COMPREHENSIVE BUSINESS VALUATION SERVICES

Evans and Associates professionals have performed hundreds of valuations for companies ranging from sole proprietorships to corporations with values extending up to one billion dollars. Evans and Associates engagements range from serving small private businesses to thinly traded public companies; from common stock to partnership interests to intangible assets. Our ability to support and defend the value conclusion under challenge is a fundamental assumption we prepare for in each of our engagements.

Our valuation services are performed for various purposes including, but not limited to, the following:

• Gift and Estate Tax Planning

  Few events are sadder to witness, or could be more easily avoided, than the forced sale of a family business to pay estate taxes. Yet this happens all too often and typically results from either poor planning or inadequate valuation advisory services.

  Gifted or bequested assets must be assigned value for federal transfer tax purposes. The IRS may assess penalty taxes on estates that undervalue assets for estate and gift tax purposes. These taxes can be minimized and penalties are less likely to be levied when a valuation has been performed in good faith by an independent appraiser. The key, however, is to have a thoroughly written, documented and defendable appraisal report prepared by a competent professional appraiser to establish a “reasonable basis” for the valuation.

• Family Limited Partnership Valuations

  Family Limited Partnerships, or FLPs, can be an excellent estate-planning tool for tax minimization and family wealth management. Through the use of carefully established discounts, FLPs enable family members to transfer limited partnership interests at major tax savings.

  Typically, assets such as real estate, marketable securities or stock in privately held businesses are contributed to FLPs by individuals who then create a small, general partnership interest and a large, limited partnership interest. These individuals then gift the limited partnership interest to family members at a discounted value to accomplish their transfer goals. Simultaneously, the senior owners maintain control over the assets through their general partnership interest. The discounted values generally reflect the limited partner's inability to control the underlying assets of the FLP and the illiquidity of the limited partnership interest. Unlike publicly traded securities, there is no readily available market for limited partnership interests, which further impairs the value of that interest.

  The keys to estate planning success through the use of FLPs begin with retaining qualified, experienced legal counsel who can design appropriate partnership agreements. Valuation expertise is also essential to compute, document and be available to defend the discounts taken on these business interests.

  It is widely recognized that the Internal Revenue Service considers the professional credentials and experience of the appraiser in determining which FLP valuations to challenge. Additionally, the tax authorities look at the depth, breadth, and quality of the report submitted in assessing their potential for challenge.

• Employee Stock Ownership Plan

  One of the important steps in establishing an Employee Stock Ownership Plan (“ESOP”) is the appraisal of the company stock that will be held by the plan. If the company is in the process of studying the implementation of an ESOP, a business valuation firm may be initially engaged to perform a preliminary or limited appraisal. Later, if the ESOP is established, a formal, comprehensive appraisal of the stock is prepared in accordance with the guidelines of the Employee Retirement Income Security Act (“ERISA”), the Department of Labor, the Internal Revenue Service and the Uniform Standards of Professional Appraisal Practice. The appraisal of the company stock held by the ESOP is then updated annually.

  An ESOP appraisal is required:

  • When the ESOP acquires employer securities
  • At least annually thereafter
  • Whenever there is a transaction between the plan and a party in interest
  • If the ESOP sells its stock position

  ERISA requires that ESOPs pay no more than “adequate consideration” when investing in employer securities. “Adequate consideration” means fair market value and the Department of Labor’s proposed adequate consideration regulations require that an appraiser assess all “relevant factors” in performing the valuation. These regulations require that the appraiser be independent and qualified, by background, experience, education and professional association membership, to value the ESOP stock.

• Financial Reporting Compliance

  Allocation of Purchase Price

  According to FASB Statement 141, Business Combinations, all acquisitions made after June 30, 2001 must be accounted for using the purchase method rather than the pooling-of-interests method of accounting. Under the purchase method, the acquisition price must be allocated among various acquired assets and assumed liabilities, with the remainder, if any, being assigned to general goodwill. FASB also requires an intangible asset to be recognized as an asset apart from goodwill and carried on the acquirer’s balance sheet at its fair value if it arises from contractual or other legal rights or if it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged – regardless if there is an intent to do so.

  While the process of assigning value to many assets is often relatively simple, it becomes quite complex with regard to specific intangible assets. A technically accurate intangible asset valuation must assess the asset’s returns specific to the intangible asset, the magnitude of the risk adjusted discount rate, and any charges for requisite tangible assets. Furthermore, the allocated values must be tested for reasonableness and correlation with the acquisition’s total forecasted returns and overall weighted average cost of capital.

  Evans and Associates has developed an expertise in this area through diligently mastering the body of knowledge as it relates to valuing intangible assets and through its direct experience in working on numerous assignments. Acquirers relying on our expertise receive defendable values supported by a highly credible, thoroughly documented report that will stand up to the scrutiny of both the SEC and other compliance organizations.

