Senior Valuation Analyst Job Opening

Senior Valuation Analyst Job Opening

JOB DESCRIPTION

  • Conduct the analysis and valuation of financial securities issued by both private and public firms, including determining the value of equities and fixed income securities as well as various types of financial derivatives;
  • Apply mathematical or statistical techniques to address practical issues in finance, such as derivative valuation, securities trading, risk management, or financial market regulation;
  • Define or recommend model specifications or data collection methods;
  • Develop core analytical capabilities or model libraries, using advanced statistical, quantitative, or econometric techniques;
  • Develop methods of assessing or measuring corporate performance;
  • Devise or apply independent models or tools to help verify results of analytical systems;
  • Assist company principals in interaction with oversight entities like accounting firms and government agencies;
  • Work with company principals in recommending various acquisition and divestment strategies to clients and prepare analyses of various financing options to effect different investment options;
  • Maintain and update complex Excel workbook valuation models;
  • Work with company principals on a variety of financial reporting engagements, including the allocation of the purchase price to acquired assets as part of an acquisition, the valuation of common stock and related employee stock options, the testing of goodwill impairment, fair value reviews of credit instruments and fair market value of entities for IRS purposes;
  • Use technology to determine the fair value of securities issued by private equity and hedge funds as well use the platform to fair value other types of alternative assets;
  • Interpret results of financial analysis procedures;
  • Maintain or modify all financial analytic models in use;
  • Produce written summary reports of financial research results;
  • Provide application or analytical support to researchers or traders on issues such as valuations or data; and
  • Research new financial products or analytics to determine their usefulness.

REQUIREMENTS

Master’s degree or foreign equivalent in finance or a related field plus two years of experience in the job offered or in comparable job/s in valuation practices.

HOURS

40/week, 9:30 a.m. – 6:30 p.m.

LOCATION

Wakefield, MA

APPLY

Resumes to be marked to:
Roger Winsby
Terra-Firma.net, Inc. d/b/a Axiom Valuation Solutions
201 Edgewater Drive, Suite 255
Wakefield, MA 01880
Telephone: (781) 486-0100
Rwinsby@axiomvaluation.com

Applicants should report to the employer, not to the local Employment Service Office.  This notice is being provided as a result of the filing of an application for permanent alien labor certification for the relevant job opportunity.  Any person may provide the documentary evidence bearing on the application to the Certifying Office of the Department of Labor located at the following address:

United States Department of Labor
Employment and Training Administration
Atlanta National Processing Center
Harris Tower
233 Peachtree Street, N.E., Suite 410
Atlanta, GA  30303
Telephone: (404) 893-0101, Fax: (404) 893-4642

Financial Needs of Established Business Owners

The role of small business owners in the US economy has been well documented by the Small Business Administration among other organizations. The vibrancy and growth potential of this group has been especially dynamic over the last two decades. While this research has been revealing, it has not focused on a number of important segments that make up the small business population. The focus of this research is to better understand the financial needs of perhaps the wealthiest, most dynamic and diverse group within this larger population. These are owners of established businesses (i.e., those with two to five hundred full-time employees in addition to a full-time owner).

This study measures the size of this group as well as the degree of their affluence. The affluence measures are determined by income and wealth excluding the value of their residence. Beyond this, we identify various segments within these broader categories and the extent business owners in each category are prepared to seriously address what we have termed business life events. Business life events are critical moments in the life of a business owner that trigger a series of actions that influence the future direction and success of the firm and its owners. The table defines five business life event categories.

Business Events

Baby boomers are the dominant segment of the wealthy owner marketplace. Given their age and wealth, they will need to address critical business life events over the next fifteen years. In two of these business life events, retirement planning and estate planning, a majority of wealthy business owners indicate that they have addressed these issues to varying degrees. The others, those tied to the value of their business, remain a mystery. As well, it is not clear that business owners with estate plans have updated those plans for gains in business value over the last decade. A primary objective of this study is to measure the degree to which owners are prepared to address business valuation related issues.


This summary is taken from a paper written by Axiom’s President, Roger Winsby and its Chief Valuation Officer, Stanley J. Feldman. Access Financial Service Needs of Established Business Owners here.

Valuation Issues Raised by Financial Accounting Statement 142

Excerpt taken from Dr. Stanley J. Feldman’s A Primer on Calculating Goodwill Impairment

The accounting rules governing business combinations, goodwill and intangible assets changed as a result of the FASB introducing Financial Accounting Standard (FAS) No: 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, on June 30, 2001. The introduction of 141 removed the use of pooling when accounting for acquisitions in favor of the purchase method. FAS142 provides guidance for determining whether tangible and intangible assets and goodwill have lost market value, or in the language of the FASB have been impaired, subsequent to their purchase. Both 141 and 142 break new ground since they focus on the “fair market values” rather than book values of acquired assets, liabilities and goodwill.

