Valuation Challenges Involving Closely Held Businesses

The valuation of closely held companies often presents unique challenges for even seasoned accountants, attorneys and valuation professionals. The private nature of the business, difference in accounting processes from larger public entities, even the reasons for valuation, each contains specific complexities not found in valuation of publicly traded companies.

Whether the valuation is driven by financing requirements, shareholder disputes, merger activities, buy-sell agreements, tax liability issues, or other litigation can be a factor in determining what valuation approach to use. Advisers must be able to identify the appropriate methodologies to employ, based on the nature of the business or interest being appraised, as well as the purpose of the valuation. Additionally, advisers must factor in current and projected market conditions, as well as the marketability of non-controlling interests. Also, valuation professionals must recognize the impact of a minority discount for non-controlling interests in the closely held firm.

There are three primary valuation approaches in determining the worth of non-publicly traded companies. A critical determination for valuation professionals and those they advise is recognizing when to use the market approach, the income approach, or the adjusted balance sheet (or asset) approach. Often the approach is influenced by whether the valuation is being conducted for transactional, litigation, or planning purposes.

Listen as our experienced panel of valuation experts provides a practical guide to meeting the challenges of performing valuations on closely held businesses.

1. Reasons for valuation and impact of valuation purpose on approach and methodology
   1. Sale or purchase of a business
   2. Shareholder disputes
   3. Succession and/or wealth transfer planning
   4. Marital dissolution
   5. Tax liability determination
2. Generally accepted valuation approaches
   1. Standard of value
   2. Premise of value
   3. Market approach
   4. Income approach
   5. Adjusted balance sheet approach
3. Discounting challenges
   1. Level of value concept
   2. Controlling interest vs. minority interest
   3. Lack of marketability
   4. "Key man" impact on value
4. Issues and possible mistakes with each approach
   1. Using an incorrect valuation method
   2. Improper adjustment to accounting records
   3. Overstating goodwill in an established business
   4. Failing to assess your company-specific risk

The panel will discuss these and other topics vital to the valuation of closely held businesses:

• How the reason why the valuation is needed can influence the valuation approach
• Shortcomings and potential risks of each of the primary valuation methods
• Why valuation advisers should not assume all ongoing businesses have measurable goodwill
• Risks associated with normalization adjustments when using the market and income approaches
• Risks of incorrect accounting adjustments in using the adjusted balance sheet approach
• Determining appropriate discounting methods for valuing noncontrolling interests in closely held businesses and interests that lack marketability
• Adequate documentation to properly support the conclusion of value

Learning Objectives

After completing this course, you will be able to:

• Recognize how the purpose of a valuation of a closely held business can influence the approach the valuation professional applies
• Determine proper discounting approaches to providing valuation of noncontrolling minority ownership interests
• Identify potential traps in making accounting adjustments when using an adjusted balance sheet approach
• Discern when a liquidation approach is appropriate in scenarios where an ongoing business may not have measurable goodwill

• Field of Study: Accounting
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing and auditing complex financial statements and performing business valuations; supervisory authority over other preparers/accountants. Knowledge and understanding of financial statement presentations and business appraisals. Familiarity with goodwill and intangible asset valuation principles

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).