tag:blogger.com,1999:blog-80556779229876229412024-02-08T07:48:10.146-08:00Wisconsin Business Value BlogDiscussing: Business Value, Wisconsin, Selling a Business, Valuation, Appraisal, Mergers and Acquisitions, Litigation, Expert Witness, Divorce, EstateBrianhttp://www.blogger.com/profile/04636449683272280609noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-8055677922987622941.post-69062784972591705902016-08-31T17:51:00.003-07:002017-10-17T06:28:25.039-07:00The Importance of Adjusting Value for Capital Structure<div class="MsoNormal">
One of the most common errors made in small company business
valuation reports in the Income Approach is failing properly adjust for capital
structure.<span style="mso-spacerun: yes;"> </span>In the following case,
accounting for working capital and capital structure result in huge value
adjustments.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<b style="mso-bidi-font-weight: normal;">HMR Manufacturing, Inc.<o:p></o:p></b></div>
<div class="MsoNormal">
<br /></div>
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You’re a newly hired valuation expert working for a private
equity firm.<span style="mso-spacerun: yes;"> </span>The partner you’re working
with needs a valuation of the stock of HMR Manufacturing, Inc.<span style="mso-spacerun: yes;"> </span>Your firm is considering a controlling
position in HMR’s stock.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
HMR is a world leader in the design and manufacture of
hydraulic power units for marine applications.<span style="mso-spacerun: yes;">
</span>The company was founded by the current owner’s grandfather over 40 years
ago, and has been highly profitable for most of that time.<span style="mso-spacerun: yes;"> </span>The owner and CEO, Hank, is asking $6 million
in cash for 100% of the stock.<span style="mso-spacerun: yes;"> </span>The firm
needs to know if they can pay Hank his $6 million and still achieve their
required ROE of 28%.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<u>Some facts about HMR:</u><o:p></o:p></div>
<div class="MsoNormal">
<u><br /></u></div>
<div class="MsoNormal">
Annual Revenue:<span style="mso-tab-count: 2;"> </span>$10,000,000<o:p></o:p></div>
<div class="MsoNormal">
Normalized Cash Flows: <span style="mso-tab-count: 1;"> </span>$1,000,000<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Cash/Checking:<span style="mso-tab-count: 2;"> </span>$800,000<o:p></o:p></div>
<div class="MsoNormal">
Accounts Receivable:<span style="mso-tab-count: 1;"> </span>$1,600,000<o:p></o:p></div>
<div class="MsoNormal">
Inventory:<span style="mso-tab-count: 3;"> </span>$500,000<o:p></o:p></div>
<div class="MsoNormal">
Fixed Assets:<span style="mso-tab-count: 3;"> </span>$500,000<o:p></o:p></div>
<div class="MsoNormal">
Real Estate:<span style="mso-tab-count: 3;"> </span>$1,500,000<o:p></o:p></div>
<div class="MsoNormal">
Total Assets:<span style="mso-tab-count: 3;"> </span>$4,900,000<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Accounts Payable:<span style="mso-tab-count: 2;"> </span>$300,000<o:p></o:p></div>
<div class="MsoNormal">
Long Term Debt:<span style="mso-tab-count: 2;"> </span>$0<o:p></o:p></div>
<div class="MsoNormal">
Total Liabilities:<span style="mso-tab-count: 2;"> </span>$300,000<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Long Term Growth Rate:<span style="mso-tab-count: 1;"> </span>2.0%<o:p></o:p></div>
<div class="MsoNormal">
Tax Status:<span style="mso-tab-count: 3;"> </span>S
Corporation (no corporate tax rate applied)<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
*All values are fair market value.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Given that the company has no projections of near term
income volatility, and that their long term expected growth rate is near the
inflation rate, your boss tells you to value the company with a Single Period
Capitalization Method.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
E = 1,000,000 / (.28 - .02) = $3,846,156.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Based on this valuation, you tell your boss that the firm
cannot buy HMR for $6 million and achieve its required ROE of 28%. After making
a crack about your lack of grey hair, your boss declares: “You’re wrong.<span style="mso-spacerun: yes;"> </span>We’re buying a <i style="mso-bidi-font-style: normal;">controlling interest</i>!<span style="mso-spacerun: yes;"> </span>We’re
not stuck with his lousy capital structure.<span style="mso-spacerun: yes;">
</span>Look at this:”<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
</div>
<ul>
<li><span style="text-indent: -0.25in;">RMA data shows that the average manufacturing
company of this sales level has only 50% of it’s total assets invested in
current assets, and we intend to beat that average.</span><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">We’ll distribute the cash, and manage the
receivables and inventory until the total current assets are less than
$2,000,000; that’s $900,000 we add to the valuation because we can take it back
and reduce our initial investment.</span></li>
<li><span style="text-indent: -0.25in;">RMA data also shows that the average
manufacturing company at this sales level has current liabilities equal to 30%
of total assets.</span><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">Assuming total assets
of $4,000,000 (after reducing current assets), we should be able to carry
payables of $1,200,000; another $900,000 of free capital that can be added to
the valuation.</span><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">Effectively, HMR
currently has net working capital of $2,600,000 where industry data suggests
only $800,000 is necessary.</span><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">HMR has
excess assets (unnecessary for producing the normalized cash flows) of
$1,800,000!</span></li>
<li><span style="text-indent: -0.25in;">We can easily borrow against HMR’s fixed assets
at 50%, and real estate at 70%, for a total long-term debt structure of
$1,300,000.</span><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">Our expected long-term
interest rate is 6%.</span><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">That’s another
piece we can remove from our equity investment (Weighted Average Cost of
Capital, or WACC).</span></li>
</ul>
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<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Re-running the income approach valuation for these
adjustments gives us:<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
E = (((1,000,000 – (1,300,000 x .06)) / (.28 - .02)) +
1,800,000 + 1,300,000<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
E = ((1,000,000 – 78,000) / .26) + 3,100,000<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
E = 3,546,154 + 3,100,000<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
E = 6,646,154<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The private equity firm can pay as much as $6.6 million for
HMR’s stock and still achieve it’s ROE of 28%.<span style="mso-spacerun: yes;">
</span>After pulling $3.1 million out of HMR’s reorganized capital structure it
will only have invested a net $3.5 million of equity.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
(Note: If HMR had any long-term debt, the $1,300,000 debt
adjustment would have been reduced by that amount.)<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Aren’t the planned changes in company capital structure
synergistic, and therefore not to be considered on a fair market value
basis?<span style="mso-spacerun: yes;"> </span>No.<span style="mso-spacerun: yes;"> </span>The anticipated changes in working capital
and debt structure are based entirely on the company’s existing resources (not
the private equity firms credit, etc.).<span style="mso-spacerun: yes;">
