Spring 2015


Focus on Corporate Transaction Financial Advisory Services

Editor for This Issue: Robert F. Reilly, CPA Financial Advisory Services Insights

Thought Leadership:
Guide to Transaction Opinions Provided by Independent Financial Advisers
Kyle J. Wishing
Transaction opinions from independent financial advisers are commonly relied on in today’s litigation-prone transaction environment. Such opinions are relied on by the directors of transaction participant companies and by other parties with fiduciary responsibilities. This discussion provides an overview of two common types of transaction opinions provided by independent financial advisers: fairness opinions and solvency opinions. This discussion summarizes the purposes of these transaction opinions, the circumstances when such transaction opinions are appropriate, and the analyses performed by the independent financial adviser in the preparation of such a transaction opinion.

Goodwill Valuation Approaches, Methods, and Procedures
Robert F. Reilly, CPA
Financial advisers are often asked to value goodwill within a corporate transaction environment. These goodwill valuations may be performed in the due diligence phase of the corporate transaction for transaction pricing and structuring purposes. These goodwill valuations may be performed in the consummation phase of the corporate transaction—as part of the preparation of a transaction fairness opinion or solvency opinion. And, these goodwill valuations may be performed within the controversy phase of the corporate transaction—to defend against dissenting shareholder appraisal rights claims or claims that the transaction resulted in a fraudulent transfer. For some transaction-related purposes, financial advisers may value goodwill as a residual amount (i.e., the residual of a total business or professional practice value minus the value of all identifiable tangible assets and intangible assets). For other transaction-related purposes, financial advisers may value goodwill as an individual, income-producing intangible asset. This discussion summarizes the generally accepted goodwill valuation approaches, methods, and procedures. And, this discussion presents an illustrative example of a goodwill valuation analysis.

Due Diligence Related to Financial Projection Bias in Pricing M&A Transactions
Michael A. Harter
For many participants in a transactional setting or a merger and acquisition setting, judgments about the merits of a deal may contain bias. Bias among transaction participants can create subtle risks by potentially producing biased valuations of the target or acquiring company. The income approach—discounted cash flow method—is a widely used valuation approach in transaction settings. Central to the application of the discounted cash flow method are management-prepared projections. When applying the discounted cash flow method in a transaction setting, the valuation analyst needs to be aware of potential bias that can permeate management-prepared projections. This discussion highlights several types of bias the valuation analyst may find in managementprepared projections. This discussion then presents the steps the valuation analyst can take to analyze and correct management-prepared projections from bias when applying the income approach—discounted cash flow method—in a transaction setting

Solvency Opinion Scenario Analysis
C. Ryan Stewart
A scenario analysis is a common procedure within the cash flow test performed as part of a fraudulent transfer or other solvency analysis. The purpose of such a scenario analysis is to help assess the risk inherent in a proposed leveraged transaction. Depending on the nature of the debtor company and on the terms of the proposed corporate transaction, the preparation of a scenario analysis within the context of a solvency opinion can be a complex undertaking. A thorough understanding of the linkages between the company risk factors and the company cash flow drivers will help the financial adviser produce a reliable transaction opinion. This discussion focuses on the application of scenario analysis in the cash flow test, the different types of debtor company operating scenarios, and the scenario development procedures commonly used by the financial adviser.

Corporate Transaction Pricing and Structuring Insights

Transaction Structure Issues Regarding the Purchase/Sale of a Financially Distressed Company
Katherine A. Gilbert
A merger or acquisition (M&A) transaction involving a financially distressed company can be structured as either a stock sale/purchase or an asset sale/purchase. Depending on the transaction structure, such acquisitive transactions may include noncompete covenants or noncompetition agreements, consulting services agreements, and/or acquired goodwill. The structure of the subject company sale transaction has income tax implications that may affect the sale/purchase price of the distressed company. This discussion focuses on (1) several common transaction structuring issues and (2) the income tax implications for both the seller and the buyer of the distressed company.

