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Valuation of privately held companies


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Valuation of privately held companies

  2. 2. PRESENTATION OVERVIEW 2 Reasons for Business Valuation  Appraisal Discounts Levels of Value  Components of an Appraisal Approaches to V l A h Value Report R  Process of ValuationHH ADVISORS LLC
  3. 3. REASONS FOR BUSINESS VALUATION 3 Estate Gift and Income Tax Estate, Ta  Litigation Support Consulting & S pport Cons lting Planning/Compliance Appraisal Financial Reporting  Issuance of Stock Options Employee Stock Ownership Plan  Restricted Stock Discount Studies Fairness Opinions  Merger & Acquisition Consulting Buy/Sell AgreementsHH ADVISORS LLC
  4. 4. LEVELS OF VALUE 4 Obtain directly by reference to Obtain directly by reference to freely tradable values via actual change of control Controlling Control Premiums transactions or other control Interest Basis methodologies. Minority Interest Discount Control Premium Obtain directly by reference to “freely tradable” comparable Obtain indirectly by reference Marketable, Minority companies or by “build up” to control valuation via a Interest Basis methodologies, which d l th d l i hi h develop Minority Interest Discount capitalization rates by estimating required rates of Marketability Discount return in relation to public markets Obtain indirectly from Marketable, Minority valuation Non-marketable, Obtain directly from actual by applicator of Marketability Minority transactions Discount Interest BasisHH ADVISORS LLC
  5. 5. THREE APPROACHES TO VALUE 5 INCOME-BASED APPROACH  ASSET-BASED APPROACH • Discounted Cash Flow (“DCF”) Method • Adjusted Net Tangible Asset Value Method • Capitalization of Earnings Method MARKET-BASED APPROACH • Public Company Guideline Method • Guideline T G id li Transaction Method i M h d • Past Transactions in Company Stock • Buy/Sell Agreement Provisions HH ADVISORS LLC
  6. 6. INCOME-BASED APPROACH 6 DISCOUNTED CASH FLOW METHOD • Relies on the present value of projected future cash flows • Should be used when a company has not yet achieved stabilized growth • Appraiser should determine the number of projection periods necessary to reach stabilized growth, through discussions with Management and their own independent analysis. CAPITALIZATION OF EARNINGS METHOD • Relies on historical cash flows • Should only be used when steady growth is expected • Growth rate should not deviate too far from expected inflation.HH ADVISORS LLC
  8. 8. ASSET-BASED APPROACH 8 NET ASSET VALUE METHOD ADJUSTED NET TANGIBLE ASSET VALUE METHOD KEY CONSIDERATIONS IN USING THIS APPROACH • Understand the appraisal’s “Premise of Value” • Company being valued as: i) a going concern; ii) an assemblage of assets; p y g ) g g ; ) g ; iii) an orderly disposition; or iv) a forced liquidation. • Understand the appraisal’s “Level of Value” • Control versus Minority • Prerogatives of ControlHH ADVISORS LLC
  9. 9. APPRAISAL DISCOUNTS 9 Discount for Lack of Control • Empirical Evidence and Studies • Mergerstat/Shannon Pratt’s Control Premium Study Discount for Lack of Marketability • Empirical Evidence and Studies • FMV Opinions’ Restricted Stock Study Discount for Lack of Voting Rights • Empirical Evidence and StudiesHH ADVISORS LLC
  10. 10. COMPONENTS OF AN APPRAISAL REPORT 10 Report • Standard of Value Defined • Consider All three Approaches to value • Discounts: Correctly identified level of value, supported, and explained • Company, Industry and Economic Overview Citations of Relevant IRS rulings, business valuation standards (American Society of g , ( y Appraisers, AICPA, USPAP etc.) Qualifications of Appraiser HH ADVISORS LLC
  11. 11. THE PROCESS 11 Gather and Provide Information and Data • Financial statements, tax returns, projections, shareholder agreement, buy/sell agreement, etc. Analysis of the Information and Data Management Interview & Site Visit Prepare the Report and Exhibits Deliver the ReportHH ADVISORS LLC