</span>Further, optimizing the company’s capital structure to maximize
shareholder value is no different than making normalization adjustments to cash flows resulting
from a controlling ownership interest.<span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
For example, reducing the owner/CEO’s salary to a reasonable
level is what we would expect a purely financial investor to do upon taking a
controlling interest.<span style="mso-spacerun: yes;"> </span>Optimizing capital structure is no different, and is
evidenced in the market place. Any other
private equity firm considering acquiring HMR would make the same
considerations when determining their maximum bid price. Optimizing capital structure is always a
consideration by market participants, and therefore must always be a
consideration in determining the value of a controlling equity interest.</div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Brian Murray CPA/ABV, CVA<o:p></o:p></div>
<div class="MsoNormal">
Murray & Roberts CPA Firm SC<o:p></o:p></div>
<div class="MsoNormal">
<a href="https://www.mycompanyvalue.com/">www.mycompanyvalue.com</a><o:p></o:p></div>
<div class="MsoNormal">
<a href="http://www.murrayrobertscpa.com/">www.murrayrobertscpa.com</a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
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<br /></div>
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Brianhttp://www.blogger.com/profile/04636449683272280609noreply@blogger.com0tag:blogger.com,1999:blog-8055677922987622941.post-63499572760070134382014-08-17T20:40:00.000-07:002017-10-17T06:29:01.555-07:00Business Valuation Multiples<br />
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><span style="background-color: white; line-height: 17px; text-align: left;">Earnings multiples and so called rules of thumb have been around as long or longer than the practice of business valuation itself. One of the key approaches to estimating the value of a business is the Income Approach, which is based on the present value of future expected earnings. That sounds very similar to a multiple of earnings, doesn't it? It may, but it isn't.</span><br style="background-color: white; line-height: 17px; text-align: left;" /><br style="background-color: white; line-height: 17px; text-align: left;" /><span style="background-color: white; line-height: 17px; text-align: left;">Using a multiple of earnings may not be a bad way to put the value of a business into a very large ball park, but that's where the thumb ruler should stop. Promising to buy any company for four times earnings - because you heard that was the going rate - makes as much sense as promising to buy any real estate for $100,000 per acre for the same reason. Yes, every piece of real estate is unique, and so is every company. Therefore, your source of earnings is also unique. Paying a set amount for a every company's earnings means the investor is requiring the same rate of return on each company.</span><br style="background-color: white; line-height: 17px; text-align: left;" /><br style="background-color: white; line-height: 17px; text-align: left;" /><span style="background-color: white; line-height: 17px; text-align: left;">Paying a set multiple for earnings fails to account for growing earnings, declining earnings, volatility of earnings, the risk or lack of risk attached to the specific business and its earnings, and last but not least the degree to which the assets being acquired can be collateralized. All of these things can dramatically change the rate of return realized to an investor on companies with the same earnings at the start.</span><br style="background-color: white; line-height: 17px; text-align: left;" /><br style="background-color: white; line-height: 17px; text-align: left;" /><span style="background-color: white; line-height: 17px; text-align: left;">Which earnings? EBITDA is the usual favorite to which multiples are applied. But EBITDA can also be deceiving, particularly in a business that is capital intensive, because it fails to account for the reduction in cash flows resulting from necessary reinvestment into equipment. </span><br style="background-color: white; line-height: 17px; text-align: left;" /><br style="background-color: white; line-height: 17px; text-align: left;" /><span style="background-color: white; line-height: 17px; text-align: left;">When it's time to make or accept an offer, a difference of 4, 5, or 6 times earnings can mean millions. A thorough valuation of the company can expose its real drivers of value. That's a small investment that can save a buyer or seller from making a million dollar mistake!</span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><br /><span style="font-size: small; line-height: 18.4px;">Brian Murray CPA/ABV, CVA specializes in business valuations and merger and acquisition consulting, and has served as an expert witness in court. Please call Murray & Roberts CPA Firm SC at (920) 225-6436 to find out more or visit our website </span><a href="http://www.murrayrobertscpa.com/" style="font-size: medium; line-height: 18.4px;">www.murrayrobertscpa.com</a><span style="font-size: small; line-height: 18.4px;">, and click on the BUSINESS VALUATION link. Go to </span><a href="https://www.mycompanyvalue.com/" style="font-size: medium; line-height: 18.4px;">www.mycompanyvalue.com</a><span style="font-size: small; line-height: 18.4px;"> now for a fast and affordable business valuation report prepared by Brian Murray.</span></span>Brianhttp://www.blogger.com/profile/04636449683272280609noreply@blogger.com2tag:blogger.com,1999:blog-8055677922987622941.post-24463292504104723132014-08-08T23:31:00.001-07:002017-10-17T06:30:16.678-07:00Real Estate in Business Valuation and Company Value<div class="MsoNormal">
<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Why is it important to factor out real
estate when valuing a business?<o:p></o:p></span></div>
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<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">First, let’s limit this discussion to companies
whose ownership or use of real estate is incidental to their business activity,
not companies for whom real estate ownership is central to their business activity.<span style="mso-spacerun: yes;"> </span>This discussion would apply to companies who
use office or industrial buildings as opposed to companies that are in the business
of leasing property to other companies.<o:p></o:p></span></div>
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<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">One of the key principles in business valuation
is risk: the risk perceived by investors associated with a particular asset or
asset type (and the cash flows it produces) will determine the rate of return
required by investors to induce them to take on that risk.<o:p></o:p></span></div>
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<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Broadly speaking, real estate – as an asset
class – generally enjoys a lower perception of risk and a lower required rate
of return than a non-public business investment.<span style="mso-spacerun: yes;"> </span>What that means in practical terms is this:
if you require a lower rate of return from an asset, you will be willing to pay
more to acquire its income producing capacity than you would another asset with
the same income producing capacity but higher risk.<span style="mso-spacerun: yes;"> </span>Therefore, lower risk equals higher value.<o:p></o:p></span></div>
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<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The primary reasons real estate is seen as
lower risk are intrinsic value and marketability.<span style="mso-spacerun: yes;"> </span>Real estate has an intrinsic value, which can
be identified regardless of how that real estate is being used at any given
