BUSINESS VALUATION & BUSINESS VALUATION & SELLING YOUR BUSINESSSELLING YOUR BUSINESS

Alina Niculita, Alina Niculita,

CFA, ASA, MBACFA, ASA, MBA

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Purpose of ValuationPurpose of Valuation

Buying or selling a businessBuying or selling a businessBuying or selling a partial interest Buying or selling a partial interest Obtaining or providing financingObtaining or providing financingInitial public offeringInitial public offeringLeveraged buyoutLeveraged buyoutESOPESOPEstate, gift and income taxEstate, gift and income taxBuy/sell agreementsBuy/sell agreementsDivorce settlementsDivorce settlementsDamage casesDamage casesMergers and acquisitionsMergers and acquisitionsDissenting shareholder actionsDissenting shareholder actionsDetermining life insurance needsDetermining life insurance needs

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Controlling Interest v. MinorityControlling Interest v. MinorityInterest Interest

ControlControl

MarketabilityMarketability

Controlling Interest > Minority InterestControlling Interest > Minority Interest

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Controlling Interest v. MinorityControlling Interest v. MinorityInterest Interest

HYPOTHETICAL EXAMPLEHYPOTHETICAL EXAMPLE

Controlling Interest Value per Share: $1,000Controlling Interest Value per Share: $1,000

Less: Discount for Lack of Control: Less: Discount for Lack of Control: 0-20%0-20%

Less: Discount for Lack of Marketability:Less: Discount for Lack of Marketability: 0-30%0-30%

Total discounts: Total discounts: 0-50%0-50%

Minority Interest Value per Share: $500-$1,000Minority Interest Value per Share: $500-$1,000

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Standard (Definition) of ValueStandard (Definition) of Value

Fair Market ValueFair Market Value

Tax PurposesTax Purposes

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Standard (Definition) of ValueStandard (Definition) of Value

Fair ValueFair Value

Shareholder Disputes PurposesShareholder Disputes Purposes

Divorce PurposesDivorce Purposes

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Standard (Definition) of ValueStandard (Definition) of Value

• Fair Market Value.Fair Market Value. UsuallyUsually assumes discounts for lack assumes discounts for lack of control and lack of marketability of control and lack of marketability

• Fair Value (Control Value).Fair Value (Control Value). UsuallyUsually without any without any discounts discounts

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Standard (Definition) of ValueStandard (Definition) of Value

• Strategic (Acquisition) Value.Strategic (Acquisition) Value. Mergers and Mergers and acquisitions purposesacquisitions purposes

• Investment Value. Investment Value. Divorce purposes. Divorce purposes.

• Intrinsic or Fundamental Value. Intrinsic or Fundamental Value.

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Premise of ValuePremise of Value

Going concern valueGoing concern value

Liquidation valueLiquidation value

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Valuation Date (“As of” Date)Valuation Date (“As of” Date)

• Internal FactorsInternal Factors

• External factorsExternal factors

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Understanding the engagementUnderstanding the engagement

Purpose of our valuation?Purpose of our valuation?

Standard of Value?Standard of Value?

Controlling/Minority Interest?Controlling/Minority Interest?

Premise of Value?Premise of Value?

Valuation date?Valuation date?

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Overview of the Valuation Overview of the Valuation ProcessProcess

..Step 6: Value &

Delivery

Step 4: Discounts & Premiums

Step 3: Valuation Approaches

Step 2: Financial, Economic & Industry Analysis

Step 1: Understanding the Engagement

Step 5: Sanity Checks

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Summary of business valuation approaches and methods

Income Approach Market Approach Asset Approach

Based on the present value theory

Based on the economic principle of substitution

Current value of all assets (tangible and intangible) less current value of all liabilities.

Methods:Discounted Cash Flow Method

Capitalization method

Primary Methods:Transaction methodPublic guideline company method

Other methods:Past transactionsBuy-sell agreementRules of thumb

Methods:Adjusted net asset valueExcess earnings method

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Planning for business exitPlanning for business exit

• 5 years good rule of thumb5 years good rule of thumb

•3-7 years3-7 years

•10 years (significant tax planning)10 years (significant tax planning)

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Business value enhancementsBusiness value enhancements

Financial statement clean up - CPAFinancial statement clean up - CPA

Improve key operating metrics - Industry Improve key operating metrics - Industry ConsultantConsultant

Employment/confidentiality agreements signed - Employment/confidentiality agreements signed - AttorneyAttorney

Proper ownership of all intellectual property. - Proper ownership of all intellectual property. - AttorneyAttorney

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Who are Potential Buyers for my Business?Who are Potential Buyers for my Business?

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Buy-Sell AgreementsBuy-Sell Agreements

• Contracts between companies (corporations, LLCs, or Contracts between companies (corporations, LLCs, or partnerships) and their owners.partnerships) and their owners.

• What will happen with the owner’s interest when certain What will happen with the owner’s interest when certain events (called “trigger events”) occur.events (called “trigger events”) occur.

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Appraiser’s QualificationsAppraiser’s Qualifications

• American Society of AppraisersAmerican Society of Appraisers: FASA, Fellow of the ASA; : FASA, Fellow of the ASA; ASA, Accredited Senior Appraiser; AM, Accredited Member.ASA, Accredited Senior Appraiser; AM, Accredited Member.

• AICPAAICPA: ABV, Accredited in Business Valuation: ABV, Accredited in Business Valuation

• National Association of Certified Valuation Analysts:National Association of Certified Valuation Analysts: CVA, CVA, Certified Valuation Analyst; AVA, Accredited Valuation Certified Valuation Analyst; AVA, Accredited Valuation Analyst.Analyst.

• Institute of Business AppraisersInstitute of Business Appraisers: MCBA, Master Certified : MCBA, Master Certified Business Appraiser; CBA, Certified Business AppraiserBusiness Appraiser; CBA, Certified Business Appraiser

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Build Advisory TeamBuild Advisory Team

• Business Transition Advisor/Exit PlannerBusiness Transition Advisor/Exit Planner

• CPA (tax)CPA (tax)

• Attorney(s) of various specialties (tax)Attorney(s) of various specialties (tax)

• Business Appraiser/Valuation AnalystBusiness Appraiser/Valuation Analyst

• Business Intermediary/Business BrokerBusiness Intermediary/Business Broker

• Industry ConsultantIndustry Consultant

• Financial PlannerFinancial Planner

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Maximizing my Sales ProceedsMaximizing my Sales Proceeds

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Best Case and the NightmareBest Case and the NightmareTax Description Best

Case – All Cap Gains

Worst Case – C-Corp Double Taxation

Fed Individual Cap Gain 20%

Fed Dividend Rate 20%Fed Invest Income 3.8Fed Deduction Phase Out

1.2

Fed Corp Rate NA 34

Oregon Individual Rate 10 10

Oregon Corp Rate NA 7

Total 35% 71%

• There are planning strategies that exist to minimize the C-Corp worst case taxation rate.

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THANK YOUTHANK YOU

Alina.niculita@outlook.com

Linked in: Alina NiculitaLinked in: Alina Niculita

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