Latest news with #equitytransactions
Forbes
4 days ago
- Business
- Forbes
Evaluating How Equity Transactions Impact A Company's Valuation
Meenal Aggarwal is the founder of Groots Valuation with expertise in valuing stocks, intangible assets and complex financial instruments. When a company engages in equity transactions, whether issuing employee stock options, facilitating a secondary trade or repurchasing shares, the implications on its valuation can be substantial. Understanding the nuances of these transactions is essential for both financial reporting and tax compliance. As the founder of a financial advisory firm that specializes in valuations, I've created a practical set of questions designed to help valuation professionals assess the relevance and reliability of recent transactions in a company's securities. Evolving Standards On June 23, 2024, the Association of International Certified Professional Accountants' (AICPA) Financial Reporting Executive Committee issued a working draft of chapters eight and nine as part of a forthcoming update to the 2013 AICPA Accounting and Valuation Guide. Here, we'll focus on chapter eight, "Inferring Value from Transactions in a Private Company's Securities." This chapter discusses the framework to calibrate equity securities valuation with a company's primary transactions, secondary transactions and repurchases. Companies typically assess the value of underlying equity when issuing instruments like employee stock options (ESOPs) or other share-based compensation. This valuation may serve two purposes: determining fair value for financial reporting—guided by U.S. generally accepted accounting principles (GAAP), specifically Topic 718 of the FASB Accounting Standards Codification—and establishing fair market value for tax purposes under Section 409A of the Internal Revenue Code. Chapter eight suggests that the secondary market transactions are relevant for the valuation if: • The transaction involves an identical security on the measurement date. • It occurs in an active market. • The evidence indicates the transaction is orderly. An identical security ensures you're comparing apples to apples. An active market suggests genuine supply and demand, and an orderly transaction implies it wasn't a distressed sale, thus providing a more reliable price point. These criteria are important because they help ensure that the transaction price accurately reflects the company's true value. The working draft from June 2024 expanded on the qualitative and quantitative factors influencing the relevance of primary and secondary transactions. This expansion means valuation professionals now have more detailed guidance and a broader set of considerations to evaluate how relevant a past transaction is to a current valuation. It's significant because it helps companies and professionals achieve more accurate and defensible valuations, particularly as private company transactions become more complex and frequent. This increased clarity can lead to better financial reporting and reliable valuation. A Framework For Evaluating Transactions: 30 Questions To Ask Based on my interpretation of Chapter 8, the following 30 questions can offer a practical way to organize those considerations. This is not an exhaustive list. They may be useful for both the valuer and the company when evaluating secondary transactions and could also serve as part of a data request from a valuer to a client. 1. Is the transaction in an identical security? 2. Is the transaction recent? 3. Have any changes occurred in the business between the transaction date and the valuation date? 4. Is the transaction on a control or minority basis? 5. What percentage of shares is acquired? 6. Do the acquired shares change the status of the shareholder from minority to control? 7. Are the volumes considerable enough? 8. Was the company in distress before the transaction? 9. Was the transaction forced? 10. Is the investor strategic or financial? 11. Is the transaction between related parties? 12. Were there multiple buyers or a single buyer? 13. Was there any pre-existing relationship between the buyer and seller? 14. Was the price negotiated? 15. Was the due diligence done before acquiring shares? 16. Were there customary marketing activities before the sale of shares? 17. Was there enough time to market? 18. Was the transaction one-time or repeated? 19. Were all shareholders given a chance to participate in the transaction? 20. What was the motivation of the buyer? 21. What was the motivation of the seller apart from raising funds? 22. Are there any other features involved with the sale, such as tag-along rights? 23. Are there voting rights? 24. Were there any other transactions along with this transaction? 25. Did the transaction occur in the principal or most advantageous market? 26. Was the transaction price an outlier? 27. Were the parties willing to do the transaction? 28. Were the parties able to do the transaction? 29. Were the parties knowledgeable of relevant facts? 30. Was the price an 'exit" price or an 'entry' price? These questions are valuable because they provide a comprehensive framework for scrutinizing past transactions. They can be asked whenever a valuation professional is considering using a recent transaction as input for their valuation judgment. They can help ensure the transaction is orderly, at arm's length and representative of true market value, ultimately leading to a more accurate and defensible valuation. For instance, a forced sale (question nine) or a transaction between related parties (question 11) might not reflect an arm's length market price. Similarly, knowing if the buyer was strategic or financial (question 10) can reveal different motivations that influence price. Moving Forward: Best Practice For Professionals As valuation standards continue to evolve, staying current with guidance from organizations like the AICPA is paramount. Valuation professionals and companies alike should proactively integrate these comprehensive questions into their assessment processes. By meticulously evaluating the nuances of equity transactions, professionals can not only enhance the reliability of their valuation judgments but also ensure greater compliance with financial reporting and tax regulations. Embracing this disciplined approach will be key to navigating the increasingly complex landscape of private company valuations and fostering confidence in reported financial figures. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
Bloomberg
5 days ago
- Business
- Bloomberg
Vietnam Regulator Orders Tighter Oversight of Stock Transactions
Vietnam's State Securities Commission has directed stock exchanges and relevant agencies to strengthen supervision of equity transactions following a recent sharp rally in the market. The SSC said bourses need to 'closely monitor' transactions that involve sharp price moves, or those that show signs of 'unusual' activities, according to a statement posted on its website. It also ordered the exchanges to coordinate with Vietnam Securities Depository and Clearing Corp. to ensure safe, stable and smooth securities trading, clearing and settlement.
