This is a discussion of the methods and uses of business valuation techniques. This webinar was presented by Theresa Seidler-Shonat, a Business Valuation Specialist from Smith & Gesteland, a Madison, Wisconsin accounting and consulting firm.

1. Business Valuation
101
Demystifying Business Valuation for
Small Business Owners
Theresa Zeidler-
Shonat
Director of Valuation
Services
1

2. What is Business Valuation?
2

3. The Short Answer
• Business valuation is a process and a
set of procedures used to estimate the
economic value of an owner's interest
in a business.
3

4. Poll Question
4

5. Let’s Start with Terminology…
• What’s the difference between
“Valuation” and “Appraisal?”
5

6. Definition:
Valuation
• Valuation – (noun)
the act or process of
determining the
value of a business,
business ownership
interest, security, or
intangible asset.
6

7. Definition:
Appraisal
• Appraisal - (noun)
the act or process of
developing an
opinion of value; an
opinion of value.
7

8. WHEN DO YOU NEED A VALUATION?
8

9. Estate and Gifting
• Death of business owner
• Transfer of business ownership to the
next generation through gift of shares
9

10. Divorce
• A party in the divorce holds an equity
position in a closely-held company, or
owns intellectual property that is
considered part of the divisible marital
property (“undivided one-half marital
property interest”)
10

11. Lending Scenarios
• Some SBA loans require a business
valuation if a specific set of conditions
exist
• Intangible assets are being used as
collateral and the lender wants an
idea of their worth
11

12. Business Planning
• Strategic planning - company is
considering several options and is
wanting to determine the impact
of several scenarios
• Succession planning
• Exit Planning
• Impact of expanding into new
industry or making an acquisition
12

13. Financial Reporting
• Company has just been acquired or
made an acquisition: purchase price
allocations (ASC 805)
– Total purchase consideration is allocated
to the acquired assets.
– Includes intangible asset valuations
13

14. Financial Reporting
• Company has goodwill or indefinite-
lived intangible assets on their balance
sheet from a previous acquisition -
impairment testing (ASC 350)
14

15. Financial Reporting
• Company holds a minority interest in
another company and is required to
mark that investment to market
15

16. Stock-Based Compensation
• 409A valuations.
– Private companies are required by
the IRS (Section 409A) to show that
their common stock options are
issued at fair market value, and
therefore must conduct a formal
valuation opinion at least once
every 12 months to avoid potential
tax penalties.
16

17. Stock-Based Compensation
• ASC 718 valuations.
– ASC 718 requires that all equity
awards granted to employees,
consultants, and board members
be accounted for at "fair value" and
then expensed over the vesting
term of the grant.
– This can become more difficult as
additional grants are made and
vesting and forfeitures add
complexity to the calculations.
17

18. Intangible Asset / Intellectual
Property Monetization
• Company is considering
monetizing assets - either through
use as collateral or licensing the
asset to a third party
• Company is contemplating sale
of the asset and need help
determining a price
• Company is contemplating
purchase of an asset and looking
to determine if price is fair 18

19. Buy-Sell Agreement
Development
• Most buy-sell agreements have a
provision for determining the price at
which an interest in the company is
sold.
– Basing this on a valuation, or requiring a
valuation in the buy-sell agreement
mitigates risk
19

20. Shareholder Buyouts
• Not all companies have a buy-sell
agreement in place.
• Business valuations can provide a
good point to begin negotiations, and
smooth the process.
20

21. 21
You’ve Decided to do a Business
Valuation.
What Happens Next?

22. Business Valuation Timeline
22
I.
•Project Scoping and Engagement Letter
•This typically takes a few days between initial discussions and the engagement letter
II.
•Information and Data Request
•This length of this step depends on how quickly client responds with requested information
III.
•Initial Modeling and industry research
•This portion should take 4 to 6 days to complete
IV.
•Follow up questions for client
•Questions arise during step III. Timing depends on client response time.
V.
•Finish model and finalize report
•A few days to a week depending on responses received in Step IV.
VI.
•Submit final report to client
•In total process typically takes 3 to 6 weeks.

