Transcription
ESOP Valuation Issues Q&APresented by:Erin D. Hollis, ASA CDBV, DirectorMarshall & Stevens IncorporatedDawn Goestenkors, Executive Vice PresidentFirst Bankers Trust Services, Inc.Matthew Lininger, Product Development EngineerRestek Corporation1
OVERVIEWTest your valuation knowledge or learn new facts aboutvaluation concepts and the report process in this fun andinteractive session!ANDPLEASE SILENCE YOUR CELL PHONES2
VALUATION PROCESSWho does what and howTimeline and expectations Documentation gathering Due diligence Onsite visits and management interviews Draft valuation report Final valuation report Presentation of conclusion to TrusteeESOP trustee sets price of stock3
KEY COMPONENTS OF THE REPORT1.2.3.4.5.6.4Entity to be valued (name,type)Valuation date (ex.December 31, 2016)Standard of value (ex. FMV)Ownership interest & valuebasis (control or minority)Premise of value (goingconcern)Rights or restrictions (buysell agreements)7.8.9.10.Report date (date final reportissued/published)Intended user of the report(ex.ESOP Trustee)Intended use/purpose of thereport (ex. ESOPAdministration)Examine and notateextraordinary and limitingconditions
FINANCIAL ANALYSISHistorical: Liquidity Profitability Leverage/capitalization Turnover ratio analysis Common-sized financialanalysis Comparative financialanalysis5 ROA ROE EBIT margin EBITDA Ratio of capex to sales Revenue growth Free CF to salesrates
COMPANY OVERVIEW: NON-FINANCIAL FACTORS 6HistoryType/date of corporationProducts or servicesMarkets and customersSeasonal or cyclicalfactorsCompetitionSuppliersKey personnelManagementEmployees SWOTBusiness plan foroperation, strategicinitiatives, and growthGoodwill factors
VALUATION APPROACHESIncome Approach Discounted Cash Flow Method Capitalization of Earnings MethodAsset (Cost) Approach Adjusted Book Value Method Dual Capitalization of Earnings Method (hybrid)Market Approach Guideline Public Company Method Guideline Transaction Method7
FINANCIAL ANALYSIS – NORMALIZATIONS 8Level of earnings: Control or minorityDiscretionary expensesNon-business related assetsReal estate (rent)Bad debtOfficers compensationWorking capital (excess or deficit)Inventory (obsolescence)Shareholder, related party notes
OTHER ESOP CONSIDERATIONS ESOP Internal Loan Amortization Repurchase obligation Planning and funding Executive compensation Synthetic equity, SARs, warrants, options Treatment of contingent purchase consideration Earnout or clawback9
ESOP TRANSACTION CONSIDERATIONSFairness opinion reportExecutive compensationLoan or financing10
COMPENSATION & THE IMPACT ON VALUEAll shares of stock owned by the ESOP, whether held asunallocated suspense shares or as allocated shares, must benetted against the total equity value.An analysis of the impact of exercising options should beconducted to compare the economic dilution vs. the projectedincrease in company value.In theory, any dilution should not negatively impact thesponsoring company’s total value, and therefore an increase indilution does not have to mean a decrease in value.Dilution11 Value
VALUATION EXPERTCredentialed American Society of Appraisers “ASA” Association of Certified Public Accountants “ABV”Experienced ESOP technical, case law, regulatory Specific industryUnbiased Unrelated party, not conflicted No financial interest in outcome12
RED FLAGSUnfamiliar with recognized valuation methodology and concepts Application of appropriate methodology is essentialSubstantial change in valuation methodology from one year tothe next Change in methodology is not substantiated or warrantedDoes not conduct best practices Breach of dutyErrors in previous report Math, conceptual, or grammaticalUnfamiliar with current or evolving regulatory issues Does not stay currentDoes not perform specific service Fairness OpinionsDoes not request to see the repurchase obligation study Circumstances depending13
RED FLAGSLoss of credentialing status Ethical violationsPoor service Lack of timeliness for responses or missed deadlinesGross negligence vs. ordinary negligence Ethical or theoreticalConflicts of interest “Two Hats”Unsubstantiated increase in cost or fees Change of fee not warranted14