  
  

  Impairment of Goodwill

  FASB Statement 142, Goodwill and Other Intangible Assets, changes how goodwill and other intangible assets are accounted for subsequent to their initial recognition. Goodwill and certain intangible assets are no longer presumed to be wasting assets and will now be assumed to have indefinite useful lives, whose value should be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives.

  FASB 142 requires an initial and annual fair value valuation of applicable intangible assets and goodwill to document the amount of their value impairment, if any. If there is no impairment to goodwill in a given year, a company will not book goodwill expense in that period. If there is impairment (i.e., fair value is less than the carrying amount), any goodwill impairment losses are to be reflected as a separate line item on the income statement.

  FASB 142 effectively creates an emerging area of expertise within the valuation field. Only those appraisers with proper training and experience should be relied upon to document the amount of impairment expense recognized on a company’s income statement or, on the other hand, certify that the value of a company’s goodwill has been maintained. Evans and Associates’ expertise in valuing intangible assets ties in nicely with goodwill impairment. Our firm looks forward to meeting the needs of public companies searching for reliable appraisal certifications as they relate to this highly complex, niche area.

• Shareholder Agreements

  When businesses are formed or reorganized, the shareholders or partners are typically consumed with the endless challenges of building the new company. In the midst of this growth, they sign shareholder agreements that seem fair and practical for what they have just created.

  Over time, however, individual shareholder circumstances, their involvement in the business, and business conditions often change. These changes can affect the value of the company on a whole, the value of their individual ownership interests in the company, the value of their individual contributions to the company through their work, and shareholders' perceptions of each others' value.

  In this dynamic environment, a shareholder may want to sell out, may get divorced or become disabled, or even die. At this critical time, they need a shareholder agreement that is clearly worded, and that meets their current circumstances and needs.

  When the agreement fails that test, the parties' recourse is often litigation, and this route frequently causes distraction from business needs, significant professional fees, and hard feelings. There are, of course, ways to avoid this pain.

  Shareholder and partnership agreements commonly include stipulations as to how the value of an interest is to be determined in the event a shareholder or partner wishes to leave the enterprise, or in the event of disability, divorce or death. The valuation stipulations, if written without the input of a business valuation expert, could suffer from inadequate and unclear references to valuation. Examples of the need for clarity include:

  • If a minority interest is involved, is it to be valued with a minority discount or is it to be the value of 100% of the company prorated to the percentage owned?
  • If book value is specified, is it to be as shown on the company's balance sheet or are adjustments to be made to recast assets and liabilities at market values instead of book values? (Book values are commonly much lower than market values.)
  • If earnings are referenced, are they to be as shown on the company's income statement or adjusted to reflect true economic performance? It is not uncommon for the earnings of a private company to be managed to minimize taxable income. Is this fair and equitable for determining the value of the interests of individual shareholders or partners?
  • The value determined by such an agreement could force a shareholder or partner (or their estate) to sell their interest back to the company or to the other owners at a price which is much lower than the value which must be assigned under IRS regulations to that interest when filing a tax return to settle the estate. The consequences of any such differences in value should be clearly understood by all parties and planned for.
  • Since the shareholder agreement was written, have separate entities been formed to own and lease assets, such as buildings, equipment or other items, back to the company? If so, these assets will not appear on the balance sheet of the company and, therefore, could be excluded when the value of an ownership interest in the company is determined under the agreement written years earlier.

  At the inception or the reorganization of a business when these agreements were signed, all was expected to go well, so these and other critical valuation issues are often not annually addressed. Failure to clarify these issues greatly increases the prospects that when the agreement is needed, it will fail you and contribute to the prospects of litigation. Don't wait for this time bomb to explode in your company. Have the valuation language in your agreements reviewed by a qualified valuation professional and updated by your attorney to reflect current shareholder and company circumstances.

LITIGATION SUPPORT SERVICES

Disputes that occasionally arise in business ultimately must be resolved. While legal counsel leads a litigation team's strategy, they frequently require expert support. Evans and Associates provides litigation support services for many phases of the engagement, from pretrial research and analysis to expert witness testimony.

Business valuation litigation support services are typically used in dissenting shareholder lawsuits, business disputes, marital dissolutions, or damage cases. Assets typically valued include businesses or equity interests in them, professional practices, intangible assets including goodwill, patents, processes, or proprietary technology.

Successful litigation support begins with qualifications and credentials. The opposing side's first line of attack frequently is to attempt to undermine the credibility of the other expert. Because Evans and Associates' principals hold senior valuation designations and possess extensive valuation and litigation support experience, our credibility can withstand challenge.

Extensive experience enables an appraiser to provide maximum benefit to legal counsel in pretrial research, advice, and analysis. Attorneys frequently lack expertise in financial or strategic issues and must rely on the expert both at trial and for assistance in advance. Legal counsel also must be confident that their expert can perform under pressure and within deadlines.

Evans and Associates possess substantial experience, in pre-trial research and analysis, in direct and cross examination preparation, and in trial testimony. Our credentials, including education, professional certifications, publications and presentations and experience provide the credibility that can be essential for effective litigation support.

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