  12. 12. 12 Mr. Hoekstra is the President of HH Advisors LLC, a PROFESSIONAL financial advisory services firm located in Atlanta Georgia Atlanta, Georgia. The firm’s financial advisory services include business and BACKGROUND OF intangible asset valuation, transfer pricing analysis, family limited partnership valuations, fairness and solvency opinions PRESENTER and litigation support services.Chad Hoekstra, ASA CPA/ABV/CFF ASA, Mr. Hoekstra worked in a public accounting firm environment from 1994 to 1999 and 2000 to 2004. HisEducation greater than ten years of cumulative experience includes• B.A., Accounting, Central College, Pella, seven years of full time experience providing business Iowa valuation, litigation support and investment banking services.Professional Designations• Public Accountant, licensed in Iowa He prepared business valuation opinion reports for federal gift and estate tax and estate planning, 1997-2003, licensed in Georgia 2003 employee stock ownership plans, family limited partnership valuations, tender offers and mergers• Accredited in Business Valuation from the and acquisitions. . He has provided expert witness services in connection with patent and other American Institute of CPAs since intangible asset litigation, estimated damages in connection with intellectual property damage claims 1999 and provided testimony in litigation matters including dissolution of marriage actions. He has• Accredited Senior Appraiser from the performed valuations in a variety of industries, including technology, consulting, manufacturing, American Society of Appraisers since 2002 chemical production, construction, commercial real estate, lodging, food service, distribution, agriculture, transportation, financial services, retailing and telecommunications.Organizations• Member, American Institute of Prior to co fo nding HH Ad isors he was a Director at a corporate finance and financial ad isor co-founding Advisors, as advisory Certified Public Accountants services firm at an Atlanta, Georgia firm Applied Economics, LLC. He worked at Applied Economics from 2005-2007. Prior to Applied Economics Mr. Hoekstra was a Manager in the• Member, Georgia Society of CPA’s business valuation and litigation support services group of Bennett Thrasher PC, an Atlanta based• Member, American Society of local public accounting firm from 2003-2005. Prior to Bennett Thrasher, Mr. Hoekstra was Appraisers employed by RSM McGladrey, Inc. in Des Moines, Iowa as a manager in their valuation services p y y y, , g• Member, Atlanta Chapter of the group from 1997 to 1999 and from 2000 to 2003. From 1994 to 1997 he provided financial audit American Society of Appraisers and attest services and tax services for McGladrey & Pullen, LLP in Cedar Rapids, Iowa. HH ADVISORS LLC
  13. 13. 13 Tim Hillegass is a Managing Director and co-founder PROFESSIONAL of HH Ad i f Advisors LLC a fi i l d i i LLC, financial advisory services firm located in Atlanta, Georgia. BACKGROUND OF Prior to HH Advisors, Mr. Hillegass was a partner with PRESENTER Applied Economics, an Atlanta financial advisory andTimothy K HillTi th K. Hillegass, MBA ASA MBA, corporate fin n e firm where he worked for se en orpor te finance firm, here orked seven years. Mr. Hillegass’ appraisals have been used for aEducation variety of purposes, such as mergers and acquisitions;• Master of Business Administration, financial reporting; SFAS 142 goodwill impairment University of Georgia tests; corporate planning, reorganizations; litigation• BS B i B.S., Business Administration, A b Ad i i t ti Auburn support; estate gift and corporate tax planning; marital estate, University dissolution, and ESOP administration.Professional Designations Mr. Hillegass leads HH Advisors’ transfer pricing practice and his assignments have been used• Accredited Senior Appraiser from the for a variety of purposes including: economic analysis support for clients facing challenges American Society of Appraisers since g gy from the United States and international taxing authorities; technology transfers and cost 2002 sharing arrangements; determination of the transfer prices for re-engineered supply chain structures; application of cost allocation methodologies for head office expenses; design andOrganizations implementation of contract manufacturing structures; implementation of royalty structures;• Member, American Society of and development of coordinated transfer pricing policies and procedures for compliance Appraisers purposes in numerous jurisdictions.• Member, Atlanta Chapter of the Mr. Hillegass has managed valuation and transfer pricing engagements for both smaller American Society of Appraisers privately held companies and larger multinational clients in the following industries: agriculture, automotive, commercial real estate, construction, consulting, consumer foods industries, distribution, financial services, information technology, lodging, manufacturing, retailing, telecommunications, and transportation. HH ADVISORS LLC
