable average annual rate of
growth
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Discount and Capitalization Rate Example
BUILDUP METHOD
Risk-free Rate of Return 5.8%Common Stock Equity Risk Premium 7.4%Small Stock Risk Premium 5.9%Company Specific Premium 4.0% Net Cash Flow Discount Rate 23.1%
Less Sustainable Growth 3.0% Base Capitalization Rate for Next Year 20.1%
Base Capitalization Rate for Current Year 19.5%
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Income Approach Discount and Capitalization Rate
– Weighted Average Cost of Capital (WACC) • Blended costs of the company’s capital structure
components, each weighted by the market value of that component
• If debt is being included in what is being valued, a WACC will be applied to an earnings stream which ignores capital structure (interest expense)
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WACC - ExampleWEIGHTED AVERAGE COST OF CAPITAL (WACC)
DebtEnter Long Term Debt Interest rate 8.00%Enter Marginal Tax Rate 30.00%Capital StructurePercent of Debt In Capital Structure 20.00%Percent of Equity In Capital Structure 80.00%
WACC CalculationCost of Equity 23.10%Multiplied By:Percentage of Equity in Capital Structure 80.00% Weighted Cost of Equity 18.50% A
Long-Term Debt Interest Rate 8.00%Multiplied By:1-Tax Rate 70.00%Cost of Debt 5.60%Multiplied By:Percentage of Debt in Capital Structure 20.00% Weighted Cost of Debt 1.10% B
Weighted Average Cost of Capital 19.60% A + B
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Income Approach Discount and Capitalization Rate
– Risk Premium: • Equities are riskier than debt and warrant a higher expected
return• Most estimates of equity risk premium rely on historical
market performance as an indicator of future• Historically, small company stock have had higher returns
and more risk than large company stocks• Subject company may be riskier than the small companies
analyzed in the empirical data
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Income Approach
Discount and Capitalization Rate– Sources for Risk Premium data:
• Stocks, Bonds, Bills, and Inflation, published annually by Ibbotson Associates
• Standard & Poor’s Corporate Value Consulting Risk Premium Report, published annually by Standard & Poor’s
• Valuation analyst comparison of performance of subject company to publicly traded guideline companies and private company completed transactions
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Income Approach Taxes and the Risk Premium
– Stock Market returns used in calculating the risk premium are after corporate taxes
• These are the returns realized by an investor.
• These returns are pre-investor taxes, after business taxes
– When applying discount rates calculated with this data, cash flows should be calculated on the same basis.
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Income Approach
Discounted Economic Income Method– Most appropriate for projected income streams
with:• Predictable, but uneven changes• Short- or intermediate-term supergrowth• Changes that are erratic and unpredictable as to
timing• Also referred to as Discounted Cash Flow Method
(DCF)
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Income Approach Discounted Economic Income Method (con’t)
– If control-type normalization adjustments are made to economic benefit stream, resulting value is on a controlling, marketable basis
– Discount for lack of marketability applicable for minority interest valuation, possibly for control basis valuation (but would be considerably smaller, if applicable)
– Little or no difference in discount rate for control v. minority valuation (an assumed capital structure in a control valuation could change WACC)
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Income Approach
Discounted Economic Income Method-Advantages– Theoretically most correct, captures present
value of all future realizable cash– Widely used in the financial markets for pricing
and decision making.
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Income Approach Discounted Economic Income Method-
Disadvantages– Requires projections of future economic benefits;
may be controversial– Requires estimate of appropriate discount rate (cost
of capital); also subject to controversy– May be difficult to explain to an audience without
sufficient financial background (certainly not this group!)
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Discounted Cash Flows Example
Discounted Cash FlowsP.V. Using
Forecast Growth Terminal 20.0% DiscountedPeriod Earnings Rate Value Discount Rate Earnings
2002 108,000$ 8.0% 0.83333 90,000$ 2003 114,480 6.0% 0.69444 79,4992004 119,059 4.0% 0.57870 68,9002005 122,631 3.0% 0.48225 59,1392006 126,310 3.0% 0.40188 50,761
Terminal Value 130,099 3.0% 765,288 * 0.40188 307,554Indicated Value 655,853$
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Present Value Theory Another example of use of Present Value
theory– Pension valuations
• Value of benefit or payout is known
• What is the value of that benefit today?