time.<span style="mso-spacerun: yes;"> </span>Businesses, on the other hand,
usually include a component of ‘goodwill’ in their value – often referred to as
blue sky – which places the enterprise value higher than the sum of the
intrinsic value of the assets used by the business.<o:p></o:p></span></div>
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<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Real estate, in part due to its intrinsic
nature, also has a well developed market, where values, sellers, and buyers are
identifiable.<span style="mso-spacerun: yes;"> </span>Businesses have different
values to different types of buyers, and have a significantly less developed
marketplace.<span style="mso-spacerun: yes;"> </span>Therefore business
interests are generally considered to be less liquid than real estate.<o:p></o:p></span></div>
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<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">If we attempt to value a business with the real
estate, we are blending two asset types into one valuation, which may result in
a portion of the earnings being over valued or under valued.<span style="mso-spacerun: yes;"> </span>It would be equally incorrect to value the
business with the real estate, and then attempt to subtract the real estate appraisal
value from the total value.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The real estate must be ‘adjusted out’ of the
business financials, and appraised separately.<span style="mso-spacerun: yes;">
</span>How is this done?<span style="mso-spacerun: yes;"> </span>It is very
simple to do in most cases.<span style="mso-spacerun: yes;"> </span>On the
balance sheet, the building (at cost, as well as any associated accumulated
depreciation) and land are removed from assets.<span style="mso-spacerun: yes;">
</span>Any mortgages associated with the buildings or land are removed from the
liabilities.<span style="mso-spacerun: yes;"> </span>On the income statement,
depreciation from the building is removed from expenses, interest on the
mortgage is removed from expenses, and a new deduction for a triple net lease
payment is added to expenses.<o:p></o:p></span></div>
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<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">A triple net lease requires that the tenant
pays all expenses related to the building, including utilities, maintenance,
insurance, and property taxes.<span style="mso-spacerun: yes;"> </span>These leases have historically averaged 9% of the fair market value of the real estate per
year.<span style="mso-spacerun: yes;"> </span>This is called a capitalization
rate, or ‘cap rate.’<span style="mso-spacerun: yes;"> </span>In periods of low
long term interest rates (such as now) cap rates have averaged 6.5 – 7.5%.<span style="mso-spacerun: yes;"> </span>The more specialized the property is, the
higher the cap rate will be.<span style="mso-spacerun: yes;"> </span>Office and
retail space usually has the lowest cap rates (because tenants are easier to
replace), while specialized industrial sites will require 10-20% higher than
average, depending on the degree of specialization.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">After these adjustments are made, the balance
sheet equity and net income will only reflect the results of the business
activity, and not any benefit of real estate investment.<o:p></o:p></span></div>
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<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I hope this discussion helps you understand why
and how we separate the real estate from the business when valuing a business.<o:p></o:p></span><br />
<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><br /></span>
<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="font-family: "arial" , "helvetica" , sans-serif; line-height: 18.4px;">Brian Murray CPA/ABV, CVA specializes in business valuations and merger and acquisition consulting, and has served as an expert witness in court. Please call Murray & Roberts CPA Firm SC at (920) 225-6436 to find out more or visit our website </span><a href="http://www.murrayrobertscpa.com/" style="font-family: arial, helvetica, sans-serif; line-height: 18.4px;">www.murrayrobertscpa.com</a><span style="font-family: "arial" , "helvetica" , sans-serif; line-height: 18.4px;">, and click on the BUSINESS VALUATION link. Go to </span><a href="https://www.mycompanyvalue.com/" style="font-family: arial, helvetica, sans-serif; line-height: 18.4px;" target="_blank">www.mycompanyvalue.com</a><span style="font-family: "arial" , "helvetica" , sans-serif; line-height: 18.4px;"> now for a fast and affordable business valuation report prepared by Brian Murray.</span></span><br />
<span style="font-family: "arial"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><br /></span></div>
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Brianhttp://www.blogger.com/profile/04636449683272280609noreply@blogger.com0tag:blogger.com,1999:blog-8055677922987622941.post-25980859659837332862014-04-20T13:45:00.000-07:002017-10-17T06:31:12.421-07:00Business Valuation: Get a Better Value<div class="MsoNormal">
Get a <i style="mso-bidi-font-style: normal;">Better</i> Value<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Why the Murray & Roberts Calculation of Value (found at <a href="http://www.mycompanyvalue.com/">www.mycompanyvalue.com</a>) is
the best in the industry<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
Everyone claims their product is the best: the best engine
oil, the best cellular service, the best hand-held power tools.<span style="mso-spacerun: yes;"> </span>Isn’t Murray & Roberts claim that their
Calculation of Value product, the ‘MRCOV,’ is the best among its peers more
promotional puffing?<span style="mso-spacerun: yes;"> </span>Actually not.<span style="mso-spacerun: yes;"> </span>We can prove it.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
We can prove that the estimate of value produced by our
product has a higher probability of reflecting the true value of your business
than our competitors.<span style="mso-spacerun: yes;"> </span>The answer is
printed before you in black and white.<span style="mso-spacerun: yes;">
</span>Most CPA firms offering calculation of value services provide a sample
report on their websites (as we do).<span style="mso-spacerun: yes;"> </span>We
downloaded them and compared them to ours.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
These reports tend to be full of industry jargon,
non-specific legalese, and wordy disclaimers, which makes pushing through them
difficult (we’ve tried to be better than the industry here too, but we also
have lawyers.)<span style="mso-spacerun: yes;"> </span>It will become evident as
you read our competitors’ reports that they employed one method only – the
income approach – to determine the value of your business.<span style="mso-spacerun: yes;"> </span>The MRCOV calculates the value of your
business using all three of the standard valuation approaches: asset, income, and
market.<span style="mso-spacerun: yes;"> </span>Obviously using three approaches
to determine value is much more comprehensive than just one, and has a higher
probability of determining the most accurate value.<o:p></o:p></div>
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<br /></div>
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Further, the MRCOV is the <i style="mso-bidi-font-style: normal;">only</i> report which also considers external industry data from two
separate and widely recognized sources of industry research.<span style="mso-spacerun: yes;"> </span>Our competitors’ reports did not include <u>any</u>
external industry data into their analysis.<span style="mso-spacerun: yes;">
</span>The MRCOV also considers: the expected future growth rate of the
