2. PRESENTATION OVERVIEW
2
Reasons for Business Valuation Appraisal Discounts
Levels of Value Components of an Appraisal
Approaches to V l
A h Value Report
R
Process of Valuation
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3. REASONS
FOR BUSINESS VALUATION
3
Estate Gift and Income Tax
Estate, Ta Litigation Support Consulting &
S pport Cons lting
Planning/Compliance Appraisal
Financial Reporting Issuance of Stock Options
Employee Stock Ownership Plan Restricted Stock Discount Studies
Fairness Opinions Merger & Acquisition Consulting
Buy/Sell Agreements
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4. LEVELS OF VALUE
4
Obtain directly by reference to Obtain directly by reference to
freely tradable values via actual change of control
Controlling
Control Premiums transactions or other control
Interest Basis
methodologies.
Minority Interest Discount
Control Premium
Obtain directly by reference to
“freely tradable” comparable
Obtain indirectly by reference Marketable, Minority companies or by “build up”
to control valuation via a Interest Basis methodologies, which d l
th d l i hi h develop
Minority Interest Discount
capitalization rates by
estimating required rates of
Marketability Discount return in relation to public
markets
Obtain indirectly from
Marketable, Minority valuation Non-marketable, Obtain directly from actual
by applicator of Marketability Minority transactions
Discount Interest Basis
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5. THREE
APPROACHES TO VALUE
5
INCOME-BASED APPROACH ASSET-BASED APPROACH
• Discounted Cash Flow (“DCF”) Method • Adjusted Net Tangible Asset Value Method
• Capitalization of Earnings Method
MARKET-BASED APPROACH
• Public Company Guideline Method
• Guideline T
G id li Transaction Method
i M h d
• Past Transactions in Company Stock
• Buy/Sell Agreement Provisions
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6. INCOME-BASED APPROACH
6
DISCOUNTED CASH FLOW METHOD
• Relies on the present value of projected future cash flows
• Should be used when a company has not yet achieved stabilized growth
• Appraiser should determine the number of projection periods necessary to
reach stabilized growth, through discussions with Management and their own
independent analysis.
CAPITALIZATION OF EARNINGS METHOD
• Relies on historical cash flows
• Should only be used when steady growth is expected
• Growth rate should not deviate too far from expected inflation.
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7. MARKET-BASED APPROACH
7
PUBLIC COMPANY GUIDELINE METHOD
GUIDELINE TRANSACTION METHOD
PAST TRANSACTIONS IN COMPANY STOCK
BUY/SELL AGREEMENT PROVISIONS
KEY CONSIDERATIONS IN USING THIS APPROACH
• Adequate comparability of guideline companies and transactions
• Ensure past transaction in company stock occurred at arm’s-length
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8. ASSET-BASED APPROACH
8
NET ASSET VALUE METHOD
ADJUSTED NET TANGIBLE ASSET VALUE METHOD
KEY CONSIDERATIONS IN USING THIS APPROACH
• Understand the appraisal’s “Premise of Value”
• Company being valued as: i) a going concern; ii) an assemblage of assets;
p y g ) g g ; ) g ;
iii) an orderly disposition; or iv) a forced liquidation.
• Understand the appraisal’s “Level of Value”
• Control versus Minority
• Prerogatives of Control
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9. APPRAISAL DISCOUNTS
9
Discount for Lack of Control
• Empirical Evidence and Studies
• Mergerstat/Shannon Pratt’s Control Premium Study
Discount for Lack of Marketability
• Empirical Evidence and Studies
• FMV Opinions’ Restricted Stock Study
Discount for Lack of Voting Rights
• Empirical Evidence and Studies
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10. COMPONENTS OF
AN APPRAISAL REPORT
10
Report
• Standard of Value Defined
• Consider All three Approaches to value
• Discounts: Correctly identified level of value, supported, and explained
• Company, Industry and Economic Overview
Citations of Relevant IRS rulings, business valuation standards (American Society of
g , ( y
Appraisers, AICPA, USPAP etc.)
Qualifications of Appraiser
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11. THE PROCESS
11
Gather and Provide Information and Data
• Financial statements, tax returns, projections, shareholder agreement, buy/sell agreement, etc.
