The option pricing model is often used to value ownership interests in early-stage companies. Developed in response to the need to reliably estimate the value of different economic rights in complex capital structures, the OPM models the various capital structure components as a series of call options on underlying total equity value.
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In recent years there has been increasing concern among ESOP sponsors and professional advisors (trustees, TPAs, business appraisers, legal counsel) regarding the scrutiny of the DOL, the Employee Benefits Security Administration (“EBSA”), and the Internal Revenue Service (“IRS”). These entities (and agencies thereof) are tasked with ensuring that ESOPs comply with the Employee Retirement Income Security Act (“ERISA”) as well as with various provisions of the federal income tax code concerning qualified retirement plans (including ESOPs). Citing concerns for poor quality and inconsistency in business appraisals, the DOL has sought in recent years to expand the meaning of “fiduciary” under ERISA to include business appraisers. In the most recent forums of exchange and deriving from various court actions, there are numerous areas of concern that DOL/EBSA appear to have regarding ESOP valuations. This paper focuses on the use of financial projections in ESOP valuations. The use (or misuse) of financial projections is often the most direct cause of over- or under-valuation in ESOPs.
In this whitepaper, we provide insight on the functional processes and analytical considerations underlying the determination of a correlated indication of value.
This whitepaper provides an overview of the primary elements of comparability and adjustments under the three primary categories of market methodology.
The purpose of this whitepaper is to help readers develop an understanding of the basic contours of the three principal financial statements. The balance sheet, income statement, and statement of cash flows are each indispensable components of the “story” that the financial statements tell about a company. After reviewing each statement, we explain how the different statements relate to one another. Finally, we provide some guidance on how to evaluate projected financial statements.
Buy-sell agreements are frequently the most forgotten corporate document in the file. No one thinks about buy-sell agreements until a triggering event, and then it becomes the only thing they think about. Partners are often surprised by the language in the contract they signed many years before, and too often a serious dispute breaks out between partners over what the words in the agreement mean, or were intended to mean.
Switching costs for capital investment are high and do-overs are expensive. The purpose of this whitepaper is to assist directors and shareholders in evaluating proposed capital projects and contributing to capital budgeting decisions that enhance value.
This whitepaper, by Travis W. Harms, equips directors and shareholders to contribute to capital structure decisions that promote the financial health and sustainability of the company.
ESOP valuation is an increasing concern for Trustees and sponsor companies as many ESOPs have matured financially, demographically, and strategically. This article addresses why a Trustee or sponsoring company might or should opt for a new appraisal provider, as well as what criteria, questions, and qualities drive the process of selecting a new appraiser.
In this 2013 whitepaper we review financial issues arising when community banks merge or sell to a larger, public institution. It is not intended to answer every question and, in some instances, our intention is to raise questions for directors and managers to evaluate. In a series of follow-up papers and webinars we will address specific topics that merit further scrutiny.
Stress testing is more than just a regulatory check-the-box exercise. Similar to stress tests performed by cardiologists to determine the health of a patient’s heart, bank stress tests can provide a variety of benefits that could serve to ultimately improve the health of the bank. Stress testing benefits include: enhancing strategic decisions, improving risk management and capital planning, and enhancing the value of the bank.
This whitepaper, by Travis W. Harms, gives directors and shareholders a vocabulary and conceptual framework for thinking about strategic corporate finance decisions, allowing them to bring their perspectives and expertise to the discussion.
Accounting Standards Update 2016-01 has generally flown under the radar since it was released almost two years ago. However, this accounting update has the potential to significantly affect financial reporting by public and private companies with minority equity investments – including corporate entities with a portfolio of venture capital investments. This whitepaper provides an overview of the accounting standards changes as they pertain to companies with equity investments and a few best practice considerations for firms with exposure to these changes.
Of the three primary corporate finance decisions, distribution policy is the most transparent to shareholders. The purpose of this whitepaper is to help directors formulate and communicate a distribution policy that contributes to shareholder wealth and satisfaction.
Effective communication between management and shareholders is a key component of the long-term sustainability and success of any family business. The cornerstone of a thoughtful and effective shareholder relations program is education. Apart from a shared vocabulary and understanding of basic corporate finance concepts, family business managers will struggle to communicate the company's strategy and financial results to shareholders clearly.
The purpose of this whitepaper is to provide an informative overview regarding the valuation of mineral royalty interests within the oil and gas industry.
This whitepaper provides an informative overview regarding the valuation of exploration and production (E&P) companies operating in the oil and gas industry.
Understanding how insurance agencies and brokerages are actually valued may help you understand how to grow the value of your business and maximize your return when it comes time to sell. The purpose of this whitepaper is to provide an informative overview regarding the valuation of insurance brokerages and agencies.
In this whitepaper, we provide an informative overview regarding the valuation of businesses operating in the regional or short-line railroad industry, explain why public company multiples can be misleading, and discuss the mechanics of valuation used by professional business appraisers. We do so in order to provide you with the knowledge and vocabulary necessary to be an informed consumer of business valuation services and, more importantly, to understand the value of your regional or short-line railroad company.
This 30+ page whitepaper contains 13 useful articles written for ESOP Trustees.
Statutory “fair value” is the standard of value for valuation in the dissenters’ rights and shareholder oppression statutes of the majority of states. Disagreements over the applicability (or not) of certain valuation premiums or discounts provide the source of significant differences of opinion between counsel for dissenting shareholders and, unfortunately, between business appraisers. However, in this whitepaper on statutory fair value, we hope to outline sufficient valuation and finance theory so we can begin to examine cases, i.e., judicial interpretations of what fair value means. With the proper background, we will be able to understand and to interpret what the courts have said in the context of valuation theory.
