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W. James (Jim) Lloyd is a shareholder and valuation services practice leader at Pershing Yoakley & Associates, P.C. Jim has valued hundreds of businesses and related intangible assets spanning a broad range of industries including healthcare, banking, manufacturing, real estate, and wholesale distribution among others. In addition to being a Certified Public Accountant, Mr. Lloyd has earned multiple professional credentials relevant to business valuation and dispute services including the Accredited in Business Valuation (ABV) credential from the American Institute of CPAs, Accredited Senior Appraiser (ASA) credential from the American Society of Appraisers, and the Certified Fraud Examiner (CFE) credential from the Association of Certified Fraud Examiners.
Jim is a frequent speaker at various national and regional conferences on valuation and litigation related topics and holds leadership roles with several professional organizations including the American Institute of CPAs and the American Society of Appraisers.
Expert testimony experience includes federal and various state and local courts and arbitration proceedings across the United States.
Page Valuation is based more on economic as opposed to tax or financial reporting rules Key valuation factors for operating companies include:
Balance Sheet Analysis Page Cash should be enough but not too much! Accounts Receivable Inventory Fixed Assets Accrued Expenses Debt Obligations collectability consider obsolete and slow moving “ in-use” vs. resale value sometimes aren’t recorded use of funds and repayment terms
Weighted average cost of equity and after-tax cost of debt
Limitations due to assets available to secure the debt
Valuation Adjustments Depending upon the facts and circumstances, one or more “valuation adjustments” may be necessary to adjust the value to the appropriate level (e.g. fair market value) However, it’s important to understand the level of value determined before adjusting it!
Common valuation adjustments include:
Adjustment/Discount for Lack of Control
Adjustment/Discount for Lack of Marketability/Liquidity
Adjustments for Lack of Control Adjustments/discounts for lack of control (DLOC) are used to adjust “control” level indications of value (i.e. determined from control level cash flows) to minority level value indications DLOC are generally based on benchmark data plus qualitative analysis Note: the DLOC adjustment should be reasonable under the circumstances (e.g. would someone likely pay an implied premium for a controlling interest in the subject company?) Page
Adjustments for Lack of Marketability Adjustments/discounts for lack of marketability (DLOM) are used to adjust indications of value to a cash equivalent basis Multiple methods available to determine benchmark discounts – several of which are controversial Analysis generally includes both qualitative and qualitative factors Resulting value should be reasonable under the circumstances Page
Reconciliation and Conclusions of Value The indications of value determined from the various methodologies utilized should be reconciled and weighted appropriately
The conclusion of value can be an absolute or range of values
If a range is used, it should be a reasonable range (e.g. +/- 10% to 15%)
Enterprise vs. Personal Goodwill Page Enterprise goodwill is part of the business and should be included in the entity’s value Personal goodwill is an individual asset and (generally) should not be included in the entity’s value
Separating Personal Goodwill Personal goodwill can be separated by normalizing compensation and/or performing a “with and without” analysis Primary Reason – Avoiding the “double dip” between business value and the individual’s earnings capacity Page
Value to hypothetical buyers and sellers with neither being under compulsion and both having relevant knowledge
Value to specific buyers and/or sellers
Includes anticipated synergies
Pro-rata share of the enterprise value (generally excludes discounts)
Valuation Organizations and Credentials Page The most common business valuation organizations and credentials include: American Institute of CPAs Accredited in Business Valuation (“ABV”) credential American Society of Appraisers Accredited Senior Appraiser (“ASA”) credential Institute of Business Appraisers Certified Business Appraiser (“CBA”)
Levels of Valuation Services Page There are basically two levels of business valuation services which include: Valuations/Appraisals which result in an “opinion” of value; and
which result in an “indication” of value and not an opinion of value
Fraud Triangle Page Culture or environment enables management or other employees to rationalize committing fraud Circumstances exist – ineffective or absent control, or management ability to override controls – that provide opportunity Management or other employees have an incentive or are under pressure INCENTIVE RATIONALIZE FRAUD OPPORTUNITY
Red Flags Standard of living is unusual relative to known financial resources Disorganized operations Poor internal controls – easy for management to override Unusual and/or unsupported journal entries Out of balance subsidiary ledgers Page
Red Flags Unusually consistent financial performance Disconnect between cash and profitability Financial results that are in substantial contrast to other relevant factors such as economic conditions, peer groups, etc. Page
How to Find It – Basic Preliminary Steps Page Determine that proper predication has been established by the client Obtain an understanding of the specific fraud suspicions or allegations by discussing the case with client/attorney and review any work already performed Start gathering and analyzing data
Gathering and Analyzing Data Page Relevant data is generally gathered from a combination of methods such as: Obtaining and reviewing documents - from client and/or other sources Personal interviews Observations Background investigations Public record inquiries
Reviewing Documents – Caution Page Data should be gathered/analyzed with a high degree of skepticism Falsified documents are often used in collusion with others in an effort to conceal the fraud Proper chain of records custody may become an issue especially if documents have been altered or falsified
Analytical Procedures Look for unusual or unexplained trends: Year-to-year comparisons of financial data Benchmark comparisons Analytical procedures can be useful for purposes of identifying potential problem areas Page