Tag Archives: valuations

2016 Trends from PitchBook’s VC Valuations Report

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PitchBook just released its 2016 VC Valuations Report, which summarizes the Venture Capital (VC) investment landscape for 2016. The report includes an overview of VC deal activity and valuations by stage. Here are a few trends in the venture financing landscape.

1. Alternative financing sources have changed the profile of early stage (particularly seed stage) start-ups. The median deal size and post-money valuations of seed stage start-ups have increased in one year from $1.0 million to $1.5 million, and $6.8 million to $8.0 million, respectively. The median seed stage post-money valuation was only $6.0 million in 2014. This run-up in valuation may be due in part to start-ups seeking seed financing at a later stage of development since alternative forms of early stage financing are more readily available compared to even five years ago. As of today, Kickstarter reported $2.9 billion in pledges to over 120,000 Kickstarter projects, compared to $529 million pledged to 22,000 projects in 2014. Although not all of the money is for start-up ventures, gone are the days when entrepreneurs had to rely solely on family and close friends for their initial capital.

Another contributing factor may be the increasing number of accelerators and incubators supporting start-ups. These organizations provide entrepreneurs with initial capital, overhead sharing, expertise, and networking opportunities that are critical in the early stages. Thus, the companies seeking seed financing are entering the space with a better-established business platform and employee base that is able to command higher valuations.

2. Liquidation participation has continued to trend downward across all stages of venture financing. Investors favor liquidation preferences by investors due to the increased payoff and reduced risk at exit. However, liquidation preferences introduce an overhang whereby if a future exit valuation (even in a bankruptcy scenario) is less than the liquidation preference, all other equity holders may receive nothing. Thus, the declining occurrence of liquidation preferences in venture deals is indicative of a more favorable financing environment for entrepreneurs.

3. Corporate backed investments command substantially higher valuations than non-corporate backed exits (i.e. VC or PE funds). The median post-money valuation of early stage (defined as Series B and prior) companies for corporate investors bore a 65% premium compared to non-corporate investors in 2016, slightly higher than the 63% premium in 2015. The premium generally reflects synergies the acquiring company may capture by integrating technologies or cross selling. The premium may also reflect a control premium, as corporate investors are likely to buy out the whole company rather than settle for an equity stake. However, corporate investors have to be wary of optimistic synergy projections, as the M&A landscape is littered with examples of hoped-for synergies that never materialized.

For more trends in venture capital financing and valuation trends by stage and industry, check out the full report.

Aronson LLC’s Financial Advisory Services practice assists clients in a variety of industries with numerous M&A-related activities, including pre-acquisition due diligence and post-acquisition purchase price allocation analyses, and impairment testing. For information about how Aronson can provide assistance in these areas, please contact Jimmy Zhou at 240.364.2698.

What is the Value of Your Small Business and Why is it Important?

Understanding the value of a small business is critical for owners. Yet many business owners consider value simply from a balance sheet perspective, assuming the reported level of net assets approximates the value of the business. While the reported net assets could be a meaningful value proxy for certain businesses in certain situations, more often than not this is not the case. Why? Because for a typical small business, intangible assets will not be reflected on the balance sheet.
The presence of one or more intangible assets in a business, such as the examples shown to the right, often result in enhanced earnings and cash flows, which can raise the value of the business over and above the reported level of net assets owned by the business. This additional value can be quantified by reconciling the difference in enterprise value determined under the Income and/or Market Approaches with the value of net assets under the Asset Approach.

Many owners take a reactive approach to valuing their small business, choosing to address valuation only when in dire need, such as a dispute or withdrawal from the business. However, by proactively addressing questions of valuation, small business owners have the opportunity to use valuation as a planning tool and long-term safeguard.

Want to know the value of your small business? Or gain an understanding of what drives its value? Consult a CPA with Accredited in Business Valuation Credentials, who can offer insight and opportunity tailored to your situation.

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Aronson LLC’s Financial Advisory Services team assists small businesses in a variety of industries with valuation and M&A-related services. To learn more click here, or contact Steve Purdy or Bill Foote at 301.231.6200.

Valuation Hindsight Challenged in Recent ESOP Case

This article was co-authored by Amanda Fuller.

A recent U.S. District Court opinion has reiterated the principle that valuations should be based on information known or knowable as of the valuation date. In the case of Fish, et al. v. GreatBanc Trust Company, et al., Case No. 1:09-cv-01668 (N.D. Ill. Sept. 1, 2016), a valuation expert’s opinion was rejected because it relied too heavily on hindsight.

The Antioch Company (Antioch) was founded in 1926. Its well-known (at least in scrapbooking circles) Creative Memories direct-sales business fueled significant growth in the late 1990s and early 2000s, with Antioch revenues reaching approximately $350 million in 2002. In 1979, Antioch established an employee stock ownership plan (ESOP). The Antioch ESOP became the 100% owner of Antioch in 2003, when the remaining non-ESOP shares were redeemed at $850 per share. Less than five years later, Antioch was forced into a Chapter 11 reorganization, rendering the ESOP participants’ shares worthless.

