We have extensive experience in performing all types of valuations for financial reporting purposes and possess the appropriate knowledge on relevant accounting and regulatory guidance, documentation requirements, and best practices in this area. We prefer to speak with the audit reviewers at the onset of the engagement, to discuss scope, suggested methodologies, and any unusual factors. Our experience has shown that this initial conversation goes far in ensuring a smooth audit review process.
Purchase Price Allocation (ASC 805)
Purchase price allocation involves the identification and valuation of all assets acquired in a transaction, along with the valuation of any assumed liabilities and contingent consideration, which can include earn-outs based on subsequent financial performance.
Common intangible assets include trademarks and tradenames, patents and technology (including in-process R&D), specific types of contracts, and numerous industry-specific intangibles such as operating licenses, franchise rights, broadcast spectrum, and emissions credits. Current guidance is phasing out the need to value non-contractual customer relationships and non-competition agreements.
Each type of intangible asset has its own unique valuation methodologies; in many cases, the facts and circumstances of the transaction and the relative importance of each acquired asset lead to the use of different valuation techniques to reflect the highest and best use of the acquired ‘bundle of assets’, per ASC 820, Fair Value Measurements.
Fresh Start Accounting (ASC 852)
This situation arises when a company emerges from Chapter 11 bankruptcy protection. It is essentially a purchase price allocation under ASC 805; however, the starting point is the bankruptcy court ruling of business enterprise value, which may not reflect the true Fair Value of the business. Therefore, these situations are more likely to see extraordinary gains and other unusual accounting implications than those falling under purchase accounting rules.
Impairment Testing of Goodwill (ASC 350) and Long-Lived Assets (ASC 360)
Impairment testing occurs in three stages. First, the company must test its long-lived assets for impairment under ASC 360 at the asset group level; an asset group is at the level of, or a level below, the reporting unit. This is a test of the “recoverability” of the asset group’s carrying value using undiscounted cash flows.
If the undiscounted cash flows exceed the carrying value, there is no impairment at the asset group level. If the undiscounted cash flows are less than the carrying value, then the company must take an impairment charge equal to the difference between the asset group’s carrying value and its Fair Value.
The company must also test its indefinite-lived assets for impairment, and any impairment is equal to the difference between the asset group’s carrying value and its Fair Value. If there has been impairment at the asset level, the company must restate the reporting unit’s balance sheet to reflect this before testing for goodwill impairment, which is the third stage of impairment testing.
Under current rules, goodwill impairment testing occurs in two steps. The first step is to compare the carrying value of the reporting unit to its Fair Value. This is essentially an enterprise valuation, as the carrying value is equal to the book value of the business enterprise (total assets, minus non-debt current liabilities). If the Fair Value exceeds the carrying value, there is no impairment. If it is less, then the company performs the second step, a ‘deemed allocation’ of the Fair Value, as if an acquisition of the reporting unit occurred at the concluded Fair Value. The Fair Value of the goodwill is equal to the residual goodwill from this hypothetical purchase price allocation, and the excess of goodwill carrying value over its Fair Value is the amount of impairment. Private companies can use a simplified version that eliminates step two and measures impairment as the excess of the reporting unit carrying value over its Fair Value. Public companies have been able to choose early adoption of this standard since 2017.
Stock-Based Compensation (ASC 718) and Complex Equity
Equity-based compensation can include common stock grants, “plain vanilla” stock options with time vesting, awards with performance-based vesting conditions, profit interests, and synthetic equity that mimics the payoffs of more conventional instruments. Much of this work may also fall under IRC §409A for tax purposes.
We tailor our analysis to each specific client’s needs given the nature of the specific equity instruments. Time-based vesting requires only the use of a Black-Scholes model, while most performance-based vesting conditions (such as hurdle prices or “times return” or IRR thresholds) require the use of binomial lattice models. Vesting requirements tied to earnings metrics, or relative to peer companies or industry benchmarks, require Monte Carlo simulation. We work with our clients to understand the specific need and design the most direct and efficient approach possible that meets all requirements under both financial reporting and tax requirements, including the AICPA Practice Aid on this topic.
Complex equity most often refers to the capital structure commonly seen in PE-backed (private equity) companies. After several funding rounds, such a company may have several layers of preferred stock, each with its own liquidation preference, dividends, participation rights, and conversion rights. It may also have convertible debt, or debt with attached warrants, outstanding options with different strike prices as well as the original common stock, which is typically located at the bottom of the capital stack.
Before the valuation of any equity-based compensation, we need to know the value of the common stock, because it is usually the security underlying the incentive compensation. This valuation requires two things: the value of the overall business enterprise, which we can sometimes infer from the most recent funding round; and the allocation of that value to the various classes of equity, which is a series of call options connected within a single, comprehensive model.
We have robust experience with this type of valuation, going back to the late-90s tech boom, and a long history of successful audit reviews in this area.
