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Transcript of Welcome Valuations. This document contains information in summary form and is therefore intended for...
Welcome
Valuations
This document contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgement. It does not purport to be comprehensive or to render professional advice. The reader should not act on the basis of any matter contained in this publication without first obtaining specific professional advice.
We believe that the statements made by us in this document are accurate but no warranty of accuracy or reliability is given. Our conclusions are based on interpretations of accounting standards and other relevant professional pronouncements and legislation current as at the date of this document. Should the interpretations, accounting standards, other relevant professional pronouncements or legislation change, our conclusions may not be valid. We are under no obligation to update the matters considered in this document after its publication.
© Hanrick Curran, February 2013All rights reserved
Disclaimer
Liability limited by a scheme approved under professional Standards Legislation
About Hanrick Curran
Our client base is mainly located in South East Queensland, but also extends to Northern New South Wales, Western Queensland, Sydney, Melbourne, Darwin, Townsville and Mackay as well as other regional areas.
We have a strong position with clients in Papua New Guinea and we also serve a growing Asian business sector. While these international connections may not be of immediate interest but we believe they are important in enabling us to effectively serve our clients.
Hanrick Curran’s Client Base
Hanrick Curran – A Brief Overview
Hanrick Curran is amongst the largest (if not the largest) independent accounting firms in Queensland. With in excess of 100 staff including partners, it has the breadth and depth of resources to provide financial advice in most areas (except specialist superannuation advice and financial planning)
Within our corporate area we regularly do valuations of businesses or components of the business. Typically the reasons why we do valuations include: structural reorganisations, as part of a selling process, disputes, mergers and acquisitions, statutory requirements.
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Valuations Undertaken Include:
• One of the 2 major cab companies in Brisbane• One of the very large Queensland funeral directors• One of the worlds largest helicopter support companies with entities
throughout the world• 2 of the major radio stations in Brisbane• The Australasian and Asian entities of one of the worlds major bedding
manufacturers• The client list of a major Australian stock broker; and currently• One of the major group tittle Administrators in Queensland, together
with valuations; covering a range of assets in a range of industries
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Index
1. What is Value
2. What is the purpose of the Valuation
3. What are you Valuing
4. What information do you need
5. Process of Valuation
6. Methodology Overview
7. Notional Realisation of Assets (NRA)
8. Capitalisation of Future Maintainable Earnings (FME)
9. Discounted Cash Flows (DCF)
10. Premium for Control / Minority Interest Discounts
11. Lack of Marketability
12. Example
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1. What is meant by Value
Some Definitions
1. Value
2. Enterprise or Entity Value
1.1 What is meant by Value
The three different definitions of Value (as per the International Valuation Standards) cover:
a) Market Value (Fair Value equivalent in the Accounting Standards)
b) Investment and Special Value
c) Fair Value (per International Valuation Council)
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a) Market Value
The price that would be negotiated between a knowledgeable and willing but not anxious buyer and a knowledgeable and willing but not anxious seller acting at arm's length within a reasonable time frame.
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b) Investment Value and Special Value
Entity specific basis of value accounting for factors that are specific to an entity and not to the market generally. These factors generally create additional value and can include:
1. The creation of a portfolio of additional assets
2. Synergies between the asset and other assets owned by the entity
3. Legal rights or restrictions
4. Tax benefits or tax burdens
5. An ability to exploit an asset that is unique to that entity
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c) Fair Value
The estimated price for the transfer of an asset and liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.
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1.2 Enterprise Entity Value or The Value of the Operations plus surplus assets
If an entity has different operating business units (perhaps in different industries) and any surplus assets therein together with any portfolio assets e.g. land, investments, it is the aggregate of all those values.
Typically the Entity Value /Enterprise Value is the value of the operations with any excess working capital adding to that value plus any land and buildings being separately valued.