business, customer concentrations, optimum capital structure, and excess/under
working capital.<span style="mso-spacerun: yes;"> </span>Most of our competitors
did not factor any of these significant conditions into their estimate of
value.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
The fact is, the limited procedures conducted by our
competitors are so extremely limited that there is a high probability their
calculation of value will fail to consider business or industry conditions that
would materially alter the value estimate of your business. <br />
<br />
<o:p></o:p>In developing our COV product, we took sample data from dozens of full valuation reports prepared by our firm and honed our mathematical model until our calculation of value consistently produced value estimates within 5% of the values determined by full valuations. Our MRCOV in most cases will produce an estimate of value within 10% of the value arrived at by full valuation. At a cost of only $499, it costs less than 10% of most full valuations - an amazing value.</div>
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<br /></div>
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Find out for yourself at <a href="https://www.mycompanyvalue.com/" target="_blank">www.mycompanyvalue.com</a>. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The MRCOV is an excellent tool for wealth planning, business
investment planning, goal setting, and more. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Brian Murray CPA/ABV CVA<o:p></o:p></div>
<div class="MsoNormal">
Murray & Roberts CPA Firm SC<o:p></o:p></div>
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<a href="http://www.murrayrobertscpa.com/">www.murrayrobertscpa.com</a><o:p></o:p></div>
Brianhttp://www.blogger.com/profile/04636449683272280609noreply@blogger.com0tag:blogger.com,1999:blog-8055677922987622941.post-43733039825894857252013-12-06T11:42:00.000-08:002017-10-17T06:32:12.285-07:00Best Value: Expert Witness or Hired Gun?<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; mso-ascii-theme-font: major-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: major-latin;">Expert Witness or Hired Gun?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; mso-ascii-theme-font: major-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: major-latin;">Business Valuation in Divorce<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; mso-ascii-theme-font: major-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: major-latin;">Your client is in a contested divorce. Included in the marital property is a very
profitable consulting firm. Your client
is the primary operator of the business, and wishes to own it exclusively after
the divorce. The spouse has no interest
in owning the business after the divorce.
Is it in your client’s best interest to obtain the lowest valuation of
that business you can get?<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; mso-ascii-theme-font: major-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: major-latin;">One of the senior partners at your firm
suggests a business valuation expert from a large local CPA firm, saying with a
wink “Harry will get the number you need.”
He also tells you that Harry has served as an expert witness for your
firm more than one hundred times over two decades.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; mso-ascii-theme-font: major-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: major-latin;">You decide to check with your CPA also. He refers you to Cathy, a CPA with valuation
credentials and ten years of experience.
Cathy works for a small firm that specializes in business valuation. She rarely serves as an expert witness; the
majority of her work is related to the buying and selling of businesses. After you call Cathy and explain your
circumstances, she tells you that she can accept the engagement, provided you
understand that she will not steer the outcome of her analysis in one direction
or another. “My number is my number,”
she declares.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; mso-ascii-theme-font: major-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: major-latin;">Which expert will better serve the interests of
your client? Many attorneys will
recommend hiring the expert who will give you the answer you want. They will argue that most of the time the
judge will split the difference between the two values, because the judge will
assume that both reports are equally skewed.
Therefore, if your report is not equally skewed, you will be ceding
ground to the opposition.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; mso-ascii-theme-font: major-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: major-latin;">Believing this logic requires that you must
also believe one or more of the following statements is also true:<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
</div>
<ol>
<li><span style="font-family: "calibri" , sans-serif;"> </span><span style="font-family: "calibri" , sans-serif; text-indent: -0.25in;">Business valuation reports are so inherently
technical that an accurate report with sound logic is indistinguishable from
one that is not.</span></li>
<li><span style="font-family: "calibri" , sans-serif; text-indent: -0.25in;"> Judges are incapable of recognizing the
differences between a sound valuation report and one that contains inaccuracies.</span><span style="font-family: "calibri" , sans-serif; text-indent: -0.25in;"> </span><span style="font-family: "calibri" , sans-serif; text-indent: -0.25in;">Further they are equally ill equipped to
discern the significance of the expert witnesses’ criticisms of each others’
reports.</span></li>
<li><span style="font-family: "calibri" , sans-serif; text-indent: -0.25in;"> The credibility and experience of the expert
witness is far more important than the quality and accuracy of their work.</span><span style="font-family: "calibri" , sans-serif; text-indent: -0.25in;"> </span><span style="font-family: "calibri" , sans-serif; text-indent: -0.25in;">Judges, not being able to discern a good
analysis from bad, will evaluate the experts based on their credentials and
experience, and will weight their testimony based on their relative
credibility.</span></li>
</ol>
<br />
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; mso-ascii-theme-font: major-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: major-latin;">Based on my experience and my readings of
judicial opinions in valuation cases, all three of these assumptions are false
in the majority of cases.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; mso-ascii-theme-font: major-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: major-latin;">Valuation reports are inherently technical,
however the logic applied in a well-written report should be understandable to
anyone with a solid grasp of standard financial investment principles (return
on investment, present value, etc.)
Given that judges have the opportunity to read two reports regarding the
same company, hear the authors’ explanations of their logic, and hear the
experts’ criticisms of each others’ reports, most judges are very capable of
evaluating the merits of an expert’s opinion.
Most judges will also be able to identify and quantify those little
inaccuracies that tend to skew a conclusion of value in one direction or
another. Judges will also base their
opinion of the expert witnesses’ credibility – in part – on the quality of
their report, their testimony, and their responses to cross-examination. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; mso-ascii-theme-font: major-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: major-latin;">The very foundations of valuation practice are
the product of judicial opinions in cases arising from a tax break offered to
companies hurt by the enactment of prohibition.
