What Should You Do If You Have a Valuation Dispute?

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During litigation, things can sometimes get negative very quickly. This is where expert business valuation services are necessary to protect your interests and ensure that the dispute gets resolved as quickly as possible. In various business and personal litigation, value will be of utmost concern for those parties involved.

Unfortunately, business valuation is not an exact science, and two valuation professionals may not come up with the same results. It is up to the individual party to hire valuation experts with the skills, experience, training, and proven approaches to ensure the valuation will be accepted by the intended users.

However, whether intentional or not, valuation disputes do sometimes occur. When they do, the dispute will typically end up in court. In some cases, a business valuation will be required. In others, it will be voluntary but highly recommended to ensure a fair and amicable transaction. Here are some of the most common scenarios that may require valuation dispute resolutions:

  • Merger and Acquisition Disputes
  • Bankruptcy Analyses
  • Buy-Sell Agreement Disputes
  • Shareholder Disputes
  • Loss of Business Value Claims
  • Breach of Contract Occurrences
  • Divorce

In these scenarios, both parties will hire attorneys who will seek business valuation experts to determine the correct value of a business. There are several ways business valuation analysts may be used during litigation.

In the pre-case phase, business valuation services may be necessary to help litigators build the case and determine how to proceed. A business valuation expert will use his or her experience to define the valuation issues, focus on all relevant information in the case, and quantify results based on the economics as well as common sense.

In addition, business valuation experts are often used during the courtroom proceedings to provide expert witness testimony, analyzing the financial aspects of the case. They can also be called by a litigation team to dispute evidence or witness testimony provided by the other party.

Given these roles in the case, your litigation team will need to secure business valuation services from a reputable firm with a substantial understanding of not only different business valuation approaches, but dispute litigation as well. From intellectual property valuation to machinery valuation services, the team at Appraisal Economics can serve your unique business valuation needs in and out of the courtroom.

If you are looking for firm with an international reputation for fair and accurate valuation and consulting services, we encourage you to contact us today.

What Are Some of the Factors that Determine How Much an NFL Franchise Is Worth?

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We are heading into another NFL season, but, for NFL owners, they have already won. That’s because NFL franchises are worth more now than ever before. According to Forbes, the average NFL team was worth $2.34 billion in 2016, which was 19% more than just the previous year. NFL owners are making more money than ever before, but the big question is why?

Regarding franchise valuation, those assessing it will have to look at a myriad of factors. And the process is a little different than other professional sports leagues for several reasons.

First and foremost, the teams in the NFL share more of the revenue. The 32 teams equally share 63 percent of the money generated by television deals, any national sponsorship revenue, a third of all ticket money, and any revenue from non-NFL events that are held in NFL stadiums. They also share net money that goes into stadium debt.

Second, there is a salary cap in the NFL just as there is in the NBA and the NHL. This year, the NFL salary cap is set at $167 million, which means teams are bound by that number to set their lineup. If they go over, they get penalized. Although, this is certainly a large sum of money and will factor into how much a franchise nets, every team will spend about the same amount of money.

This is different from MLB or the Premier League where player salaries could significantly differ from team to team. In addition to that, NFL player contracts are not guaranteed, so a contract may come off the books much quicker than in another league where a franchise could be paying for a player years after that player has left the team. Google “Bobby Bonilla Day” to learn why the Mets are still paying Bobby Bonilla even though they released him in 2000.

So What Makes the Cowboys So Much More Valuable than the Bengals?

The Dallas Cowboys are the most valuable team in the NFL; in fact, they are the most valuable franchise in the world. And it’s not about the winning.  Dallas hasn’t held the Lombardi Trophy since the 90s. However, Dallas does know how to generate revenue. The Cowboys posted $700 million in revenue in 2015, sending their valuation up to $4.2 billion. The Bengals, a team that has enjoyed some recent success, is worth less than half of that.

There are several factors that go into why the Cowboys are worth so much. For one, the Cowboys call AT&T Stadium home. The stadium has a seating capacity of more than 80,000 people and was opened in 2009. In the first year, the Cowboys generated an additional $120 million in revenue from the sale of personal seat licenses, luxury suite deals, club seat tickets, stadium sponsorship, parking, merchandising, concessions, and more.

In addition to that, Jerry Jones is an expert at branding, and he did not shy away from the “America’s Team” nickname coined in the 1970s. And Dallas is not exactly a small market. It is the ninth largest city in the United States, and it is one of the most popular NFL teams outside of the city as well.