Venture Capitalists e.g. Archer Capital which has different business units (in the health and aged care industry) is an example of a multi-operations enterprise
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2. What is the Purpose of the Valuation What types of valuations are there
(a) Purpose
• A fairly critical starting point• You always need to understand the purpose• It may influence your valuation approach and the conclusion
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Typical Purposes Include:
• Family law property settlements• Shareholder disputes• Succession planning• Mergers and acquisitions• Taxation and other statutory requirements e.g. Stamp Duty• Purchase Price Allocations• Sale of Entity / Change of Ownership• Entity Re-organisations• Listing on a Stock Exchange• Expert’s Reports included in Product Disclosure Statements etc
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(b) Types of Valuation Engagement (APES 225)
Valuation Engagement
Limited Scope ( Indicative Value)
Calculation Engagement
Limitation or Restrictions on application of:
• Approaches• Methods and• Procedures
Agreed Application of:
• Approaches• Methods and• Procedures
Conclusion of Value
Conclusion of Value Calculated Value
Report must state that if valuation engagement had been performed results may have been different
Valuations are undertaken under (Australian Professional and Ethical Standard 225) (“APES 225”) which sets out The mandatory requirements and guidance for valuations.
Free to apply valuation:
• Approaches• Methods and• Procedures
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3. What are you Valuing
The Business
Or
The Entity
Or
Components of the Business or Entity• The Equity
Assets — Liabilities = Equity• Shares/Units (Equity)in the Entity
Majority Interest
Significant Parcel
Minority Interest• Goodwill• Other Intangibles
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Assuming no Synergies or special value, The Components can be represented as follows:
$ 90MEQUITY VALUE
$ 60 MACTUAL DEBT
$ 150 M TOTAL VALUE OF BUSINESS ( ENTERPRISE VALUE)
$ 10 M SURPLUS ASSETS
$ 140 M VALUE OF OPERATIONS
$ 40 M WORKING CAPITAL
$ 100 M VALUE OF BUSINESS ( EXCLUDING WORKING CAPITAL)
$ 80 M TANGIBLE ASSETS
$ 20 M INTANGIBLE ASSETS
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4. What information do you need
4.1 Typically this includes:• Constitutions• Agreements• Financial Information (historic and future budgets / cashflows)• Tax Returns• Property Valuation and rental details• Business and strategic plans (if available)• Industry Data• Organisation and Structure Charts
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4.2 What are the issues you need to understand
• The business fundamentals including key people issues and fundamental activities
• Critical industry success factors• The income drivers & product contributions• SWOT of the business• Key supplier/supply and customer power/marketing issues• Risk factors
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Risk factors include:
a) Where in the business & product cycle are they
b) The Industry & The Competitors
c) Financing issues
d) Earnings - history
- future
e) Dependence on key people
d) Contingencies
Generally you should do a “walkthrough of the business”
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5. Process of Valuation
(a) Valuation Process Overview
Understand what is to be
valued
Understand business and
industry
Normalise and project revenues, margins, profits, capex,
working capital,
forecast cash flows
Select and apply
appropriate valuation
methodology and interpret and cross-
check
Adjust for liquidity, equity,
minority.
Report(APES 225)
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YES
NO
b) Valuation ApproachIs it a project to which DCF may be applicable.For example:
Projects with finite livesNew projects with high growth maturityExisting projects entering high growth or expansion phasesVariable profits / cash flows
1. A combination of methods may be applicable in certain circumstances (for example, for separate divisions of a group).2. Compare all values with net asset value for reasonableness.3. DCF methodology may not be appropriate (for example, due to lack of information).4. Value will depend on whether the underlying asset backing can be accessed.5. Typically used for a mature business with stable earnings / cash flows
YES NO
YES
NOYESNOYES
YES
NO
NO
Is it a controlling interest? Is a DCF valuation
appropriate? 3
DCF Valuation2
Is it profitable? Is it profitable?