Several of the IRS most prominent Revenue Rulings are the product of
judicial opinions. Judicial opinions
have continuously served as a guide to professionals’ best valuation practices,
with particular emphasis on the most contentious theoretical topics.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; mso-ascii-theme-font: major-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: major-latin;">Choosing the ‘hired gun’ will cost your client
more, in most cases. If you present a
valuation report with well-substantiated logical conclusions, the opposing side
may accept your expert’s opinion of value.
In most cases this would dramatically improve the chances for a
negotiated settlement, saving your client significant time and expense. Even if the opposition does not accept your
expert’s opinion out of hand, after hiring their own expert they may conclude that your value estimate was reasonable, which again increases the probability of a negotiated
settlement. If your report is highly
skewed, you have almost certainly assured your client an expensive court battle
involving multiple expert witnesses, depositions, and court appearances. Finally, a skewed report may cause your
client to have unrealistic expectations, which frequently result in
disappointment.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , sans-serif;">It is very probable that the estimate of value in a skewed report (which inherently contains some inaccuracies or
omissions in order to reach its skewed conclusions) will be completely
disregarded if a knowledgeable judge is comparing it to a well-written
reasonably valued opinion. You may argue
that your client hasn't lost anything in such a case. I disagree.
Because the judge has completely accepted the opposing side’s value, you
have lost the smaller more realistic negotiating opportunity that reasonably
exists in every company. Your client has
also spent tens of thousands of dollars more to achieve a result that they may
have obtained months earlier. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif; line-height: 18.4px;">Brian Murray CPA/ABV, CVA specializes in business valuations and merger and acquisition consulting, and has served as an expert witness in court. Please call Murray & Roberts CPA Firm SC at (920) 225-6436 to find out more or visit our website </span><a href="http://www.murrayrobertscpa.com/" style="font-family: arial, helvetica, sans-serif; line-height: 18.4px;">www.murrayrobertscpa.com</a><span style="font-family: "arial" , "helvetica" , sans-serif; line-height: 18.4px;">, and click on the BUSINESS VALUATION link. Go to </span><a href="https://www.mycompanyvalue.com/" style="font-family: arial, helvetica, sans-serif; line-height: 18.4px;" target="_blank">www.mycompanyvalue.com</a><span style="font-family: "arial" , "helvetica" , sans-serif; line-height: 18.4px;"> now for a fast and affordable business valuation report prepared by Brian Murray.</span></div>
Brianhttp://www.blogger.com/profile/04636449683272280609noreply@blogger.com3tag:blogger.com,1999:blog-8055677922987622941.post-26028295907690706032012-11-02T09:50:00.002-07:002017-10-17T06:33:40.937-07:00Business Valuation Techniques: Best Comparable Transaction Analysis<br />
<div class="MsoNormal">
<b><span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Selecting
Comparable Companies/Transactions<o:p></o:p></span></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Many appraisers prefer the guideline company method because of the quantity and
quality of data available about the selected company or companies. Some appraisers will review hundreds of
companies searching for the one most comparable to the subject company. This, however, is also the problem. We are lured by the data to over rely on one
or a few comparable companies. </span><br />
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><br /></span>
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">It is impossible
to know all of the factors contributing to one company’s value as of a given
date by reviewing its financial data.
Circumstances involving key personnel, large customers, proprietary
technology, and the condition of equipment all may have influenced the share
price or transaction value. Was the
transaction hostile, or for the benefit of upper management? Did the transaction incorporate synergistic
value which allowed the buyer to pay a premium to fair market value? Perhaps the most significant question would
be: what were the short and long term growth rates of earnings expected by
the investors? Far too many factors are unknown to pin an estimate of value to
a single comparable. Valuing a company
is not like valuing a residence or a piece of real estate. We can’t just walk through the place and have
a look at the kitchen floor.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">The
risk of arriving at an erroneous conclusion of value (or, a highly erroneous
conclusion, given there is no ‘right answer’ in valuation work) is increased
due to information affecting transactions that is unknown to the appraiser. Therefore, the probability of unknown
information skewing an estimate of value derived from the Market Approach
increases as the number of companies compared to (‘the group’ of comparable
companies) decreases. The unknown
factors present in individual companies are diminished or ‘washed-out’ as the
size of the group increases, just as a diversified portfolio of securities
reduces the unsystematic risk associated with each security in that portfolio. This principle is true when applying either
the guideline company method or the transactional data method. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">We
cannot claim to know all factors pertaining to an individual company, but we
can reasonably assess the conditions present in an average company given the
industry. We can more reliably estimate
the expected growth rate of earnings of an average company in an industry than
we can estimate the expectations of investors for a specific company when
limited information about that company is available. Today, due to expanding databases, we can
select a large group of companies with many factors similar to our subject
company; industry, size, profitability, etc.
<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Ten
to twenty companies is a sufficient size to substantially reduce the risk of an
individual transaction skewing the result.
It should be comprised of the most comparable companies identifiable. The subset of companies should be limited to
those in a reasonable size range and in a similar profitability percentage as
your subject company. Transaction date
is less significant than industrial similarity and size. According to Ibbotson’s <u>Stocks, Bonds,
Bills, & Inflation</u>, historic equity returns do not indicate clear
patterns or trends over their 80+ year period of data collected, and are better
characterized as a ‘random walk’ from year to year. For this reason, date range does not need to be
limited to transactions within a few years of the valuation date. Depending on the industry, ten years is a
reasonable maximum. Industry conditions
may change substantially in more than a decade.
Those changes could impact investors’ long-term perceptions of risk for
that industry. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Geographic
limitations should be applied judiciously based on the nature of the subject
company. If a company’s customers,
suppliers, and competitors are nation-wide, then geographic limitations may not
have an impact on the operation of the business. Unnecessarily restricting a search to
a geographic region could limit the number of companies in the resulting sample. This may cause the acceptance of a broader criterion of search characteristics (thereby
reducing the similarity of the comparable companies in your group to your
subject company) to achieve a reasonable group size. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<b><span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Using the
Data<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Many
experts will calculate key ratios or multiples (Price to Sales, Price to
Earnings, Price to Gross Margin) for each comparable company, and find the medians
and means of those ratios. Medians are
often preferred to means because medians are not skewed by outliers. Means are also useful because they allow for
the calculation of the average deviation percentage of the mean. This is a useful measure of the dispersion of
the data in the group. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">The
less divergent the data is within the group, the more consistent and reliable
the median or mean produced. An average
deviation percentage less than 20% indicates highly consistent data, and above
50% is highly divergent. The degree of
consistency in the data is a measure of how reliable the estimate of value
arrived at using the Market Approach will be, and may indicate to the appraiser
the degree to which they may rely upon this approach in their final conclusion
of value.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">The median and mean ratios are applied to data from the subject company to arrive at a transactional value.
