Understanding the Importance of Not-for-Profit Valuations
Public and private non-for-profit corporations undergo valuations on a regular basis to establish new lines of credit and help facilitate M&A negotiations.
As is the case for many valuations, accuracy is only possible when working with an independent appraisal firm that specializes in nonprofit entities. Below are some considerations that will help you understand the importance of these non-for-profit valuations.
Merger Considerations
There are times when a nonprofit organization has grown significantly or their mission evolves or has changed direction. At this juncture, it might make sense for a nonprofit to merge with another not-for-profit organization or even a private corporation.
Before this transaction can take place, the nonprofit merging into or being absorbed by another entity must be thoroughly evaluated. This nonprofit valuation process protects all parties and ensures none are left with an unexpected tax liability.
General Asset Reporting
The Internal Revenue Service (IRS) has very strict guidelines surrounding nonprofit organizations. In order to keep their classification, nonprofits must report transactions in a timely and specific manner. While virtually every transaction gets recorded somewhere, these transactions may require a valuation overview before or after IRS reporting:
- Cash donations exceeding $10,000
- Non-cash donations exceeding $5,000
- Estate, trust, and legacy donations
- Privately owned stock and option donations
Internal Reorganization
It is not uncommon for a nonprofit to divest itself of a department or chapter. The section being removed from the organization may be moving on to join a national or international division of the same charity. Other times, one sector simply grows too large for the organization or chooses to pursue and develop a new offshoot of the originating nonprofit.
Whatever the reason for the reorganization, a nonprofit valuation is required. This data collection will help both organizations properly market themselves and keep their financial affairs in order for tax reporting purposes as well as general financial transparency.
Importance of Nonprofit Valuations
Understanding when a nonprofit valuation is useful is not the same as understanding the importance of obtaining an expert nonprofit appraisal before a qualifying event. In the spirit of fairness and due diligence, the valuation protects both parties from future litigation should any concerns arise after the transaction. The independent valuation also provides crucial feedback about the current state of financial affairs.
Depending on the circumstances and the type of nonprofit, the valuation process will focus on a specific need or pain point. The specific approach to the valuation helps orchestrate an objective outcome, whether it be a cash flow evaluation or a general market value determination.
Nonprofits are under constant scrutiny by a number of different groups, often with competing interests. The benefits of conducting valuations when appropriate for nonprofits are obvious. Moreover, the consequences for not procuring a valuation can be disastrous. The IRS can be rather unforgiving over the smallest oversight or omission. There is no reason to take a chance of unnecessary conflict with this intimidating agency.
COVID-19: How the Pandemic Impacted Sports Franchise Valuations
The current global pandemic has changed not only how people conduct business, but also how they spend their leisure time. Closures of public venues and social distancing restrictions severely limit access to many popular activities. Virtually every franchise and sporting event has been impacted — from the NFL to Preakness. Players and fans have certainly been affected, but how about franchise valuations?
Revenue Streams
Traditionally, sports franchise operations depended on various different streams of revenue to maintain profitability. They can prove to be great investments because there are multiple opportunities to secure income. These options provide stability and act as both passive income as well as an ongoing marketing strategy.
Buyers must consider not only the current state of the economy, but also the overall profitability of the franchise itself. Most sports franchise valuations consider the profitability of these contingencies:
- Human Capital
Fans, coaches, and the public in general take a serious interest in the lives and habits of professional athletes. The processes of scouting, recruiting, and drafting players are a lucrative undertaking in the world of sports. As much of the world remains on lockdown due to COVID-19, most live sporting events have been cancelled or postponed. Arenas, stadiums, and even fields that host games are either temporarily closed or are operating at a fraction of their normal capacity.
- Branded Merchandise
Brand recognition is a huge part of every vital industry, and sports franchises are among the most profitable in this area. Branded apparel, promotional items, and team memberships account for millions in annual sales numbers. Sports franchise valuations encompass all forms of active, passive, and residual income. Contracts involving franchise merchandise and other marketing efforts have remained largely unaffected by the pandemic.