Capitalisation of FMP valuation2 & 5
Capitalisation of FMP (minority discount base), or FMD5 (Future Maintainable Dividends)
Probably little value4
Are there reliable DCF Forecasts available or can
they be prepared? 3
Notional Realisation of
Assets
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6. Methodology
6.1. Alternatives:
(a) Earnings/Cash Flow based• Capitalisation of Future Maintainable Earnings (FME)• Capitalisation of Dividends (not often used)• Discounted Cash Flows (DCF)
(b) Assets Based• Notional Realisation of Assets (NRA)
(c) Rule of Thumb (ROT)•a less specific earnings/cash flow basis
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6.2. Alternatives:
Method Focus Area Strength Weakness Consider using for
1. Capitalisation of Future
Maintainable Earnings
(FME)
Historic businessperformance andprofitability. Usesthis to assesssustainable futureperformance andthen capitalisesthe return basedon riskassessment bycomparison to alternateinvestments.•Comparable Transactions•Comparable Entities•Investment fundamentals
• Widely used and accepted.
• Relies on the past as a forecaster for the future.
• Level of usage provides some degree of comparability
•Assumes the future will continue as has the past.•Less reliable where volatility of earnings exists.•Less reliable for immature businesses
•Mature businesses.•Stable revenue streams.•Businesses where reasonable certainty of future earnings exists.
2. Discounted cash flow
method (DCF)Assesses thevalue of abusiness as thediscounted valueof the future freecash flows of thebusiness plus theterminal value, ifany, of the business.
• Strong technical background.
• Focuses on the future cash flow stream that is being purchased.
• Requires reliable historic and future cash flow forecasts.
• Requires assessment of wide range of industry and finance factors
•Businesses with locked in forward revenue streams.•Innovation or technology businesses.•Projects.•start UPS•Highly variable cash flows
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Method Focus Area Strength Weakness Consider using for
3. Notional Realisation of Assets / Net asset Backing Method (NRA)
The value of thebusiness is thesum of the net tangible asset.
•Inherently conservative.•Typically low risk.
• Makes no allowance for goodwill or some intangibles.
• Ignores any inherent value within the business.
• Businesses dominated by their tangible assets.
• Poor Performing businesses or losses.
• Businesses where the break-up value is likely to exceed going concern position.
• Businesses where goodwill exists but other factors limit reasonable certainty of a return on the goodwill.
4. Rule of Thumb or
Industry Multiplier
Method (ROT)
Utilizes acceptedindustry ormultipliervaluation modelsthat are used andaccepted at anindustry level andconsistentlyreflected in the market.
• Aligns closely to market experience.
• Generally easy to calculate.
• Has no real valuation discipline.
• Can be misleading to an uninformed market.
• Limited allowance for variance within a sector.
• Franchises.• Small businesses.• Industry sectors with a
large number of participants.
• Annuity type businesses.
