713.800.4343  |  1.800.859.9945
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Complex Valuation Services

Valuation of Complex Securities
We are a full service, independent valuation firm that advises clients with valuations of complex securities. In an era of increasing use of fair value measurements, we help public and privately held companies, private equity and venture capital firms successfully manage their financial reporting valuations.

We assist clients with all types of hard to value alternative assets and liabilities including

  • Highly Complex Valuations
    • Options
    • Warrants
    • Convertible Bonds and Promissory Notes
    • Contingent Consideration and Earnouts
  • Standard Portfolio Valuations
    • Level 3 Securities
    • Value at Risk, Cash Flow at Risk and Earnings at Risk
    • Loans
    • Bonds
    • Equity
    • Structured Products
Our professionals offer a mix of finance and accounting expertise and maintain active involvement in the major standard setting bodies such as the AICPA and CFA Institute. We keep current on developments in financial reporting methods and regulatory requirements under U.S. GAAP, IFRS, SEC, PCAOB, FASB and FINRA.

The importance of experience cannot be undervalued when determining the fair value of complex securities. It is important to partner with independent specialists who can provide:
  • Highly experienced expertise capable of solving complex problems
  • Complete independence with robust supportable documentation
  • Transparent valuation reports that clearly identify methodologies and conclusions
  • Quality control to ensure compliance with regulatory requirements and internal policies and procedures

Valuation of Contingent Consideration and Earnouts
One of the most complex challenges of a business combination is determining and then accounting for the fair value of any contingent consideration associated with the transaction. Contingent consideration, also referred to as an earnout, is commonly used to bridge a valuation gap, provide continuing incentive to business sellers or account for the achievement of technical or other milestones.

Acquirers must measure fair value not only at the acquisition date, but again at each quarter so long as the contingent consideration exists as an asset or liability. As a result, whatever effect the target company’s performance has on earnings can be tempered by an opposite (but not necessarily equal) impact on earnings. Best-of-breed valuation techniques are needed to estimate the fair value of the earnout provision.

We work with you to:
  • Identify the earnout that is part of a business combination or equity compensation
  • Calculate the acquisition-date earnout valuation using appropriate modeling techniques, such as scenario-based models or Monte Carlo Simulations
  • Assist in developing probabilities of attaining the earnout payoffs
  • Remeasure assets and liabilities for each reporting date until the contingency is resolved
  • Model the effects on future earnings under a variety of scenarios
  • Prepare valuation reports and engage with your external auditors to provide audit support
  • Gain greater visibility into the financial implications of earnouts while establishing a robust one-time or recurring valuation process.

Valuation of Convertible Securities
Convertible securities valuation can be tricky. Since the securities are hybrid instruments (containing both equity and debt features), fair value needs to be measured upon issuance and may be required on a quarterly mark-to-market basis. Even the slightest complexity within these instruments can create the potential for accounting surprises and unexpected earnings volatility.

To gain control of these instruments, we help you:
  • Develop fair value estimates for financial reporting purposes
  • Test various mixes of stock and bonds for hedging convertibles
  • Analyze how changes in parameters, such as share price or interest rate, can affect future valuations and the equity component thereof
  • Prepare valuation reports and engage with your external auditors to provide audit support
  • Develop rigorous convertible debt valuations, manage uncertainty around future payouts, and deploy a stable, repeatable process for your mark-to-market valuations.

Advanced Pricing Models
Corporate finance and accounting professionals, attorneys and auditors may find distinct advantages in understanding the functionality of pricing models needed for many complex securities, such as Monte Carlo simulations and lattice-based models. We are experienced using these advanced quantitative tools to value complex securities or other hard-to-value assets.

Monte Carlo simulation is a technique used to understand the impact of risk and uncertainty in financial, project management, cost, and other forecasting models. Many financial instruments have special features – such as exercise limitations or payout contingencies – that make standard analytic approaches (e.g., Black-Scholes formula) inadequate. In such cases, Monte Carlo simulation is a popular and versatile alternative. It provides a means of computing the outcome of complex functions -- such as derivative values, contingent debt, or an entire enterprise -- by simulating multiple random paths of the underlying variables.

Lattice based methods, which include binomial- and trinomial-trees, are another class of models commonly used to value complex financial instruments. In these models, possible future values of the underlying stock or bond are represented as discrete nodes on a graph, or tree, that expands through time. Different exercise options can be represented at each node on the tree, making lattice models a flexible tool for path-dependent derivatives, early exercise options, and hybrid debt/equity structures.

Risk Metrics
Risk methods such as Value at Risk (VaR), Earnings at Risk (EaR), and Cash Flow at Risk (CFaR) derive from a general class of probabilistic models that measure the risk of loss in market risk sensitive instruments. These models measure the potential loss that could occur in normal markets, over a defined period, within a certain confidence level. VaR may measure the uncorrelated risks of single transactions or the correlated risks of several different exposures in a portfolio.

Value at Risk measures risk to the mark-to-market value of a portfolio, typically over a short duration. VaR may be calculated in a variety of ways, including variance/co-variance, historical simulation, and Monte Carlo simulation. The variance/co-variance model, for example, relies on statistical relationships to describe how changes in different markets can affect a portfolio of instruments with different characteristics and market exposures.

Earnings at Risk and Cash Flow at Risk are also probabilistic measures developed from statistical analysis. Cash Flow at Risk models the risk to future cash flows of a business over a longer period (e.g., one year). Earnings at Risk measures potential loss in a company's earnings due to changes in interest rates over a given period.

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Certified Public Accountants | Houston, Texas
10260 Westheimer Road, Suite 310 * Houston, Texas 77042
Phone 1.800.859.9945

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