- Media Outlets
Televised sporting events offer income opportunities for franchises and advertisers. Partnerships between sports franchises and sponsors create residual income benefits for both parties. Live television and radio broadcasts attract robust audiences who welcome ways to engage in the franchise. Online streaming events and replay parties are increasing in popularity and the rise in social media marketing has provided rich returns for sports franchises.
Historical Data
Recent transactions, like the sale of the North Carolina Panthers in 2018, have some investors wondering about the validity of sports franchise valuations. How will economic slowdown impact these purchases? If history is any indication, NFL and MLB ownership will outpace economic downturns and inflation. The Miami Dolphins franchise was scooped up by Stephen Ross in 2008, at the peak of a monumental recession. Fans prove to be loyal to the franchise as well as their respective teams.
Despite historical data and the stability of sports franchise operations, leaders in the sports industry should procure expert advice when it comes to valuations. Based on decades of experience, our valuation experts at Appraisal can help with fairness opinions, purchase price allocations, and so much more.
Litigation Support – Valuation Disputes
The arenas of corporate law and valuation disputes are unpredictable. Many companies are not even aware that they need legal support until it is too late.
Valuation disputes are one of the most common services requested when preparing for a legal battle. If you or your executive team is facing a valuation dispute or other litigation issue, here is what you need to know in advance.
Valuation Disputes
Determining the worth of a specific item or event requires complex analytical thought and extensive research. Whether in a corporate or familial circumstance, these processes are difficult and both skill and tact are required to successfully resolve a dispute. Regardless of which side of the dispute your company is representing, you must have the confident ability to protect your stance and solidify your valuation claims.
Mergers and Acquisitions
Mutually beneficial mergers and acquisitions occur virtually every day. Oftentimes, a floundering company is absorbed by a larger company. This effort saves a customer base, provides income, and supplies viable leads to the purchasing company. Post-closing valuation disputes are not uncommon in buyout situations. Remorse can stem from either the buyer or the seller and cause a disagreement. Understated or overstated earnings and other missed expectations can quickly lead to litigation. Expert and swift valuation assessments are required to protect your stance and remove objectivity from the discussion.
Shareholder Variance
Despite the close regulation of the financial industry, shareholder disputes are on the rise. A minority shareholder dispute could become a class action suit if not properly addressed. Publicly traded companies are at risk of litigation from external and internal shareholders. Corporate entities are judged by the return they provide for investors as well as how they perform as a whole. Earnings statements and reports are heavily weighted against stockholder interests.
Prepare for the best outcome by having an independent appraisal report ready for public viewing. Any number of regulatory agencies and governing bodies could take part in a shareholder valuation dispute.
Corporate Bankruptcy
In the unfortunate case of corporate restructuring or bankruptcy, the Courts demand a high level of research and reporting. The sometimes conflicting goals of company executives versus trustees and the U.S. Court must be amicably resolved. Independent analysis will protect your business interests and introduce an acceptable fair market evaluation. This valuation report will be used not only to determine the overall assets of a business, but also provide options for suitable recovery.
These situations represent only a small portion of any number of potential valuation dispute cases. Large corporations and small businesses alike must have an adequate litigation support team on standby. Appraisal Economics has provided expert witness testimony in many of these scenarios, including: federal tax cases, determining damages, and bankruptcy cases. Individuals involved in martial or even custody disputes must have litigation support to prevent unnecessary losses. Otherwise, the results could be devastating.
Untold financial losses, and even criminal proceedings, could result if the executive staff is unprepared for a routine audit or an unexpected lawsuit. Make certain that your reputation and assets are protected before a valuation dispute or other litigious circumstance arises.
Executing M&A Transactions in the Pandemic
The ongoing pandemic has stalled economies across the world for months now. We have seen how it has impacted both individuals and businesses, but only so far as rising unemployment rates and business bankruptcy cases are concerned.