Analysis of the Information and Data
Management Interview & Site Visit
Prepare the Report and Exhibits
Deliver the Report
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12. 12
Mr. Hoekstra is the President of HH Advisors LLC, a
PROFESSIONAL financial advisory services firm located in Atlanta Georgia
Atlanta, Georgia.
The firm’s financial advisory services include business and
BACKGROUND OF intangible asset valuation, transfer pricing analysis, family
limited partnership valuations, fairness and solvency opinions
PRESENTER and litigation support services.
Chad Hoekstra, ASA CPA/ABV/CFF
ASA,
Mr. Hoekstra worked in a public accounting firm
environment from 1994 to 1999 and 2000 to 2004. His
Education greater than ten years of cumulative experience includes
• B.A., Accounting, Central College, Pella, seven years of full time experience providing business
Iowa valuation, litigation support and investment banking services.
Professional Designations
• Public Accountant, licensed in Iowa
He prepared business valuation opinion reports for federal gift and estate tax and estate planning,
1997-2003, licensed in Georgia 2003 employee stock ownership plans, family limited partnership valuations, tender offers and mergers
• Accredited in Business Valuation from the
and acquisitions. . He has provided expert witness services in connection with patent and other
American Institute of CPAs since
intangible asset litigation, estimated damages in connection with intellectual property damage claims
1999
and provided testimony in litigation matters including dissolution of marriage actions. He has
• Accredited Senior Appraiser from the
performed valuations in a variety of industries, including technology, consulting, manufacturing,
American Society of Appraisers since
2002 chemical production, construction, commercial real estate, lodging, food service, distribution,
agriculture, transportation, financial services, retailing and telecommunications.
Organizations
• Member, American Institute of Prior to co fo nding HH Ad isors he was a Director at a corporate finance and financial ad isor
co-founding Advisors, as advisory
Certified Public Accountants services firm at an Atlanta, Georgia firm Applied Economics, LLC. He worked at Applied
Economics from 2005-2007. Prior to Applied Economics Mr. Hoekstra was a Manager in the
• Member, Georgia Society of CPA’s
business valuation and litigation support services group of Bennett Thrasher PC, an Atlanta based
• Member, American Society of local public accounting firm from 2003-2005. Prior to Bennett Thrasher, Mr. Hoekstra was
Appraisers employed by RSM McGladrey, Inc. in Des Moines, Iowa as a manager in their valuation services
p y y y, , g
• Member, Atlanta Chapter of the group from 1997 to 1999 and from 2000 to 2003. From 1994 to 1997 he provided financial audit
American Society of Appraisers and attest services and tax services for McGladrey & Pullen, LLP in Cedar Rapids, Iowa.
HH ADVISORS LLC
13. 13
Tim Hillegass is a Managing Director and co-founder
PROFESSIONAL of HH Ad i
f Advisors LLC a fi i l d i i
LLC, financial advisory services
firm located in Atlanta, Georgia.
BACKGROUND OF
Prior to HH Advisors, Mr. Hillegass was a partner with
PRESENTER Applied Economics, an Atlanta financial advisory and
Timothy K Hill
Ti th K. Hillegass, MBA ASA
MBA, corporate fin n e firm where he worked for se en
orpor te finance firm, here orked seven
years. Mr. Hillegass’ appraisals have been used for a
Education variety of purposes, such as mergers and acquisitions;
• Master of Business Administration, financial reporting; SFAS 142 goodwill impairment
University of Georgia tests; corporate planning, reorganizations; litigation
• BS B i
B.S., Business Administration, A b
Ad i i t ti Auburn support; estate gift and corporate tax planning; marital
estate,
University dissolution, and ESOP administration.
Professional Designations Mr. Hillegass leads HH Advisors’ transfer pricing practice and his assignments have been used
• Accredited Senior Appraiser from the
for a variety of purposes including: economic analysis support for clients facing challenges
American Society of Appraisers since g gy
from the United States and international taxing authorities; technology transfers and cost
2002 sharing arrangements; determination of the transfer prices for re-engineered supply chain
structures; application of cost allocation methodologies for head office expenses; design and
Organizations implementation of contract manufacturing structures; implementation of royalty structures;
• Member, American Society of
and development of coordinated transfer pricing policies and procedures for compliance
Appraisers purposes in numerous jurisdictions.