23. Poll Question
23

24. So What is “Value?”
• “Value” expresses an economic
concept. As such, it is never a fact
but always an opinion of the worth
of a property (asset)
• “Value” should always be qualified;
e.g., “fair market value,” “liquidation
value,” or “investment Value
24

25. Definition: Value
(USPAP, paraphrased)
• Value is the monetary
relationship between
properties (assets) and
those who buy, sell, or
use those properties
(assets)
25

26. The “Definitions of Value”
• Fair Market Value
• Fair Value
• Investment Value
• Intrinsic Value
• Liquidation Value
–Orderly
–Forced
26

27. Fair Market Value
• “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 relevant facts. Court
decisions frequently state in addition
that both the hypothetical buyer and
seller are assumed to be able, as well
as willing, to trade and to be well
informed about the property and
concerning the market for such
property.” 27
Source: IRS Revenue Ruling 59-60

28. 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,
when neither is under
compulsion to buy or sell and
when both have reasonable
knowledge of the relevant 28
Source: The International Glossary of Business Valuation
Terms

29. Fair Value (Financial
Reporting)
• "The price that would be received to
sell an asset or paid to transfer a
liability in an orderly transaction
between market participants at the
measurement date."
29
Source: ASC 820

30. Fair Value
• Can also be defined on a state-by-
state basis in divorce matters.
30

31. Investment Value
• "The value to a particular
investor based on
individual
requirements and
expectations."
31
Source: The International Glossary of Business Valuation
Terms

32. Intrinsic Value
• "The value that an investor
considers, on the basis of an
evaluation or available facts, to
be the "true" or "real" value that
will become the market value
when other investors reach the
same conclusion. When the term
applies to options, it is the
difference between the exercise
price or strike price of an option
and the market value of the
underlying security." 32
Source: The International Glossary of Business Valuation
Terms

33. Liquidation Value
• The most probable price that a
specified interest in real property is
likely to bring under extreme
compulsion to sell.
33
Source: Paraphrased from the Appraisal Institute, The Dictionary of Real Estate
Appraisal

34. 34
What (Exactly) is Being Valued Here?

35. The Value Equation
35
+
+
+
The Business Enterprise Equation
Value of Business
Enterprise
Value of Net
Working Capital
Value of Equity
Value of Tangible
Assets
Value of Interest-
Bearing DebtValue of
Intangible Assets
BEV =
Value of
Underlying Assets
=
Value of Invested
Capital
= =

36. Invested Capital
• Invested capital (sometimes
called business enterprise value)
is the value of the entire business
– Think of it like the price you would
receive if you were to sell the whole
business today
• Its equal to the value of the
equity in the business plus the
value of the debt. 36

37. Equity
• The value of the business available to
equity holders after debt service.
• Equity can be valued as a 100%
interest, or a fractional interest.
37

38. Levels of Value
• Business Enterprise Value (Total
Invested Capital)
• Equity Value, 100%
• Equity Value, Non-controlling
• Equity Value, Non-marketable
• Equity Value, non-controlling, non-
marketable
• Equity Value, non-controlling, non-
marketable, non-voting 38

39. Intangible Assets
• Intellectual Property (IP)
• Marketing Intangibles
• Contract-Based Intangibles
• Customer-Relationship-Based
Intangibles
• Artistic Intangibles
39

40. 40
Does WHEN a Valuation is Done
Make a Difference?

41. 41

42. Point in time Measurement
• Value Changes over time
• “Valuation Date” is important
42

43. Some Valuations have Date
Requirements or Deadlines
• Estate tax: date of death
• Financial Reporting: fiscal year end
43

44. Let too
much time
elapse…
… and
gathering
information can
be like an
archaeological 44

45. 45
How Much Valuation Do I Need?