Yet, how does the pandemic affect the operations of companies that are still active? Beyond remote work or heavily updated safety protocols, practically every facet of a business has been changed since the COVID-19 crisis, including mergers and acquisitions.
Some companies have had to cancel their transaction plans, while other companies have had to completely modify their deal terms. Here is a look into how the pandemic has transformed middle market M&A:
Potential Takeover Bids
The U.S. stock market is bearing the brunt of economic losses and business disruption that has resulted from the coronavirus. With stocks reaching all-time lows, many public companies now come as easy targets for potential hostile takeovers. The sharp depression in stock price is also leaving these companies open to activist agendas, wherein shareholders try to sway control through pressuring the company’s board of directors. A takeover attempt, however, will require mobilization of a lot of key people.
A company that is targeted for acquisition will need immediate legal and strategic assistance from a host of professionals, including legal and financial advisors, investment banks, and PR firms, among others. In addition, the company must prepare a response plan that entails each board of directors’ member’s roles and responsibilities during the transaction as well as a communications plan that details prepared responses for different scenarios.
Unpredictable Future Events
It is not clear how long the pandemic will last or what the extent of its damage will be to economies, so future events remain highly uncertain. From a transaction point of view, this makes it incredibly difficult to predict future performance and value of both the acquiring company and the company being targeted for acquisition. Both companies must factor in the loss or gain in value and performance in both a non-pandemic and pandemic situation. This brings to light certain parts of the acquisition agreement, such as the Material Adverse Effect Causes and Valuation Issues.
As for the latter, an unbiased third-party valuation firm should be hired to perform fairness opinion and purchase price allocation. There are several strategies that companies involved in a transaction use to fill valuation gaps, including earnouts, buyer stock, and purchase price adjustments.
Earnouts are used to account for downside risk while enabling the acquired company to obtain complete value if they are able to hit all performance metric targets. Buyer stock, on the other hand, may be used in lieu of cash by the acquired company while day-to-day operations remain volatile. Lastly, purchase price adjustments are designed to compensate either party if predetermined financial measures behave abnormally as the transaction closes.
While broad economic outlook remains bleak, financial markets will have to stabilize at some point. Companies will gain a better understanding of the residual effects of the pandemic and the resulting opportunities that COVID-19 brings.
If you are considering or are in the midst of a transaction, contact us today. Our team will walk you through the process and ensure you have everything you need for a successful merger or acquisition.
USDA Grants For Renewable Energy Projects
The Rural Energy for America Program (REAP) offers unprecedented benefits for the U.S. economy. Farm, ranch, and small business owners are eligible to apply for grant funding to support renewable energy upgrades.
These initiatives are designed to ultimately increase domestic sustainability and reduce dependency on foreign energy, specifically oil. Below are details that will better help you understand REAP’s benefits and how to apply for the resources it provides.
Funding Availability Through REAP
In total, the REAP outlines provisions for over $400 million in federal funding. Many small businesses and some corporations may be eligible for grant awards under the program. Rural energy for America resources are not limited to those in rural professions. However, stipulations within the program limit the specific projects that are covered by federal grant funding.
Qualifying Renewable Energy Projects
Opportunities under the REAP guidelines cover options across virtually every industry. In general, projects that increase energy efficiency or reduce the carbon footprint of a company or region are likely to be eligible for a grant award. The program, which has undergone many transformations before the final version was approved in 2017, was developed to improve the quality of life in rural America.
The larger picture is that these relatively small improvements will ultimately benefit the entire nation in a variety of tangible ways. The Interagency Task Force on Agriculture and Rural Prosperity was designed in an effort to determine how to best utilize resources to create the most impact.
Corporate recipients such as major hoteliers have been awarded funding for the installation of solar panels. Solar panels not only reduce electricity costs over time, but they also reduce the strain on local power grid systems.
Restaurants and agricultural landowners have also received funding for improvements such as anaerobic digesters, insulation, and HVAC systems that decrease waste and loss of energy through inefficient ventilation. Other projects that focus on a switch to renewable energy sources such as wind and solar power may also be covered.
