Professional Documents
Culture Documents
Valuation Methodologies
Discounts and Premiums
Buy/Sell Agreements
Patent Infringement
Damage Assessment
Partner Disputes
Economic Damages
Marital Dissolutions
Financial Reporting
Purchase Price Allocation, Impairment Testing and Stock Options and Grants, etc.
Strategic Planning/Transaction
Value Enhancement
Business Plan/Capital Raising
Strategic Direction, Spin-Offs, Carve Outs, etc.
Acquisitions, Due Diligence
2
1.1 Proposal
and
Engagement
Letter
Signed Engagement
Letter with Retainer
2.1 Company
and Industry
Analysis
1.3 Establish
Valuation
Date
1.2 Establish
Standard of
Value and
Define Purpose
1.4 Data
Gathering
2.2 Analyze
Historical
Financial
Statements
2.4 Financial
Statements
Analysis
(Ratios, etc.)
3.2 Narrative
Write-up of the
Report
3.4 Finalize
Purpose
Establish Purpose of the Engagement
Estate/Gift, Buy/Sell Agreements, etc.
Standards of Value (i.e. Fair Market Value, Fair Value, etc.)
Interest Being Valued (i.e. Enterprise, Equity, Marketable, NonMarketable, Control, Minority, etc.)
Valuation Date
Agree on a Appropriate Valuation Date
Utilize Data Subsequent to the Valuation Date
Sometimes can Consider Data After the Valuation Date if it was
Foreseeable as of the Valuation Date
Adjustments
Projections (If applicable)
6
Target Industry
Valuation Methodologies
Income Approach
Market Approach
Net Asset Approach
Income Approach
The Income Approach is a valuation technique that provides an
estimation of the value of an asset based on the present value of
expected cash flows.
The various forms:
Capitalization of Earnings/Cash Flow Analysis (Gordon Growth Model)
Discounted Cash Flow Analysis (DCF)
Dividend Discount Model (DDM)
CF1
Value =
(r-g)
CF = Free Cash Flow
(FCFF or FCFE)
r = Discount Rate
Cost of Capital or
Cost of Equity
g = Expected Growth Rate
10
11
CF2
Value =
1
=
=
=
=
+
(1+r)
CF
TCF
R
G
CFn
2
(1+r)
TCF / (r-g)
+
(1+r)n
(1+r)n
Cash Flow
Terminal Cash Flow
Discount Rate (Weighted Average Cost of Capital) or (Cost of Equity)
Long-term Growth Rate
12
13
14
4.5%
5.0%
6.0%
-1.1%
2.0%
16.4%
Bu (Unlevered Beta)
=
1 + ( 1 - t ) W d / We
BL (Relevered Beta)
= Bu ( 1 + ( 1 - t ) Wd / Wc )
Wd = Weight of Debt
We = Weight of Equity
Wc = Weight of Capital
The result will be a market-derived beta specifically adjusted for the degree of
financial leverage of the subject company
16
Cost of Debt
Cost of Debt Based on Subject Companys Credit Rating and
Borrowing Rate (i.e. Prime rate + 1%, BBB, BB, B-, Prime Rate,
etc.) at Valuation Date
After Tax Cost of Debt
Cost of Debt x (1 Target Companys Tax Rate)
Debt to Capital Ratio
Control Value: Target/Optimal or Industry Average Debt to
Capital Ratio
Lack of Control/Minority Value: Company Specific Debt to
Capital Ratio
17
18
Equity Multiples
Fair Market Value of Equity (Stock Price x Outstanding Number of
Shares)
Common Equity Level Multiples
19
20
21
Control Value
Private Market Transaction Approach
Private to Private Transactions
Control Value
Common Transaction Database
MergerStat, Pratts Stat, Biz Comps, Capital IQ
22
24
26
The U.S. Tax Court normally allows discounts for lack of marketability for
non-controlling interests in closely held companies, but the size of the
discounts varies greatly from one case to another
Need to carefully study the recent case law in the relevant jurisdiction
The quality of the expert evidence and testimony presented in the Tax
Court makes a big difference in the outcome
The Tax Court expects good empirical evidence, relevant to the subject
at hand; simple averages are insufficient
27
28
Although they cannot be sold on the open market, they can be bought
by qualified institutional investors. Thus, the restricted stock studies
compare the price of restricted shares of a public company with the
freely-traded public market price on the same date
Price differences are attributed to liquidity
Many feel the discounts are a reliable guide to discounts for LOM
Empirical Studies: McConaughy, SEC Institutional Investor, Gelman,
Trout, Moroney, Maher, Standard Research Consultants, Siber, FMV
Opinion, Management Planning, Johnson, Columbia Financial Advisors
Studies
29
These data are most appropriate for valuing restricted stocks and are difficult to
apply to private companies
The value of the studies is that the comparisons are apples to apples (i.e. liquid
stock value vs. illiquid stock value of the same company at the same time).
Restrictions have been relaxed and discounts have dropped
Statistical studies can explain at best 1/3 of the discount
30
Other Studies
Modified put option model (i.e. Finnerty and Chaffee)
Modified cost of capital total beta (McConaughy and Covrig)
Private Company Discount by Koeplin, Sarin & Shapiro, Journal
of Applied Corporate Finance Winter 2000.
Find approximately a 30% discount. Perhaps the best study, but limited
sample size makes it difficult to apply to a specific case.
32
34
Control Premium
Other things equal, an interest with control is worth more than
one that lacks control
35
Control Premium
Common Prerogatives of Control
Elect directors and appoint management
Determine management compensation and perquisites
Set policy and change the course of business
Acquire or liquidate assets
Select people with whom to do business and award contracts
Make acquisitions
Liquidate, dissolve, sell, leverage or recapitalize the company
Sell or acquire treasury shares
Register the companys stock for a public offering
Declare and pay dividends
Change the articles of incorporation or bylaws or operating
agreement
36
37
1
Minority Discount
1
1 + Control Premium
This is overly simplistic. Ignores hubris and synergy and other factors that
impact take-over premia
38
39
Other Discounts
Key Person Discount
Measure potential negative impact to the projected cash flows in the
absence of Key Personnel
Block Discount
A large interest may be less liquid than a smaller one
40
Other Discounts
Voting vs. Non-Voting
If a company has both voting and nonvoting classes of stock, there
may be a price difference between the two, usually in favor of the
voting stock
Based on level of influence by the voting shareholders, restrictive
agreements, state laws and policies and the total number of block of
shares between voting and non-voting
Empirical studies indicates premium for voting shares
Lease, McConnell and Mikkelson Study 5.4%
Robinson, Rumsey and White Study 3.5% ~ 4.5%
OShea and Siwicki Study 3.5%
Houlihan Lokey Howard & Zukin Study 3.2% (average), 2.7%
(median)
41
42