FAQs

Valuations serve many purposes. A valuation estimates the value of a company’s invested capital (both debt and owners’ equity) or a company’s owners’ equity. Sometimes the subject interest is a percentage of the whole of the whole company, or the value can be stated as a per share value.

The purposes of a valuation are for: 1) estate or gift tax reporting; 2) values for a corporations stock for stock options and shareholder transactions; a value for a divorce settlement; or a value to begin the process of a buy/sell negotiation or settlement in a lawsuit.

The valuation of a business is an involved process if done correctly. The Professional Associations (AICPA, ASA, NACVA, IBA and CFA Institute), the IRS and the courts recognize the need for qualified accredited valuation analysts (or certified business appraisers) that have the required expertise and experience in business valuation. Without these qualifications, the IRS or the courts will not accept the value.

Many persons believe business valuations are “easy,” only requiring application of a “rule of thumb” or a factor of five times EBITDA (a proxy for net cash flow). These casual methods assume that all businesses in a particular industry are exactly the same. Due to various factors, such as performance, market momentum, the industry, geographical costs, quality of customers, or expertise of personnel, the value of a company may be more or less than average.

A) The date of valuation is the date required for the particular valuation purpose.

B) For estates this is the decedent’s date of death.

C) For gifts, it is the date of the gift.

D) For stock options under Internal Revenue Code Section 409A, or other shareholder transactions, the date of valuation is generally the end of the Corporation’s fiscal year or an interim date selected by management or the Board of Directors.

E) For divorces, for heavily capitalized businesses with major tangible asset investments, it is the date of trial (i.e. the date nearest trial that has available data). For a company in which the services are heavily dependent on the skills of the “in spouse,” i.e. the spouse in the business, the date of separation may be stipulated by the attorneys or decreed by the court.

F) For buy/sell transaction, the seller or the buyer may select a date that is applicable and for which there is financial data available.

Anacapa Valuations generally uses three valuation approaches and needs five years of financial statements (the exception is a start-up company with less than five years of data). We need to have a balance sheet for the company as of the date of value (or as of the end of the most recent month available). We generally also need to have information about the Company’s ownership structure, and the distributions made to owners, partners, or members, or the dividends paid shareholders. We need to know about restrictions on the sale or the transfer of the subject interest.

Anacapa Valuations generally uses three valuation approaches. Anacapa Valuations generally uses the independent appraisals of the real estate or values of the other underlying assets held (e.g. oil reserves or timber reserves). For the income approach and the market approach we need five years of income statements or IRS Forms E or 8825. We also like to have five years of company balance sheets if available, if not, we require balance sheet information for the date of valuation (e.g. cash balances, tenant deposits, mortgage balances, etc.). We generally also need to have information about the Company’s ownership structure, and the distributions made to owners, partners, or members. We need to know about restrictions on the sale or the transfer of the subject interest.

Anacapa Valuations needs to make a site visit operating companies, if possible. For both holding companies, Anacapa Valuations generally relies on the site visit of the real estate appraiser.

Yes, for both operating companies and holding companies, Anacapa Valuations’ analyst will need to interview the company’s management or their representative about various issues, including:

A) The nature of the company’s operations and future plans, including any planned company sales, potential asset liquidations, or planned asset acquisitions.

B) The company’s industry and market, as well as the company’s customers (especially if there exist a heavy customer concentration), products, competition, and suppliers.

C) The expected future revenue of the company, including the company’s expected growth.

D) The company’s profits or losses, labor costs and risks, rental expenses (especially related-party rent), and any discretionary expenses that should be adjusted.

E) The dividend, partner or owner annual distribution policy and five year history.

A) Valuation discounts may be required to adjust indications of enterprise value (100%) to the appropriate level of value of the subject interest. There are four basic levels of value that analysts consider: 1) the strategic level (e.g. used in specific situations with a specific buyer that benefits from existing circumstances); 2) controlling level (e.g. an interest with voting control in either a public or private company); 3) non-controlling, marketable level (e.g. this is the level of a stock traded on a stock exchange); and 4) non-controlling, non-marketable level (e.g. this is the level of a minority interest in a private company).

B) The discount for lack of control is one of two major adjustments used. It is based on the risk inherent in a subject interest due to the lack of voting rights and the lack of power over the management’s compensation, the distributions of the company’s net cash flow, the sale of the company’s assets or the whole company, or the sale of the subject interest. The discount for lack of control represents the necessary adjustment to the enterprise value to compensate the buyer for the risk and uncertainty inherent in the subject interest.

C) The discount for lack of marketability is a reduction in the value of a subject interest that is not traded on stock exchange (e.g. for public company stock) or secondary market (e.g. for real estate limited partnerships). Without a ready market, the investor may face a lack of liquidity, i.e. long exposure times, for sale of his/her subject interest. The discount for lack of marketability also reflects the lack of financial and other information available from a small business. In publicly registered companies, the Securities and Exchange Commission (SEC) requires quarterly and annual filings of financial information; this reduces the risk to shareholders and investors. The discount for lack of marketability generally reduces the value of the subject interest to a level of value that the private investor believes compensates him/her for this risk of illiquidity.

D) For fractional interests and real estate limited partnerships/LLCs, often a single “fractional interest discount” is used that contains both of the above discounts.