Grant awards may cover a project in its entirety or offset a portion of the total cost. Renewable energy projects are reviewed on a case by case basis by a qualified agent familiar with the program.
Additional Resources
Another major benefit of the Rural Energy for America Program is dedicated sustainability. Federal funding provided substantial funding for state and local resource centers. The Department of Agriculture’s Rural Development Office oversees regional REAP resource centers. The USDA rural development officers are responsible for overseeing and monitoring many factors affecting life in rural communities. These initiatives include but are not limited to reducing unemployment through job creation, encouraging business development, improving infrastructure, and providing adequate community resources.
These local offices are available in each state and provide assistance for applicants. Program specialists help prospects understand their eligibility, and provide status updates on existing applications as well. Field Accountants are available through regional offices and travel to meet with ranchers and farmers where applicable. Any of these REAP experts have information on a variety of funding options, including loans, that may benefit the applicant.
If you are applying for this grant to fund a renewable energy project, do not forget to get an appraisal so you understand the value of the project, as well as how it impacts your business’ overall value. Contact us today to get started.
Do You Know How Much Your Company’s IP is Worth?
In the United States, many companies rely heavily upon their intellectual property. As such, companies that build their operations on innovation and intangible assets are more likely to thrive. Your business will not only be more profitable, but it also gives you a competitive edge over other organizations in your industry.
However, you cannot take advantage of these benefits unless you know what your company’s intellectual property is worth. This also means that you cannot protect and capitalize on your assets. Despite its importance, a majority of business owners do not know how to calculate their IP, or at least do not do so accurately. This can have a drastic and damaging impact on a business’ bottom line.
Here is what you can do to begin understanding the worth of your intellectual property.
Conduct an IP Audit
The first step to consider is conducting a thorough intellectual property audit on your assets, risks, and opportunities. These audits help analyze, protect, and bolster your IP, while also correcting any mistakes that were made to your IP rights. An audit will also bring to light any red flags that one company’s products or services are infringing on another company’s intellectual property.
An IP audit takes a look at everything from trademarks, copyrights, patents, domain names, and trade secrets. Conducting an audit will help you understand how you can best utilize and manage your intellectual property for future profit. Since these rights are designed and enforced by the law, these audits are typically performed by a law firm or a specialized valuation firm.
Once you understand the IP you have, you should then get a valuation of your intellectual property.
Advantages of an IP Valuation
Registered and granted IP rights are critical because they prove your ownership over your intangible assets. It is this documentation that is necessary to prevent other people from using your assets for their own profit, which could take away from your own profitability.
Determining the value of your intellectual property is complex, but it is that value that helps you determine the appropriate royalty rates you can charge. An IP valuation does not only safeguard you from your competition, it also increases the overall value of your business. This increase could prove advantageous if you ever need to apply for a business loan. It also gives you leverage if another company wanted to purchase your business.
This is exactly the kind of valuation services we provide at Appraisal Economics. If you do not already know the worth of your intellectual property, contact us today for an IP valuation.
COVID-19: Increased Risk of Impairment of Goodwill
The coronavirus pandemic has drastically impacted global markets. It has not only disrupted supply chains, but it has also affected consumer buying behavior and restricted certain traveling and workforce capabilities. All of these factors have had adverse effects on the financial health of certain companies.
As a result, companies are having to reevaluate their financial reporting, which includes their right-of-use (ROU) assets, their property values, their intangible assets, and their goodwill. When a company’s carrying value on financial statements exceeds its fair value, it is considered to be impaired. Goodwill impairment should be something that companies are already testing for on an annual basis, but certain events, like the global pandemic, are cause for additional testing.
Other example triggering events include certain cost factors, management changes, bankruptcy, events that affect reporting units, and a deterioration of economic conditions or the environment that a certain company operates within. To determine if an impairment exists, fair value must be assessed. In some cases, so must recoverability that is based on undiscounted cash flows. Since COVID-19 has lowered the fair value of companies, goodwill impairment is likely to be an issue that will impact all businesses across a variety of markets.