Implementation of 142 raises critical business valuation issues that center on measuring the fair market value of a reporting unit. Based on the language of the Statement and Appendix B in particular, the Board has concluded the following:

  1. Goodwill is measured at the reporting unit level.
  2. Testing for goodwill impairment requires that the reporting unit be valued.
  3. The fair market value of the reporting unit is equal to what a willing buyer would pay for full control of the reporting unit when the buyer and sellers are not under any compulsion to transact.
  4. In most instances, the Board recognizes that the value of a reporting unit will be estimated using a discounted cash flow methodology. FAS 142 is consistent with Concepts Statement 7 which states (refer to paragraphs 39-54 and 75-88 of Concepts Statement No.7, Using Cash Flow Information and Present Value in Accounting Measurements) that a “present value technique is often the best available technique with which to estimate the fair value of a group of net assets (such as a reporting unit). The cash flows that are expected to materialize should reflect estimates and expectations that marketplace participants would use to develop fair market value estimates of the reporting unit.”
  5. Appendix E of FAS 142 summarizes relevant sections of Concepts Statement 7 as it relates to calculating the present value of cash flows. This Statement indicates that where appropriate, the present value calculation should reflect discounts for lack of liquidity and/ or marketability.
  6. Based on the above, the value of a non-public reporting unit should reflect a premium for control and a discount for lack of marketability.
  7. If the value of the reporting unit is less than its carrying value, then this may indicate that goodwill is impaired. To test for this, the Statement requires that the standalone fair market value of all identified tangible and intangible assets be established. The difference between the fair market control value of the reporting unit and the aggregated standalone value of identified assets is equal to implied goodwill. If this value is less than the carrying value of goodwill, then goodwill is deemed to be impaired.
  8. FAS 142 requires that intangible assets be identified, allocated to reporting units, and valued accordingly. Appendix A of the Statement gives examples of classes of intangible assets. They are: customer lists, patents, copyright, broadcast licenses, airline route authority, and trademarks.

Six Myths of Valuing and Transacting Family-owned Businesses

This post contains excerpts  from an Axiom presentation done for the Family Firm Institute.

Myth 1: Firms in my industry always sell for a multiple of revenue.

Myth 2: Public firm transaction multiples are larger than private firm transaction multiples.

Myth 3: Acquirer’s of private firms over pay.

Myth 4: Most transactions are within the same industry.

Myth 5: Foreign buyers play no role in the market for private firms.

Myth 6: Tax status has no impact on firm value.

In summary:

– Owners of private firms appear to leave money on the table even though private firms sell for higher multiples than their public counterparts; that is private firm multiples should be even greater than reported.

– There is no such thing as “the transaction multiple: businesses in the same industry sell for vastly different multiples.

– Tax status impacts value: S corporations are worth more than equivalent C corporations.

– Foreign buyers play a major role in the private firm marketplace.

– Cross industry acquisitions are common in the private market.

For more information and access to the presentation, visit www.axiomvaluation.com

 

Welcome Todd!

Todd Feldman has joined the Axiom team as a Senior Valuation Analyst and Partner.

todd_feldmanIn the past, he has worked with Axiom as an economic analyst prior to working as a consultant for Fundamental Investment Advisors in San Francisco, and as an Associate Professor of Finance at San Francisco State University where he taught Corporate Finance and Financial Markets & Institutions, advised undergraduate students, and researched behavioral finance and international economics.

Todd is an accomplished academic with a passion for research. He received his Bachelor’s degree in Finance and Accounting form SUNY, Binghamton and went on to pursue his Masters of Science in Applied Economics at University of California, Davis, and Masters of Arts in International Economics at University of California, Santa Cruz before receiving his PhD in International Economics and Finance from UC Santa Cruz. Todd has earned the CFA designation and in addition he has published in major academic and practitioner journals. His publications include:

  1.  “Buy and Hold versus Timing Strategies, The Winner is.” Joint with Alan Jung and Jim Klein. Journal Portfolio Management, 2015.
  2.  “Quantifying Irrational Sentiment.” Journal of Investment Strategies, 2014, 3, 1-16.
  3.  “Investor Behavior and Contagion.” Quantitative Finance, 2014.
  4.  “Emotional Investing and Performance.” Algorithmic Finance, 2011, 45-55.
  5.  “Computational Economics and Econometrics: An Exercise in Compatibility,” (joint with Andy Sun) International Journal of Computational Economics and Econometrics, 2011, 105-114.
  6. Behavioral Economics Conference, Erasmus University Rotterdam, in honor of Daniel Kahneman, October 2009.
  7. Brand Value and Perceived Risk in the Service Sector – Presented at Almaden Research Lab, IBM, San Jose, CA, September 18th, 2008.
  8. Humans, Robots and Market Crashes: A Laboratory Study – Presented at the International ESA Conference at Caltech, Pasadena, CA, June 28th 2008
  9. Portfolio Manager Behavior and Global Financial Crises – Presented at SCIE PhD Conference, Santa Cruz, CA, May 30th 2008.

 

Valuing Intellectual Property of an Early Stage Company

Congress shall have the power to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries

 US Constitution, Article 1, Section 8, Clause 8

The Issue

Intellectual property (IP) was recognized as having value by the founding fathers of the country.  As intangibles and intellectual property become the true source of where corporate value lies, correctly valuing IP takes on an increased level of importance.  IP refers to creations of the mind and the related rights to use these in commerce. While it certainly includes patents, trademarks, licenses and permits, it also includes internally developed knowhow related to manufacturing a product and/or developing a service.  Professor Baruch Lev of the Stern School at NYU has indicated that a significant percentage of the value of public firms is attributable to various types of IP, the bulk of which does not appear on their balance sheets. While the contribution of IP to overall firm profitability varies, what we do know is that it provides corporate owners with a decided competitive advantage which allows them to earn rates of return that exceed their respective costs of capital.  The upshot is that firms that have IP that is long-lived will also have market values of equity that far exceed their corresponding book values.

In cases where the firm is a startup that has IP but little or no revenue, valuing the IP is both complex and difficult. Because of these facts, the value of startup firm IP is often based on its reproduction cost. However, in those cases where there is a demonstrated market for the firm’s product that incorporates the IP, basing the IP value on its reproduction cost will almost certainly undervalue it. The reason for this outcome is that the return to the owners of the IP will likely be very high. Just think what the revenue might be if the owning firm licensed the IP to another firm and collected a 2% royalty rate on licensee sales that incorporated the IP. If the market is likely to be large and the firm owning the IP has the capacity to take advantage of the business opportunity, then the IP will have a value that far exceeds its reproduction costs.

But opportunity aside, startup risk for most early stage firms is very great, and while IP can mitigate this risk profile to some degree, the inability of a startup to exploit its IP will more than likely reduce its value to both the owners and potential acquirers.  One has no idea when sales will occur and how large they will be for firms that own IP but have limited or no sales history.  In these instances, any value attributed the IP will be uncertain and highly suspect.  Since IP values are in part determined by what a hypothetical licensee might pay in the form of a royalty rate, any selected rate—like expected sales—is subject to a great deal of uncertainty particularly where the IP is unproven.

But what if we knew what the range of sales would likely be in any future year and we also knew what the range of royalty rates might be? Knowing this, we could produce thousands of IP values based on randomly combining sales and royalty rates and arranging these in such a way that we form a distribution which shows the percentage of the total associated with each value.  These percentages are probabilities associated with each of the values produced.  The value of the IP is the sum of the product of each value multiplied by its associated probability. The beauty of this approach is that it does not require revenue projections which are notoriously optimistic and generally wrong both in terms of timing and size.  Below we report the results of employing this method to valuing IP of a startup firm with small first year sales.

 Case Study

Axiom’s client capitalized the costs of acquired technology, knowhow, trade secrets and identifiable costs incurred to develop, file, and defend the company’s patents and new patents or provisional patent applications. This knowledge base allowed the firm to produce proprietary chemical products that eliminated harmful microbes in a variety of customer settings.

Axiom undertook a comprehensive FASB 142 Step 1 analysis of the assumptions made by management which is the basis of its baseline forecast. This included a review of source-based market analysis undertaken by management and its consultants. In addition, we tested to see whether the number of customers implied by their projections is reasonable in light of recent developments at the company. Management has also provided details on its sales pipeline as substantive backup to its projections.

Based on this analysis we concluded that the IP may be impaired and that a determination of the fair value of the IP is required.  Since the firm had relatively little revenue and projections were generally unreliable, we used a Monte Carlo approach which required the following information:

  1. Current annual revenue
  2. Revenue growth range for each projected year over the eleven year economic life of the IP
  3. Range of royalty rates
  4. Cost of capital

The only input that is problematic in this analysis is item two above.  Axiom developed a unique data set which shows revenue growth rates for startup firms by industry for each year after each firm’s formation.  This data set was the basis for revenue growth ranges used in the Monte Carlo.  The essential characteristic of startup firm performance is that revenue growth could be 300% in one year and zero or even negative in the next.  For startups and early stage firms, revenue growth is essentially random and the Monte Carlo framework can easily accommodate this randomness.

