Table of Contents

Foreword

Preface

  • Highlights of this Book
  • Who Should Read this Book?
  • About the Book

Acknowledgments

PART I – FOUNDATIONS: VALUING A BUSINESS

Chapter 1: Fundamental Concepts for Defining Value

  • Standard of Value
  • Level of Value
  • Premise of Value
  • Conclusion

Chapter 2: Defining the Engagement

  • The Importance of Defining the Engagement
  • Defining the Client
  • The First Call
  • The Subject Entity and Entity Type
  • Entity Distinctions and Entity Significance in the Valuation
  • State of Entity Organization or Incorporation
  • Principal Business Location
  • Description of the Subject Interest
  • Purpose and Intended Use of the Valuation
  • Date of the Valuation
  • Scope of the Work Product
  • Summary Assignment Definition Table
  • The “As of Date” of the Appraisal and the Date of the Appraisal Report – Added Thoughts and Perspective
  • Conclusion

Chapter 3: Information Collection and Due Diligence

  • Importance of the Information Collection and Due Diligence Phase
  • Industry and Economic Considerations
  • Financial Information and Analysis
  • The Management Interview
  • Preparation
  • Agenda of a Typical Management Interview
  • Conclusion

Chapter 4: An Overview of Valuation Approaches

  • Recognized Valuation Approaches
  • Methodology and Level of Value, Direct and Indirect Methodology
  • Conclusion

Chapter 5: Valuation Approaches – The Cost Approach

  • The Cost Approach
  • Typical Adjustments in the Cost Approach (using Tangible Net Asset Value Methods)
  • To Tax Affect or Not
  • Conclusion

Chapter 6: The Income Approach to Value

  • Direct Capitalization and Discrete Projection Methods
  • Reconciliation of Income Methods to Market Methods
  • Typical Adjustments to the Income Statement
  • Adjustments That Correspond to Balance Sheet Treatments
  • Reconciling or Reclassifying Interim Period Measures to Fiscal Period Measures
  • Income Statement Adjustments and Considerations
  • Matching the Cost of Capital to the Benefit Stream
  • Developing the Cost of Capital
  • Summary Examples of Developing the Cost of Equity Capital
  • Growth Rate of Earnings / Net Cash Flow
  • Finishing the Direct Capitalization Equation
  • Developing the Single-Period Benefit (“Ongoing Earnings” and “Ongoing Net Cash Flow”) and Preparation for the Discounted Future Benefits Method
  • Example of a Single Period Capitalization to Derive the Market Value of Total Invested Capital
  • The Discounted Future Benefits Method (DFB)
  • Conclusion

Chapter 7: The Market Approach

  • Valuation Methods under the Market Approach
  • Rules of Thumb
  • Transactions Method
  • Guideline Public Company Method
  • The Fundamental Adjustment
  • Guideline Transactions Method
  • Conclusion

Chapter 8: Correlation of Value

  • Global Considerations in the Correlation Process
  • Examples of Correlating a Value Indication
  • Conclusion

Chapter 9: Valuation Discounts and Premiums

  • The Levels of Value Revisited
  • Perspective on the Control Premium
  • Control Premiums – Substance Over Form
  • Perspective of the Minority Interest Discount
  • Marketability Discounts
  • Conclusion

PART II – BUSINESS VALUATION STANDARDS

Chapter 10: Uniform Standards of Professional Appraisal Practice (USPAP)

  • Overview of USPAP Valuation Standards
  • USPAP Ethics Rule
  • 2010-11 USPAP Competency Rule
  • 2010-11 USPAP Scope of Work Rule
  • 2010-11 USPAP Jurisdictional Exception Rule
  • USPAP Business Appraisal Review (USPAP Standard 3)
  • Business Appraisal Development: USPAP Standard 9
  • Business Appraisal Report Standards USPAP Standard 10
  • USPAP Certification Requirement
  • USPAP Statements on Appraisal Standards and Advisory Opinions
  • Conclusion