46. Opinion of Value (Appraisal)
• a. An Appraisal is the act or process of determining the
value of a business, business ownership interest,
security, or intangible asset.
• b. The objective of an appraisal is to express an
unambiguous opinion as to the value of a business,
business ownership interest, security or intangible asset
which opinion is supported by all procedures that the
appraiser deems to be relevant to the valuation.
• c. An appraisal has the following qualities:
• (1) Its conclusion of value is expressed as either a
single dollar amount or a range
• (2) It considers all relevant information as of the
appraisal date available to the appraiser at the time of
performance of the valuation
• (3) The appraiser conducts appropriate procedures
to collect and analyze all information expected to be
relevant to the valuation
• (4) The valuation considers all conceptual
approaches deemed to be relevant by the appraiser
46

47. Calculation of Value
• Calculation engagement, as defined in the
Statement on Standards for Valuation Services
(SSVS)
• A valuation analyst performs a calculation
engagement when
– (1) the valuation analyst and the client agree on the
valuation approaches and methods the valuation
analyst will use and the extent of procedures the
valuation analyst will perform in the process of
calculating the value of a subject interest (these
procedures will be more limited than those of a
valuation engagement) and
– (2) the valuation analyst calculates the value in
compliance with the agreement. The valuation analyst
expresses the results of these procedures as a
calculated value. The calculated value is expressed as
a range or as a single amount.
• A calculation engagement does not include all of
the procedures required for a valuation
engagement and were a valuation engagement to
be performed, the results may be different. 47

48. 48
Attributes Opinion of Value
Calculation of
Value
Acceptance
Accepted by Courts X
Accepted by IRS X
Basis for Expert Testimony X
Analysis Includes
Income Approacjh X Sometimes
Market Approach X Sometimes
Cost Approach X Sometimes
Economic and Market Conditions X
Past Sales of Interest in Business X
Financial Benchmarks X
Market Research X
Industry Research X
Macro Risk Assessment X
Company-Specific Risk Assessment X
Minority and Marketability Discounts when appropriate
to subject interest
when appropriate to
subject interest
Calculation of Value vs. Opinion of Value

49. 49
How Is Value
Determined?

50. Three Approaches to Value
50
Market
Approach
Asset
Approach
Income
Approach
Value Conclusion

51. Market Approach
51

52. Market Approach Theory
• The value of the company (or asset)
reflects the price at which
comparable companies (or assets) are
purchased under similar circumstance.
• Requires that comparable transactions
be available.
52

53. Market Approach - Methods
• Guideline publicly-traded
company method
– Based on similar and relevant
comparable entities
– Adjustments are often necessary to
make the comparables more similar
• Comparative transaction method
– Based on actual transactions of
similar entities
53

54. Public Company Method
• Valuation relies on information
from comparable publicly
traded companies
• Should have several
“comparables”
• Adjustments may be necessary
to make them more
comparable or to normalize the
comps
• Sometimes it just doesn’t make
sense to use public companies
54

55. Comparative Transaction
Methods
• Transaction
database
multiples
• Prior “arm’s-
length”
transactions
• Rules of thumb
55

56. Comparability?
• Public companies tend to be much
larger, have greater resources and
access to capital
– Public company multiples often need to
be adjusted
• Private companies – usually don’t
know terms of transaction, which can
impact price
56

57. Asset Approach
57

58. Asset Approach Theory
• The value of the company is estimated
as a function of the current cost to
purchase or replace all assets held
within the operating entity.
• It is based upon the principal of
substitution, which states that no
prudent investor would pay more for a
company (or asset) than the amount
to re-create or buy it.
58

59. Asset Approach
• Useful for:
–Asset-intensive businesses
–Real estate holding
companies
–Entities that hold mostly
securities (or cash)
–Some contracting businesses
that bid for work
59

60. Asset Approach
• Often requires outside appraisals
• Must identify non-operating
assets like excess cash or
obsolete inventory
• Company may have intangible
assets that contribute to business
value that aren’t listed on the
books
60