If a business conducts a test which proves goodwill impairment, it is important that they hire a specialized valuation firm. Goodwill impairment is already a complex matter that considers a significant number of factors, but the coronavirus pandemic has had unprecedented and uncertain impacts that are outside of what a typical goodwill impairment might be. For example, companies will need to figure out if the pandemic’s effects will be temporary or more permanent, which will influence their future cash flows and impairment. They must also consider both the direct and indirect consequences of the pandemic.
Our team of professionals at Appraisal Economics have extensive experience in goodwill impairment analysis and the valuation of fair value. It is difficult for many companies to understand what this pandemic means for their business, but our experts are here to guide you through these unsettling times. If you have any COVID-related questions or need to address goodwill impairment, contact us today.
COVID-19 and Estate Planning: A Unique Opportunity to Plan Ahead
The pandemic has impacted more than just the healthcare industry and unemployment rates, it has also heavily affected the United States economy. Investors are seeing record-setting fluctuations in marketable security values as a result of COVID-19, and all sectors are experiencing a suppression in asset values.
These wavering market trends can be tempting, but anyone who makes an impulsive decision to capitalize on these fluctuations could end up hurting their investments or personal finance goals. However, these market swings do present a unique opportunity for estate planning with careful preparation.
The COVID-19 pandemic has shown exactly why personal planning is so important. Unprecedented times come without warning, giving you little time to protect yourself from the unexpected consequences. Choose to be proactive instead of reactive. When was the last time you had your estate planning documents updated? If it has been a while, these documents might not accurately reflect your goals, or they may contain out-of-date information.
In addition to adequately protecting yourself against uncertainty, the historically low interest rates and reduced asset values provides you with an opportunity to engage in low-cost wealth transfers. Any gifts of assets that have dropped in value can leverage the lifetime federal gift tax exemption and exclusion amounts that are already available under our current law.
Married couples can take advantage of these tax exemptions if each spouse creates a trust that includes a lifetime interest in that trust for the other spouse. Similarly, individuals can now gift assets to their children and pay less gift tax in order to do so.
The pandemic has been a unique opportunity to plan ahead, but that planning must also be accompanied by the right support system. However you choose to benefit from the situation, you need to work with a reputable appraisal firm or else your efforts will be in vain.
There has been an estimated $10 trillion that has begun changing hands from one generation to the next. Estate planning provides a lasting legacy for descendants, so make sure you are protecting that legacy by working with certified valuation experts that will make sure your information is correct and up-to-date. If you want to take advantage of estate planning in the midst of the coronavirus pandemic, contact our team today and we will walk you through the process so that everything is in order.
Here Is What Estate Planning Looks Like During the COVID-19 Crisis
There are a variety of reasons why valuing an estate is so important. People need an estate valuation for financing purposes, an investment analysis, and taxation, among other reasons. When to get an estate valuation depends on what you need it for, although it is beneficial to get one more regularly than you might think, just to have it on hand if a situation were to arise.
Oftentimes, an estate valuation is necessary under more dire circumstances, like when someone in your family passes away. Just like death is uncertain and rarely predictable, so are other moments that are beyond our control. Take the recent COVID-19 pandemic, for example. For many of us, this crisis is something we have never encountered before. As such, the grim reality of coronavirus has forced a number of individuals to face “what if” scenarios they have never addressed before.
The COVID-19 crisis is pushing individuals to finally reach out and sign the documentation for their estate plans. Other individuals are beginning to put their estate planning into action, which is a measure that should have likely been taken years ago. For those of you who have yet to begin or finalize this process, now is a good opportunity to have your estate appraised. Due to the current market conditions, asset values are suppressed, which will also help you save on your taxes.
Below are a few things you should know about estate planning during the pandemic:
Witnessing and notarization through video conferencing
With stay-at-home or shelter-in-place orders being given throughout various states, certain governors are signing emergency orders that allow both witnessing and notarizing to be done over a video call. This applies to documentation such as wills, trusts, and powers of attorney.
