BV201: Introduction to Business Valuation BV201: Introduction to Business Valuation: Part 1 Course Hours: 24 Instruction + 3 Exam Hours = Total 27 CPE Credits (see your instructor for further details) Course Outline The American Society of Appraisers wishes to emphasize that these course materials are NOT authoritative. They are intended to be used together with the assigned reading material and the observations of the course instructors as the basis for lectures and discussion in this course. Concepts and valuation methods portrayed in this course are NOT: • The only valuation methods used by competent appraisers or the only concepts considered by competent appraisers; • The only way the individual methods should or could be done; • Cookbook appraisal methods that may be applied to any appraisal. Appraisals must be done with knowledge of the facts and circumstances of the subject company and all other relevant factors. A particular valuation method that is relevant and appropriate for the appraisal of one company at one point in time may or may not be appropriate for another time or another company. v. 4.3 (12/10) Non-authoritative © 2010 American Society of Appraisers i BV201: Introduction to Business Valuation v. 4.3 (12/10) Non-authoritative © 2010 American Society of Appraisers ii BV201: Introduction to Business Valuation Table of Contents CHAPTER 1. INTRODUCTION I. Course Introduction.........................................................................................................1 II. The Business Appraisal Profession .................................................................................2 III. Necessary Business Appraisal Skills and Qualifications ................................................3 IV. Course Prerequisites........................................................................................................5 CHAPTER 2. BUSINESS VALUATION THEORY I. Comparison with Real Estate Appraisals ........................................................................1 II. Three Approaches to Value.............................................................................................1 III. Basic Description of a Business ......................................................................................3 IV. Organizational Structure of Business..............................................................................4 V. Financial Structure of Business.......................................................................................6 Handout 2-1. Calculation of Assignments 1 & 2 ..................................................................11 VI. Basic Concept of Value.................................................................................................13 VII. Value vs. Cost vs. Price.................................................................................................13 VIII. Standards of Value ........................................................................................................15 IX. Premise of Value ...........................................................................................................18 X. The Purpose and Intended Use of the Valuation...........................................................19 XI. Professional Obligation of the Appraiser ......................................................................21 XII. Professional Standards ..................................................................................................23 XIII. Basic Variables Affecting Value...................................................................................25 XIV. The Role of IRS Rulings ...............................................................................................27 XV. The Role of Key Court Cases........................................................................................28 XVI. The Role of FASB Guidance.........................................................................................28 XVII. Steps of a Business Appraisal......................................................................................29 Exhibit 2-1. Determining Which Appraiser to Choose .........................................................31 Exhibit 2-2. GDT, Inc. Audit Report and Notes to Financial Statements.............................43 Exhibit 2-3. Revenue Ruling 59-60.......................................................................................55 v. 4.3 (12/10) Non-authoritative © 2010 American Society of Appraisers iii BV201: Introduction to Business Valuation CHAPTER 3. DEFINING THE APPRAISAL ASSIGNMENT I. BVS-I ................................................................................................................................1 II. Pre-Engagement Assessment............................................................................................1 III. What is Being Appraised ..................................................................................................2 IV. The Effective Date of Appraisal .......................................................................................3 V. The Scope of the Appraisal...............................................................................................3 VI. Engagement Letters...........................................................................................................5 Assignment 1—Defining the Appraisal Assignment ...............................................................7 CHAPTER 4. DATA GATHERING I. Data Gathering via the Internet.........................................................................................1 II. General Information..........................................................................................................1 III. Economic and Industry Data.............................................................................................1 IV. Specific Data Sources .......................................................................................................5 Exhibit 4-1. Basic Bibliography............................................................................................13 Exhibit 4-2. GDT, Inc. History of the Company...................................................................23 CHAPTER 5. GENERAL ECONOMIC AND POLITICAL ANALYSIS I. Introduction.......................................................................................................................1 II. The Globalization of Economic Factors ...........................................................................2 III. Country-Specific (National) Economic Factors................................................................3 IV. Regional and Local Economic Factors .............................................................................4 CHAPTER 6. INDUSTRY ANALYSIS I. Introduction to Industry Analysis .....................................................................................1 II. Porter’s Five Forces and Generic Strategies.....................................................................2 v. 4.3 (12/10) Non-authoritative © 2010 American Society of Appraisers iv BV201: Introduction to Business Valuation CHAPTER 7. COMPANY ANALYSIS I. Applying the Business Appraiser’s Analysis to the Company .........................................1 II. Financial Performance Analysis .......................................................................................1 III. Financial Statement Adjustments ...................................................................................11 IV. Company Risk Factors....................................................................................................14 V. Analytical Frameworks...................................................................................................14 VI. SWOT Analysis ..............................................................................................................16 VII. Company-Specific Value Drivers...................................................................................19 Exhibit 7-1. SWOT Questionnaire ........................................................................................21 Exhibit 7-2. Common Value Enhancers and Detractors .......................................................33 CHAPTER 8. OVERVIEW OF THE MARKET APPROACH I. Introduction.......................................................................................................................1 II. Basic Principles Underlying the Market Approach ..........................................................3 III. Basic Steps of the Market Approach Process ...................................................................6 IV. ASA Standards and Definitions........................................................................................6 Exhibit 8-1. Estate of Joyce C. Hall ......................................................................................11 CHAPTER 9. GPC STEP 1—GUIDELINE SEARCH AND SELECTION I. Overview of the Guideline Public Company Method .....................................................1 II. ASA SBVS-1 Conceptual Framework and Guidance.....................................................1 III. GPC Selection Process ....................................................................................................2 IV. Getting and Setting up the GPC Financial Statements....................................................9 Assignments M(1-5) Selection of Guideline Public Companies (GPC) ................................13 Exhibit