The range of royalty rates within an industry can be determined in a reasonably straightforward way since there is a great deal of data on royalty rates. In our case the range varied between 1% and 4% and the rate was randomly selected.  The analysis consisted of a Monte Carlo simulation that generated 1,000 random revenue growth rates over the 11 year asset life and 1,000 random royalty rates. These growth rates were applied to a starting revenue number which was then multiplied by a randomly generated royalty rate to calculate the royalty fee income. We then summed the present value of the after-tax royalty fee income and added back the implied tax amortization benefit to arrive at the fair value of IP for each of the 1,000 growth and royalty paths. The histogram of IP values is shown below:

Histogram of IP

 We used the histogram as the basis for determining the distribution that most accurately approximates the IP generating function.  Using this distribution, the probability weighted IP value was calculated. This value, $4,145,100, is the fair value of the IP.  The beauty of the Monte Carlo is that one can determine not only the expected value of the IP but the probability that the IP is within a certain range.  For example, the probability that the value of the IP is $12 million (1.2E+7) is about 1%, whereas the probability that the value of the IP is $3.2 million is 26%.

Roger Winsby Interviewed on the Importance of Business Valuations

On May 8, 2015, Axiom’s president, Roger Winsby did a radio show interview with Josh Patrick, president of Stage 2 Planning Partners. and a host on Exit Coach Radio Network & Podcast.  They discussed the various reasons why business owners should consider getting a valuation and what to look for as a business owner who is getting a valuation done. The interview can be found in the Axiom Library or on Exit Coach Radio.com

 

Dr. Stan Feldman Appointed to the Sterilis LLC Board of Directors

On March 9, 2015, Axiom’s Chairman, Dr. Stanley Feldman was appointed to the Board of Sterilis LLC as an independent Director.  Sterilis is revolutionizing the regulated medical waste industry.

Dr. Feldman is the Chairman and co-founder of Axiom Valuation Solutions and has an extensive background in valuing complex capital structures of early and late stage VC and private equity financed firms, and has conducted numerous assignments to meet the requirements of FAS 123R and IRS 409A.  He has led valuation teams working with Axiom clients going through the IPO process and has successfully interacted with the SEC and Big Four audit firms on valuation issues related to client S-1 filings.

Stan is a Certified Patent Valuation Analyst faculty member and leading expert in valuation issues, including Purchase Price Accounting (FAS 141R/ASC 805) and Goodwill Impairment (FAS 142/ASC 350) particularly, as they impact the valuation of intangible assets.

For more information regarding Dr. Feldman and Sterilis, please follow the link below:

Press Release

C Corp to S Corp Conversion

From February’s Axiom on Value

The Window to Elect S Corp Status for 2015 Closes March 15

Many business owners are completely focused on the day-to-day operation of their business.  For these owners, issues of ownership transition planning and optimal tax strategy at the owner’s exit are “nice to consider” but will be irrelevant if the company does not make it through next month’s payroll.  CPAs for these businesses try to educate their clients on the long-run implications of staying as a C corporation, the de facto structure when incorporating, but often run into a variant of “why bother? In the long run, we are all dead”.

The decision whether to elect S corporation is a complex one, and should only be done after reviewing with your advisors the pros and cons of both corporate structures.  However, we note that according to IRS statistics, most “small” businesses chose the S form at some point in their stage of development, so it is an issue worth serious consideration if the owner expects to sell the business, rather than close it down upon retirement.

 Major Difference in Taxes Paid in an Asset Sale between a C and S Corp

The primary reason to consider electing S corporation status is that there can be a significant difference in the taxes paid on the sale of a business in an asset transaction between an S corporation seller and a C corporation seller.  (If the buyer is willing to buy the corporate stock, then there may be little or no difference in taxes paid by sellers of a C or an S corporation).   In an asset transaction for a C corporation, the gains on tangible and intangible assets are taxed at the corporate capital gains rate, which is 35% at the federal level.  Then, when the corporation closes down, it will distribute the remaining cash as dividends, which in most cases are taxable at the individual level.  The effective tax rate can exceed 55% of the gain in the C corporation assets.

The asset sale of an S corporation after 10 years following the S election will be taxed at a much lower rate, since the capital gains are taxed at the individual capital gains rate, and there is no tax on distributions.