Intangible Asset Valuations in Health Care Industry Transactions
Robert F. Reilly, CPA
Financial advisers routinely assist the various parties to a health care industry corporate transaction. Financial advisers assist clients in all four phases of the corporate transaction: (1) the due diligence pricing and structuring phase, (2) the corporate governance and regulatory compliance “financial opinion” phase, (3) the financial accounting phase, and (4) the post-deal regulatory challenge or shareholder litigation phase. The identification and valuation of the subject health care entities’ intangible assets is an important component of the financial adviser’s procedures in each of these four corporate transaction phases.

Emerging Trends Insights

Virtual Currency, Real Tax: Taxation and Valuation Issues Related to Emerging Digital Payment Systems .
John E. Elmore, JD, CPA
This discussion summarizes how the future of digital payment systems is being realized today and how this progress affects both financial accounting and income tax accounting. First, this discussion defines and explores concepts such as digital payment systems and virtual currencies. Second, this discussion examines the implications of the emerging digital payment systems from both a taxation and a valuation perspective.

Best Practices:
Q&A with Tim Hauser of the U.S. Department of Labor .
Frank (Chip) Brown, CPA
As part of a national enforcement project centered on ESOPs, the U.S. Department of Labor (DOL), through its Employee Benefits Security Administration (EBSA) agency, has increased its level of scrutiny of ESOP employer stock valuations relied on by fiduciaries in ESOP stock purchase or sale transactions. This increased scrutiny has led to an increase in the number of ESOP-related suits filed by the DOL. Tim Hauser is the Deputy Assistant Secretary for Program Operations of EBSA at the DOL, and as such is the chief operating officer of the agency. His responsibilities include overseeing the EBSA regulatory and enforcement of ESOPs and other welfare benefit plans. The purpose of this interview with Tim is to provide a regulatory perspective on ESOP employer stock valuation and related enforcement. The topics discussed in this interview range from his opinion on the areas for improvement in ESOP valuations to his thoughts on current enforcement efforts. The author hopes this interview not only provides insights on important ESOP-related issues, but also illustrates that a continued dialogue between all parties (e.g., ESOP practitioners and the DOL) may result in a common perspective that reduces litigation in the future.

Forensic Analysis Insights

Texas Supreme Court Clarifies its Position on Shareholder Oppression
Samuel S. Nicholls
During June 2014, the Texas Supreme Court reversed two Texas appellate court decisions that had ruled in favor of minority shareholder oppression claimants. This discussion reviews the judicial decisions of Ritchie v. Rupe and Cardiac Perfusion Services v. Hughes, both decided in June 2014 by the Texas Supreme Court. In both matters, the absence of a shareholder oppression statute in Texas required the litigants to pursue a legal claim—the Texas receivership statute. The language of that statute does not define “oppression,” and the legislative intent of that statute appears to have been to remedy instances of extreme mismanagement or criminal activity. Relief under a breach of fiduciary duty claim was not available because neither a formal nor informal fiduciary relationship could be established. Although relief may have been justified in the interest of fairness and supported through common law, as were the opinions of the trial and appellate courts in these matters, the Texas Supreme Court relied on the state statute. In the absence of clear language within the Texas receivership statute supporting the allegedly oppressed minority shareholders, the Texas Supreme Court had no choice but to interpret legislative intent, and to remand.

Attributes That Influence Intellectual Property Value
Robert F. Reilly, CPA
Financial advisers are often asked to analyze an owner/operator’s intellectual property. The financial adviser may be asked to perform this analysis for transaction (sale or license) purposes, financing (collateral value) purposes, taxation (income, gift and estate, or property tax) purposes, financial accounting (fair value determination) purposes, corporate governance and strategic planning (management stewardship and commercialization opportunity) purposes, and litigation (tort claim and breach of contract claim) purposes. The financial adviser may be asked to conclude a defined value, exchange ratio, license royalty rate, intercompany transfer price, or economic damages measurement for the intellectual property. This discussion considers the attributes that may influence the financial adviser’s intellectual property value conclusion.