• Member, Atlanta Chapter of the
Mr. Hillegass has managed valuation and transfer pricing engagements for both smaller
American Society of Appraisers privately held companies and larger multinational clients in the following industries:
agriculture, automotive, commercial real estate, construction, consulting, consumer foods
industries, distribution, financial services, information technology, lodging, manufacturing,
retailing, telecommunications, and transportation.
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14. 14
Perry D. Walter is a Managing Director of HH Advisors
PROFESSIONAL LLC, a financial advisory services firm located in Atlanta,
Georgia.
BACKGROUND OF HH Advisors completes over 150 business appraisals a
PRESENTER year, with approximately 40% involving trusts and estates.
Perry D. Walter, CFA Prior to joining HH Advisors LLC, Mr. Walter was a
j g , W
Senior Consultant and Business Plan expert for inCode
Education Telecom (2007-2009), a strategy and management
• Master of Business Administration-Finance consulting firm focused on providing advisory and
University of North Carolina, Chapel Hill, consulting services for telecommunications and
technology companies, as well as Private Equity firms.
NC
• B.A., Economics and Communications
University of Virginia, Charlottesville, VA
Mr. Walter founded Digital Media Investigations (2005-2006), a computer forensics firm focused on
civil litigation and financial fraud cases. Mr. Walter was also one of four co-founders and CFO of
Professional Designations WireFree Connect LLC, a venture-funded wireless Internet service company.
• Chartered Financial Analyst (CFA)
• Accredited Senior Appraiser from the Previously, as a general partner at Valiant Ventures (2001-2005), a venture consulting company, he
American Society of Appraisers since helped early-stage technology companies develop their business and strategic plans, build-out their
2002 senior teams, and raise various rounds of capital. Valiant invested in Eyewonder, Inc., which was
acquired by Limelight Networks in 2010 for $110 million.
Organizations
• CFA Institute Mr. Walter served as Senior Telecom Analyst with The Robinson-Humphrey Company (1996-2001)
• Atlanta Society of Financial Analysts (a division of Smith Barney) and he held a similar position with Raymond James Financial (1993-
• Member, Atlanta Chapter of the American 1996) in St. Petersburg, Florida. While at Robinson-Humphrey, he was recognized as an All Star
Society of Appraisers Analyst and top stock picker by The Wall Street Journal and received an “Honorable Mention” by
• Georgia Aquarium Volunteer Diver with
Diver, Institutional Investor in its analyst rankings.
y g
over 700 hours of service
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15. APPENDIX
15
WACC and Components
WACC/Cost of Equity
Company, Economic, and Industry Overview
Fin n i l An l i
Financial Analysis
Report Deliverable
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16. WACC AND COMPONENTS
16
WACC – WEIGHTED AVERAGE COST OF CAPITAL
WACC = (RE X WE) + (RD [1-T] X WD)
WHERE:
• Re =Cost of equity capital
• Rd =Cost of debt capital
• We =Percentage of equity capital, at market value
• Wd =Percentage of debt capital, at market value
Percentage
• T=The firm's effective income tax rate
RELATIVE PERCENTAGES
• Industry Based
• Company Based
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17. COMPANY, ECONOMIC AND INDUSTRY
OVERVIEW
17
AT APPRAISAL DATE, NOT REPORT DATE
Local Conditions, if relevant
Economic Industry
General Overview and Indicators Correct SIC or NAICS Code
Consumer Spending and Inflation Description & Market Characteristics
Business/Manufacturing Conditions Supply/Demand Determinants
Financial Markets
Fi i lM k t Product/Service S
P d t/S i Segmentation
t ti
Housing Markets Industry Performance
Unemployment Industry Outlook
Inflation Rates
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18. FINANCIAL ANALYSIS
18
Growth Rates Turnover Analysis
Profitability Working Capital Analysis
Gross Margin Analysis Capital Structure
Cash Flow (EBITDA) Industry Specific
Analysis Financial Analysis
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19. REPORT DELIVERABLE
19
Company Overview Appraisal Approaches
Financial Analysis Income Approach
Economic Overview Market Based Approach
Industry Overview Asset Based Approach
Strengths & Weaknesses Summary & Conclusion
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