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A comprehensive overview of key concepts and valuation methods relevant to the nacva cva exam 2025. It covers topics such as closely held stock valuation, intangible asset valuation, discount for lack of marketability, and various valuation approaches. The document also includes references to relevant regulations and standards, making it a valuable resource for students preparing for the exam.
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*Closely held stock Fair market standard Technical term Does not apply to mergers/acquisitions Does apply to state/gift tax valuation Arm- 34 Intangible value Introduced good will Good will Exists if excess earnings Determined by capitalizing excess earnings RR 66- 49 Required properly prepared appraisals by qualified individuals 68 - 609 Risk associated with cash is less than inventory Risk with inventory is less than intangible assets
Determining discounts for lack of marketability 81 - 253 Superseded by RR 93- 12 83 - 120 Valuing preferred stock 93 - 12 "A minority discount will not be disallowed solely because a transferred interest, when aggregated with interests held by the family members, would be a part of a controlling interest." Re. Procedure 98- 34 Compensatory stock options IRC 2703 Estate, gift, tax and other tax purposes Dept. of Labor (DOL) ESOPs
Methods to project economic earnings
Calculating Gordon Growth Model Present value = CFo (l + g)/ k - g CFo Cash flow in period o (the period immediately preceding the valuation date.) k Discount rate (or cost of capital) g Expected long-term sustainable growth rate of the cash flow used (remember, in the context of valuation of closely held companies, valuation analysts will generally use either Net Cash Flow to Equity or Net Cash Flow to Invested Capital) 3 sources of comparable company transaction data
Factors that may increase the discount for lack of marketability: a) Restrictions on transfers b) Little or no dividends or partnership payout c) Little or no prospect of either public offering or sale of company; especially if so stated in corporate minutes or other documentation d) Limited access to financial information Factors that may decrease the discount for lack of marketability: a) "Put" option b) Limited market available that may be interested in purchasing shares (e.g., ESOP) c) Imminent public offering or sale of company d) High dividend or partnership payouts May increase or decrease discount for lack of marketability: a) Size of block - depending on size and circumstances b) Buy-sell agreement - depending on provisions Lack of marketability absence of a ready or existing market for the sale or purchase of the securities being valued Restricted stock (also known as letter stock) Stock of a publicly traded company that is restricted from trading for a specific period of time. Identical to the publicly traded stock except that it is not freely traded. Cannot be sold in the public markets. Can be sold in private transactions.
These transactions usually must be reported to the Securities and Exchange Commission (SEC) and therefore become public record, allowing a comparison be done of the price of the restricted stock to the publicly traded stock Restricted Stock Studies a) SEC Institutional Investor Study (1971) b) Gelman Study (1972) c) Moroney Study (1973) d) Maher Study (1976) e) Trout Study (1977) f) Willamette Management Assoc. Study (1981-1984) g) Stryker/Pittock Study (1983) h) Silber Study (1991) i) Hall & Polacek Study (1994) j) Johnson Study (1999) k) Columbia Financial Advisors, Inc. Studies (2000) l) Management Planning Study (2000) m) FMV Opinions (2001) n) The Hertzel/Smith Study (1993) Pre-Initial Public Offering (or Pre-IPO or simply IPO) Analyze the stock prices of companies before and after they become public companies. The difference between these prices has been attributed to the stock's marketability.
. Pre-IPO Studies a) Robert W. Baird & Co. Studies (The Emory Studies)
After the historical financial statements have been adjusted for economic or normalizing items, the analyst should begin a thorough financial analysis of the adjusted financial statement data. Such analysis helps to identify: Where has the company been. Where is the company today. Where might the company be in the future. Current Ratio and Quick Ratio are categorized as what type of ratio for a company? Risk ratios What two sources of the subject company are used to perform a Comparative Analysis? Common-Size Analysis and Ratio Analysis Best way to determine if a normalizing adjustment should be made to Accounts Receivable? Look at accounts receivable aging RMA is a good benchmark to use when determining average amounts of cash needed to operate the company Sources of empirical data on control/minority interests Mergerstat Review Morningstar Principia SEC Studies
Where discounts for lack of marketability are appropriate for controlling interests, they are typically much smaller than those for minority interests The S election allows a shareholder to avoid which individual level tax? Allows a shareholder to avoid the dividend tax Mercer concludes that the amount of distributions causes no differences in value. Grabowski Assumes that 100% of free cash flow is available for distributions Does not assume that 100% of the free cash flow will actually be distributed Allows for consideration of appropriate discounts for lack of control and lack of marketability to the extent that such amounts will not be distributed. Van Vleet Assumes that the subject S Corporation is distributing 100% of its earnings and if this is not the case then any appropriate discount for lack of marketability should be adjusted. Treharne Allows for varying levels of distributions from no distributions to 100% distribution.
discusses accounting for intangible assets in a business combination. ASC 66- 49 outlined procedures to all types of non-cash property for which an appraisal is required for gifting and/or charitable contribution ASC 830 deals with foreign currency translation The business valuation community generally assumes four basic levels of value
When discounting cash flow to invested capital, the appropriate discount rate is Weighted average cost of capital The net cash flow to equity will result in a value of equity capital The Professional Standards recognize two types of services Valuation Engagements and Calculation Engagements The Professional Standards are applicable when valuing a business business ownership interest security intangible asset The Professional Standards are principle-based If you are a member of more than one certifying organization with standards, you must follow the standards of each and every organization to which you belong.
A conclusion of Value may be communicated as a single number or a range either orally or in a written report Under Reporting Standard Sec. V.C.1.(g)(2), a member may perform a valuation engagement for a contingent fee when expressing a conclusion of value, but must disclose such financial arrangements in his or her report. Valuation analyst's main objective when gathering internal information is to gain an adequate understanding of the subject company's operational management and earnings ability In order for a company to be truly comparable it must share the following characteristic similar capital structures be of similar size, relative to sales volume and total assets similar competitive positions within the industry The internal liquidity ratios (also referred to as solvency ratios) measure a firm's ability to pay its near-term financial obligations. INTERNAL LIQUIDITY RATIOS
Cash Ratio Formula (Cash + Marketable Securities)/ Current Liabilities Receivable Turnover Measure of how many times accounts receivable are collected during the period being examined. Receivable Turnover Formula Net Sales/[(Beginning A/R + Ending A/R) ÷ 2] Inventory Turnover Number of times a company sells (or turns) its inventory during the year. Inventory Turnover Ratio Cost of Goods Sold/ [(Beginning Inventory + Ending Inventory) ÷ 2] High inventory turnover can indicate better liquidity, superior merchandising, or a shortage of needed inventory for sales. Payables Turnover ratio measures the number of times a year that a company pays its average accounts payable balance
Payables Turnover Formula Cost of Goods Sold/ [(Beginning AP + Ending AP) ÷ 2] Cash Conversion Cycle measures the time between the outlay of cash for inventory and the collection of cash from the sale of that inventory. Cash Conversion Cycle Formula Inventory Turnover Period + Days to Collect Receivables - Payable Payment Period OPERATING EFFICIENCY RATIOS
