[Data for the case is adapted from the AICPA's Course: "Developing Your Business Valuation Skills: An Engagement Approach". Copyright American Institute of Certified Public Accountants. Used with permission. All rights reserved.]
This case puts the student in the role of a CPA, ABV engaged in valuing a closely held family business for purposes of buying out a disenfranchised family member. Students are exposed to basic valuation research, confront the limitations of historical cost financial statements, choose an appropriate valuation method and exercise professional judgment in a variety of valuation decisions. The issues of objectivity, client conflicts of interest and business valuation accreditation are also introduced.
The case is appropriate for junior or senior level accounting or finance majors with a solid background in financial accounting. The case can be taught in one to two hours of class time and will require four to five hours of outside preparation by students.
Jess Parker, a CPA, ABV, is hired by one his former college friends to place a value on a wholesale grocery business currently owned by him, his brother and sister. Family friction has led to the brother wanting to retire and have his interest bought by the other two siblings.
Over a three week period, Jess works with his client and one of his staff members in doing the research and preliminary work. As he responds to questions from the client and his assistant, Jess explains some of the major challenges and issues involved in valuing a non-public business. Students research some common valuation methods and select the one most appropriate to the set of conditions in the grocery valuation. As students progress through the valuation and write the report they deal with limitations of traditional financial reports, the challenge of estimating proper discount and capitalization rates and the subjectivity of the valuation process.
MONDAY, FEBRUARY 4, 2002
Jess Parker, a partner in charge of the business valuation area for Worth & Worth PSC, was going through the morning mail. On answering the phone Jess was greeted by an old college friend, Dan Cirr. Since college, Dan had been fairly successful in the wholesale grocery business with his brother Darryl and sister Ann. After the usual swapping of semi-true war stories from their college days, Dan got down to business. He needed Jess' help since a recent family quarrel was forcing Ann and Dan to buy out Darryl's interest in their family's grocery business. Dan agreed to come by the office after lunch on Tuesday.
Jess Jones, CPA/ABV had done tax consulting at Worth & Worth for twelve years before deciding to specialize in the area of business valuation. He had received his ABV (Accredited in Business Valuation) designation from the AICPA two years before and had done twenty or so valuation engagements since then. Through his valuation experience he knew that every valuation engagement had its own special character and presented unique challenges.
TUESDAY, FEBRUARY 5
Dan arrived in Jess' office and the two began discussing the valuation situation. Dan briefly summarized Cirr's operations and ownership arrangements (Appendix I).
Dan, Ann and Darryl had each inherited one-third of the shares in the business from their father, Vincent, in 1990. Since then, all three had been active in running the business and had received equal compensation. Since early 1998, however, Darryl's in-laws had been the source of some friction in the business and Darryl had asked to be bought out effective the end of last year. Dan and Ann were happy to do so.
Having faced similar family business arrangements before, Jess immediately asked: "What sort of buy-sell provisions are spelled out in the shareholder agreement?"
Dan briefly summarized it, "In short, the shareholder agreement says that the Company must pay a price equal to the fair market value of Darryl's ownership interest as of the end of the most recent business year. …