Valuation

Mercovus authors defendable valuations in a timely manner.  Whether the issue is tax reporting, or financial reporting, or a pending transaction, we’ve got you covered.  Beyond providing accurate opinions of value, Mercovus helps clients achieve comfort with and understanding of valuation methodologies.

Company Valuations – M&A

When most people think “business valuation” they think of investments, mergers, and acquisitions.  In selling or buying a business, it is helpful to have a third-party valuation.  An independent third-party valuation can serve both to inform and support a negotiating position.  Mercovus provides contemporaneous valuations to assist its clients engaging in, or hoping to be engaged in, corporate transactions.

Security Valuations Tax and Financial Reporting

If you want to know the market value of public company stock, you can “google it”.  For privately held companies, there is no publicly traded stock from which to obtain a value:  So what should someone do when they want to grant stock based compensation to employees or make a charitable gift of stock?  Then it is time to go obtain a professional opinion of value.  Mercovus can help.

When we value a business for strategic purposes, our training and experience informs our opinion.  When we author a valuation for tax or financial reporting purposes, we need to factor in other commentary:  Relevant items could include IRS regulations, Financial Accounting Standards Board (FASB) standards, or case law.  Mercovus can author valuations that are cogent, meet clients’ needs, and adhere to these standards.

Internal Revenue Code Section 409A (IRC 409A) requires that any new stock option be priced at or above “fair market value” (FMV).  Pricing stock options below FMV will cause adverse tax consequences for both the issuing company and the option holder.  Mercovus has valued private company stock for the purposes of option issuance and compliance with IRC 409A and Accounting Standards Codification (ASC) 718.  Our reports have been reviewed by all of the Big Four and other major accounting firms and passed Statement on Auditing Standard (SAS) 73 review.  We also have experience valuing fractional interests in operating companies for estate and tax planning purposes.  Multiple entities?  Tiered ownership?  Complex capitalization?  We’ve got it covered.

Purchase Price Allocations (PPAs)

Accounting can be weird.  Self-developed intangible assets typically aren’t on the balance sheet but acquired intangible assets are.  Under both GAAP, ASC 805, or International Financial Reporting Standards (IFRS), IFRS 3, the acquiring company must allocate the purchase consideration to the assets and liabilities acquired, according to their “fair value,” and then periodically review those “fair values” for impairment.  How much of the purchase consideration is attributable to the patent portfolio?  How much is attributable to customer relationships?  The workforce?  And when we consider that the acquiror paid in shares of its own stock and a cash earnout, what exactly is the value of “the purchase consideration” in the first place?

These are not easy questions for management teams to answer:  Fortunately, Mercovus has the expertise to help clients satisfy these accounting requirements.  In a typical engagement, we identify intangibles to be valued, determine the most appropriate valuation methodologies, estimate intangible values, and reconcile intangible values to enterprise or transaction value.  Our clients receive detailed calculations and a narrative report supporting our analysis.

Asset and Goodwill Impairment

Once a company has intangible assets or goodwill on its balance sheet, it must annually review the value of those assets to determine whether they are “impaired” and, if so, determine the amount by which the value should be reduced.  Mercovus can also assist with this impairment analysis.

 

 

Complex securities

 

The Black-Scholes option pricing method fundamentally transformed the valuation of derivatives.  Despite well-documented issues of volatility skews (sneers and smiles),[1] Black-Scholes is widely considered to provide reasonable valuations of simple derivatives.  But what about complex securities?  What if a warrant is exercisable into either common stock, or a future round of preferred stock (if one occurs)?  What if the exercise price is adjustable based on certain milestones?  These complicating factors “break” Black-Scholes and require the use of customized modeling.

The appraisers at Mercovus like math and logic:  We love modeling the impact of complex terms using statistical software and Monte Carlo simulations.  Mercovus is equally skilled in taking off its “mathematician hat” and explaining its modeling and valuation assumptions to clients and third-party reviewers in lay terms.  If you need to account for complex debt or equity securities, Mercovus can help.  Contact us at info@mercovus.com.

 

 

[1] See, for example Sundheim, Eric.  "Implied Volatility and Volatility Smiles in Option-Pricing-Based Security and Business Valuations," Business Valuation Review: Spring 2015, Vol. 34, No. 1, pp. 31-38.