Valuations in Buy/Sell Agreements for Private Companies and - PowerPoint PPT Presentation

Presenting a live 110 ‐ minute teleconference with interactive Q&A Valuations in Buy/Sell Agreements for Private Companies and Businesses Mastering Standards and Best Practices to Calculate and Update Fair Market Value WEDNES DAY, JUNE 22, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Kelly Noll Senior Financial Analyst GBQ Consulting Columbus Ohio Kelly Noll, S enior Financial Analyst , GBQ Consulting , Columbus, Ohio James Alerding, Partner, Clifton Gunderson , Indianapolis Brian Bornino, Director of Valuation Services, GBQ Consulting , Columbus, Ohio For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10 .

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Valuations in Buy/Sell Agreements for P i Private Companies and Businesses t C i d B i Seminar June 22, 2011 Kelly Noll, GBQ Consulting James Alerding, Clifton Gunderson knoll@ gbq.com jim.alerding@ cliftoncpa.com Brian Bornino, GBQ Consulting bbornino@ gbq.com 5

Today’s Program Recent, Relevant Trends Slide 7 – Slide 11 [Kelly Noll] Valuation S tandards That Affect Buy/ S ell Agreements Slide 12 – Slide 28 [Jim Alerding] Critical Valuation Issues For All Buy/ S ell Agreements Slide 29 – Slide 33 [Brian Bornino] Slide 34 – Slide 56 Case S tudies [Brian Bornino and Kelly Noll] Slide 57 – Slide 68 Related-Party Buy/ Sell Issues [Jim Alerding] Best Practices And Recommendations Best Practices And Recommendations S S lide 69 – S lide 69 – Slide 75 lide 75 [Brian Bornino] 6

Kelly Noll, GBQ Consulting RECENT RELEVANT TRENDS RECENT, RELEVANT TRENDS 7

Key To A Successful Buy-Sell Agreem ent • Goal: Ensure a smooth and fair ownership transfer • Improper valuation is a huge obstacle to this! • Improper valuation results in costly, disruptive and p p y, p time-consuming disputes. • A no-win situation for everyone involved A no win situation for everyone involved • Takeaway: Proper valuation is KEY to a successful buy sell agreement buy-sell agreement. 8

Difficulties I n Perform ing Valuations Today • Proper valuation is difficult in today’s economic environment. • Many companies have had “unusual” performance recently. • Backward looking valuations emphasize “unusual” Backward-looking valuations emphasize “unusual” performance and often lead to improper valuations. • Sales multiples • Earnings multiples • Capitalization of earnings • Book value 9

Key Valuation Concept: Valuation I s Forw ard-Looking: Do these companies have the same value? Do these companies have the same value? • Identical historical cash flow; different future outlook • Implications for backward-looking valuation models? 1 0

Today’s Goals • Provide critical information needed to properly value a company in the context of a buy-sell agreement p y y g • Key valuation standards • Critical valuation issues Critical valuation issues • The problems with fixed-price/ formula methods • Potential areas of concern • Related party buy-sell issues • Best practices and recommendations 1 1

Jim Alerding, Clifton Gunderson VALUATION STANDARDS THAT VALUATION STANDARDS THAT AFFECT BUY/SELL AGREEMENTS 12

Why Issue Standards? • The AICPA has the responsibility to provide guidance to its members in all areas of practice members in all areas of practice. • BV standards are designed to improve the consistency and quality of practice among AICPA members that provide valuation services of practice among AICPA members that provide valuation services. 13

Who Must Follow SSVS1? • All members of the AICPA • CPAs who are not members of the AICPA, if their state has adopted AICPA standards as part of its accountancy law 14

When Does SSVS1 Apply? It applies when a member is engaged to or as part of another It applies when a member is engaged to, or as part of another engagement, estimates the value of a business, business ownership interest, security or intangible asset. 15

Do Other AICPA Standards Apply? • Yes, SSVS1 did not change or modify any of the AICPA ethical standards so the following apply: standards, so the following apply: – Independence (Rule 101) – Integrity and objectivity (Rule 102) – General standards (Rule 201) G l d d (R l 201) • Professional competence • Due professional care 16

Other Standards (Cont.) – General standards (Cont.) ( ) • Planning and supervision • Sufficient relevant data – Compliance with standards (Rule 202) Compliance with standards (Rule 202) – Confidential client info (Rule 301) – Contingent fees (Rule 302) – Acts discreditable (Rule 501) – Consulting Standard No. 1 17

Two Fundamental Factors The process of valuation involves: The process of valuation involves: 1. The application of business valuation approaches and methods 2. The exercise of professional judgment in the valuation process 18

Exceptions From Standard Not applicable when the value of an interest is provided to the member by the client or a third party and the member does not apply valuation by the client or a third party, and the member does not apply valuation approaches and methods or report on the value 19

Exceptions From Standard (Cont.) Not applicable to internal use assignments from employers to Not applicable to internal use assignments from employers to employee members not in the practice of public accounting 20

Exceptions From Standard (Cont.) Not applicable to mechanical computations that do not rise to the level Not applicable to mechanical computations that do not rise to the level of an engagement to estimate value 21

Using Work Of Specialists • A valuation analyst should note the level of responsibility, if any, being assumed for the work of the third party specialist being assumed for the work of the third party specialist • The specialist’s report may be included at the option of the valuation analyst valuation analyst. 22

Calculation Engagement • The valuation analyst and the client agree on the specific valuation y g p approaches and methods to be used, and the extent of the valuation procedures the analyst will perform; and • The valuation analyst estimates the value in compliance with the agreement. • The results are expressed as a calculated value, either as a single amount or as a range. 23

Valuation Engagement • Analyze the subject interest • Consider and apply appropriate valuation approaches and methods • Prepare and maintain appropriate documentation – ask only for info you intend to use 24

Calculation Engagement (Cont.) • Does not include all of the procedures in a full valuation engagement engagement • Valuation analyst should consider most of the fundamental factors considered in a full valuation considered in a full valuation 25

SSVS: Types Of Services And Reports Type Of Service yp “Valuation “Calculation Engagement” g g Engagement” g g “Detailed report” W itt Written Report R t “C l “Calculation report” l ti t” “Summary report” O Oral Report l R t All Allowed d All Allowed d 26

USPAP • Applies to members of the ASA • No legal requirement to follow USPAP (Uniform Standards of Professional Appraisal Practice) • IRS does not espouse a particular standard – just some standard 27

USPAP (Cont.) • It does not have a calculation • Report rules are very stringent • Considering prohibiting communication of preliminary results and drafts 28