Chapter 11: American Society of Appraisers (ASA) Business Valuation Standards

  • ASA BVS General Preamble
  • ASA BVS-I (General Requirements for Developing a Business Valuation)
  • ASA BVS-II (Financial Statement Adjustments)
  • BVS-III (Asset-Based Approach to Business Valuation)
  • ASA BVS-IV (Income Approach to Business Valuation)
  • ASA BVS-V (Market Approach to Business Valuation)
  • ASA BVS-VI (Reaching a Conclusion of Value)
  • ASA BVS-VII (Valuation Discounts and Premiums)
  • ASA BVS-VIII (Comprehensive Written Business Valuation Report)
  • ASA BVS-IX (Intangible Asset Valuation)
  • ASA SBVS-1 (Guideline Public Company Method)
  • ASA SBVS-2 (Merger and Acquisition Method)
  • PG-1 (Litigation Support: Role of the Independent Financial Expert)
  • PG-2 (Valuation of Partial Ownership Interests)
  • Conclusion

Chapter 12: The American Institute of Certified Public Accountants (AICPA) Statement on Standards for Valuation Services

  • Introduction and Scope
  • Overall Engagement Considerations
  • Development
  • Valuation Approaches and Methods
  • Detailed Report
  • Summary Report
  • Calculation Report
  • Oral Report
  • Conclusion

Chapter 13: National Association of Certified Valuation Analysts (NACVA) Professional Standards

  • Preamble; General and Ethical Standards
  • Valuation Services
  • Development Standards
  • Reporting Standards
  • Miscellany
  • Conclusion

Chapter 14: The Institute of Business Appraisers (IBA) Business Appraisal Standards

  • Standard One: Professional Conduct and Ethics
  • Standard Two: Oral Appraisal Reports
  • Standard Three: Expert Testimony
  • Standard Four: Letter Form Written Appraisal Reports
  • Standard Five: Formal Written Appraisal Reports
  • Preliminary Reports
  • Conclusion

Chapter 15: Canadian Institute of Chartered Business Valuators Practice Standards

  • Practice Standard 110 – Valuation Reports
  • Practice Standard 120 – Scope of Work
  • Practice Standard 130 – File Documentation
  • Practice Standard 210 – Advisory Reports
  • Practice Standard 220 – Scope of Work for Advisory Reports
  • Practice Standard 230 – File Documentation for Advisory Reports
  • Practice Standard 310 – Expert Reports
  • Practice Standard 320 – Scope of Work for Expert Reports
  • Practice Standard 330 – File Documentation Standards in Expert Reports
  • Standard 410 – Limited Critique Reports
  • Practice Standard 420 – Scope of Work for Limited Critique Reports
  • Practice Standard 430 – File Documentation Standards for Limited Critique Reports
  • Practice Bulletins
  • Conclusion

Chapter 16: Internal Revenue Service (IRS) Business Valuation Standards

  • IRM 44841 – Introduction
  • IRM 4482 – Development Guidelines
  • IRM 44843 – Resolution Guidelines
  • IRM 44844 – Reporting Guidelines
  • Conclusion