• Example
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Present Value Theory Present Value Definition
– Code of Federal Regulations (“CFR”), the Proposed Rule on Employee Benefit Plans [6 C.F.R. Part 31, 3121(v) (1986)]:
• “Present value” of a pension benefit in a defined pension plan means the value as of a specified date of an amount or series of amounts due thereafter, where each amount is multiplied by the probability that the conditions on which payment of the amount is contingent will be satisfied, and is discounted according to an assumed rate of interest to reflect the time value of money. The present value must be determined as of the date the value is required to be taken into account using actuarial assumptions and methods that are reasonable as of that date.
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Income Approach
Capitalization Method– Most appropriate for projected income streams
that are:• Stable or evenly growing
• Erratic and unpredictable as to timing (if the company’s income is unstable and random as to timing, the Discounted Earnings Method may not be able to produce any more accurate a value indication than the capitalization method)
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Income Approach
Capitalization Method (con’t)– If control-type normalization adjustments are made to
economic benefit stream, resulting value is on a controlling, marketable basis
– Discount for lack of marketability applicable for minority interest valuation, possibly for control basis valuation (but would be considerably smaller, if applicable)
– Little or no difference in discount or capitalization rate for control v. minority valuation (an assumed capital structure in control valuation could change WACC)
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Income Approach
Capitalization Method-Advantages– Widely used by investors (although not as
much as Discounted Future Earnings)– Does not require specific-period, long-term
forecasts– Simple to understand and explain
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Income Approach Capitalization Method-Disadvantages
– Oversimplification of discounting method– Implicitly assumes that a variable capitalized
represents a reasonable base from which future benefits will proceed
– The measure of economic income to be capitalized and the capitalization rate may be controversial
– Difficult to use in start-up or high-growth companies
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Capitalization of Earnings Example
Capitalization of Earnings Method
After-Tax Cash Flow $100,000Divide By :Capitalization Rate 19.5% Indicated Value $512,821
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Market Approach
Guideline Companies (publicly traded) Market Transactions (private companies) Prior transactions, offers and buy-sell
agreements Rules of Thumb
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Market Approach
Guideline Companies (publicly traded)– EDGAR– Hoover’s online
If controlling interest being valued, there may be some control premium warranted
Discount for lack of marketability applicable if minority valuation, possibly if control valuation
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Market Approach
Guideline Companies-Advantages– There are many guideline publicly traded companies
available for different industries– Market is regarded as final arbiter of value– Prices of guideline publicly traded companies
available as of any effective valuation date– Excellent quantity and quality of data for each
company from SEC filings– Most investors and judges familiar with method
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Market Approach
Guideline Companies-Advantages (con’t)– Inexpensive to acquire data with readily available
databases and software (although proper data analysis is time consuming)
– Extensive empirical data available to support quantification of a discount for lack of marketability if valuing minority interest
– Especially relevant if subject company could go public
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Market Approach
Guideline Companies-Disadvantages – Public companies not available in all industries– Difficult to find adequately similar companies– Most public companies are much larger than
private companies being valued– Many public companies have higher growth
potential, which may require a difficult adjustment in the comparison
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Market Approach
Guideline Companies-Disadvantages(con’t) – For small companies, factors driving value may
be different than for public companies– If valuing a controlling interest, adjustment for
control may be difficult and controversial
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Examples of Pricing Multiples
Price to Earnings Multiple from Public Company
Net Income $100,000Multiply By:P/E Multiple 5.0 Indicated Value $500,000
Price to Revenue Multiple from Public Company
Revenue $1,000,000Multiply By:P/R Multiple 0.4 Indicated Value $400,000
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Market Approach
Market Transactions (private companies)– Pratt’s Stats– Done Deals– BIZCOMPS– Institute of Business Appraisers (IBA) database
Good for control valuations If used for minority valuation, usually would have to
discount for both minority interest and lack of marketability
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Market Approach
Market Transactions-Advantages– If valuing controlling interest, no premium for
control needed– Generally understood and accepted by courts– If the acquired company was public before