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6.3. The difference between FME and DCF BasisFME DCF
Uses earnings (as a proxy for cash
flows)
Earnings are in current $, growth is
allowed for in the PER/Multiple/Cap
Rate
Consistent earnings and growth
May be on minority or a control basis
(depends on PER used)
Often earnings are considered on a
pre tax basis and often pre-
depreciation, amortisation
Uses cash flows after allowing for working capital changes and capital
expenditure
Cash flows allow for inflation and growth (“Dollars of the Day”)
Variable earnings and growth for initial period, then consistency of
both for perpetuity period
Control Basis
Cash flows are invariably after tax. Depreciation / amortisation is
excluded (very difficult to do on a pre-tax basis)
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NOTE:- Discount Rate WACC or EBIT multiple/PER need to be consistently on a pre-tax or post tax basis
FORMULA RECONCILIATION ( DCF: FME)
FME uses EBIT Multiple /(P/E) DCF uses discount rate / WACC
Or
E.g. Assume (WACC) Discounts Rate is 18%Growth rate 3%Assume WACC (excluding growth rate) (3%) 15 %
Or 6.67x
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7 NOTIONAL REALISATION OF ASSETS
Restating the Balance sheet at market value
(i) Asset (at Value) less liabilities (at Value)
= Equity (at Value)
The Value of the Enterprise (funded by debt and equity) on an NRA basis
= the Value of the Asset
(ii) Assets - At market Value
Effectively no goodwill, but may include the value of intangibles e.g. licenses, rent roll
Less: • Search , selling and marketing costs• Tax that would apply particularly CGT/income tax
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(iii)Typical Valuation adjustments to assets include:• Impairments to reduce assets e.g. Debtors• Stock obsolescence • Investments in fixed interest securities where coupon rate is
lower/higher than current rates.• Land and Buildings to be restated at Value• Tax adjustments e.g. CGT• Investment in Securities where cost and market value are different
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(iv)Typically adjustments to liabilities include:• Related party loans on a non commercial basis• Loans from third parties secured by assets of business owner
generally are equity/quasi-equity
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8. (a) Capitalisation of Future Maintainable Earnings ("FME")
Operations Value = FME x Multiple (EBIT Multiple/PER)
Therefore need to determine:• FME
&• Multiple (PER/Capitalisation Rate)
Note
Capitalisation Rate is simply the inverse of the PER
e.g. a Cap Rate of 20% = or PER of 5x10020
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8.1.1 Review Historic Profits & Adjust for:• Non recurring items ("one off') / events• Non commercial arrangements e.g.. Related Party transactions• Remove activities which will be the subject of an alternative approach e.g.. Property Investments,
Investments• Inconsistency in accounting treatment • Inconsistency of periods• May need to adjust for inflation
8.1 How do you determine FME
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8.1.2 Typical adjustments include:
• A large bad debt where historically the business does not have a history of bad debts• A loss or gain on the sale of non core assets• Non commercial rental paid to a related entity• Tax depreciation and leasing charges (these should be put on an accounting basis)• Non-commercial superannuation (wages benefits e.g. superannuation, cars)• Differences in accounting standards• Removal of non core income and expenses where these are separately valued
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8.1.3 Review future cash flows/Budgets
8.1.4 Taxation Issues
Use of notional rate with actual earnings and depreciation (“tax shield”) issues with allowance being made for temporarily lower rates or tax losses
8.1.5. Which year do you choose
a) Prior year
b) Current year
c) Next or future years
d) Combination
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8.1.6 Which basis of Earnings do you choose
• Earnings (before tax) (EBT)• Earnings (after tax)/(EAT)• Earning Before Interest and tax (EBIT)• Earnings Before Interest Tax, Depreciation & Amortisation (EBITDA)
Note EBITDA is often used in order to eliminate the effects of differences in:
(i) funding (use of debt)
(ii) asset structures e.g. assets may be held off balance sheet in the entity to be valued on comparable companies
(iii) differences in taxation, particularly where entities have offshore assets / operations
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8.2. How do you determine the Multiple/Price Earnings Ratio PER'sEither:• Comparable Company; or• Comparable Transaction; or• Alternate investment
8.2.1 Comparable Company Method• Identify and research comparable company(s)• Identify basis to be applied e.g. EAT, EBIT, EBITDA and calculate for comparable companies• Adjust PER of “Comparable Companies” to reflect differences with subject entity e.g. size, product
range, geographical spread, balance sheet strength, management, growth etc• Adjust comparable PER to prospective basis if you are using future earnings• Adjust PER to match geared/ ungeared PER’s to geared/ungeared earnings on consistent basis e.g.