Market size, stadium revenue, and branding all contribute to an NFL team’s valuation. This is why we have seen a number of moves in the past few years. The Rams moved back to Los Angeles and doubled in value because they were no longer in a smaller market and were promised a new stadium. The Chargers moved to Los Angeles because San Diego wouldn’t provide the team with a new stadium, while Los Angeles said it would do so. The Vikings upgraded to a new stadium in 2016, and the team’s value increased by 38% because of revenue generated by ticket sales, personal seat licenses, and advertising.

With so much of the revenue shared among all of the NFL teams, these are the most significant factors that will determine why one team is worth more than another. In the end, though, with no sign of revenue slowing down, every NFL owner in the league should be pretty happy with their progression over the past few years.

In Purchase Price Allocation, Intangible Assets Matter

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Jeff Bezos was briefly the world’s richest man. The founder of Amazon achieved this title after Amazon stock jumped $15. However, the stock did end up dropping by 4% a day later, so Bill Gates was able to take back the title. Still, many analysts believe that Bezos will jump past Bill Gates in the upcoming weeks and months.

One of the reasons why Amazon stock surged was because of its recent acquisition of Whole Foods Market. Amazon is getting into the grocery industry as it purchased Whole Foods for more than $13 billion. Whole Foods Market was founded by John Mackey, and it has been an omnipresent fixture in affluent and hipster neighborhoods.  Now that Amazon owns the company, this could lead to major changes in the physical and online grocery industries.

Purchase Price Allocation and Intangible Assets

 

Amazon’s purchase of Whole Foods Market gives us the perfect opportunity to talk about purchase price allocation – one of the services offered by our valuation experts at Appraisal Economics. For accounting purposes, a company will hire a valuation services firm  to help them allocate, or assign value to, the various assets that were purchased. Purchase price allocation is also used to recognize goodwill.

For purchase price allocation, there are two types of assets that will be analyzed and valued: tangible and intangible assets. Tangible assets represent physical resources like plant, property, and  equipment. Regarding the Whole Foods acquisition, valuation experts would determine the fair market value of the real estate, furniture, fixtures, equipment, and other physical assets as part of their purchase price allocation.

However, this only represents part of the value of a company. Whole Foods Market did not have $13.4 billion worth of stores, equipment, and capital. So why did Amazon pay that much? Because Whole Foods Market is a household name that is recognized by most people in the United States. Brand is one of many assets that fall under the category of intangible assets, and they can significantly increase a company’s value. Here are some other intangible assets that a valuation company may be asked to assess:

  • Trademarks
  • Patents
  • Contracts
  • Customer lists
  • Royalty agreements
  • Licensing agreements
  • Power purchase agreements
  • Leases
  • Franchise agreements
  • Internet domains

When one company buys another, it will need to allocate value to the intangible assets, in order to record their purchase price on the opening balance sheet and comply with all financial reporting requirements.  You can certainly expect that Amazon will be hiring a valuation firm to allocate Whole Food’s intangible assets to remain in compliance.

If you are in need of purchase price allocation services, involving both tangible and intangible assets for accounting purposes, Appraisal Economics’ team includes financial analysts, engineers, and CPAs with years of experience completing these studies.

 

Determining the Value of Customer Relationship Assets in the Consumer Goods and Services Industry

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In any consumer products and services business, maintaining strong customer relationships is important to long-term success. When consumer products and services businesses invest in developing, managing, and upgrading customer relationship assets, like customer lists, the information can be very valuable.

Think about it: you have a database of information from repeat customers about the types of purchases they make, how often they purchase things from you, and other details that could help you better market your products or services.

Although these customer lists often don’t require a valuation, there are times when they do, which is why we wanted to take a second and discuss how customer relationships are typically valued, and when you should inquire about our valuation services regarding your customer relationship assets.

When Is a Customer List an Intangible Asset Apart from Goodwill?

 

In order to accurately determine the value of customer lists, valuation experts will review the nature of the lists themselves and how much remaining economic life remains. Customer relationship assets have a finite life, and many decrease in value over time.

Factors that will affect the economic life of those assets include customer mortality, whether or not customer transactions are contractual in nature, the type of business, and if the business in question can offer an inherent advantage to its customers that its competitors cannot.

In some cases, economic life cannot be determined or the customer transactions are not separately identifiable. In these instances, those assets will be considered part of the goodwill.

When Is Valuation Necessary and How Is It Calculated?

 

The valuation of customer-related assets is necessary for allocating the purchase price in a business combination, certain transactions such as transfer pricing, and licensing, lending,  and litigation. There are three general approaches to valuation: cost, market, and income. The cost and market approaches are generally not applicable for customer-related assets for various reasons, and so the income approach is most commonly used by valuation experts.

