Corporate Valuation

The ability of a business enterprise to smoothly navigate through transitioning ownership changes is a critical strategic issue. A well drafted buy-sell agreement (or shareholder agreement) is a useful tool to ensure stable ownership transition upon the death, disability, or departure of a shareholder.

A key element of this agreement is determining the price at which the shares will transact upon a specified triggering event. Many buy-sell agreements set the redemption price at book value or a formula, which often vary substantially from the market value for the shares. Many agreements do not specify consideration of factors like lack of control and lack of marketability, but these can significantly affect the value of a private business interest.

For existing buy-sell agreements, it is beneficial to consult with a business appraiser when triggering events in the agreement occur, or when considering amendments to the agreement. Careful consideration of the valuation issues once the buy-sell agreement is triggered leads to smooth ownership transition outcomes.

A fairness opinion is a letter report, provided by a qualified independent valuation consultant than states whether the consideration offered in a proposed transaction is fair from a financial point of view. The purpose of a fairness opinion is twofold: 1) to provide decision makers with relevant information and 2) to provide evidence that the decision maker(s) exercised prudent business judgment in their decision making process on behalf of shareholders or other constituents.

Fairness opinions have been widely used by boards of directors since the landmark Delaware Supreme Court opinion Smith v. Van Gorkham in 1985. In that opinion, the Delaware Supreme Court ruled that a board of directors had breached its fiduciary responsibilities because it failed to become fully informed prior to approving the proposed transaction. While the Van Gorkham court stopped short of requiring fairness opinions as a matter of law, the financial community widely adopted the practice of obtaining a fairness opinion on proposed transactions as a means to demonstrate a board’s exercise of prudent business judgment, thus providing the board with some measure of liability insulation.

Although every proposed transaction has its own unique characteristics, the process undertaken by the independent valuation consultant providing a fairness opinion typically includes the following components:

• Extensive due diligence to thoroughly understand: 1) the transaction terms and provisions, 2) the companies involved in the transaction, and 3) relevant economic and industry considerations;
• The application of appropriate valuation methodologies and analysis of relevant and sufficient capital market evidence;
• Consideration of potential alternatives to the proposed transaction;
• Making a determination of whether the consideration offered in the proposed transaction is fair to constituents from a financial point of view;
• Providing documentation in the form of the fairness opinion letter and supporting documentation.

Although investment bankers have commonly provided fairness opinions, board directors should exercise caution before engaging an investment banker if the banker is compensated from the successful completion of the transaction due to the inherent conflict in such situations. In contrast, a qualified independent valuation consultant not involved as an intermediary in the transaction is able to provide an independent fairness opinion, thus eliminating any conflict of interest issues.

BVA possesses the requisite financial experience and expertise as well as independence necessary for board of directors to properly discharge their duties to their stakeholders. We understand transaction consideration structures and deal terms. Importantly, BVA’s valuation expertise in supporting its opinions using appropriate methodologies, relevant capital market data and sound analysis results in deliverables that provide a corporate board of directors with compelling evidence of a board’s exercise of prudent business judgment.

In some scenarios, a contemporaneous business appraisal may be required by a lender prior to approving a loan if the securities or the assets of the business are pledged as collateral for the loan. A well-documented business appraisal can not only meet lender requirements, but a business appraisal prepared in advance of the loan application may also assist the borrower in negotiating favorable loan terms with the lender.

Healthcare valuation requires specialized knowledge in a variety of issues such as competitive and economic environments, regulatory influence, reimbursement considerations, and technology trends. The need for specialized healthcare valuation knowledge extends to the type of healthcare entity to be valued, such as inpatient medical service provider, outpatient medical service provider, or ancillary enterprises such as medical equipment manufacturing & distribution, medical billing, health care staffing, and pharmaceutical manufacturing & distribution enterprises.

Due to the unique issues related to healthcare valuation, the business appraiser called upon to perform the valuation must possess related experience and the ability to identify and correctly analyze the impact of issues unique to healthcare valuation. In addition, because of rapid changes in the regulation, economic environment and operation of health care entities, business appraisers working in the area of healthcare valuation must constantly keep abreast of these changes to correctly incorporate the changes into their value conclusion.

Because healthcare valuation demands experience and specialized knowledge, clients who look for business appraisal providers are best served by identifying firms that possess these attributes. BVA possesses a breadth of experience in healthcare valuation inclusive of numerous inpatient medical enterprises, outpatient medical enterprises and related healthcare entities. In addition, BVA professionals regularly attend continuing professional education offerings on health care valuation, such as the American Society of Appraisers Multidisciplinary Advanced Education in Healthcare Valuation Program. The combination of experience, education and ability to discern changing trends that impact healthcare enterprises provides BVA with a solid platform to assist clients and their advisors on healthcare valuation matters.

An important component of planning and completing a leveraged or management buyout is the determination of the fair market value of the business, which then may be used to negotiate transaction price and other deal terms. Obtaining an independent and objective valuation is of particular importance when the seller is setting the value expectation to address the appearance of bias on behalf of the seller. As it is common to initiate the buyout transition process by authorizing minority equity interests in the business, it is essential for the business appraiser to be very familiar with allowances to value for lack of control and lack of marketability. BVA possesses significant experience preparing valuations for management buyouts as well as dealing with the aforementioned allowances to value.

A business valuation’s prepared well in advance of a potential transaction has a number of benefits. An objective and well prepared valuation will indicate to the private business owner how the business would be viewed by a potential acquirer. A professional valuation analysis will identify value drivers and risk factors, providing opportunities to enhance and accentuate those value drivers, as well as mitigate risk factors, well in advance of a transaction.

Most importantly, however, a business valuation prepared in advance of a transaction provides the business owner with the knowledge to effectively negotiate price and deal terms from a position of strength. Having the knowledge gained through the business appraisal process gives the business owner the ability to quickly respond to an unsolicited offer or sell the business due to illness, disability or other unforeseen circumstance. Given that the business ownership interest is typically the largest single asset on the business owner’s personal balance sheet suggests that the cost of a professional business valuation may be the single best investment of resources a business owner can make.

In the absence of a buy-sell agreement, a well-qualified business appraiser is an indispensable resource to business owners and their legal counsel. BVA is well qualified to address issues such as whether lack of control and lack of marketability discounts are applicable, issues that have a major impact on value.

The determination of the fair market value of stock in a business is an essential element in the feasibility, establishment and maintenance of an employee stock ownership plan (ESOP). A valuation is required to satisfy relevant Internal Revenue Service and Department of Labor rules, as well as to meet the fiduciary responsibilities of the ESOP trustee.

Although the same basic valuation tenets applicable for ESOP valuations are applicable for other business valuations, valuations prepared for ESOP purposes involve complexities not encountered in most valuation projects. As a consequence, the business appraiser must be familiar with dealing with issues such as ESOP specific adjustments, control/minority considerations and lack of marketability (inclusive of put option and repurchase liability) in an ESOP context. BVA professionals are well versed with the specific issues related to ESOP valuation.