Addendum A USPAP 3 Comparison Chart
Addendum B USPAP 9 Comparison Chart

PART III: LESSONS FROM THE TRENCHES

Chapter 17: Alleged Errors of Omission by Appraisers

  • Failure to Comply With USPAP
  • Valuation Credentials
  • Too Much Involvement by Counsel in the Appraisal Report Preparation
  • Standard of Value
  • Valuation Date
  • The Subject Property Interest
  • Bias
  • Sources of Data
  • Independence
  • Pure Reliance on Case Law
  • Site Visits and Management Interviews
  • Failure to Provide Sufficient Explanation
  • Disregard of Material Facts
  • Improper Sampling Techniques
  • Off Financial Statement Items
  • Failure to Sufficiently Explain Assumptions
  • Insufficient Due Diligence
  • Failure to Make Inquiries With Significant Third Parties
  • Failure to List All Appraisers’ Qualifications
  • Failure to Consider the Small Stock Premium
  • Failure to Factor in Income Tax
  • Failure to Set Forth the Adjustments to Financial Statements in the Appraisal Report
  • Failure to Have Work be Susceptible of Replication
  • Failure to Identify the Multiples Selected
  • Failure to Discuss Weightings in the Appraisal Report
  • Failure to Distinguish Between Tax and Book Depreciation
  • Failure to List Guideline Companies
  • Failing to Separate Operating and Nonoperating Aspects of a Company
  • Failing to Lay Foundation for Small Stock Premium
  • Failing to Justify Capitalization or Discount Rates
  • Failure to Think like an Investor
  • Failure to Define Capital Structure
  • Failure to Adequately Consider the “Willing Buyer”
  • Failure to Adequately Consider the “Willing Seller”
  • Failure to Accurately Describe the Subject Property
  • Failure to Properly Classify the Subject Company
  • Failure to Explain the Basis for a Valuation Discount
  • Failure to Properly Consider the Subject Company’s Growth Rate
  • Failure to Explain Market Multiples Selected For Guideline Companies
  • Failure to Explain Equal Weighting of Conclusions of Value
  • Failure to Consider Differences between the Subject Company and the Guideline Companies
  • Failure to Utilize Data From a Guideline Company That the Appraiser’s Own Summary Chart Reflects is Closest to the Subject Company
  • Failure to Explain the Selection of the Range of Performance Ratios Selected
  • Failure to Adequately Explain Why Companies Selected as Guideline Companies are in Fact Comparable to the Subject Company
  • Failure to Explain Why so Few Comparable Properties or Guideline Companies Were Selected
  • Conclusion

Chapter 18: Alleged Errors of Commission

  • Retrospective Appraisals
  • Use of Past Publications of an Appraiser Against the Appraiser
  • Using Untested Methodology
  • Improper Reliance Upon a Draft Appraisal
  • Conclusion of Value Offends Common Sense
  • Mathematical Errors
  • Inconsistency
  • Double Counting
  • Conflicting Conclusions of Value
  • Sole Reliance upon a Valuation Model
  • Incorrect Usage of the Discounted Cash Flow Method
  • Skewed Assumptions
  • Overemphasis on Buy-Sell Restrictions among Related Parties
  • Using Historic Book Value of Assets in Net Asset Value Approach Even Though Asset Appraisals Had Been Obtained
  • Misapplication of Pre and Post Tax Figures
  • Ignoring the “Hypothetical” Nature of the Willing Buyer or Willing Seller
  • Inconsistent Use of Commercially Available Data
  • Use of Commercially Available Data That Warns of its Statistical Inaccuracy
  • Misstatement of Methodology Employed by Appraisers on Whose Work the Appraiser Has Relied
  • Undue Reliance Upon the Work of Another Appraiser
  • Using a Valuation Method without Laying a Foundation That It Is a Legitimate Method (for example, The Business Broker Method Using Data from the IBA Market Database)
  • Improper Reliance on a Study That Does Not Completely Provide All of the Relevant Data
  • Failure to Apply Discussion of Economic Factors to the Subject Company
  • Using Commercially Available Data in a Manner Contrary To How The Data Source Says The Data Should Be Used
  • Failure to Proofread Report Prior to Issuance
  • Apparently Conflicting Assumptions Used for the Same General Purposes without Sufficient Explanation
  • Use of Different Valuation Methods in Valuing the Same Interest in Valuation Reports Offered at Different Times without Adequate Explanation
  • Making Improper Adjustments to Financial Statements
  • Reliance upon the Pre-IPO Studies and the Restricted Stock Studies to Determine the Discount for Lack of Marketability for a Controlling Interest
  • Misreading or Failing to Properly Consider Rev Rul 59-60
  • Failure to Accurately State the Number of Shares Outstanding in the Subject Company
  • Inconsistency in Valuation Methodology Expressed in Testimony Versus the Appraiser’s Methodology as Expressed in another Writing
  • Unreasonably Low Projections
  • Failure to Add Back Depreciation Included in Computation of Costs-of-Goods-Sold in the Computation of EBDIT
  • Combining the Discount for Lack of Control with the Discount for Lack of Marketability
  • Utilizing an Assumed Income Tax Rate That Differed From the Actual Past Tax Rates of the Subject Company
  • Disconnect between Assumption as to When Revenues or Expenses Would be Received or Incurred and When Those Items Were Actually Received or Incurred
  • Error in Computing Terminal Value when Using the Income Approach
  • Discounting an Income Stream Only at or Close to the “Risk-Free” Rate
  • Modifying or Abandoning Positions Taken in the Written Appraisal Report during the Appraiser’s Testimony
  • Referring to a Standard Industrial Code in the Appraisal Report without Identifying That Number in the Report
  • Relying Upon Guideline Companies That Were Not Comparable to the Subject Company
  • Preparing and Utilizing Earnings Projections That Vary Significantly From the Earnings Projections Prepared by the Subject Company
  • Use of Only One Year’s worth of Guideline Company Data
  • Inappropriate Employment of a Discount to Make a Conclusion of Value under One Valuation Approach Come Out More in Line With the Conclusion of Value Reached Under another Valuation Approach
  • Failing to Properly Calculate a Valuation Discount
  • Inappropriate Use of a Price-to-Asset Multiple Where the Difference between Book Value and Asset Fair Market Value is not Close
  • Selection of Too Few Guideline Companies or Comparable Properties
  • Selection of Too Few Performance Measures in the Guideline Company Method
  • “Cherry Picking” Valuation Multiples
  • Using an Inexcusably Old Comparable Sale
  • Inappropriate Reliance upon Governance Document Restrictions in Establishment of Valuation Multiples
  • Stating the Wrong Date from a Comparable Sale
  • Mismatching the Valuation Dates of the Guideline Companies and the Subject Company in Computing Price Multiples
  • Defining “Guideline Company” Too Narrowly
  • Conclusion