Problem: valuing the subject
company based on an earnings multiple derived from the group, effectively
applies the group’s expected growth rate of earnings to the subject company.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Applying
a median multiple to the subject company may be applicable if the company’s
performance is comparable to the median company in the group. If this technique is used, adjustments to the
resulting value should be made for capital structure and excess assets to
arrive at an equity value comparable to other approaches. If the subject company has a short or long
term expected growth rate that is substantially different from the group, then
applying the median Price to Operating Income ratio of the group to the
expected operating income of the subject company may not produce a reasonable
estimate of value. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">A
comparison which allows the appraiser to factor out growth can be derived by
taking the analysis of the median/mean comparable company a step further. In the following example, median/mean data of
the group was used to calculate a discount rate applied to the median/mean
company earnings. This discount rate can
be directly compared to the discount rate determined in the Income Approach as
a measure of reasonableness for both approaches. The company can then be valued using the
income approach formulae, except the discount rate applied to the future
expected earnings would come from the median or mean company data of the
comparable group. This technique allows
for variable rates of increasing or declining earnings to be accounted for
within the Market Approach. This is not
a blending of approaches, because the discount rate arrived at in the Market
Approach is completely independent of any other approach.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Example:<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">In
the table below, two ‘companies’ are created from the group, one representing
the median of the group, and the other the mean. Acquisition debt was estimated at one third
the purchase price. The anticipated
growth rate of net cash flows was estimated to be 4%, showing little growth
above long term inflation. Cost of debt
was estimated to be 7%. Using the Single
Period Capitalization Method, the Return on Investment (ROI) of the median
company is 25.7%, and is 17.2% for the mean company. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div align="center">
<table border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin-left: 4.65pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; mso-yfti-tbllook: 1184; width: 453px;">
<tbody>
<tr style="height: 15.6pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;">
<td colspan="3" nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 272.05pt;" valign="bottom" width="453"><div align="center" class="MsoNormal" style="text-align: center;">
<b><span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Return on
Investment Analysis<o:p></o:p></span></b></div>
</td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 1;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"></td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"></td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"></td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 2;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"></td>
<td nowrap="" style="border-bottom: solid windowtext 1.0pt; border: none; height: 15.6pt; mso-border-bottom-alt: solid windowtext .5pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="center" class="MsoNormal" style="text-align: center;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Median<o:p></o:p></span></div>
</td>
<td nowrap="" style="border-bottom: solid windowtext 1.0pt; border: none; height: 15.6pt; mso-border-bottom-alt: solid windowtext .5pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="center" class="MsoNormal" style="text-align: center;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Mean<o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 3;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"></td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"></td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"></td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 4;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"><div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Sales<o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">4,146,305 <o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">7,048,142 <o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 5;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"><div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Operating Income<o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">654,856 <o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">1,130,277 <o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 6;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"><div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Price<o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">2,831,142 <o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">7,601,103 <o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 7;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"><div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Price/Sales<o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">0.68 <o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">1.08 <o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 8;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"><div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Op Inc/Sales<o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">15.8%<o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">16.0%<o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 9;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"><div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Price/Op Inc<o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">4.32 <o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">6.72 <o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 10;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"><div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Est Aquisition Debt<o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">934,277 <o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">2,508,364 <o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 11;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"><div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Estimated Growth Rate<o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">4.0%<o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">4.0%<o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 12;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"><div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Estimated Cost of Debt<o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">7.0%<o:p></o:p></span></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">7.0%<o:p></o:p></span></div>
</td>
</tr>
<tr style="height: 15.6pt; mso-yfti-irow: 13; mso-yfti-lastrow: yes;">
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 145.45pt;" valign="bottom" width="242"><div class="MsoNormal">
<b><span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">ROI<o:p></o:p></span></b></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<b><span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">25.7%<o:p></o:p></span></b></div>
</td>
<td nowrap="" style="height: 15.6pt; padding: 0in 5.4pt 0in 5.4pt; width: 63.3pt;" valign="bottom" width="106"><div align="right" class="MsoNormal" style="text-align: right;">
<b><span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">17.2%<o:p></o:p></span></b></div>
</td>
</tr>
</tbody></table>
</div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Given
the large range in size of the companies in the group, the largest companies
can have a significant impact on the group mean (company #18’s purchase price
is larger than the total of companies #1-12).
Further, the largest three companies’ ratios are all substantially
higher than the group averages. For
these reasons, the median company is a better representation of the group
overall.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Based
on the estimated return on investment of the median company in the 18 company
group of 25.7%, the 28.23% required return on investment for equity capital in
XYZ, Co. stock derived from the Income Approach appears to be a reasonable
basis for valuing earnings.<o:p></o:p></span></div>
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<span style="font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "calibri" , "sans-serif"; font-size: medium; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Brian
Murray CPA/ABV, CVA specializes in business
valuations and merger and acquisition consulting, and has served as an expert
witness in court. Please call (920)
225-6436 to find out more or visit our website <a href="http://www.murrayrobertscpa.com/">www.murrayrobertscpa.com</a>, and click
on the BUSINESS VALUATION link. Go to <a href="https://www.mycompanyvalue.com/" target="_blank">www.mycompanyvalue.com</a> now for a fast and affordable business valuation report prepared by Brian Murray.<o:p></o:p></span></div>
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Brianhttp://www.blogger.com/profile/04636449683272280609noreply@blogger.com0tag:blogger.com,1999:blog-8055677922987622941.post-67214485696097553452012-10-03T19:34:00.004-07:002017-10-17T06:34:20.293-07:00Corporate Tax & Company Value: Tax Affecting<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
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<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Are Valuation Experts Tax Affecting The Wrong Earnings?<o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Recently NYU
professor and noted valuation authority Aswath Damodaran posted a blog article (The
dividend 'tax cliff' approaches: Implications for stocks) about the potential
devaluation of dividend paying stocks if the preferred dividend tax rate were
to climb back up to the ordinary rate.