acquisition, excellent comparative financial data usually available
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Market Approach
Market Transactions-Disadvantages– Fewer comparative merger and acquisition
transactions than guideline publicly traded companies are available
– Data not readily accessible on a single database– Not all databases included full terms of the deal– Transactions are not on the same date as the
effective valuation date and may require adjustments for differences in time
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Market Approach
Market Transactions-Disadvantages(con’t)– If valuing minority interest, discounts for minority
ownership and/or lack of marketability may be controversial and hard to quantify
– If the acquired company was private before acquisition, financial data are limited and may not be possible to verify
– Often includes synergistic or strategic value; therefore may not represent fair market value
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Market Approach
Prior transactions, offers, buy-sell agreements– Resulting value depends on whether they were
applicable to control or minority transactions– Must consider adjustments for differences in
time, if applicable
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Market Approach
Prior transactions, offers, buy-sell agreements-Advantages– If on an arm’s-length basis, may be the best
evidence of value– Accurate, detailed data often available
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Market Approach
Prior transactions, offers, buy-sell agreements-Disadvantages– May be difficult to establish arm’s-length character– Removed in time from effective valuation date; may
require adjustments for differences in time– In case of offers and incomplete contracts, may be
difficult to establish if it is a bona fide offer from a qualified buyer
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Market Approach
Rules of Thumb– Universally relate to control value– If using for minority value, need to consider
adjustments for minority and/or lack of marketability
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Market Approach
Rules of Thumb-Advantages– Should be considered if they are widely
publicized in a particular industry– Usually simple to apply– Should be used as a “sanity check”
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Market Approach
Rules of Thumb-Disadvantages– No empirical verification as to extent to which
market actually tends to follow them– Usually do not know details of transactions that
allegedly underlie the rule– For most industries, the various sources of rules
of thumb usually produce a very wide range of values
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Premiums and Discounts
Discount for Lack of Control (minority interest discount)– An amount or percentage deducted from an
equity interest to reflect minority position or lack of control
– Can not be observed in the market– Must be inferred from control premiums
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Premiums and Discounts
Sources for Discount for Lack of Control (minority interest discount)– Mergerstat Review – Closed end mutual funds (for FLPs owning
marketable securities– Limited partnership secondary markets (for
FLPs owing real estate)
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Sample Mergerstat Data
Mergerstat Premium2001 and 2000
2001Premium
2001ImpliedDiscount
2000Premium
2000ImpliedDiscount
Average 57.2% 36.4% 49.2% 33.0%Median 40.5% 28.8% 41.1% 29.1%Controlling ownership 58.0% 36.7% 49.1% 32.9%Block of minority interest 35.2% 26.0% 32.6% 24.6%Median for transactions of $25 million or less 56.3% 36.0% 42.9% 30.0%Median for companies trading at 0-5 x earnings 19.4% 16.2% 28.6% 22.2%Median for companies trading at 5-8 x earnings 31.6% 24.0% 38.4% 27.7%Median for companies trading at 8-10x earnings 33.3% 25.0% 41.5% 29.3%Median for companies trading at 10-12x earnings 40.1% 28.6% 33.9% 25.3%Median for companies trading at 12-15x earnings 27.3% 21.4% 27.3% 21.5%Median for companies trading at over 15x earnings 36.5% 26.7% 40.3% 28.7%
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Premiums and Discounts
Discount for Lack of Marketability– An amount or percentage deducted from an equity
interest to reflect lack of marketability– The standard for marketability of minority interests
is public securities markets - cash in three days– The discount necessary to generate a sufficient
increment of return to the holder of a minority interest to induce him to make a particular investment
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Premiums and Discounts
Sources for Discounts for Lack of Marketability– Restricted stock studies– IPO studies– Bid-ask spreads
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Restricted Stock Studies
Number of StandardStudy Observations Median Mean Deviation Low High
1 SEC InstitutionalInvestor Study 398 24% 26% na (15%) 80%
2 Gelman Study 89 33% 33% na <15% >40%
3 Moroney Study 146 34% 35% 18% (30%) 90%
4 Maher Study 34 33% 35% 18% 3% 76%
5 Trout Study 60 na 34% na na na
6 Stryker/Pittock Study 28 45% na na 7% 91%
7 Willamette Mgmt Study 33 31% na na na na
8 Silber Study 69 na 34% 24% (13%) 84%
9 Hall/Polacek Study 100+ na 23% na na na
10 Management Planning Study 49 29% 28% 14% 0% 58%
Averages 33% 31%
Source: Mercer, Z. Christopher, Quantifying Marketability Discounts, p.69. See Chapter 2, Figure 2-14; Inclusive of Management Planning Study discussed in Chapter 12.
Range
SUMMARY RESULTS OF TEN RESTRICTED STOCK STUDIES
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The Emory IPO Studies
NumberPeriod of IPOs Mean Median High Low Std. Dev.