EBIT EBITDA• Review for Reasonableness • Adjust multiple to a control basis. Shares Traded on the ASX are generally on a minority basis
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8.2.2 Comparable Transactions
Involves researching relatively – recent, comparable transactions which has been reported in the market and adjusting for any differences (similar to adjustments for PER)
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8.2.3 Investment Method
(a) Capital Asset Pricing Model (CAPM)• Cost of Equity• Weighted Average Costs of Capital (WACC)
(b) Capitalisation Rate
(b) (i) Cost of Equity (Ke)
Ke = Rf + β (Rm – Rf) + α
Rf = 10 Year Government Bond Rate (yield) = 3.04%
(factor, because unusually low)
(Rm – Rf) = MRP: (Market Risk – Risk free rate) = Market Risk Premiums
β = say 1.5
α = Risk premium adjustment
Therefore Ke = 3.04% + 1.5 (8%) + 2.5%
Ke = 17.54% (risk adjusted)
= 6% – 8.0% (refer 9.2.2 for comments on MRP)
EssentiallyRisk free rate + β (Market risk premium)
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(ii) WACC / Discount Rate
WACC – Ke (1-D/V)+ Kd(1-t(d/v)
Ke = 17.54%
D/V = Debit / Market Value of Company = say 20%
Kd = cost of Debit = say 10%
t = tax rate = 30%
WACC = 17.54% (1-20%) + 10% (20%) (1-30%)
= 15.43% Post Tax WACC
= 22.05% Pre Tax = EBIT Multiple of 4.54 x
(b) Capitalisation Rate
= Rf = Risk free rate
+Rp = Risk Premia (determined by applying % to various risk factors – refer appendix 2 for example factors)
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8.2.3.1 Risk Free Rate
Long term commonwealth bond rate (yield) is used as a proxy for the risk free rate.
This bond rate:• Is generally determined by auction and the “spot” rate may vary on a regular basis• Allows for inflation and credit risk of default by Australian Government
It is also noted that:
i. The long term bond rate has averaged approximately 8.1% in the last 40 years and
ii. Is currently very low due to the current economic climate; and
Therefore, Consideration needs to be given to adjusting the stated spot rate to reflect a long term asset approach (an alpha adjustment)
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8.2.3.2 Risk Premia
• Industry risk – can be determined from industry associations, IBIS Reports, ASX market reports and
other areas e.g. company’s strategic plan • Company specific Risk (refer risk issues) – (Refer Appendix 2).• For Private companies there is an additional risk to reflect the discount for lack of marketability (refer
11.1)
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9. Discounted Cash Flows
9.1 Cash Flows
9.1.1 What are Cash Flows:• Accounting earnings (after tax) (EAT)
Adjusted for:
+ Interest & Dividends
+ depreciation / amortisation
-/ + Capital expenditure / sales
-/ + increase / reduction in working capital• Inflated $ used (Dollars of the Day)
NOTE: To calculate working capital it is preferable to use a % of sales, once initial working capital has been determined. A guide / method of determining is normal periods of credit for customers and suppliers and normal stock levels (stock turnover)
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9.1.2 Timeframe (Explicit Forecast period)
• At least 5 but not more than 10 years
NOTE: where the explicit forecast period is <5 years the terminal value will represent > 80% - 90% of the total present value. Similarly it is very difficult to forecast for more than 10 years.
• Matches asset cycle impact of terminating value vs ability to estimate too far out
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9.1.3 Terminal Year
Constant growth model
Calculated as:
Cash flow in the year after the forecast period discount rate - growth rate
NOTE: The growth rate includes inflationary growth
NOTE: Terminal Value should be checked for reasonableness against:• Goodwill i.e. what is the difference between the exit value and book value of NTA’s• What is the implied PER?• Is the growth rate reasonable?• Will the debt: equity ratio be similar to the current debt: equity ratio?
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9.2 Discount Rate(WACC)
Some considerations
9.2.1. What is the Debt: Equity Ratio (at Market Value)• 3 Alternatives:
i. Actual - Debt: Equity
ii. Optimal - Debt: Equity
iii. Industry Average – Debt: Equity
• Each may produce a different WACC and therefore impact on value (perhaps substantially)• Generally use industry average, unless entity will not sustain this rate.