If equities would be devalued due to an increase in the dividend tax
rate, then the rate of return required by investors for equities was lower
during the period the preferential rate was in effect than before or after the
preferential rate existed. Investors
recognize the preferential tax rates available to them for long-term capital
gains and qualifying dividends, and require a lower rate of return from assets
producing tax-preferred income. This
could inspire valuation experts to make a tax adjustment reducing untaxed PTE
(Pass Through Entity) income to equate it with corporately taxed income that
qualifies for tax preference at the shareholder level. Before making this tax adjustment, the
valuation expert should consider the following:<o:p></o:p></span></div>
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<!--[if !supportLists]--><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">1.
<!--[endif]-->If the build-up method is used in the income
approach, and Ibbotson data is used to arrive at the discount rate, the 80+
year return averages used were derived from a period where capital gains and
dividends where predominantly not tax preferred. Non-preferred PTE earnings may be more
comparable to the historic discount rate than the recently tax preferred
corporate earnings. <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">2.
<!--[endif]-->If a transactional data method is used in the market
approach, many of the comparable companies (depending on the size of the subject
company) will also be PTEs. Given that
the investors acquiring those companies have factored the entity status into
their decision, it would not be appropriate to convert PTE income to tax
preferred income when comparing to other PTEs.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpLast" style="margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">3.
<!--[endif]-->Investors offset the benefit of tax preferred
dividends against the absence of a preferential long-term capital gains tax
rate applied to C corp assets. The degree of the offset is dependent upon: the
tax circumstances of the investor, the probability of the investment being
liquidated in an asset sale, and the potential capital gains resulting from
such a sale.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">While it is
clear that investors would prefer lower taxed C corp dividend income to
ordinarily taxed PTE income (all else being equal) perhaps valuation experts
are adjusting the wrong income. Instead
of reducing PTE earnings to make them equivalent to C corp earnings, then
valuing the reduced earnings using historic equity returns (which are derived
predominantly from non-tax preferred periods), perhaps the PTE earnings should
not be reduced at all. Instead, when
valuing a C corp, the required rate of return by investors should be adjusted
to factor in the relatively recent tax law preferring them. Making an adjustment to lower the required
rate of return for C corp earnings to reflect the temporary tax preference given
them would effectively increase the value of those earnings to the investor. This could be applied for the time period
that the beneficial tax rate is expected to be present. This rate adjustment could also be moderated
based the potential of an asset based sale causing capital gains to be taxed at
the corporate level. Making this adjustment would properly account for the
potential decrease in value postulated by Professor Damodaran.<o:p></o:p></span></div>
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<br /></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; line-height: 18.4px;">Brian Murray CPA/ABV, CVA specializes in business valuations and merger and acquisition consulting, and has served as an expert witness in court. Please call Murray & Roberts CPA Firm SC at (920) 225-6436 to find out more or visit our website </span><a href="http://www.murrayrobertscpa.com/" style="font-family: arial, helvetica, sans-serif; line-height: 18.4px;">www.murrayrobertscpa.com</a><span style="font-family: "arial" , "helvetica" , sans-serif; line-height: 18.4px;">, and click on the BUSINESS VALUATION link. Go to </span><a href="https://www.mycompanyvalue.com/" style="font-family: arial, helvetica, sans-serif; line-height: 18.4px;" target="_blank">www.mycompanyvalue.com</a><span style="font-family: "arial" , "helvetica" , sans-serif; line-height: 18.4px;"> now for a fast and affordable business valuation report prepared by Brian Murray.</span><br />
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<!--EndFragment-->Brianhttp://www.blogger.com/profile/04636449683272280609noreply@blogger.com0tag:blogger.com,1999:blog-8055677922987622941.post-15745764264174754102012-10-02T21:03:00.003-07:002017-10-17T06:35:03.040-07:00Due Diligence - a terrific article<br />
<a href="http://link.exitplanning.com/v/554/a9bcd7253043bf109e08fe0158b60006485fe62bd2f79bd9"><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Article about Due Diligence Process for Sellers found in Exit Planning Review</span></a><br />
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Well worth reading if you're preparing to sell your business!</span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Brian Murray CPA/ABV, CVA</span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Murray & Roberts CPA Firm SC</span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><span style="font-size: small; line-height: 18.4px;">Brian Murray CPA/ABV, CVA specializes in business valuations and merger and acquisition consulting, and has served as an expert witness in court. Please call Murray & Roberts CPA Firm SC at (920) 225-6436 to find out more or visit our website </span><a href="http://www.murrayrobertscpa.com/" style="font-size: medium; line-height: 18.4px;">www.murrayrobertscpa.com</a><span style="font-size: small; line-height: 18.4px;">, and click on the BUSINESS VALUATION link. Go to </span><a href="https://www.mycompanyvalue.com/" style="font-size: medium; line-height: 18.4px;" target="_blank">www.mycompanyvalue.com</a><span style="font-size: small; line-height: 18.4px;"> now for a fast and affordable business valuation report prepared by Brian Murray.</span></span><br />
<br />Brianhttp://www.blogger.com/profile/04636449683272280609noreply@blogger.com0tag:blogger.com,1999:blog-8055677922987622941.post-38200640350080438402012-10-02T20:50:00.003-07:002017-10-17T06:35:40.866-07:00Buying or Selling a Business? Here's What to Look For in a Business Valuation<br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white; line-height: 17px; text-align: left;">Are you considering selling your company or buying a company? Do you need to value a business for an estate, divorce, or for estate planning? An expertly prepared business valuation report may prove to be a very valuable investment. </span><br style="background-color: white; line-height: 17px; text-align: left;" /><br style="background-color: white; line-height: 17px; text-align: left;" /><strong style="background-color: white; line-height: 17px; text-align: left;"><span style="color: blue;">GET VALUE</span></strong><span style="background-color: white; line-height: 17px; text-align: left;"> It is essential that your valuation expert has significant experience in business purchase and sale transactions. No amount of study can replace real world experience. We have been valuing businesses for ten years, and providing business consulting to our clients interested in buying or selling businesses for twelve years. Brian Murray is an expert in business valuation, has been recognized as a Certified Valuation Analyst (CVA) by the National Association of Certified Valuation Analysts, and has given expert witness testimony in depositions and court.