1991-1993 54 45% 44% 83% 3% 21%1990-1992 35 42% 40% 82% 4% 21%1989-1990 23 45% 40% 94% 6% 22%1987-1989 27 45% 45% 94% -6% 22%1985-1986 21 43% 43% 90% -4% 21%1980-1981 13 60% 66% 76% 6% 18%
All Years 310 44% 43% 94% -6% 21%
Source: John D. Emory, "The Valuation of Marketability as Illustrated in Initial Public Offeringsof Common Stock, November 1995 through April 1997," Business Valuation Review, September 1997, p. 125.
Discount to IPO Dispersion of Observations
THE EMORY STUDIES (1980-1993)
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Valuation Issues in Equitable Distribution
Valuation of :– Marital property
– Separate property
– Active v. passive
– Debts (marital and separate)
– Property composed of both separate and marital elements
– Changes in value of marital assets between date of separation and date of distribution
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Valuation in Equitable Distribution
Equitable Distribution– North Carolina became an “equitable distribution” state
in 1981
– N.C. GS§50-20 states that “the court shall determine what is the marital property and divisible property and shall provide for an equitable distribution of the marital property and divisible property between the parties. . .”
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Valuation in Equitable Distribution
Equitable Distribution– In assigning a value to the property, the court will:
• Classify all property of the parties as separate, marital, or divisible
• Value the separate property and assign to appropriate party
• Value each item of marital property• Consider active and passive components of value in
marital, separate and divisible property
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Valuation in Equitable Distribution
Equitable Distribution (con’t)• Classify the debts of the parties as separate or
marital and value them
• Apportion or distribute the marital debts in an equitable manner
• Distribute the marital and divisible property equitably
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Valuation in Equitable Distribution
Marital Property - GS§50-20(b)(1)– All real and personal property acquired by
either spouse or both spouses during the course of the marriage and before the date of the separation of the parties:
• It is presumed that all property acquired after the date of marriage and before the date of separation is marital property except property which is separate property under subdivision 2 of GS§50-20.
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Valuation in Equitable Distribution
Separate Property - GS§50-20(b)(2)– All real and personal property acquired by a
spouse before marriage or acquired by a spouse by bequest, devise, descent, or gift during the course of the marriage
• The increase in value of separate property and the income derived from separate property shall be considered separate property.
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Valuation in Equitable Distribution
Divisible Property - GS§50-20(b)(4)– All real and personal property as set forth below:
• all appreciation and diminution in value of marital property and divisible property of the parties occurring after the date of separation and prior to the date of distribution, except that appreciation or diminution in value which is the result of postseparation actions or activities of a spouse
• passive income from marital property received after the date of separation
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Valuation in Equitable Distribution
Divisible Property - GS§50-20(b)(4) • all property, property rights, or any portion thereof
received after the date of separation but before the date of distribution that was acquired as a result of the efforts of either spouse during the marriage and before the date of separation
• increases in marital debt and financing charges and interest related to marital debt
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Active v. Passive Issues
An increase in value of separate property remains separate property
Increases in value of separate property resulting from contributions of time or money of one or both spouses is “active” appreciation
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Active Appreciation
Arises from “financial or managerial contributions of one of the spouses to separate property during marriage.”– Increases in value are marital property– Allows the marital estate a fair return on its
investment of time and money
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Passive Appreciation
“Enhancement of the value of separate property due solely to inflation,changing economic conditions, or such other circumstances beyond the control of either spouse”– Burden of proof falls upon the party claiming
the appreciation was passive
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Active or Passive?
Determining Factors:– Nature of the Property– Impact of Market Conditions– Spouse’s expertise in managing the asset– Degree of management control over asset– Appreciation resulting from third party efforts– Influence of governments
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Active or Passive?
Appreciation of Closely Held Corporations– Often centers around the degree of management
control a spouse exercises over the asset (Smith v. Smith)
– Not always clear cut (Lawing v. Lawing)
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Active or Passive?
How to determine?– Court must determine value of the business at the time
of marriage, at separation, and near date of trial or distribution.
– Court must then determine what portion of the increase is attributable to the efforts of the parties during marriage. This increase is marital property and subject to division.
– Remainder is separate property.
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Active or Passive?
How to determine?– Court must also determine the appreciation or
diminution in value between the date of separation and trial or distribution date.
– If this appreciation or diminution is passive, it is divisible property.
– If this appreciation or diminution is active, it is separate property.
Example problem in handout
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Valuation Methodologies and Evaluating Valuation Experts
Presented to the
North Carolina Association of District Court Judges
by:T. Randolph Whitt, CPA, ABV
Kelly A. Schmid, CPA, CVA, ABV
Crisp Hughes Evans, LLP
April 10, 2003