Tiếng anh chuyên ngành kế toán part 64 pps

Because Victoria made adjustments to the 2000 pro forma income state-ment see the pro forma column in Exhibit 18.5 for discretionary items offi-cers’ compensation and rent expense and in

as of December 31, 2000, on an as-if-freely-traded basis Since this amount is based on rates of return of freely traded marketable securities, Victoria will take a valuation discount for lack of liquidity at the end of her analysis

Because Victoria made adjustments to the 2000 pro forma income state-ment (see the pro forma column in Exhibit 18.5) for discretionary items (offi-cers’ compensation and rent expense) and income tax expense, the 2000 pro forma earnings and resulting value of $31.7 million represents a value for a control (rather than a minority) equity interest

In summary, the discounted cash f low methodology determines ACME’s value today, which represents an owner’s perceived future benefits discounted

to the present value The DCF method forecasts ACME’s cash f lows into the future and discounts them to their present value In addition, this method as-sumes that the owner will sell the company at some point in the future and re-ceive the sale price The estimated future sale price is also discounted back to present value The present values of future earnings and future sale price are added together to determine the value of ACME

MAR K ET APPROACH: PUBLICLY TR ADED

GUIDELINE—COMPANIES METHOD

Bob asks Victoria to explain the market approach to determining value She says the market approach is a general way of determining a value by comparing the asset to similar assets that have been sold In business valuation, this can be done by looking for any prior arm’s-length sales of the company’s stock, sales of other companies, or prices of shares in publicly traded companies In the latter two instances, careful analysis of the other companies must be done to deter-mine if they would properly serve as guidelines under this approach The

American Society of Appraisers describes guideline companies as those

“com-panies that provide a reasonable basis for comparison to the investment char-acteristics of the company being valued Ideal guideline companies are in the same industry as the company being valued; but if there is insufficient transac-tion evidence available in the same industry it may be necessary to select com-panies with an underlying similarity of relevant investment characteristics (risks) such as markets, products, growth, cyclical variability and other salient factors.”2

In ACME’s case, there have never been any prior sales of corporate stock

In addition, Victoria is unable to find any sales of guideline companies in which adequate information is available However, she is able to identify five publicly traded companies that could potentially serve as guidelines under the market approach

Having identified the list of potential public companies through database searches, Victoria performs a qualitative and quantitative analyses on the com-panies to determine whether they should serve as guideline comcom-panies This analysis results in the selection of five companies

Business Valuation 619

Victoria’s analysis looks at the public companies’ balance sheets and in-come statements over several years, growth rates, margins, returns on assets and equity, and financial ratios She also analyzes various share price multiples

of the public companies such as:

• Market value of invested capital to sales

• Market value of invested capital to earnings before interest, taxes, depre-ciation, and amortization (EBITDA)

• Market value of invested capital to earnings before interest and taxes (EBIT)

• Market value of equity to pretax income

• Market value of equity to net income

• Market value of equity to cash f low

• Market value of equity to book value

Based on her detailed analyses of the guideline companies and comparing them to ACME, Victoria determines that the following price multiples of the public companies appear to be most correlated and relevant for application to ACME: market value of invested capital to sales, market value of invested cap-ital to EBITDA, market value of invested capcap-ital to EBIT, and market value of equity to pretax income

The median price multiples for the five public companies are:

Then Victoria applies the median price multiples to ACME See Ex-hibit 18.12 for her calculations Her analysis indicates a value of ACME’s eq-uity at December 31, 2000, of $35.2 million on an as-if-freely-traded basis Since Victoria made adjustments to the 2000 income statement (see the resulting pro forma column in Exhibit 18.5) for discretionary items (officers’ compensation and rent expense), she explains that the 2000 earnings and

re-sulting value of $35.2 million represents a value to an owner of a control

eq-uity interest Thus, Victoria concludes that there is no need to add a control

premium A control premium is an upward adjustment to the value that

re-f lects the power ore-f control as compared to the value ore-f a noncontrol equity in-terest (However, many analysts believe that a control premium would be necessary simply because of the use of public minority share multiples even though the income was adjusted upward to ref lect the discretionary expenses

of a control owner Many of these people, however, would not use the median multiple of the public companies as Victoria did but adjust it [usually down]

Median Price Multiple

a S

Business Valuation 621

for fundamental differences between the selected public companies and the private business Thus, if these analysts first adjust the price multiple down-ward as a fundamental adjustment and then apply an updown-ward control premium, the result may be similar to Victoria’s valuation conclusion.)