61. Income Approach
61

62. Income Approach Theory
• Predicated upon the value of the
future cash flows that an asset
will generate over its remaining
useful life.
• It involves the projection of the
cash flows the company (or
asset) is expected to generate.
• These cash flows are then
converted into a present value
equivalent through discounting.
62

63. Income Approach - Methods
• Discounted cash flow method
• Capitalization of earnings method
• Other methods exist, but are less
commonly used
63

64. Discounted Cash Flow
Method
• Converts a stream of projected
earnings or other benefit stream into
present value by applying a discount
rate
• The earnings from each period are
discounted to present value and then
a “terminal” value is added to arrive at
the total value
64

65. 65
FCFFn (1 + g) (1 + WACC)0.5
PV = FCFF1 + FCFF2 + … + FCFFn + WACC - g
(1 + WACC)0.5
(1 + WACC)1.5
( 1+ WACC)n - 0.5
(1+WACC)n
Where:
PV = Present Value
FCFF = Free Cash Flow to the Firm
n = Number of Periods in Discrete Projection Period
g = Long-Term Sustainable Growth Rate in FCF
WACC= Weighted Average Cost of Capital
Discounting Formula

66. Present Value
66
Value today Years of saving
$1.00 1 year
$1.00 2 years
$1.00 3 years
Amount received Years till cash flow
$1.10 1 year
$1.21 2 years
$1.33 3 years
$1.00
$1.00
What will savings be worth?
Examples of Present Value
$1.21
$1.33
$1.10
Saving Today at 10%
Discounting Future Cash Flows at 10%
What is this cash flow worth today?
$1.00

67. Projected Earnings
• Predict future performance
based on analysis of historical
performance and current and
expected operating and industry
conditions
– Various tools are available to assist
the valuator in predicting future
performance
– Common sense and informed
judgment must be the deciding
factors
67

68. What Is the Discount Rate?
• The rate of return, or cost of capital,
necessary to convert a monetary sum,
payable or receivable in the future,
into present value
68

69. How Do We Develop a
Discount Rate?
• Weighted Average Cost of Capital
(WACC)
– Capital Asset Pricing Model (CAPM)
• Published industry standards
69

70. Weighted Average Cost of
Capital
70
WACC = (Ke x We) + (Kd x Wd)
Where: Ke = Cost of Equity
Kd = Cost of Debt
We = Weight of Equity
Wd = Weight of Debt
WACC Formula

71. Cost of Equity
71
Cost of Equity = Rf + β(RPm) + RPs + RPu
Where: Rf =
β =
RPm =
RPs =
RPu =
(1)
Modified Capital Asset Pricing Model
Risk premium for specific company
("unsystematic risk)
Risk premium for small size
Cost of Equity Formula (1)
Rate of Return for a risk-free security as of the
valuation date
Subject company's beta coefficient
Equity risk premium for the market

72. Cost of Equity
72
Cost of Equity = RPm + Rf + RPs + IP + RPu
Where: RPm =
Rf =
RPs =
IP =
RPu =
(1)
Modified Capital Asset Pricing Model - Build-Up Method
Risk premium for specific company ("unsystematic risk")
Cost of Equity Formula (1)
Equity risk premium for the market
Rate of Return for a risk-free security as of the valuation
date
Risk premium for small size
Industry Risk Premium

73. Example of a Build-Up Method
to Developing the WACC
Risk-Free Rate (20-year Treasury-Bill) 2.5%
Equity Risk Premium 7.0%
Size Premium 3.5%
Company and Industry Specific Risk Premium 5.0%
Total Equity Discount Rate 18.0%
Less: Long-Term Growth 5.0%
Equity Capitalization Rate 13.0%
73

74. Capitalization of Earnings
Method
• Like other income approach
methods, this is based on the
principle that the value of the
business can be estimated by the
future benefits received from
ownership of the business.
• Future benefits of ownership are
assumed to be reliably predicted
by past performance,
• Only appropriate for companies in
stable growth phases
74

