Summer 2013


Focus on Transaction Advisory Services

Editor for This Issue: Steve Whittington Transaction Pricing and Structuring Insights

Best practices:
Transaction Structuring: Intangible Asset Due Diligence and Valuation

Robert F. Reilly, CPA
Valuation analysts are often called on to value intangible assets for various transaction pricing and structuring reasons. One important part of the transaction-related analysis is the intangible asset due diligence process. In this process, before performing any quantitative analysis, the analyst confirms the condition and the existence of the target company intangible assets. There is a generally accepted process that most analysts follow during the intangible asset due diligence process. This process is usually the first step in the transaction-related valuation analysis. This discussion summarizes the transaction-related intangible asset due diligence and valuation process.

You May Not Need a Business Valuation
Robert P. Schweihs
Business transactions have become increasingly more complex over time. Individuals responsible for making the decision whether to accept a complex business transaction will sometimes request that a business valuation be performed. Alternatively, the decision maker may seek the advice of a valuation analyst who will act as the independent financial adviser to that decision maker. The independent financial adviser may conduct an analysis that is consistent with generally accepted business valuation standards and practices. However, such an analysis will focus on the specific information needs of the decision maker.

Earn-Outs: In Search of the “Win-Win” Scenario
Darius Hartwell, Esq.
Earn-out provisions are commonly used in M&A transactions when the buyers and sellers cannot agree upon a specific purchase price before the date of closing. This discussion examines the typical components and characteristics of transactional earn-out provisions, the motivations of the buyers and sellers in transactions involving earn-outs, and some of the common areas of controversy that may arise in the use of earn-out provisions. Finally, this discussion looks at strategies that the transaction participants—and their professional advisers—can consider in structuring and administering earn-outs that can serve the goals of all parties and avoid disputes.

Transaction Financial Reporting Insights

Intangible Assets in Purchase Price Allocations
Brian Holloway
There are numerous reasons why a company will conduct a valuation of its intangible assets. One such reason relates to valuing the intangible assets, and all other assets, that were transferred in the acquisition of the company. As is the case with any valuation, the valuation analyst should be familiar with the assignment purpose and with all compliance matters associated with the intangible asset valuation. This discussion provides an overview of (1) the purchase price allocation analysis procedures and (2) the procedures that analysts consider in the valuation of intangible assets as part of the acquisition accounting.

Discount Rates in a Purchase Price Allocation
David Turney
This discussion summarizes the interrelatedness of the weighted average cost of capital and the weighted average return on assets within the context of a purchase price allocation for financial reporting purposes. Failure to understand this fundamental relationship can lead to inaccurate estimates of value for the acquired assets and, therefore, inaccurate reported asset values and amortization expense on the financial statements of the acquirer. The WACC can be viewed as a weighted average of the required rates of return for the individual assets of the acquired company. The selected intangible asset rates of return should be reviewed for reasonableness through a weighted average return on assets analysis. Understanding the nature and risk of the expected cash flow (of the enterprise and specific assets) is important to ensuring consistency throughout the analysis.

Transaction Litigation Insights

Thought Leadership:
Development and Application of Company Management-Prepared Projections in a Dissenting Shareholder Appraisal Action Context

Justin Nielsen
The proper usage of company management-prepared projections when applying the income approach—discounted cash flow method—is an ongoing issue for any valuation analyst, especially as it relates to shareholder appraisal rights actions. The Delaware Chancery Court regularly provides guidance as to the proper usage of management projections when applying the discounted cash flow method within a dissenting shareholder appraisal rights action. This discussion highlights several historical and recent Delaware Chancery Court decisions, and it provides insights into the valuation analyst’s role in properly utilizing management projections when applying the income approach—discounted cash flow method—within a dissenting shareholder appraisal rights action.

The Treatment of Synergistic Value Arising from Transactional Disputes
Kevin P. Carey
The Delaware Chancery Court often decides on synergistic value issues relating to dissenting statutory shareholder appraisal rights matters. Given its sophistication in this area, the Chancery Court’s decisions are closely followed by valuation analysts, lawyers, and other courts. This discussion considers several recent Delaware Chancery Court decisions, in addition to one decision by the New Jersey Superior Court. And, this discussion provides insights into the synergistic value aspects of each judicial decision.

Protecting Directors from the New Trends in M&A Litigation
Doug Raymond, Esq.
When a public company is sold, the company’s board of directors will most likely be sued. This discussion considers how a board of directors can seek to reduce the potentially harmful impacts of litigation. Educating a board of directors on the options available to it is the first step toward protecting it from M&A litigation.

ESOP Transaction Insights

The Role of an Independent Financial Adviser in ESOP Installation Transactions
Kyle J. Wishing, Weston C. Kirk, and John W. Haley
Transactions are highly anticipated and highly controversial events for companies in both public and private markets. Companies commit significant time and resources in sourcing the proper deal. Transactions typically involve outside consultants who may include investment bankers, deal attorneys, and accountants. Due to the unique nature and added complexity of transactions involving employee stock ownership plan (ESOP) sponsor companies, it is necessary for sponsor companies (or potential sponsor companies) to undertake additional due diligence procedures. These due diligence procedures involve hiring an external ESOP trustee to oversee the installation transaction on behalf of plan participants and having a fairness opinion provided by an independent financial adviser. The ESOP trustee represents the interests of the ESOP and the plan participants in the installation transaction. The ESOP trustee will typically rely upon the independent financial adviser regarding the financial aspects of the proposed ESOP installation transaction.

ESOPs: The Swiss Army Knife of Liquidity Strategies

William A. Stewart
The flexibility that is inherent in transactions with employee stock ownership plans (ESOPs) simultaneously presents tremendous benefits and challenges in structuring transactions. Evaluating all of the options allows the seller, the sponsor company, and the employees to determine which options work best for them

New Legislation Enhances the Benefits of a Section 1042 Tax-Deferred Sale
Michael R. Holzman, Esq., and Christopher T. Horner II, Esq.
Recent legislation increased the income tax rates imposed on the gross incomes of U.S. taxpayers. Shareholders of privately held businesses who are seeking to diversify their wealth or exit their business should carefully consider how recent changes in the law will impact their diversification and exit planning strategies. This discussion explains how a tax-deferred sale to an ESOP is even more advantageous to shareholders than in recent years.

Industry Spotlight Insights

The Transitioning Medical Professional Liability Market—Challenges in Valuing a Medical Professional Liability Company
Charles A. Wilhoite, CPA, and Scott R. Miller
Likely driven by continuing health reform efforts and the flight of physicians from administrative detail and operating risk, statistics indicate that the number of physicians in private practice has declined notably over the past 10 years. By the time the Affordable Care Act was upheld by the U.S. Supreme Court on June 28, 2012, at least one industry source was estimating that the number of physicians in private practice would decrease to just over one in three by 2013. As physicians have shifted from independent operating status to employed status, in essence reducing the number of insurable physicians for certain participants in the medical malpractice insurance segment, a question regarding the continuing value of medical malpractice insurance companies naturally arises.