Exam 10: Analysis and Valuation of Privately Held Companies

Owners of private businesses attempting to minimize taxes may overstate their contribution to the firm by giving themselves or family members unusually low salaries,bonuses,and benefits.

Restricted stock is often issued to employees of privately held firms as a significant portion of their total compensation.Such stock is similar to other types of common stock except that its sale on the open market is prohibited for a period of time.

Private firms must file quarterly earnings reports with the Securities and Exchange Commission.

Empirical evidence suggests that discounts have declined in recent years.

The purpose of adjusting the target's income statement is to provide an accurate estimate of the current year's reported operating income or operating cash flow.

Case Study Short Essay Examination Questions GHS Helps Itself by Avoiding an IPO In 1999, GHS, Inc., a little known supplier of medical devices, engineered a reverse merger to avoid the time-consuming, disclosure-intensive, and costly process of an initial public offering to launch its new internet-based self-help website. GHS spun off its medical operations as a separate company to its shareholders. The remaining shell is being used to launch a ''self-help'' Website, with self-help guru Anthony Robbins as its CEO. The shell corporation will be financed by $3 million it had on hand as GHS and will receive another $15 million from a private placement. With the inclusion of Anthony Robbins as the first among many brand names in the self-help industry that it hopes to feature on its site, its stock soared from $.75 per share to more than $12 between May and August 1999. Robbins, who did not invest anything in the venture, has stock in the new company valued at $276 million. His contribution to the company is the exclusive online rights to his name, which it will use to develop Internet self-help seminars, chat rooms, and e-commerce sites. : -Why was the shell corporation financed through a private placement?

The primary purpose of the buyer adjusting the seller earnings is to provide an accurate estimate of the current year's operating income or cash flow in the base year.

All family owned businesses are small.

Case Study Short Essay Examination Questions Cantel Medical Acquires Crosstex International On August 3, 2005, Cantel Medical Corporation (Cantel), as part of its strategic plan to expand its infection prevention and control business, announced that it had completed the acquisition of Crosstex International Incorporated (Crosstex). Cantel is a leading provider of infection prevention and control products. Crosstex is a privately owned manufacturer and reseller of single-use infection control products used primarily in the dental market. As a consequence of the transaction, Crosstex became a wholly owned subsidiary of Cantel, a publicly traded firm. For the fiscal year ended April 30, 2005, Crosstex reported revenues of approximately $47.4 million and pretax income of $6.3 million. The purchase price, which is subject to adjustment for the net asset value at July 31, 2005, was $74.2 million, comprising $67.4 million in cash and 384,821 shares of Cantel stock (valued at $6.8 million). Furthermore, Crosstex shareholders could earn another $12 million payable over three years based on future operating income. Each of the three principal executives of Crosstex entered into a three-year employment agreement. James P. Reilly, president and CEO of Cantel, stated, "We continue to pursue our strategy of acquiring branded niche leaders and expanding in the burgeoning area of infection prevention and control. Crosstex has a reputation for quality branded products and seasoned management." Richard Allen Orofino, Crosstex's president, noted, "We have built Crosstex over the past 50 years as a family business and we continue growing with our proven formula for success. However, with so many opportunities in our sights, we believe Cantel is the perfect partner to aid us in accelerating our growth plans." and Answers: -Speculate why Cantel may have chosen to operate Crosstex as a wholly-owned subsidiary following closing.Be specific

Because of data limitations,valuation of private firms often requires more subjective adjustments than for public firms.

If a buyer expects that the target firm's revenue has been overstated,the buyer can reconstruct revenue by examining usage levels of the key inputs required to produce the product or service.