This whitepaper is a compilation of thoughts we have gathered in the early days of this new tax regime. We present what we think are the major issues that RIA partners should consider.
Lower tax rates generally contribute to higher valuations – but some new rules and limitations require careful assessment to determine their effect on investor returns and financing options.
With more than 35 public registrants reporting nearly $40 billion of assets under management, business development companies, or BDCs, are increasingly important financial intermediaries, matching a wide variety of businesses needing capital with yield-hungry investors eager to provide it. Like private equity funds, BDCs invest in a portfolio of generally illiquid securities of privately held companies. Unlike private equity funds, which are structured as finite-lived investment partnerships, BDCs are publicly traded vehicles accessible to retail investors, providing permanent capital for investment. As long as certain distribution requirements are met, BDCs are not subject to income tax. The purpose of this whitepaper is to review the principal financial statement components of BDCs with a view to clarifying the factors that are most likely to influence financial performance.
The purpose of this article is to provide an informative overview regarding the valuation of businesses operating in the brick industry.
Over the past decade, the telecommunications industry has been characterized by rapid innovation accompanied by the obsolescence that often follows rapid innovation. Regardless of how you choose to deal with the ever changing competitive environment – be it through selling, acquiring, divesting, or any other major strategic change – it is important to realize the value of your telecommunications company as it stands today.
The ownership of every practice will change hands. The event that triggers the transfer can be categorized as either voluntary or involuntary. It is important for physicians to consider the universe of ownership transfer possibilities, because sooner or later, you will be involved.
Valuation for start-up enterprises can be a tricky proposition. Regardless of industry, start-ups generally share a common set of operational characteristics and valuation needs that are distinct from mature firms. In this article, we will discuss common circumstances that give rise to the need for a valuation, basic valuation concepts, and specific valuation considerations relevant to start-up companies.
This article is intended to provide insight into the situational (when and why) and analytical (how) aspects of valuing electrical distributors. A lack of knowledge regarding the value of your business could be very costly.
Urgent Care Centers provide personal health care consultation and treatment outside of the traditional emergency room and primary care physician models. Per industry data, both the number of Urgent Care Centers and the volume of services provided by Urgent Care Centers have increased rapidly over the past decade. Current industry factors point to a continuation of this growth. Given this, if you own a center, or an interest in one, now is an important time to understanding the key elements underlying the value of your investment.
Understanding how equipment and machinery dealerships are valued may help you understand how to grow the value of your business and maximize your return when it comes time to sell. The purpose of this whitepaper is to provide an informative overview regarding the valuation of agricultural equipment and machinery dealerships.
There are many reasons why a truck dealership can be worth more or less than a standard rule of thumb might imply, and many reasons why a particular business interest in a truck dealership can be worth more or less than the pro rata value implied by that rule of thumb. This article provides useful information as to how truck dealers are valued and what impact that might have on their owners.
Most trust companies share attributes of both family offices and asset managers, so there really is no one-size-fits-all definition of an independent trust company. Recognizing the particular characteristics of any given trust company is essential to understanding its value in the marketplace.
A lack of knowledge regarding the value of your practice could be very costly. Opportunities for successful liquidity events may be missed or estate planning could be incorrectly implemented based on misunderstandings about value. In addition, understanding how veterinary practices are valued may help you understand how to grow the value of your practice and maximize your return when it comes time to sell. The purpose of this whitepaper is to provide an informative overview regarding the valuation of a veterinary practice.
Debate over discounts and premiums in business valuation persists. Nowehere is this truer than with the marketability discount (or DLOM). Within the ESOP community, much of the confusion over DLOMs is mitigated due to the presence of put options. However, a legacy of concern over control premiums has now become an acute issue.
A review of the recently released Section 2704 of the Internal Revenue Service Code from business and valuation perspectives finds that the Proposed Changes, if adopted as published, will affect, but not eliminate valuation discounts.
In Valuation and Transaction Advisory Considerations for Wholesale Beverage Distributors, Tim Lee offers important insights for principals of distributorships, their legal advisors, as well as wholesaler CFOs, board members, and lenders. This paper includes an in-depth discussion of industry rules of thumb, helps you understand basic valuation theory and how the realities of the industry reconcile to the fundamentals of financial valuation and M&A strategy. The paper also includes examples of differing transaction scenarios and tools for assessing how transaction values and deal financing translate to investment return.
Understanding the value of an asset management business requires some appreciation for what is simple and what is complex. On one level, a business with almost no balance sheet, a recurring revenue stream, and an expense base that mainly consists of personnel costs could not be more straightforward. At the same time, asset management firms exist in a narrow space between client allocations and the capital markets, and depend on revenue streams that rarely carry contractual obligations and valuable staff members who often are not subject to employment agreements. In essence, RIAs may be both highly profitable and prospectively ephemeral. Balancing the particular risks and opportunities of a given asset management firm is fundamental to developing a valuation.
The sustained low yield environment is pressuring BDC earnings. If BDCs implement modest dividend cuts, will stock prices decline to maintain investor yield, or will investors accept lower stock yields amid a dearth of compelling alternative income plays? The experience of mortgage REITs examined in this whitepaper, published September, 2014, suggests that erosion of NAV per share from credit-related writedowns is a bigger threat to stock prices over time.