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9.2.2. What is the Market Risk Premium (MRP)
Studies of the stock market indicate that:• The MRP (which is a forward looking estimate) - should be no change to the widely used 7% when
dividend imputation benefits are included; and • Because of current market volatility the MRP in the short to mid-term (up to 5 years) will be between
16% - 18%.
Accordingly to smooth the MRP an adjustment to 8% - 9% may be required.
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10. Premium for Control / Minority Interest Discounts
10.1 Control/Lack of Controla) Premiums for Control
The concept of a premium for control reflects the additional value that attaches to a controlling interest compared to the value of a minority interest generally traded on the ASX.
Based on takeover premiums and other market studies, control premiums generally range between 20% to 40%.
Australian Control PremiumsIndustry Number of
TransactionsAverage control premium – number of days pre announcement
2 5 20
Metal 55 26.4% 29.9% 33.9%
Energy 23 13.6% 27.8% 32.8
Pharmaceuticals &Biotechnology & life science
10 36.0% 36.0% 37.1%
Real Estate 13 10.6% 10.3% 12.1%
Banks & diversified financials 18 14.8% 12.3% 13.3%
other 93 22.3% 25.9% 33.0%
Source RSM Bird Cameron 2011 Control Premium Study
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b) Minority Interest (Lack of Control)
Note: Lack of control is the corollary of a premium of control
Minority interest shareholders generally have no ability to influence the decision making of a company including decisions which impact on their investment e.g. dividend policy. As a result they have less value per share than their pro rata value of equity.
Typically, discounts range between 10% to 50% on their pro rata value and is considered as follows:
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Larger Discount Smaller Discount
Existence of a shareholders agreement No Yes
Dividend Policy No Yes
Dividend History No Yes
Drag and Tag Provisions No Yes
Proposal to list or sell No Yes
No and % held by other shareholders None Lots
“Grey Market” for Shares No Yes
Age of Principal Shareholder Young Older
Spread of other S/H blocks Little Lots
Possible Range 50% 10%
11.1 Discount for Lack of Marketability (DLOM)
For entities whose shares are not traded on an official stock exchange these shares (and entities) are less marketable (liquid) than listed entities – for unlisted entities there is a discount for lack of marketability (DLOM).
• The DLOM is applied to the value which results from the calculation under either a DCF or FME
method
• The size of the discount depends on a range of factors including the industry, size of the entity, types of assets and other issues risk issues.
Studies and the courts, particularly in the USA note there is no commonly accepted model for illiquidity/marketability discounts. Typically Australian discounts range between 5% to 40%, with average discounts in the 20% to 25% range.
• This discount is applied to either the overall valuation or the illiquid assets within an entity. For
example, an entity which has illiquid trading operations and liquid investments, the discount is only applied to the illiquid elements.
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11.2 Calculations are Applied in order
• Lack of Marketability say 30%• Lack of Control say 40%
To get the overall discount for minority shares:
$ Discount
Say Value of Enterprise 100
DLOM Say 30% 30 30
70
Lack of control say (40% of $70) 28 28
Minority interest Value 42 58
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Disclaimer
These notes contain factual information concerning the taxation and compliance implications of certain accounting and taxation matters. The notes are intended as a guide only and may not apply to circumstances of particular individuals. Do not act on the contents of these notes without first obtaining specific advice from a qualified tax or legal professional about your particular circumstances.
Hanrick Curran Group, its associates and the presenter hereby disclaim any responsibility for persons relying in whole or in part on these notes or the information presented at this seminar.