The 10 Year Window for the BIG Tax 

For companies that elect S corporation status, there is a 10 year window following the election when the C corporation tax structure will apply to the value created as a C corporation.  The IRS imposes a “Built-In Gain (BIG) tax on the gain in value of the company’s assets as of its conversion from C to S.  The gain in value over the value as a C corporation is taxed based on the S Corp rules.  Consequently, it is necessary to determine the value of the company and its tangible and intangible assets in their C status as of the conversion date.

If S Election is Made, a Business Valuation Should be Done

The valuation should be done using the conversion date as the effective date.  This valuation will be based on the financial statements of the business up to the conversion date, and on the outlook for the company as of the valuation date.

The valuation should determine the total fair market value of the business.  For larger companies, there should be an additional analysis to allocate the total asset value over specific tangible and intangible assets, in case there are sales of specific assets during the 10 year window.

This valuation will not be filed with the IRS upon its completion.  The valuation will stay with the corporation and its CPA for use in the tax calculations, if there is a sale of assets or the business during the 10 year window.  Having the valuation done just after the conversion date is the best way to maximize the rewards from building and operating a privately held business.

 S Corporation Basics (from IRS publications)

S Corporation Requirements

To qualify for S corporation status, the corporation must meet the following requirements:

– Be a domestic corporation
– Have only allowable shareholders
* May be individuals, certain trusts, and estates and
* May not be partnerships, corporations or non-resident alien shareholders
– Have no more than 100 shareholders
– Have only one class of stock
– Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

Steps to Elect S Status:

Complete and file Form 2553:  No more than two months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year prior to the tax year the conversion is to take effect.

Is Investing in an Equity Tranche of a CLO Too Risky?

From November’s Axiom on Value:

By: Dr. Stanley Jay Feldman, Chairman, Axiom Valuation Solutions

John Roberts, Managing Director, Axiom Valuation Solutions

One of the more complicated investments to value is the lower end tranches of CLOs, collateralized loan obligations.  Axiom’s CLO model provides investors with accurate pricing of all CLO tranches including the equity tranche, which, as it turns out, is highly valuable in a low interest rate slow growth economic environment as we show below.

CLOs are an important part of the fixed income landscape primarily because they offer benefits that other structures do not.   CLOs offer investors an opportunity to invest in slices or tranches of the CLO that meet their particular risk appetites and yield objectives.  At the same time, CLOs contribute to a more liquid loan market since CLOs use the funds raised through issuance of securities (tranches) to fund the purchase of loans.  The basic CLO structure is shown below.

Basic CLO Structure

A CLO operates like any other business: It owns assets, in this case bank loans, and funds the purchase of these assets with debt and equity. The debt stack is made up of a series of securities (X thru C) that have priority claims on the cash flows generated by the assets.  Securities with the highest priority claims (X-A) are paid interest and principal first, and hence are rated highly, while those securities that are at the lower end of the debt stack (B-C) have a lower priority claim on the cash flows and as a result face the possibility that interest and principal will not be paid as expected.   The subordinated notes are equivalent to equity since it receives cash flow only after X thru C is paid. In cases where issuing firms default on their loans, promised cash flows  to all but the least risky tranches are at risk of not being fully paid.   Since the equity tranche only receives residual cash flow, its value in large measure is a function of the probabilities associated with loans in the CLO portfolio defaulting, dollar size of the defaults, size of the recovery value associated with defaults and the timing of these recovery payments.   

Using Axiom’s CLO model, the chart below shows the payment to equity under the base case and three default scenarios.   Keep in mind that even though there is a default, in most cases, a large percentage of the principal is subsequently recovered.  The analysis assumes a 70% recovery rate, which is the average recovery of principal for bank loans.  The recovery occurs subsequent to the default date.

Equity Payout at Different Default Rates

In this example, the par value for the equity tranche is $35,000,000.  In the base case scenario, the equity holder would receive over $60,000,000 for a six year investment period.  If, however, the default rate for the collateral loans was 1% per year (cumulative 6%), the equity holder would only receive $54,000,000.  At a 2% per year default rate, the equity holder would receive $47,000,000, and at a 5% per year default rate, the equity holder would receive less than par or about $28,000,000.

Based on the weighted average credit rating of the CLO loan portfolio, the cumulative six year default rate for six years is about 12% based on a recent S&P study on loan defaults.   Our analysis indicates that the equity tranche is reasonably well protected since even at a 2% annual default rate (12% cumulative), cumulative payments to the equity tranche exceed par value.