Within the income approach, there are a number of valuation methods used to value customer-related assets, including the multi-period excess earnings method (MPEEM), the distributor method, the with-and-without method, and the cost savings method.  The MPEEM is often used when the customer-related assets are the primary income generating asset.  If another asset is the most important valuable asset, then typically that asset will be valued using the MPEEM and the customers and other supporting assets will be valued using an alternative method.

At Appraisal Economics, we specialize in various valuations services for the consumer products and services industry, including the valuation of customer relationship assets and goodwill impairment. We encourage you to contact us today to learn about our methodologies and success stories.

Are There Patents in the Food and Beverage Industry?

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Have you ever been to a restaurant and the meal was so good that you thought they should get a patent for it? In truth, the food industry is comprised of intellectual property at every level. If you were to search the United States Patent and Trademark Office, you will find food patents of all kinds. They can include recipes, but there are some companies that actually don’t patent their recipes.

In this 2001 New York Times article, it explains that companies like McDonald’s, Coca-Cola, and Kentucky Fried Chicken don’t patent their secret recipes and choose to just keep them under lock and key instead. The ultra-secrecy of the Colonel’s recipe for fried chicken is what makes it so valuable. When you file a patent, the patent is generally good for twenty years. Kentucky Fried Chicken has been around for more than sixty years, and the national chain has managed to keep the trade secret. However, many companies do decide to patent their recipes for the added protection if they want to prevent competitors from trying to figure out their secret.

Additionally, many food companies seek patents for packaging, new methods of processing their product, and novel applications.  Also, trademarks are highly defended as they can add immense value to a brand. Just think of your favorite food and beverage companies. Any logos, slogans, graphics, or words specific to that brand can receive trademark protection. There have been countless trademark disputes over the years involving food companies where one accused the other of stealing its likeness for profit. Trademarks create distinction in the marketplace, enabling customers to recognize a specific brand.

At Appraisal Economics, we have worked with many companies in the Food and Beverage Industry on valuation projects for various applications. For example, we have valued trademarks covering  mayonnaise,  cakes,  soups, and  peanut butter.  Our work has been done  for mergers and acquisitions, transfer pricing, and financial accounting purposes.

Our patent and trademark valuation process for the food and beverage industry is similar to our process for other industries.  We first discuss the  patents and  propriety technology with your company’s  management to get a clear picture of what makes it unique.  We then review the overall industry for similar technologies and analyze the future financial prospects of the patent. Finally, our team  conducts a financial analysis that includes the development of all assumptions and valuation models to determine the value of the patent. Our years of experience and quality of work are unmatched in the food and beverage industry.

So the next time you say that something is so good it should be patented, it very well might be.

How Do You Value a Business in a Buy-Sell Agreement?

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If a company has multiple owners, it will most likely have some form of a buy-sell agreement in place. A buy-sell agreement is designed to protect the interests of an individual owner’s estate as well as the interests of the other owners and the company as a whole. It also ensures that the owners don’t have to work with heirs that don’t possess the same passion or knowledge of the company as an owner had.

A buy-sell agreement is essential as it prepares for the unexpected and safeguards against potential losses from a key owner dying by establishing the rules for ownership transition. Finally, a buy-sell agreement protects the estate of the deceased owner by ensuring the heirs get paid from the proceeds of the life insurance policy an amount stipulated per the agreement.

The Business Valuation Provision and Why Formula and Fixed Price Approaches Don’t Always Work

 

One of the key components of any good buy/sell agreement is having an accurate means of assessing fair market value. There are a number of approaches that can be taken. For one, the owners could agree on a formula valuation, like a multiple of earnings. However, formula valuations can be inaccurate if the formulas aren’t updated. For example, a formula that worked well for when the agreement was made might not fit as well ten or fifteen years down the road.

The fixed price approach, in which owners agree on a price per share that can be updated later on, similarly, suffers from the same problems. If a company does wish to do a fixed price approach on a buy/sell agreement, the price of the shares should be negotiated and updated yearly to ensure the valuation isn’t too high or too low.

Finally, another approach that could produce the most fair and accurate valuation is a defined process approach. This valuation is one that typically includes an independent appraisal from a third-party valuation service provider. An independent appraisal ensures the valuation is unbiased and reflects the current condition of the company.

A Note about Intellectual Property Valuation

 

At Appraisal Economics, we provide asset valuation services for a variety of different business transactions. If the owners of a company have decided to use a defined process approach where there is an independent appraisal, the company’s intangible assets, like intellectual property, will also need to be assessed to determine the fair market value of a company. Our intellectual property valuation team can provide accurate valuations of intellectual property, such as trademarks, copyrights or patents, to ensure a company’s next steps go smoothly when a key owner passes away.

