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.
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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.
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In this whitepaper, we provide insight on the functional processes and analytical considerations underlying the determination of a correlated indication of value.
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This whitepaper provides an overview of the primary elements of comparability and adjustments under the three primary categories of market methodology.
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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.
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Earnings are a crucial reference point in determining transaction prices negotiated by buyers and sellers of RIA firms. However, reported earnings, even when audited and presented in accordance with Generally Accepted Accounting Principles (GAAP), have limitations. GAAP earnings are backward-looking, reflecting how a business has performed under specific rules in the past. While these historical earnings have their uses, buyers in the RIA industry focus more on the future—what’s visible through the windshield, not the rearview mirror.
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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.
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In times of succession, tensions can run high. Having a clear and effective buy-sell agreement is truly imperative to minimizing costly and emotional drama that may ensue in times of planned or unplanned transition.
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For most middle-market companies, especially those that have not been acquisitive in the past, executing on a single acquisition (much less a broader acquisition strategy) can be fraught with risk. There are many elements, from finding the right targets, to pricing the deal correctly, to successfully integrating the acquired business that could derail efforts to build shareholder value through acquisition. In this whitepaper, we cover buy-side topics from the perspective of middle-market companies looking to enter the acquisition market.
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This whitepaper, by Travis W. Harms, assists directors in evaluating proposed capital projects and contributing to capital budgeting decisions that enhance value.
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This whitepaper, by Travis W. Harms, equips directors to contribute to capital structure decisions that promote the financial health and sustainability of the family business.
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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.
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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.
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In this whitepaper we discuss some key considerations in the valuation of banks and bank holding companies.
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There are three basic components of compensation for investment management firms: Base salary/Benefits, Variable Compensation/Bonus, and Equity Compensation. We discuss these and more in this whitepaper.
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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.
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From the perspective of family shareholders, dividend policy is the most transparent element of corporate finance. The purpose of this whitepaper is to help family business directors formulate and communicate a dividend policy that contributes to family shareholder wealth and satisfaction.
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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.
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Everyone agrees that communication promotes positive shareholder engagement, but what does it look like to communicate financial results effectively? In this whitepaper, we offer practical suggestions for presenting key financial data in ways that family shareholders find useful.
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This whitepaper gives an overview of considerations in valuing wealth management firms including when you need a valuation and valuation methodology used.
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Valuing a FinTech company can be a very complicated and difficult task; however, it carries significance for employees, investors, and stakeholders of the company. While FinTech companies have large differences, including niche (payments, solutions, technologies, etc.) and stage of development, understanding the value of a FinTech company is crucial to everyone with an interest in the company.
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The purpose of this whitepaper is to provide an informative overview regarding the valuation of mineral royalty interests within the oil and gas industry.
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This whitepaper provides an informative overview regarding the valuation of exploration and production (E&P) companies operating in the oil and gas industry.
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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.
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This 30+ page whitepaper contains 13 useful articles written for ESOP Trustees.
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For buyers and sellers, the stakes in a transaction are high. You only get one chance to do it right. In this whitepaper, we illustrate how buyers and sellers benefit from a quality of earnings report that extracts a company’s sustainable earning power from the thicket of historical GAAP earnings. We review the most common earnings adjustments applied in QofE analyses and review the role of working capital and capital expenditures as the links between EBITDA and cash flow available to buyers.
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Selling your business is a daunting exercise that requires careful preparation and real-time vigilance. In this whitepaper, we define some practical steps business owners can take to ready their businesses for the best transaction outcome.
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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.
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Succession planning has been an area of increasing focus in the RIA industry, particularly given what many are calling a looming succession crisis. The demographics suggest that increased attention to succession planning is well warranted: a full 62% of RIAs are still led by their founders, and only about a quarter of them have non-founding shareholders. Yet when RIA principals were asked to rank their firm’s top priorities in 2019, developing a succession plan was ranked last. Fortunately, there are many viable options for RIA principals looking to exit the business.
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Mercer Capital's 2022 Energy Purchase Price Allocation Study provides a detailed analysis and overview of valuation and accounting trends in different subsectors of the energy space for the 2021 calendar year.
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Family business directors need the best information available when making strategic financial decisions that will help set the course of their business for years to come. This Benchmarking Guide is the resource directors need.
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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.
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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.
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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.
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Despite the relatively high level of financial sophistication among RIA buyers and sellers, and broad knowledge that substantial portions of value transacted depends on rewarding post-closing performance, contingent consideration remains a mystery to many industry participants. Yet understanding earn-outs and the role they play in RIA deals is fundamental to understanding the value of these businesses, as well as how to represent oneself as a buyer or seller in a transaction. we offer this whitepaper to explore the basic economics of contingent consideration and the role it plays in negotiating RIA transactions
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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.
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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.
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In this whitepaper, we break down the value drivers of a dealership, discuss when you might need a formal valuation, introduce the valuation methodologies used by professional business appraisers, and go into some depth about topics such as dealer financial statements and normalizing adjustments to the balance sheet and income statement.
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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.
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Valuing an InsurTech company can be complicated and difficult, but carries important significance for employees, investors, and stakeholders for the company. While all InsurTech companies have differences, including what niche (distribution, claims, benefits, etc.) they operate in or what stage of development the company is in, understanding the value of the business is critically important.
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The whitepaper breaks down basic concepts that must be defined in every valuation and goes into depth about three commonly accepted approaches to value. Financial and market considerations are discussed as are the differences between public and private companies as well as public and private logistics companies.
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Throughout this whitepaper, we look into the payment industry’s place in the larger FinTech ecosystem, macroeconomic factors driving the industry, microeconomic factors pertaining to specific companies, and what valuation methods are most prudent when determining the fair market value of a payments company.
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There are many reasons why a trucking company can be worth more or less than a standard rule of thumb might imply, and many reasons why a particular business interest in a trucking company can be worth more or less than the pro rata value implied by that rule of thumb. This whitepaper provides useful information as to how trucking companies are valued and what impact that might have on their owners.
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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.
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Understanding the value of an oilfield services (OFS) company is by its very nature a complex matter. The unpredictable cyclicality of the oilfield services industry requires careful consideration of many industry-wide and company-specific factors in developing a reasonable forecast of future operating results. While consideration of such factors should be part of the analysis in the appraisal of businesses in all industries, the impact of these considerations is magnified in highly cyclical industries such as that served by OFS businesses. This whitepaper provides invaluable guidance in regard to these aspects of the OFS industry.
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In the whitepaper, we describe the situations that may lead to a valuation of your firm, provide an overview of what to expect during the valuation engagement, introduce some of the key valuation parameters that define the context in which a firm is valued, and describe the valuation methods and approaches typically used to value independent trust companies.
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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.
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Understanding the value of an asset management firm 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.
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Understanding the value of an investment 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, investment 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.
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Family business advisors help companies and leaders navigate a wide range of business and family challenges, ranging from corporate governance to succession planning to family relationship dynamics and all points in between. This whitepaper helps fill in that gap.
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