However, since the $35.2 million value is based on freely traded mar-ketable securities, Victoria will take a valuation discount for lack of liquidity at the end of her analysis

R ECONCILIATION OF VALUATION METHODS

The results of Victoria’s valuation analysis are:

Method Value

Income approach $31.7 million

Market approach 35.2 million

Victoria chooses to weigh each method equally resulting in an average value of $33.5 million This value represents 100% of the common stock of ACME at December 31, 2000, on an as-if-freely-traded and control basis

DISCOUNT FOR LACK OF LIQUIDITY

A freely traded basis means an investment can be sold and converted to cash

within several days When shares of stock are sold on a public exchange, the seller will usually receive cash within a few days making them freely traded in-vestments Under the income approach, Victoria used rates of returns from publicly traded securities Under the market approach, she used price multi-ples of publicly traded shares Thus, the values under both of Victoria’s ap-proaches result in as-if-freely-traded values Because it would likely take Bob (or any other owner of the business) several months or longer to sell ACME and receive cash, the liquidity of an investment in ACME’s shares is significantly different than the liquidity of publicly traded shares of stock Therefore, Vic-toria takes a discount from the as-if-freely-traded value of $33.5 million for ACME’s equity

The preceding provides the rationale for applying a discount for lack of liquidity However, the amount of the discount must be quantified The closest empirical evidence to quantify the discount comes from studies of restricted public stock prices and studies of share prices just prior to companies’ initial public offerings These studies indicate discounts for lack of marketability of 35% to 45% on average Since these studies relate to minority equity positions

in the companies instead of control positions, Victoria uses a discount below the averages of the studies Based on her analysis and judgment, she applies a 10% lack of liquidity discount to the as-if-freely-traded $33.5 million equity

value This represents the discount an investor would require for buying shares

in ACME instead of an investment that is freely traded

VALUATION CONCLUSION FOR ACME

Victoria concludes that the fair market value of the common stock of ACME as

of December 31, 2000, was $30,150,000 ($33.5 million less 10% discount for lack of liquidity)

VALUING MINOR ITY INTER ESTS

The preceding ACME case study valued 100% of the equity (stock) in the business Had Bob owned only, say, 25% of the common stock, Victoria would have to apply some additional analysis to value his minority interest With a 25% interest, Bob would no longer have the ability to control the company

A minority interest is a business ownership of less than 50% of the voting

shares The owner of a minority interest in most private businesses cannot

con-trol the company A concon-trol interest in a company has the power to direct

man-agement and policies of a business usually through ownership of enough shares

to inf luence voting and other decisions Intuitively, someone would rather own

a control interest in a private business (51%) instead of a minority interest (49%) because of the power to control the company Buyers would typically pay a significantly different price when comparing a 51% interest to a 49%

interest This phenomenon is called a discount for lack of control (or minority

discount)

The second area of additional analysis for Victoria would be for the

typi-cal difficulty in selling a minority interest in a closely held business Mar-ketability is the ability to quickly convert property (an investment) to cash at

minimal cost Hypothetically, if Bob owns only 25% of ACME’s stock and someone else owns the other 75%, the number of buyers interested in buying Bob’s shares is significantly less than if he owns 100% Since Bob actually owns the entire company, he has several ways to sell it For example, he can sell the company through an investment banker or business broker He can also take the company public If Bob hypothetically only owns 25% of ACME’s stock, these options are not realistically available to him Therefore, his minor-ity interest is less marketable Intuitively, investors prefer owning marketable investments over nonmarketable ones Therefore, buyers of minority interests

in private companies typically pay less since the shares are not marketable

This is called a discount for lack of marketability.

In valuing a minority interest, a major consideration is the timing and amount of the anticipated future economic benefits f lowing directly to the nority owner This consists of the company’s periodic distributions to the mi-nority owner and the estimated holding period for owning the equity interest

Business Valuation 623

until it is sold and the sales proceeds are received We saw through the DCF model that the value of the asset is the present value of the expected future benefits In valuing a minority interest, the emphasis shifts toward the future benefits f lowing to the minority shareholder as opposed to the business overall For example, if a minority owner expects not to receive any distributions from the business for 10 years even though the business is profitable, this is signifi-cantly different from a business that makes annual shareholder distributions of the profits The values in these two situations would be considerably different

BUSINESS VALUATION STANDARDS

Professional business appraisers follow certain standards when doing business valuations Business valuation standards include the following:

Uniform Standards for Professional Appraisal Practice—The Appraisal Foundation

Standards issued by various membership organizations such as American Society of Appraisers, Institute of Business Appraisers, and National As-sociation of Certified Valuation Analysts

VALUE ENGINEER ING

Just as the CEO of a public company tries to enhance the value of the shares, management of a private company can work on increasing the value of the business in anticipation of a future sale Certain factors can have a significant effect on the value of a typical closely held business Management can focus on these factors to potentially increase the future value of the business Some of the factors are obvious, while some are not They include the following:

• Decrease expenses (increases cash f low/income)

• Increase revenues (increases cash f low/income)

• Significantly increase the earnings growth rate (may increase earnings projections, lower capitalization rate due to growth factor)

• Eliminate the owners’ personal expenses and perquisites (increases cash

f low/ income, lowers buyer risk of inaccurate financial statements)

• Report all income on the financial statements and tax return (increases cash f low/income)

• Develop the management team for the possibility that the current owner(s) may leave the business upon a sale (lowers buyer risk of earn-ings volatility)

• Plan for the current owner-managers’ continuing employment under the new owner for a fixed period (lowers buyer risk of earnings volatility and loss of customers, employees, and vendors)

• Have annual financial statements audited or reviewed by a certified pub-lic accountant and improve interim financial reporting (lowers buyer risk

of inaccurate financial statements)

• Develop a list of potential synergistic buyers and identify the ones with the most to gain from an acquisition of the subject company (search for the highest synergistic value to be paid)

• Decrease dependency on major customers and vendors (lowers buyer risk

of earnings volatility in the event of the loss of any of these customers or vendors)

• Begin assembly of key business information for potential buyers (lowers buyer risk of perceptions of potential earnings volatility without having such knowledge)

• Improve any existing poor financial statistics or ratios (lowers buyer fi-nancial risk)

Public companies report earnings and performance on a quarterly basis and the share prices frequently react quickly On the other hand, private com-pany values generally react more slowly to changes Thus, management may need to work on value improvement factors one to two years in advance of mar-keting a business

SUMMARY

The fair market value of a private business is essentially an estimate of the price that a willing buyer would pay and a willing seller would accept Buyers have different motives for buying a business Financial buyers are looking for a return on their investment Strategic buyers are usually looking to integrate their company with the business for unique strategic reasons Financial buyers pay fair market value while strategic buyers usually pay a price ref lective of the unique strategic advantages to the specific buyer Often, strategic buyers pay more than fair market value Although it is possible to conduct a business valuation that is not overly complex, the question remains whether the result-ing value is accurate Many variables go into a valuation analysis A business valuation is both a quantitative and qualitative process that is focused on as-sessing investment risk and investment return It is largely an assessment of the risks a buyer is taking in acquiring and owning the company In addition, a val-uation attempts to project the earnings an owner of the business can expect in the future as a return on investment

Author’s Note This chapter is not intended to be a complete text on business

valuation It is meant to illustrate through examples many of the fundamentals

of business valuation and their application The proper application of valuation theory depends on the actual facts and circumstances of the investment being valued

Business Valuation 625

FOR FURTHER R EADING

Desmond, G and J Marcell, Handbook of Small Business Valuation Formulas and

Rules of Thumb, 3rd ed (Los Angeles: Valuation Press, 1993).

Pratt, S., R Reilly, and R Schweihs, Valuing a Business: The Analysis and Appraisal

of Closely Held Companies, 4th ed (New York: McGraw-Hill, 2000).

Pratt, S., R Reilly, and R Schweihs, Valuing Small Businesses and Professional

Prac-tices, 3rd ed (New York: McGraw-Hill, 1998).

Reilly, R and R Schweihs, Valuing Intangible Assets (New York: McGraw-Hill,

1998)

Smith, G and R Parr, Valuation of Intellectual Property and Intangible Assets (New

York: John Wiley, 2000)

Trugman, G., Understanding Business Valuation: A Practical Guide to Valuing

Small-to Medium-Sized Businesses (New York: AICPA, 1998).