In an action brought under the Employee Retirement Income Security Act of 1974 (ERISA), the plaintiffs, who were participants in the Antioch ESOP, sought more than $233 million in damages, alleging that the plan trustee and members of Antioch’s ESOP Advisory Committee and Board of Directors breached their fiduciary duties in connection with the 2003 share redemption.

In a 131-page September opinion following a 34-day trial, the U.S. District Court found in favor of the defendants, ruling that the defendants did not violate the standards set in ERISA sections 404, 405, or 406 and; furthermore, did not cause the plaintiffs’ alleged damages. Notably, the trustee was found to have “conducted a thorough and vigorous review of the Transaction and worked diligently to protect the ESOP’s interests by negotiating better Transaction terms.” That review process apparently included hiring qualified financial advisors and legal counsel, and scrutinizing their conclusions.

The Court also found that the $850 per share redemption price paid by Antioch in 2003, was no greater than fair market value and that the plaintiffs’ losses resulted from unforeseeable market declines:

Even assuming that plaintiffs succeeded in proving breaches by defendants under ERISA sections 404 and 405, the evidence shows that any such breaches did not cause any damages because (a) as explained in detail above, the Company did not overpay for the non-ESOP shares, and (b) it was not the Transaction that caused the Company to fail and the ESOP participants’ shares to become worthless; rather, the Company failed due to a sales decline caused by market forces and conditions outside the defendants’ control and that defendants could not have predicted in 2003.

The plaintiffs’ offered expert witness testimony suggesting the share price in the 2003 transaction was inflated. The Court was not convinced, finding the expert opinions on behalf of the plantiffs not to be credible because “they are not based on sound or commonly applied valuation methodologies, and are improperly determined ‘from the perspective of . . . hindsight’ based in part on telephone conversations with former Antioch employees sympathetic to plaintiffs more than ten years after the Transaction, rather than from ‘the time the investment was made’ in 2003.”

To the contrary, the Court held that “the consideration paid for the non-ESOP shareholders’ stock was supported by the financial analysis and valuations” conducted contemporaneously by financial advisors engaged around the time of the 2003 transaction as well as testimony from the defendants’ financial expert witness.

Antioch’s per-share value fell precipitously from 2006 to 2008 (see illustration). The Court found that the decline in Antioch’s share value was not caused by the 2003 redemption, but rather by factors generally unforeseeable at that time. Such factors included double-digit decreases in company sales starting in 2006, deterioration of the traditional scrapbooking industry, the emergence of broadband and social media, which altered customer buying habits, and, the financial crisis that began in late 2007 and continued into 2008.

The valuation of a company’s shares is a date-specific exercise. The fair market value of the shares should reflect what was known or knowable as of the valuation date. Among other things, this case demonstrates that retrospective valuations can present significant challenges compared to an analysis performed contemporaneously. In the end, it may be that the Court found the plaintiffs’ claims with respect to the share price in the 2003 transaction to be nothing more than creative memories (pun intended).

Further reading:

http://www.prnewswire.com/news-releases/fifteen-week-esop-trial-results-in-defense-ruling-for-kmk-law-clients-300328830.html

https://www.hklaw.com/publications/District-Court-Rules-on-ERISA-Liability-of-Board-and-ESOP-Advisory-Committee-Members-in-ESOP-Transactions-09-08-2016/

Aronson LLC works with ESOP-owned companies in a variety of capacities. To learn more about benefit plan audits and consulting visit here or contact Amanda Fuller at 301.231.6289. To learn more about feasibility studies, valuations and litigation support click here or contact Bill Foote at 301.231.6299.

Introducing our Financial Advisory Services Leadership Team

Aronson LLC is excited to announce the recent launch of our Financial Advisory Services practice. Core service offerings include: forensic accounting and litigation support, valuations, transaction services, M&A advisory, corporate finance, and strategic advisory. While Aronson has offered these financial advisory services for many years, our recent realignment centralizes these skills and resources and enables us to service our clients more effectively.

Our team members draw on their diverse backgrounds across numerous disciplines to deliver results and exceed client expectations. Each engagement is led by partner- or director-level personnel, who are complemented by experienced staff. Aronson’s Financial Advisory Services practice is led by:

  • Larry Davis, who has over 25 years of transactional experience in mergers, acquisitions, divestitures, and financings. He has worked on more than 40 transactions involving middle‐market defense and government services companies.
  • Bill Foote, a Certified Public Accountant (CPA) with nearly 20 years of assurance and financial advisory services experience. Bill assists clients with complex valuation projects, financial disputes, accounting investigations, and financial/accounting due diligence.
  • Philip McMann, who provides investment banking services to defense and government technology services firms. Over the past 15 years, Phil has worked on over 30 M&A transactions involving private middle-market and publicly-traded companies.
  • Stuart Rosenberg, a CPA with nearly 30 years of consulting, tax, and assurance experience. Stuart specializes in forensic accounting and litigation support services, with an emphasis on estate, trust, and marital disputes and shareholder disputes, as well as related expert witness testimony.

If you are interested in learning more about this practice, please refer to our website or contact Angie Jusino, Director of Business Development, at (240) 364-2653 or ajusino@aronsonllc.com.

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