Interest rates hit a record low
Due to the market volatility, interest rates are continuing to decline. Annuities, short-term loans, mid-term loans, and long-term loans have all reached historic lows. Now is a good time to take advantage of these low interest rates. You can consider refinancing loans to your family members or other beneficiaries, lending funds to your children, or selling your assets.
Estate planning can be done remotely
Visitation restrictions might mean you cannot currently meet with your attorney, but that does not mean you have to halt your estate planning. You can still create an estate plan, update or finalize documentation, and get an estate valuation. Email and other lines of communication are still open, and many attorneys and experts are offering remote meeting options to their clients as well.
The staff at Appraisal Economics has years of trust and estate valuation experience, including determining minority and marketability discounts. We also work closely with attorneys, accountants, and financial planners. Learn more on our website.
The Ins and Outs of Approaches Used to Determine a Cogeneration Plant’s Value
Cogeneration plants are one of the most cost-effective and efficient ways to generate electrical and thermal energy, which can take the form of either hot water, hot air, steam, or all three. As the name suggests, cogeneration plants use combined heat and power (or “CHP”) as a fuel source. Natural gas is predominantly used in modern cogeneration plans, but biomass fuels and coal are also commonly used as well.
Cogeneration plants may seem like a newer concept, but the idea has been around since the late 1800s. The energy they use would otherwise be wasted heat (think: a plant’s exhaust) that can now be harnessed as an additional energy benefit. Not only do these power plants operate at a 50 to 70 percent higher efficiency rate than other plants, but they are also better for the environment. There are thousands that are currently operating across the United States and Canada. This may be a smaller number than other power plants, but they are integral to our electrical generation.
One thing to note is that the energy produced by cogeneration plants can either be used on-site or can be collected and distributed to third party companies. This depends on whether the plant is part of a larger facility or is just a stand-alone facility.
Cogeneration plants are more complex and, therefore, more difficult to value. Below are some of the ins and outs of each valuation approach, which all go into determining the final value.
Sales Comparison Approach
This approach determines value by comparing recent sales of similar cogeneration plants in the market. These sale prices are pitted against the subject plant and then adjusted in accordance with size, capacity, age, location, and market conditions.
Cogeneration plants are unique, so it is sometimes more challenging to determine adjustments effectively and reliably. An appraiser needs to determine the tangible assets, which requires applying deductions that can indicate value. Deductions must also be made for intangible assets, which include the workforce and management teams, computer software, as well as operating procedures and manuals.
Income Approach
This method measures value by taking the plant’s present worth and future monetary benefits into consideration. For cogeneration plants, cash inflows and cash outflows must be determined. A cash inflow is forecasted by the sales of electrical and thermal energy. Cash outflows, on the other hand, include costs associated with operating expenses, fuel, and future capital expenditures.
An appraiser will develop these forecasts based on the level of confidence they have in how accurate these inflows and outflows will be. Some industries are more volatile than others, so only a small degree are confidently forecasted out more than two to three years into the future. Additionally, the economic environment of the plant’s industry is determined and could greatly affect how profitable the cogeneration plant will be.
Cost Approach
This approach analyzes the physical condition of the plant, its operating characteristics, and its utilization. Additionally, the economic environment and any technological advances in the industry are also taken into consideration. When determining depreciation, an appraiser looks at wear and tear, operating stress, and any effects of prolonged accidents, shutdowns, or disasters.
Modern cogeneration plants also have more inherent value than older plants. Plants that use updated technology tend to have more efficient operations that decrease maintenance, labor, operating costs, emissions costs, and the generation of heat rates.
A final valuation is given once all of these approaches are correlated and compared with one another. Not only does an appraiser need to consider each approach carefully, there must also be a firm understanding of the operations, economics, and electrical generation industry.
At Appraisal Economics, we have an experienced team of engineers, tax, and appraisal consultants that have provided expertise to power plant companies all over the world. You can learn more about our power plant service here.