How Do Valuation Firms Determine Trademark Value?

trademark sign and padlock

 

A good trademark can add inherent value to a company. When you consider the level of competition and number of choices out there, a distinguishing name, symbol, or phrase is essential to create brand awareness and produce a following. We can easily name a few brand names or symbols associated with everything from computers to cereal. The goal for businesses of all sizes is to develop strong trademarks, and valuing them correctly is paramount to determining overall value for a wide variety of applications, including mergers and acquisitions, venture funding, and taxation purposes.

 

Types of Trademarks

 

Fanciful Trademark: This is the most easily defendable. It is a made-up word, phrase, or symbol designed specifically for a brand, product, or service.

 

Arbitrary Trademark: This is where the word, phrase or symbol has a common meaning, but it is not associated with the type of products and services provided.

 

Suggestive Trademark: Word, phrase, and symbols that are not meant to directly describe a product or service but shine it in a particular light.

 

Descriptive Trademark: A word, phrase, or symbol that describes goods or services. It could potentially have a secondary meaning differentiating the business but not necessarily.

 

Generic Trademark: A word, phrase, or symbol that describes a product category or service. This is not defendable in court.

 

Valuation Approaches

 

Every valuation firm will have its own specific formula and set of processes for IP valuation. In general, there are three different valuation approaches. The first is the income approach, which takes the estimated cash flows from the trademark and deducts any risks or costs spent developing it. The second is the market approach. This takes a look at relevant transactions in the market, like buying/selling or licensing, to determine a value. The third is the cost approach. This consists of reviewing the historic cost of creating the trademark and the cost it would take to replace it.

 

When looking for a valuation firm, consider using a firm that has specialized experience in your industry and has shown relevant success in assessing trademark value. Appraisal Economics is proud to offer IP valuation services that are current with emerging market trends, and we have the skills, expertise, and resources to help your organization determine trademark value for your shareholders, management, and financiers. Given the importance of valuing intangible assets like trademarks accurately, choosing the best firm for your needs is crucial to success.

 

Contact us today to learn more about our IP valuation services.

What Goes into Patent Valuation?

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A truly new concept for goods or services might be able to receive patent protection and could be worth billions of dollars. Many are worth much less.  Valuation experts provide patent valuation services to determine the values of individual patents and patent portfolios, and many other related services. Patents are a form of intellectual property (IP) and – for companies like Apple and Tesla – may even be the company’s primary assets.

 

In addition to affecting the value of the overall business, patent appraisers advise clients with such matters as buying and selling patents, determining appropriate royalty rates and terms for patent licensing, and assessing whether and to what extent patents may serve as collateral for lending purposes. The factors that influence the value of a patent depend on the type of patent, the industries in which it could be used, and other variables.  Some general things to consider:

 

What is the Status of the Patent Filing? The value depends on the stage of the patent filing, whether it was approved, is pending, or is an earlier stage.  Thorough research involves gaining a detailed understanding of a company’s IP holdings, including the patent application itself, any foreign patent applications that relate to the invention, litigation history, etc.

 

How Impactful is the Patent? Some patents are revolutionary; others are slight modifications on existing ideas and inventions that may affect an industry more marginally. It is the job of the valuation team to assess the potential of the patent. They will look at the industry and other patents and inventions to estimate the effect of the subject patent on the marketplace.

 

How Defensible is the Claim? A well­-constructed patent claim may be more valuable if it likely to withstand potential challenges from competitors.  Although the service of a patent attorney is not required to file a patent, the guidance of experienced professionals may result in a stronger claim that is more defensible, which is worth more to a potential buyer or licensee.

 

How Will the Patent Generate Cash Flow? There are many different ways that a company can monetize a patent.  An owner can research, develop, manufacture, distribute, and retail a product that relies on the patent, essentially building an integrated business around the patents.  Alternatively, it could license the use of the patent to others for royalties, which can be structured in various ways (up­-front, annual, as a percent of sales or profits, etc.). A valuation firm should consider who will ultimately use the patent and how it will be used.

 

Clearly, although the concept of how firms generate profits using patents is fairly straightforward, determining a value for a specific patent can be quite complex and requires experienced appraisers. Appraisal Economics has deep experience working with clients around the world in practically all industries, and we have a staff that consists of engineers as well as appraisers. Contact us today to learn more about our patent valuation services.

What Is Portfolio Valuation and Why Are Firms Turning to Third Party Valuation Services?