</span><br style="background-color: white; line-height: 17px; text-align: left;" /><br style="background-color: white; line-height: 17px; text-align: left;" /><span style="background-color: white; color: blue; line-height: 17px; text-align: left;"><strong>WEALTH DRIVERS</strong></span><span style="background-color: white; line-height: 17px; text-align: left;"> In addition to revealing the value of your business as of a certain date, a valuation report can expose key drivers of value that may help you maximize your company's worth. </span><br style="background-color: white; line-height: 17px; text-align: left;" /><br style="background-color: white; line-height: 17px; text-align: left;" /><span style="background-color: white; line-height: 17px; text-align: left;">For example, one company's key driver of value may be the consistency of its earnings stream and the strength of its balance sheet. If management should decide to make an aggressive investment in advertising in an attempt to grow the company shortly before the sale, the company value may actually be reduced by the interruption of cash flows if the benefits of the advertising have not yet materialized.</span><br style="background-color: white; line-height: 17px; text-align: left;" /><br style="background-color: white; line-height: 17px; text-align: left;" /><span style="background-color: white; line-height: 17px; text-align: left;">In another case, a valuation report exposed that a company's value was deminished due to increased risk caused by a substantial amount of their sales being derived from a single customer. Company management responded by aggressively diversifying their customer base. Even though the sales to the new customers were made at slightly lower margins than those to the larger customer, the company's value was greatly increased due to the reduction of risk perceived by investors.</span><br style="background-color: white; line-height: 17px; text-align: left;" /><br style="background-color: white; line-height: 17px; text-align: left;" /><span style="background-color: white; line-height: 17px; text-align: left;">After analyzing another company we found its key driver of value was consistent annual growth in sales and cash flows. After learning this we advised management to maintain this growth rate. As a result, the company management chose not to sell business units which would have caused total company revenues to fall. Ultimately this company was sold at a price that was principally based upon the company's consistent growth rate.</span><br style="background-color: white; line-height: 17px; text-align: left;" /><br style="background-color: white; line-height: 17px; text-align: left;" /><span style="background-color: white; color: blue; line-height: 17px; text-align: left;"><strong>GET MORE THAN FAIR</strong></span><span style="background-color: white; line-height: 17px; text-align: left;"> Often a company may have value to a particular investor, or type of investor, that is higher than fair market value. This additional value is called synergistic value, or strategic value. Our experience in merger and acquisition transactions and contacts with corporate buyers and private equity groups helps us identify those strategic opportunities. After those strategic opportunities are identified, we develop a profile of the ideal strategic buyer, estimate the cash flows they would derive from the acquisition, and determine the strategic value based on those additional cash flows. This information can prove to be very valuable in negotiation.</span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white; line-height: 17px; text-align: left;"><br /></span>
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<!--StartFragment--><span style="line-height: 115%;">Brian Murray CPA/ABV, CVA specializes in business valuations and merger and
acquisition consulting, and has served as an expert witness in court. Please call Murray & Roberts CPA Firm SC
at (920) 225-6436 to find out more or visit our website <a href="http://www.murrayrobertscpa.com/">www.murrayrobertscpa.com</a>, and click
on the BUSINESS VALUATION link. Go to <a href="https://www.mycompanyvalue.com/" target="_blank">www.mycompanyvalue.com</a> now for a fast and affordable business valuation report prepared by Brian Murray.</span></span><!--EndFragment--><br />
<span style="font-family: "calibri"; font-size: 11.0pt; line-height: 115%;"><br /></span>Brianhttp://www.blogger.com/profile/04636449683272280609noreply@blogger.com0tag:blogger.com,1999:blog-8055677922987622941.post-10647946364829536692012-10-02T20:27:00.002-07:002017-10-17T06:36:14.598-07:00Tax Affecting S Corp Earnings, Bernier II; Implications on Business Value<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><br /></span>
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<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><br /></span></div>
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<b><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large; line-height: 115%;">Bernier Heading Back to Trial
Regarding How Tax Affecting S Corp Earnings Can Substantially Reduce Value<o:p></o:p></span></b></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Unlike
traditional corporations (C corporations), subchapter S corporations do not pay
federal or state income taxes. However
the earnings of S corporations are taxed to the shareholders at the full
ordinary rate, instead of the 15% corporate dividend rate (preferred rate)
enjoyed by shareholders of C corporations.
To account for this difference, some valuation professionals feel the S
corp earnings should be ‘tax affected,’ presuming that a rational investor
would prefer C corp earnings to S corp earnings, all else being equal.<o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">The
adjustments can be substantial. In <i>Delaware Open MRI Radiology v. Kessler</i>,
the court settled on a 29.4% adjustment.
However, very convincing arguments can be made for both applying and not
applying the adjustment, and courts have ruled in both directions (<i>Gross, Gallagher, Giustina, Bernier</i>, <i>Kessler</i>). The IRS (see <i>Gross</i>) has historically taken the position that tax affecting is
inappropriate. Now, Bernier v. Bernier –
a key divorce case supporting tax affecting - is headed back to trial.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">The impact
of tax affecting the S corp earnings will, in most cases, cause a reduction in
value near or equivalent to the discount percentage.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Regardless
of whether tax affecting S corp earnings will benefit your client’s position or
not, your valuation expert should address their logic for applying or not
applying the discount in their valuation report. Failure to do so may result in the court
discounting or disregarding your expert’s testimony (see judicial commentary in
<i>Bernier I</i> and <i>Kessler</i>).<o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Brian Murray
CPA/ABV, CVA specializes in business valuations and
merger and acquisition consulting, and has served as an expert witness in
court. Please call Murray & Roberts
CPA Firm SC at (920) 225-6436 to find out more or visit our
website <a href="http://www.murrayrobertscpa.com/">www.murrayrobertscpa.com</a>,
and click on the BUSINESS VALUATION link. Go to <a href="https://www.mycompanyvalue.com/" target="_blank">www.mycompanyvalue.com</a> now for a fast and affordable business valuation report prepared by Brian Murray.<o:p></o:p></span></div>
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<!--EndFragment-->Brianhttp://www.blogger.com/profile/04636449683272280609noreply@blogger.com0