Chapter 19: Ten Burning Issues within the Appraisal Profession

  • Issue 1: Methods of Determining the Discount for Lack of Marketability
  • Issue 2: Applicability of Discount for Lack of Marketability to a Controlling Interest
  • Issue 3: Validity of Discount for Imbedded Capital Gains
  • Issue 4: Shift of “Comparability” from the Publicly Traded Arena to the Private Arena
  • Issue 5: Efficient Market Hypothesis and Exceptions (for example, Small Firm Effect)
  • Issue 6: Value of Control vs Value of Synergy
  • Issue 7: Do Public Company Stock Prices Indicate a Marketable, Minority or a Marketable, Control Position?
  • Issue 8: S Corporation Tax-Affecting
  • Issue 9: Factoring Financial Statement Adjustments When Estimating the Value of a Noncontrolling Interest
  • Issue 10: Validity of the Capital Asset Pricing Model for Valuing Interests in Closely Held Businesses
  • Conclusion

Chapter 20: Random Practical Valuation Tips and Thoughts

  • Discovery and Privileges
  • Attorney-Client Privilege
  • Attorney Work Product Privilege
  • Tax Practitioner Privilege
  • A Free Standing, Complete Report, or a Mere Letter or Restricted Use Appraisal Report?
  • Those Business Appraisers Must Be Identified in Time
  • Should a Business Appraiser Always Follow USPAP?
  • How Much Input Can a Client’s Advisor Have in the Preparation of a Business Appraisal Report?
  • Types of Appraisers; Appraisal Associations
  • Random Strategy Tips
  • Conclusion

Appendix A Appraisal Standards Chart

Appendix B Information Request List

Appendix C Management Interview Checklist

Appendix D Sample Engagement Letter

Glossary

Bibliography

  • Business Valuation Texts
  • Business Valuation Journals and Newsletters
  • Cost of Capital
  • Equity Risk Premiums
  • Articles

About the Authors

About the Website

Index