, Handbook of Business Valuation, 2nd ed T West and J Jones, Eds (New

York: John Wiley, 1999)

, Stocks, Bonds, Bills, and Inf lation Yearbook Valuation Edition (Chicago:

Ibbotson Associates, published annually)

INTER NET LINKS

www.aicpa.org American Institute of Certified Public

Accountants www.appraisers.org American Society of Appraisers www.appraisalfoundation.org Appraisal Foundation

www.instbusapp.org Institute of Business Appraisers

Valuation Analysts

NOTES

1 International Glossary of Business Valuation Terms, jointly published by the

American Institute of Certified Public Accountants, American Society of Appraisers, Canadian Institute of Chartered Business Valuators, National Association of Certi-fied Valuation Analysts, and Institute of Business Appraisers Further terminology from this jointly published international glossary is included in glossary at the end of this book

2 American Society of Appraisers, Statement on Business Valuation Standards 1.

Accounting exposure: Increases or decreases in assets and liabilities resulting from

exchange rate movements, which may not be associated with either current or prospective cash inf lows or outf lows Accounting exposure is distinguished from economic exposure where cash inf lows and outf lows are expected to be associated with exchange rate movements

Accrual accounting: An accounting method that recognizes revenues as they are

earned and expenses as they are incurred The timing of revenue and expense recognition is not tied to the timing of the inf low and outf low of cash Accrual ac-counting is seen as essential in order to develop reliable measures of periodic finan-cial performance

Acquisition: The purchase—not necessarily for cash—of a controlling interest in a

firm

Activity-based costing: A process of identifying the different activities that

gener-ate costs

Adapter: Typically, a small circuit board inside a computer that lets the computer

work with hardware external to the computer Examples: A network adapter allows a computer to be hooked into a network; a display adapter allows a computer to drive (display text, graphics) a computer monitor

AICPA: The American Institute of Certified Public Accountants This is the

na-tional professional association of certified public accountants (CPAs)

All-current method: A method of translating foreign-currency financial

state-ments whereby all assets and liabilities are translated at the current (balance sheet date) exchange rate, contributed capital accounts are translated at historical ex-change rates (rates in existence when the account balances first arose), and all rev-enues and expenses are translated at the average exchange rate in existence during the reporting period Translation adjustments resulting from f luctuating exchange rates are accumulated and reported with accumulated other comprehensive income

in shareholders’ equity

Amortization: the periodic, noncash charge used to reduce an intangible asset Application Service Providers (ASP): Companies that rent out applications and

process data for other companies, similar to service bureaus in the 1960s and 1970s

Glossary 627

Asset (asset-based) approach: A general way of determining a value indication of

a business, business ownership interest, or security by using one or more methods based on the value of the assets of that business net of liabilities

Asset acquisition: an acquisition executed by purchasing the assets of the target

firm

Asymmetric risk: An exposure that results in profits or losses only if the underlying

price or economic variable moves in one direction

At-the-money: The condition of a call or put option when the strike price equals

the stock price Some economists define at-the-money as being the case when the stock price equals the present value of the strike price

B2C e-commerce: The sale of goods and services between a company and a

con-sumer over the Internet

Balanced scorecard: A comprehensive set of performance measures intended to

capture a more balanced picture of management’s success in achieving goals than can

be captured by financial measures only

Bearish: Pessimistic Anticipating a decrease in an asset value.

Best efforts underwriting: An agency arrangement by which underwriters agree

to use best efforts to sell all, or a certain minimum number of, shares of a public offering

Beta: A measure of systematic risk of a security; the tendency of a security’s returns

to correlate with swings in the broad market

Bidder: The firm that initiates a merger or acquisition; the bidder usually retains

control of the surviving firm

Bit: The smallest gradation of data stored in a computer Technically, a bit is either

a 1 or a 0 Computers use groups of bits, called bytes, to represent character data

Blue-sky laws: State laws regulating securities that provide for licensing

brokers/dealers and registering new securities issuances

Budget: A comprehensive, quantitative plan for utilizing the resources of an entity

for some specified period of time—showing planned revenues, expenses, and result-ing earnresult-ings—together with a planned balance sheet and cash f low statement If bud-gets adjust for volume they are called f lexible; otherwise, they are static

Budget entity: Any accounting entity, such as a firm, division, department, or

project, for which a budget is prepared

Budget performance report: An internal accounting report that shows the

differ-ence between actual results and expected performance planned in a budget

Budget review process: The process of evaluating budget proposals and arriving

at the master budget

Budget variance: The difference between the budgeted data and actual results Bullish: Optimistic Anticipating an increase in an asset value.

Business valuation: The act or process of determining the value of a business

en-terprise or ownership interest therein

Byte: Typically, eight bits in a computer, which as a unit, represent one character of

data A computer diskette can store 1,400,000 bytes of data, or 1,400,000 characters

of data This represents about 500 pages of single-spaced text