Another area where enterprise valuation applies, along with the valuation of complex equity, is portfolio review for private equity, business development companies, and other investment firms. Quarterly and annual valuation reviews require an efficient, consistent process to reporting investment fair values to shareholders, managers, and limited partners, and these analyses, also are subject to auditor review.
We work with our clients in this area to develop sound processes, beginning with the initial investment, which provide supportable valuations through the equity investment life cycle.
Many situations give rise to the need for enterprise valuations in advance of a potential transaction. The key is having a sound, reliable and understandable valuation that meets the unique needs of each case. The purpose and intended use of a valuation can vary widely, from a range of value based solely on transaction data to inform negotiations, to a comprehensive analysis and full narrative report to document the establishment of an ESOP or the value of a large, complex business.
There is no “one size fits all” solution, and we tailor each valuation to the specific needs of the situation and the client. Our deep experience across a range of industries allows us to provide informative and supportable insights to assist our clients as they consider potential transactions.
Belanger Valuation does not provide fairness or solvency opinions. While we have extensive experience in these areas, we firmly believe that these services require a sizeable team led by senior professionals, and access to a cadre of highly experienced independent reviewers. We provide referrals for these services, and can participate as one of several outside reviewers if asked to do so.
Tax valuation needs arise in many circumstances, including:
- Planning and Assessment
Through two-plus decades serving corporate clients with their tax valuation needs, we have the expertise to fulfill many of these needs outside of the traditional large advisory firm structure. Ed Belanger has extensive personal experience in each one of these services.
Transactional tax valuations arise from M&A activity. These needs can include the valuation of intangible assets for determining built-in gains and accelerating the use of net operating loss carrying forwards beyond the IRC §382 limitation, or for use in tax purchase price allocations under IRC §1060. An additional area of need is the valuation of the personal goodwill of the seller/operator as a personal, rather than corporate asset, and the valuation of executive non-compete agreements to document compliance with the change-of-control payment limitations of IRC §280G.
Buyers often bring tax advisors into transaction planning process late, or even after a transaction has closed. Post-transaction reorganizations occur for a variety of reasons, including fully using existing tax attributes, rationalizing the tax structure of the merged entity, and optimizing the tax structure for the future. Valuation needs in this area include entity appraisals under IRC §351 and IRC §355, which often arise when moving legal entities among different tax jurisdictions, debt forgiveness under IRC §108, and worthless stock deductions under IRC §165.
Ongoing tax planning needs are numerous. Where Belanger Valuation can specifically help are in the areas of equity compensation under IRC §409A, including the IRC §83(b) election, which converts future value appreciation to capital gains, and with the C-Corp to S-Corp conversion under IRC §1374.
Many companies have transfer pricing, tangible asset valuation, cost segregation, and other valuation needs following a transaction, which are outside our areas of expertise. We will team with other reputable service providers with the proper expertise in these areas, or refer them in their entirety.
Valuation for Commercial Lenders
Many cash flow lenders “back-stop” a commercial loan with a valuation of the underlying business. We provide these clients with an enterprise valuation tailored specifically to their loan documentation needs. This flexibility allows for the most cost-efficient way for lenders to document fully their lending decisions with independent valuation analysis.
SBA Loan Documentation
Valuations performed for SBA loan documentation purposes follow the guidance of SOP 50 10 5(J), Lender and Development Company Loan Programs. We are familiar with this guidance, and as a holder of the ASA credential, Ed Belanger meets its professional certification requirements. We have provided value SBA value documentation for many lenders and borrowers, and our experience in this area ensures timely and supportable analysis and value conclusions.
Intellectual Property Valuation for Asset-Based Lending
Asset-based lenders who use intellectual property (IP) as collateral require an independent valuation of these assets, which can include trademark or patent portfolios, rental stream assets, data libraries, and other income-producing intangible assets.
All qualifying assets have certain characteristics in common, including legal protections such as patents, trademarks or copyrights, and the ability to transfer those assets separate and apart from the underlying company, which currently holds them. The valuation of IP assets for lending purposes entails the same analysis and documentation as valuation for purchase price allocation, yet the few firms that specialize in serving asset-based lenders charge a large premium for this service. We have relevant experience in this area, and we will fully meet your needs at a reasonable price.
Our deep understanding of financial transactions, operating companies and investment cash flows allows us to provide services in a flexible manner to a variety of clients on an as-needed basis.
We have served both public and private clients in building complex investment models, analyzing the cash flow and earnings impact of potential acquisitions, and providing detailed documentation and oversight in support of the client’s own internal valuation processes. For those organizations that neither have a dedicated corporate development team, nor wish to distract the financial team from its core duties, we can assist in these areas on a project-specific basis.
Carried Interest Valuation
Carried interest valuation is often the most complex type of valuation to model, especially for sponsors with multiple investments, each of which may have its unique mix of investors, preferences, waterfall, debt characteristics, and other features. Our experience provides the foundational knowledge to understand the underlying operating businesses or properties, to grasp quickly the unique structure of each investment vehicle, and to reflect accurately the value of the sponsor carried interest, and the value of each investor’s respective interest.