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Appendix 1
CASH SKIMMING
Say take $100,000 income off the top
Therefore Tax Savings (on $100K) = $30PA
VALUE FORGONE
UNDECLARED $100K
Tax thereon 30
Earnings (After – Tax) 70
SAY at PE Multiple of 5X
Value of undeclared income $100K (5x$70K) 350M
Annual TAX saved $30K
Therefore the value increase represents 11-12 years of tax saved on the skimmed amount
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Discount RateClosely Held Business Risk Premiums
Description
Category Business Status Industry Competition
Financing Requirements
Management Dept Past Earnings Future Earnings
Risk Premium (pre-tax)
1 Established business
Strong trade position Well financed Depth in management
Stable Highly predictable
6-10%
2 Established business
More competitive Well financed Depth in management
Stable Fairly predictable
11-15%
3 N/A Highly competitive Little capital required No depth in management
N/A As risk is high not very predictable
16-20%
4A Small, depends on special skills
N/A Little capital required N/A N/A Very predictable 21/25%
4B Large, established, highly cyclical
N/A N/A May be depth in management
Past earning may not be stable
Very predictable 23-25%
5 Small ‘one person’ business
N/A N/A Managed by main operator
N/A Extremely unpredictable
26-30%
*Risk Premium added to the risk-free rate
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Risk FactorsExample Factors
External Factors Impact Entity Rating
• Industry life cycle: the stage of the life cycle a company is at (ie. start-up, growth, mature, etc.), will influence its sales growth rate, required investment and profitability.
• Economic sensitivity: broad macro-economic factors such as the GDP growth rate, interest rates and exchange rate movements.
• Threat of new entrants: such as low barriers to entry for new competitors.
• Rivalry among existing competitors: the level of existing and forecast competition from current industry players.
• Threat of substitute products: possible creation of a new type of competition.
• Bargaining power of suppliers: pressure on the key inputs to the business.
• Bargaining power of buyers: pressure on the key outputs of the business.
• Technological change: which can threaten both the demand for a particular product and the cost of its manufacture.
• Political and regulatory environment: exposure to factors such as quality standards, pollution, market restrictions and boundaries, and taxation.
• Social change: changing demand for products resulting from shifts in demographics.
Appendix 2 (a)
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Internal Factors Impact Entity Rating
• Company strategy: choice of strategy will have different growth outcomes and levels of risk
• Monitoring and quality of planning, forecasting and budgeting achievement of those plans/forecasts/budget.
• Market position: incumbency, and forecast strength relative to others.
• Position on cost curve: being a low-cost producer, relative to competitors, provides market advantage and improves the capacity to survive price wars.
• Management capability: a key characteristic of any high-value company.
• Capacity utilisation: provides an indication of capital efficiency and the ability to recover overheads.
• Financial strength: the use of debt creates financial risk for shareholders in a company, as the debt holders have higher-ranked claims on the business's cash flow. Returns to offset this risk need to be generated or the shareholders suffer.
• Quality of plant and facilities: this can affect the cost of production and the technological attributes of the business's products.
• Level of integration: the extent of forward, backward and horizontal integration that a business has can reduce risks, such as those relating to supplier and customer relationships.
• Customer and supplier influences: the balance of power can affect the costs of production and selling prices
• .Research and development: the protection and development of market share and production costs.
• Centralised financial controls: quality financial information enables the best possible decision making by management.
• Personalities: a subset of the quality of management factor, particularly in private companies
Appendix 2 (a) continued
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Reference Material / Sites
The Valuation of Businesses, Shares and Other Equity 4th Edition
By Wayne Lonergan
The Australian Valuation Handbook
By Leadenhall VRG Pty Ltd
Applied Valuation Course / Material
(FIN224) conducted by Kaplan Professional
Websites
Biz Exchange
Duff & Phelps, LLC
The American Society of Appraisers
Bloomberg
Morningstar (lbbotson Associates)
ASX
SIRCA for β
IBIS Industry Reports
Software you can buy
Valuation Software
EIS 1 BStar
Capital IQ (subsidiary of Standard and Poor’s) for market research Valuation Software
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Thank you
www.hanrickcurran.com.au