Valuation for Financial Reporting : Fair Value Measurements and ...

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Exhibit 3.20 Target Company Valuation of Trade Name as of December 31, 2007 ($000s)2008 2009 2010 2011 2012 2013 2014 2015 2016 2017(1) Net Sales from Business Enterprise Analysis $58,800 $64,680 $71,148 $76,840 $82,219 $86,330 $90,646 $95,178 $99,937 $104,934Pretax Relief from Royalty 2.0% $1,176 $1,294 $1,423 $1,537 $1,644 $1,727 $1,813 $1,904 $1,999 $2,099Income Tax Liability 40.0% 470 517 569 615 658 691 725 761 799 839After-tax Royalty $706 $776 $854 $922 $987 $1,036 $1,088 $1,142 $1,199 $1,259(2) Present Value Income Factor 16.0% 0.9285 0.8004 0.6900 0.5948 0.5128 0.4421 0.3811 0.3285 0.2832 0.2441Present Value Relief from Royalty $655 $621 $589 $548 $506 $458 $415 $375 $340 $307Sum of Present Value Relief from Royalty, 2008–2017 $4,814Residual Calculation:2017 After-tax Royalty $1,2592018 After-tax Royalty, Assuming Growth of 5.0% $1,322Residual Capitalization Rate, Perpetual Growth of 5.0% 11.0%Residual Value, 2018 $12,018(2) Present Value Factor 0.2441Fair Market Value of Residual 2,934Present Value of Trade Name Royalty Flows 7,748Amortization BenefitDiscount Rate 16.0%Tax Rate 40.0%Tax Amortization Period (Years) 15Amortization Benefit 1,477Fair Value of Trade Name, Rounded $9,230Footnotes:(1)Figures shown from Business Enterprise Analysis (BEA) - Cash Flow Forecast (Exhibit 3.17)(2)Based on mid-period assumptionNote: Some amounts may not foot due to rounding.The impairment test presented in this example is assumed to be performed as of December 31, 2007.# Copyright 2007 by FVG Holdings, LC and Financial Valuation Solutions, LLC. All rights reserved. Used with permission.117
118 Valuation for Financial Reportingconsidered impaired, and the carrying amount will be written down to the new fairvalue per SFAS No. 142.Noncompetition AgreementIn the interest of brevity and because we already have a full noncompete analysis as anexample in the previous section, assume that under the assumption of competition,sellers could negatively impact Target Company’s sales for two years (i.e., the seller, ifnot under a noncompete agreement, could theoretically go to work for a competitor orstart a new company and cause the target company to grow slower than otherwiseforecast). Variable expense percentages are assumed to be the same for both scenarios.The probability of the covenantor’s competing and succeeding is still assessed at50%. After reducing the gross value by the probability factor and adding anamortization benefit, the fair value of the noncompete agreement is determined tobe $2,090,000.The recoverability test of SFAS No. 144 indicates that the sum of the undiscountedcash flows (here, for five years, ignoring the residual) exceeds the carrying value.Thus, no impairment is recognized. The remaining useful life is now two years.TechnologyAs was done last year, the fair value of the Company’s developed technology (as well asthe fair values of in-process research and development and customer base) wasdetermined using an income approach specifically, the multiperiod excess earningsmethod (MPEEM) (see discussion on pages 92–97), which measures the present valueof the future earnings to be generated during the remaining lives of the assets. Using theBEA as a starting point, we calculated pretax cash flows attributable to the technologyReturn on:Contributory Asset ChargesNet Working Capital 5.0%Land and Building 7.0%Machinery and Equipment 8.0%Software 17.0%Trade Name 16.0%Noncompete Agreement 16.0%Assembled Workforce 16.0%Technology 18.0%IPR&D 20.0%Customer Base 17.0%Note: The discount rates shown here are for example purposes only and represent general relationshipsbetween assets. Actual rates must be selected based on consideration of the facts and circumstances relatedto each entity and risk of underlying assets.Rate
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VALUATION FORFINANCIALREPORTINGFair
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VALUATION FORFINANCIALREPORTINGFair
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To our familiesnear and faryoung an
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PrefaceThe second edition of this b
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AcknowledgmentsTo Deanna Muraki, th
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xivAbout the Authorsappraiser with
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Valuation for FinancialReportingFai
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Appendix 1.2Pronouncements Excluded
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Intellectual PropertyAppendix 2.1On
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Exhibit 4.8 Target Company Valuatio
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210 IndexBusiness Enterprise Analys
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212 IndexGoodwill (continued )111,
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214 IndexLong-termcapital, 71debt,
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216 IndexSecurities and Exchange Co
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