  14. 14. 14 Perry D. Walter is a Managing Director of HH Advisors PROFESSIONAL LLC, a financial advisory services firm located in Atlanta, Georgia. BACKGROUND OF HH Advisors completes over 150 business appraisals a PRESENTER year, with approximately 40% involving trusts and estates.Perry D. Walter, CFA Prior to joining HH Advisors LLC, Mr. Walter was a j g , W Senior Consultant and Business Plan expert for inCodeEducation Telecom (2007-2009), a strategy and management• Master of Business Administration-Finance consulting firm focused on providing advisory and University of North Carolina, Chapel Hill, consulting services for telecommunications and technology companies, as well as Private Equity firms. NC• B.A., Economics and Communications University of Virginia, Charlottesville, VA Mr. Walter founded Digital Media Investigations (2005-2006), a computer forensics firm focused on civil litigation and financial fraud cases. Mr. Walter was also one of four co-founders and CFO ofProfessional Designations WireFree Connect LLC, a venture-funded wireless Internet service company.• Chartered Financial Analyst (CFA)• Accredited Senior Appraiser from the Previously, as a general partner at Valiant Ventures (2001-2005), a venture consulting company, he American Society of Appraisers since helped early-stage technology companies develop their business and strategic plans, build-out their 2002 senior teams, and raise various rounds of capital. Valiant invested in Eyewonder, Inc., which was acquired by Limelight Networks in 2010 for $110 million.Organizations• CFA Institute Mr. Walter served as Senior Telecom Analyst with The Robinson-Humphrey Company (1996-2001)• Atlanta Society of Financial Analysts (a division of Smith Barney) and he held a similar position with Raymond James Financial (1993-• Member, Atlanta Chapter of the American 1996) in St. Petersburg, Florida. While at Robinson-Humphrey, he was recognized as an All Star Society of Appraisers Analyst and top stock picker by The Wall Street Journal and received an “Honorable Mention” by• Georgia Aquarium Volunteer Diver with Diver, Institutional Investor in its analyst rankings. y g over 700 hours of service HH ADVISORS LLC
  15. 15. APPENDIX 15 WACC and Components WACC/Cost of Equity Company, Economic, and Industry Overview Fin n i l An l i Financial Analysis Report DeliverableHH ADVISORS LLC
  16. 16. WACC AND COMPONENTS 16  WACC – WEIGHTED AVERAGE COST OF CAPITAL WACC = (RE X WE) + (RD [1-T] X WD) WHERE: • Re =Cost of equity capital • Rd =Cost of debt capital • We =Percentage of equity capital, at market value • Wd =Percentage of debt capital, at market value Percentage • T=The firms effective income tax rate  RELATIVE PERCENTAGES • Industry Based • Company BasedHH ADVISORS LLC
  17. 17. COMPANY, ECONOMIC AND INDUSTRY OVERVIEW 17 AT APPRAISAL DATE, NOT REPORT DATE Local Conditions, if relevant Economic Industry General Overview and Indicators Correct SIC or NAICS Code Consumer Spending and Inflation Description & Market Characteristics Business/Manufacturing Conditions Supply/Demand Determinants Financial Markets Fi i lM k t Product/Service S P d t/S i Segmentation t ti Housing Markets Industry Performance Unemployment Industry Outlook Inflation RatesHH ADVISORS LLC
  18. 18. FINANCIAL ANALYSIS 18 Growth Rates Turnover Analysis Profitability Working Capital Analysis Gross Margin Analysis Capital Structure Cash Flow (EBITDA) Industry Specific Analysis Financial AnalysisHH ADVISORS LLC
  19. 19. REPORT DELIVERABLE 19 Company Overview Appraisal Approaches Financial Analysis Income Approach Economic Overview Market Based Approach Industry Overview Asset Based Approach Strengths & Weaknesses Summary & ConclusionHH ADVISORS LLC