75. Capitalization of Earnings
Method
75
PV = NCF1
k-g
Where:
PV =
NCF1 =
k =
g =
Present value
Net Cash Flow expected in period 1, the period immediately
following the valuation date
Weighted Average Cost of Capital
Expected long-term growth rate in net cash flow
Capitalization of Earnings Formula

76. Discounted Earnings Method vs.
Capitalization Method
• DCF is applied when
– Future performance is not expected to be
consistent and/or stable
• Capitalization is applied when
– Company performance is expected to be
stable or grow at a stable rate
76

77. 77
What Impacts Value?

78. 78
Factors that
Affect Business
Value
External
Business owner
can't really
change these
Internal
Business owner
can change these
and impact
business value

79. External Factors That Impact
Company Value
Increase Value
• Expanding markets
• A dominant market
position
• Barriers to entry
• Expanding industry
• Expanding economy
• Shift in consumer
preference to
company product
Decrease Value
• Shrinking market
• Challenged market
share
• Lack of barriers to entry
• Contracting industry
• Contracting Economy
• Shift in consumer
preference away from
company product
79

80. Market Timing
80
SIC Code Industry Pre-Recession(1)
Recession (2)
Post-Recession (3)
5812 Eating Places 0.49 0.38 0.35
7231 Beauty Shops 0.49 0.40 0.36
7349 Building Cleaning and Maintenance Services 0.68 0.65 0.65
7389 Business Services, Not Elsewhere Classified 1.01 0.99 0.93
7538 General Automotive Repair 0.48 0.42 0.39
7991 Physical Fitness Facilities 0.66 0.76 0.64
8299 Schools and Education Services, NEC 1.07 0.66 0.94
Notes: (1) Pre-recession is defined as 1/1/03 through 11/31/07
(2) Recession is defined as 12/1/07 through 8/31/09
(3) Post-recession is defined as 9/1/09 through 12/1/14
Transactions Multiples Throughout the Business Cycle
MVIC to Sales

81. Internal Factors That Impact
Company Value
Increase Value
• Organized up-to-date
financials
• Strong gross margins
• Projections of strong
cash flow
• Sufficient working
capital to support
operations
• Systems and structures
• Cross trained
employee base
Decrease Value
• Declining Sales
• Inconsistent yearly
financial performance
• Unreported cash, or
off-balance sheet loans
• Lack of key employees
• No formalized business
and marketing plan
81

82. DISCOUNTS FOR LACK OF CONTROL
AND MARKETABILITY
82

83. Levels of Value
83
Investment or Synergistic Value
Control Value (Freely-Traded)
Minority Value (Freely-Traded)
Non-Marketable, Minority
Interest Value
$14
$12
$10
$7
Marketable, control value
Marketable, control value
Marketable, non-control value
Non-marketable, non-control
value

84. Discounts & Premiums
• Discount for lack of control
• Premium for control
• Discount for lack of marketability
• Key person discount
• Depend on the interest to be valued
and the techniques used to establish
the value conclusion
84

85. Value of Control
• Control attributes
– Hire and fire
– Distribute earnings/declare dividends
– Buy and sell assets
– Enter into contracts
– Liquidate the business
– Set strategic objectives and goals
– Set compensation and performance
standards
85

86. Lack of Control
• Lack of control in a closely held
company implies you are at the mercy
of the controlling owner(s)
• Substantial discounts may be
necessary to attract an investor to
purchase a minority interest in a closely
held company
86

87. Determination of
Discount/Premium
• Control premium studies
• Mergerstat Control Premium Studies
– Measures how much over the market price
is paid to gain control of a company
– Looks at the price of the stock before and
after the announcement of an acquisition or
merger
87

88. Marketability
• Ability to convert ownership interest to cash
• Time required to do so affects the level of
marketability
• Other factors that affect marketability
– Distributions of earnings
– Active market or industry roll-up
– Key person
– Number and profile of owners
– Restrictions on transfer of stock
88