 

Word Cloud "Leverage"

Private equity funds, hedge funds, and other institutional asset managers are increasingly engaging independent valuation experts to perform various portfolio valuation services rather than conducting the portfolio valuations internally.  A portfolio valuation is done to determine and report alternative investments’ performance, which is often required for financial reporting and tax compliance, and also affects the investment manager’s compensation.

Determining the fair market value of illiquid assets is notoriously difficult because – by definition – there isn’t a market to determine the price, unlike many stocks, bonds, and other traditional investments.  Additionally, there are various laws, regulations, and policies governing valuations to protect investors against abuse.  The IRS has valuation requirements to prevent individuals and organizations from underreporting their incomes to pay less in taxes.

Why Independent Portfolio Valuation Makes a Lot of Sense for Illiquid Assets

 

Many private equity funds, pension funds, hedge funds and other institutional investors do their portfolio valuation in‑house, but this can foster the perception of a conflict of interest.  Investors of those funds who may be considering putting in new capital want transparency.  They want to know that there is no bias in the valuation and that values and performance are being reported accurately.  Even if there is no actual conflict of interest or bias, investment managers often prefer independent valuations to demonstrate the lack of bias – especially for capital calls and interfund transfers.

Increased regulations make independent portfolio valuation a smarter decision for illiquid assets.  Dodd-Frank requires hedge fund advisors to now register with the SEC.  This is intended to prevent another financial crisis like the one in 2008‑2009.  European regulators are doing the same thing in response to the global financial crisis.

Finally, independent portfolio valuation is often preferred by the auditors who ensure that the financials, which rely on the portfolio valuations, conform to Generally Accepted Accounting Principles (GAAP).   Auditors have been put under increasing pressure to ensure the integrity of the financial statements, making third-party portfolio valuation desirable as audits can be more efficient when the analysis is prepared by a firm that is experienced in performing and documenting the work.

Appraisal Economics can tailor portfolio valuation services to meet a client’s individual needs.  We have worked with a number of different firms on assignments that included preferred and common equity, variable‑rate municipal and convertible corporate bonds, limited partnership interests in private equity and hedge funds, and tangible and intangible assets.  We can provide our results in several different forms, and we have a proven methodology and experience with these illiquid assets to ensure an accurate and efficient process.  Contact our valuation team at +1 201 265 3333 to learn more about our services.

 

The Top 4 Worst Mergers and Acquisitions

Newspaper with headline "Merger!"When considering a merger or acquisition, there will always be a certain amount of speculation involved. However, with enough research into markets, trends, and revenue streams, and the use of valuation services, companies can take a great deal of the guesswork out of any venture and make a sound investment.

The alternative is not pretty, and can cost your company thousands, millions, or even billions of dollars, or perhaps bankrupt you. Here are some of the worst-case scenarios that Appraisal Economics seeks to help companies avoid.

1.  AOL & Time Warner – No such list is complete without mentioning the colossal failure of the AOL-Time Warner merger. The timing could not have been worse:  The deal went through for just over $160 billion in 2000, but the dot.com bubble burst not long afterward and, when combined with a decline in the popularity of dial-up and clashing corporate ideals, spelled disaster for the newly merged company. The two companies have since gone their separate ways.

2.  Quaker Oats & Snapple – This is the sort of story that particularly emphasizes the role that research and planning have to play in M&A. First and foremost, Quaker paid $1.7 billion for Snapple, an amount that was deemed to be about $1 billion too high by market experts. Secondly, they failed to recognize that the market for their new line of products was significantly different from what they had anticipated. They were hoping to tempt larger retailers like supermarkets and franchise restaurants with Snapple products, when the largest market was actually small retailers like convenience stores. This gross miscalculation led to Quaker selling the company for $300 million after only a little more than two years.

3.  eBay & Skype – When eBay bought Skype in 2005 for $2.6 billion, they thought that adding a video chat option to the service would enhance communications between buyers and sellers. As it happened, eBay users were pretty happy just keeping things simple, and did not see a particular need for extras like Skype. When the option never caught on as intended, eBay sold Skype in 2009 for a loss of $700 million.

4.  New York Central & Pennsylvania Railroad – This 1968 train wreck of a merger was intended to help both companies reduce costs in a changing industry landscape that was starting to heavily favor air and highway travel. However, the newly-formed Penn Central could not turn a profit and just two years after the initial deal, the company announced that it was filing for bankruptcy. Several factors potentially influenced this outcome aside from the changing market, including regulations preventing customer-facing rate adjustments and corporate cultures that had been at odds when they were rivals.

These are just some of the best examples of why an analysis of current markets and their trajectories is not only ideal, but necessary before any merger or acquisition. Appraisal Economics can do a thorough review of the companies involved in a potential deal and help determine the appropriate sale or purchase price. Contact us today!