Case Study Short Essay Examination Questions Cantel Medical Acquires Crosstex International On August 3, 2005, Cantel Medical Corporation (Cantel), as part of its strategic plan to expand its infection prevention and control business, announced that it had completed the acquisition of Crosstex International Incorporated (Crosstex). Cantel is a leading provider of infection prevention and control products. Crosstex is a privately owned manufacturer and reseller of single-use infection control products used primarily in the dental market. As a consequence of the transaction, Crosstex became a wholly owned subsidiary of Cantel, a publicly traded firm. For the fiscal year ended April 30, 2005, Crosstex reported revenues of approximately $47.4 million and pretax income of $6.3 million. The purchase price, which is subject to adjustment for the net asset value at July 31, 2005, was $74.2 million, comprising $67.4 million in cash and 384,821 shares of Cantel stock (valued at $6.8 million). Furthermore, Crosstex shareholders could earn another $12 million payable over three years based on future operating income. Each of the three principal executives of Crosstex entered into a three-year employment agreement. James P. Reilly, president and CEO of Cantel, stated, "We continue to pursue our strategy of acquiring branded niche leaders and expanding in the burgeoning area of infection prevention and control. Crosstex has a reputation for quality branded products and seasoned management." Richard Allen Orofino, Crosstex's president, noted, "We have built Crosstex over the past 50 years as a family business and we continue growing with our proven formula for success. However, with so many opportunities in our sights, we believe Cantel is the perfect partner to aid us in accelerating our growth plans." and Answers: -What factors might cause Crosstex's net asset value to change between signing and closing of the agreement of purchase and sale?

Corporate shells have value because they enable the buyer to

Because of the need to satisfy both the demands of stockholders and regulatory agencies,public companies need to balance the desire to minimize taxes with the goal of achieving quarterly earnings levels consistent with investor expectations.Failure to do so frequently results in an immediate loss in the firm's market value.

Revenue Ruling 59-60 describes the general factors that the IRS and tax courts consider relevant in valuing private businesses.Of the following valuation methods,which do the IRS and tax courts view as the most important?

A corporate shell may have value because

. Case Study Short Essay Examination Questions Deb Ltd. Seeks an Exit Strategy In late 2004, Barclay's Private Equity acquired slightly more than one half the equity in Deb Ltd. (Deb), valued at about $250 million. The private equity arm of Britain's Barclay's bank outbid other suitors in an auction to acquire a controlling interest in the firm. PriceWaterhouseCooper had been hired by the Williamson family, the primary stockholder in the firm, to find a buyer. The sale solved a dilemma for Nick Williamson, the firm's CEO and son of the founder, who had invented the firm's flagship product, Swarfega. The company had been founded some 60 years earlier based on a single product, a car cleaning agent. Since then, the Swarfega brand name had grown into a widely known brand associated with a broad array of cleaning products. In 1990, the elder Williamson wanted to retire and his son Nick, along with business partner Roy Tillead, bought the business from his father. Since then, the business has continued to grow, and product development has accelerated. The company developed special Swarfega-dispensing cartridges that have applications in hospitals, clinics, and other medical faculties. After 13 years of sustained growth, Williamson realized that some difficult decisions had to be made. He knew he did not have a natural successor to take over the company. He no longer believed the firm could be managed successfully by the same management team. It was now time to think seriously about succession planning. So in early 2004, he began to seek a buyer for the business. He preferably wanted somebody who could bring in new talents, ideas, and up-to-date management techniques to continue the firm's growth. The terms of the agreement called for Williamson to work with a new senior management team until Barclays decided to take the firm public. This was expected some time during the five-to-seven year period following the sale. At that point, Williamson would sell the remainder of his family's stock in the business (Goodman, 2005). -Succession planning issues are often a reason for family-owned businesses to sell.Why do you believe it may have been easier for Nick than his father to sell the business to a non-family member?

In many countries,family owned firms have been successful because of their shared interests and because investors place a higher value on short-term performance than on the long-term health of the business.

The availability and reliability of data for public companies tends to be much greater than for small private firms.

In adjusting base year income,an appraiser must be aware of the implications of various accounting methods for value.During periods of inflation,businesses frequently use the last-in,first out method to value inventories.This approach results a reduction in the cost of sales and an increase in gross profits and taxable income.