89. Discount for Lack of
Marketability
• From Pre-IPO studies
– Comparing the price of a company’s
stock before and after the
announcement of “going public”
• From Restricted Stock Studies
– Compare Letter Stock restricted from
trading for a certain time period to its
publicly traded counterpart
89

90. 90
Marketable, control value 5,000,000$
Discount for lack of control 20% 1,000,000$
Marketable, minority value 4,000,000$
Discount for lack of marketability 30% 1,200,000$
Non-Marketable, minority value 2,800,000$
Example of Lack of Control and Lack of Marketablility Discounts

91. WHAT ARE THE ADJUSTMENTS TO MY FINANCIAL
DATA AND WHY HAVE YOU DONE THEM?
91

92. Adjustments to Financial
Statements
• One objective of
financial statement
analysis is to
provide a financial
picture that can be
reliably used to
estimate future
performance.
92

93. Adjustments to Financial
Statements
• Historical financial statements may
need to be adjusted for certain items
that distort the picture of the true
operating performance of the
business.
93

94. Reasons for Financial
Adjustments
• To develop a starting point
from which to predict future
earnings
• To present historical financial
information on a normalized
basis
• To adjust for accounting
practices that are a departure
from industry or GAAP
standards 94

95. Reasons for Financial
Adjustments
• To facilitate comparison of a given
company to itself, to other companies
within the same industry, or to an
accepted industry standard.
• To compare the debt and/or capital
structure of the company to that of its
competition or peers
• To compare compensation with
industry norms
95

96. What is Adjusted?
• Unusual items
• Nonrecurring items
• Extraordinary items (both unusual and
nonrecurring)
• Non-operating items
• Items affected by changes in
accounting principle
• Items that are not in conformance
with GAAP
• Degree of ownership interest,
including whether interest has control
96

97. Unusual Items
• Events or transactions that posses a
high degree of abnormality
• Unrelated to, or only incidentally
related to, the ordinary and typical
activities of the entity
97

98. Nonrecurring Items
• Events or transactions that are not
reasonably expected to recur in the
foreseeable future
98

99. Extraordinary items
• Events or transactions that are
distinguished by their unusual nature
and infrequency of occurrence
• Item must be both unusual and
nonrecurring to be classified as
extraordinary
99

100. Extraordinary items
• Events or transactions that are
distinguished by their unusual nature
and infrequency of occurrence
• Item must be both unusual and
nonrecurring to be classified as
extraordinary
100

101. Unusual, Nonrecurring, and
Extraordinary items
• Strikes and other types of work
stoppages
• Litigation expense or recoveries
101

102. Unusual, Nonrecurring, and
Extraordinary items
• Uninsured losses due to unforeseen
disasters like fire or flood
• One-time realization of revenues or
expenses due to nonrecurring
contracts
• Gain or loss on the sales of a business
unit or business assets
102

103. Unusual, Nonrecurring, and
Extraordinary items
• Discontinuation of operations
• Insurance proceeds received on the
life of a key person or from property or
casualty claim
103

104. Non-Operating Items
• Excess cash
• Marketable securities (in excess of
reasonable needs of the business)
• Real estate (if not used in business
operations)
• Private planes, entertainment, or sports
facilities
• Antiques, private collections, etc.
104

105. 105
Changes in Accounting Principal
• A change in the method of pricing
inventory (e.g., LIFO to FIFO)
• A change in the method of depreciating
previously-recorded assets (e.g., straight-
line to MACRS)

106. Changes in Accounting Principal
• A change in the method of accounting for
long-term construction-type contracts
• A change to or from the full-cost method
of accounting in extractive industries
106

107. Nonconformance with
GAAP
• Financial statements prepared on
a tax or cash accounting basis
• Unrecorded revenue in cash
business
• Inadequate bad debt reserve
107