COMMON VALUATION ERRORS 15Check the Math!Incorrect standard of value appliedInappropriate normalizations – double counting discounts orpremia (control v minority)Inappropriate application of methodologyForecasts are not reasonable, defensible, or unaffected byconflictsEconomic and industry overviews do not tie with financialanalysis of subject entityIgnores synthetic equity or deferred compensation liability ordilutionESOP Adjustments
Don’t Forget!Please fill out your evaluation for this sessionYou can find it in the Conference App or ask for a paperversion16
ERIN D. HOLLIS, ASA, CDBVErin D. Hollis, ASA, CDBV, is a Director at Marshall & Stevens Incorporated. She works withinthe Chicago financial practice group conducting opinions and analyses for closely-held andpublicly-traded entities for litigation, taxation and transactional purposes, and with ESOPclients on financial analysis and consulting services needs.Experience – Since 2000, Ms. Hollis has worked with advisors and closely-held businessowners for ESOP valuation needs, and has experience providing valuation advisory andeconomic analysis services in the areas of litigation, taxation, transactional, and planningpurposes. Erin has provided valuation services in industries, such as manufacturing,construction, transportation, agricultural, distribution, retail, wholesale, and a wide range ofservice industries, including architecture and engineering.She is a qualified expert witness, and has testified for various marital and corporate litigationmatters. She is a prolific author on the subject of business valuation, and has written forseveral industry trade publications and as a contributing author for professional organizations.Erin sits on the Business Valuation Committee of the American Society of Appraisers (ASA) andthe Valuation Advisory Committee (VAC) of the ESOP Association, and is a member of theNCEO.Education – Erin received a B.A. and B.S. from Michigan State University. She is an AccreditedSenior Appraiser (ASA) with the American Society of Appraisers, and Certified in DistressedBusiness Valuation (CDBV) with the Association of Insolvency & Restructuring Advisors (AIRA).125 S. Wacker Drive, Suite 850Chicago, IL 60601312-223-8477 ext. 1920 officeehollis@marshall-stevens.com
DAWN GOESTENKORSDawn Goestenkors, MBA, Executive Vice President, Employee Benefits GroupBS Finance, Quincy University, MBA Southern Illinois University - Edwardsville.Dawn brings vast experience and knowledge gained from more than 10 years in trusteeservices for employee stock ownership and qualified retirement plans. Dawn’s past workexperience includes commercial credit underwriting and lending. She has a concentrationin plan administration and DOL regulatory issues, as well as deep ESOP transactionalexperience. Dawn is a member of The ESOP Association, Employee Owned S-Corporationof America (ESCA), National Center for Employee Ownership (NCEO) and frequently speakson trustee and fiduciary topics. Dawn joined First Bankers in 2007.2321 Kochs LaneQuincy, IL 62305(217) 221-8654dawn.g@fbtservices.com
MATTHEW LININGERMatthew Lininger is a Product Development Engineer with more than 15 years of experienceat Restek Corporation in Bellefonte, PA. For the past 5 years, he has also served the companyas an elected Internal ESOP Trustee. During his tenure, he has developed expertise in manyESOP areas and has been heavily involved in the valuation process. He is a member of theEmployee Ownership Communications Team at Restek, a group which is responsible forensuring that employees understand both the valuation process and its results. Matt hasattended numerous chapter conferences where he has presented talks on ESOP topics.Education – Matt earned an A.S. in Plastic and Polymer, an A.S. in Toolmaking, and an A.S. inAutomated Manufacturing from the Pennsylvania College of Technology. He is a CertifiedSolidWorks Professional (CSWP) with Dassault Système SolidWorks Corporation.110 Benner CircleBellefonte, PA 16823814-353-1300 ext. 2382matt.Lininger@restek.com
Don’t Forget!Please fill out your evaluation for this sessionYou can find it in the Conference App or ask for a paperversion20
Questions ?Thank You for Attending!21
ESOP Valuation Issues Q&A Presented by: Erin D. Hollis, ASA CDBV, Director . Test your valuation knowledge or learn new facts about valuation concepts and the report process in this fun and interactive session! AND . PLEASE SILENCE YOUR CELL PHONES. 2 . VALUATION