108. Nonconformance with
GAAP
• Understated amounts of
inventory, failure to write off
obsolete or slow moving
inventory, etc.
• Unrecorded liabilities such as
capital lease obligations,
workforce-related costs (wages,
sick/vacation pay), deferred
income taxes
• Capitalization/expense policies
for fixed assets and prepaid
expenses
108

109. What Are Adjustments Based
On?
• Industry ratios
• Market wage data
• Company historical data
109

110. GOODWILL?
110

111. What is Goodwill?
Two commonly used definitions of
goodwill
- The bundle of all intangible assets of a
company
- The residual intangible value remaining
after all identifiable intangible assets have
been valued.
111

112. What Is Goodwill?
• Entity goodwill is the
goodwill that attaches to
the business enterprise.
112

113. What Is Goodwill?
• Personal Goodwill is the
goodwill that attaches to
the persona and
personal efforts of the
individual.
– Generally considered to
be difficult to transfer, if it
is transferable at all
113

114. When Does Goodwill Matter?
• Divorce Valuations
• Financial Reporting
114

115. Where Does Personal
Goodwill Arise?
• Traditionally, the issue of personal
goodwill arose almost exclusively in
the context of a professional practice
owner.
• The line gets “fuzzy” in the
commercial business arena
• Personal goodwill in a commercial
business might be more “key person
risk” than actual personal goodwill
• Look for special relationships with
customers or suppliers 115

116. Separating Personal from
Entity
• No generally accepted methodologies to
divide goodwill into personal and entity
components
– Methods to calculate personal goodwill can
depend on case or jurisdiction
– Multi-Attribute Utility Model
– With and Without Analysis
– Excess Earnings
116

117. Factors the Impact Personal
Goodwill
• Age and health of professional
• Earning power
• Reputation
• Comparative success
• Practice duration
• Marketability
• Types of Clients and Services
117

118. Factors that Impact Personal
Goodwill
• Location and Demographics
• Fees
• Source of New Clients
• Production
• Workforce
• Competition
• Non-Compete Agreements
118

119. DIVORCE-SPECIFIC VALUATION
CHALLENGES
119

120. Valuation isn’t Taught in Law
School
• Judges don’t necessarily understand
valuation theory
– Contradictory Case Law proves this out
– Valuation report needs to make valuation theory
and the intuition behind it crystal clear
120

121. Short Window in
which to Obtain
Info• Need to
anticipate all
future info
needs as part
of discovery
process
121

122. Short Window in which to Obtain
Info• Valuation Process Often Goes Like This:
1. Request info
2. Go through info and determine if additional info is
required
3. Request follow on info
4. Repeat step two/three as needed
5. Valuation and report writing
6. Last round of questions to cover issues that came up in
the valuation process/dot the i’s and cross the t’s.
7. Finalize and issue report
• Steps 3, 4, and 6 can be challenging
122

123. Short Window in which to Obtain
Info• If you miss key info, you are out of luck
123

124. Problematic Information Flow
• Spouse may be unwilling to
share info, or actively
attempting misdirection
124

125. Incentive to Hide Value
• Perceived advantage to
making business look less
valuable
• Postpone signing contracts
that guarantee business
income
• Defer follow-on rounds of
financing
• “Business Shift” Syndrome
125

126. “BS”
• A sudden shift in
business performance
around the time of the
divorce filing.
• Business owner trying
to make business
appear less valuable.
• Could also be the result
of macroeconomic or
industry conditions.
Careful assessment is
necessary 126

127. In summary…
• Valuation is a process that leads to
an opinion of value.
• There are many scenarios in which
a valuation is needed or helpful.
• There are three approaches to
value, but many valuation
methods.
• You can value invested capital,
equity, or individual assets.
• Certain situations have special
considerations to be aware of.
127

128. Questions?
128

129. 129

130. Theresa Zeidler-Shonat
Director of Valuation Services
Smith & Gesteland, LLP
608.828.3154
theresa.zeidler-shonat@sgcpa.com
130