PPC's Guide to Business Valuations

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INTRODUCTORY MATERIAL

  • PREFACE
  • HOW TO USE THE GUIDE
  • ACKNOWLEDGMENTS
  • ACKNOWLEDGMENT OF COPYRIGHTS
  • ABOUT THE AUTHORS . . .
  • LIST OF SUBSTANTIVE CHANGES AND ADDITIONS

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CHAPTER 1: OVERVIEW OF A BUSINESS VALUATION ENGAGEMENT

  • 100 INTRODUCTION
    • What Is a Closely Held Business?
      • How Does Size Affect the Definition?
      • Does the Approach Used to Value a Publicly Traded Company Differ?
    • What Is a Valuation Engagement?
      • Reasons for Valuation.
      • Scope of Service.
    • For Whom Is This Guide Written?
      • How the Guide Is Organized
      • Glossary of Valuation Terms.
      • Notation System.
  • 101 THE ROLE OF THE CONSULTANT IN A BUSINESS VALUATION ENGAGEMENT
    • The Role of Objectivity and Independence in a Valuation Engagement
      • There Is Normally a Presumption of Objectivity.
      • Protecting the Appearance of Objectivity.
      • Objectivity of Consultants Who Perform Litigation Support Services.
      • Independence.
    • Advisory Engagements
    • Other Professional Standards
      • Standards of the American Institute of Certified Public Accountants (AICPA).
      • Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation.
      • Standards of the American Society of Appraisers.
      • Standards of the Business Valuation Committee of the ASA.
      • Standards of the National Association of Certified Valuation Analysts.
      • Standards of the Institute of Business Appraisers.
      • Guidelines of the Internal Revenue Service.
    • How These Requirements Affect Exempt Consultants
    • Impact of Accounting Guidance
      • FASB's Future Role in the Valuation Field.
    • Impact of Federal Legislation on Business Valuers
      • FIRREA.
      • Gramm-Leach-Bliley Act.
      • Treasury Department Circular No. 230.
      • Pension Protection Act of 2006 (PPA).
      • Small Business and Work Opportunity Tax Act of 2007.
      • Standards of Practice.
      • Sarbanes-Oxley Act of 2002.
      • Public Company Accounting Oversight Board (PCAOB).
  • 102 EDUCATION AND EXPERIENCE
    • Evaluate Capabilities
      • Developing the Expertise without Prior Experience.
      • Hiring an Experienced Valuation Consultant from the Outside.
      • Forming a Strategic Alliance with an Existing Valuation Consultant.
    • Training Requirements
      • American Institute of Certified Public Accountants.
      • American Society of Appraisers.
      • National Association of Certified Valuation Analysts.
    • Institute of Business Appraisers
    • Obtaining Relevant Experience
    • Resources That Are Needed
      • Personnel Resources.
      • Library Resources.
      • Computer Resources.
  • 103 OVERVIEW OF A VALUATION ENGAGEMENT
    • Overall Engagement Approach
    • Pre-engagement and Planning Procedures
      • Evaluate Whether to Accept the Engagement.
      • Prepare a Detailed Work Program.
      • Develop a Time and Fee Estimate.
      • When Appropriate, Obtain Approval of the Work Program, Staff Assignments, and Fee Estimate.
      • When Necessary, Prepare a Proposal Letter or Oral Presentation.
      • Obtain an Engagement Letter.
    • Data Collection, Analysis, and Valuation Procedures
      • Collect Data Appropriate for the Valuation Methods Used.
      • Perform the Valuation Methods under the Supervision of an Experienced Individual.
    • Reporting and Wrap-up Procedures
      • Determine the Final Estimate of Value.
      • Document Work Performed and Conclusions Reached.
      • Consider Obtaining a Representation Letter (If Possible).
      • Draft the Valuation Report.
      • Perform a Detailed Review of the Workpapers and Report Draft.
      • If Practical, Obtain an Independent Internal Review of the Workpapers and Report Draft.
      • Resolve Any Professional Disputes.
      • Discuss Engagement Findings and Report Draft with the Client.
      • Determine That All Review Points and Open Items Have Been Cleared.
      • Prepare the Final Report.
      • Sign the Report or Transmittal Letter.
      • File the Workpapers.
      • Evaluate the Staff's Performance.
  • APPENDIX 1A: Professional Standards and Guidelines
    • APPENDIX 1A-1: AICPA Statement on Standards for Valuation Services No.1, Valuation of a Business, Business Ownership Interest, Security or Intangible Asset
    • APPENDIX 1A-2: ASA Business Valuation Standards (Permission to Reprint Granted by the American Society of Appraisers)
    • APPENDIX 1A-3: NACVA Professional Standards as of May 31, 2002 (revised November 20, 2007)
    • APPENDIX 1A-4: Business Appraisal Standards as Promulgated by The Institute of Business Appraisers, Inc. Effective October 25, 2001 (Reprinted with Permission of The Institute of Business Appraisers, Inc.)
    • APPENDIX 1A-5: Internal Revenue Service Business Valuation Guidelines Release Date: July 27, 2006
    • APPENDIX 1A-6: Other Professional Standards of The American Institute of Certified Public Accountants
  • APPENDIX 1B: Comparisons of Professional Standards
    • APPENDIX 1B-1: BV Standards: The Positive Side
    • APPENDIX 1B-2: Comparison of SSVS No. 1 to the ASA Standards and USPAP
  • APPENDIX 1C: Business Valuation Reference Materials

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CHAPTER 2: OVERVIEW OF VALUATION TERMS AND METHODOLOGY

  • 200 INTRODUCTION
    • Why This Chapter Is Important
  • 201 VALUATION TERMS
    • What Is an Appraisal?
      • Appraisal versus Valuation.
    • What Is Value?
      • Fair Market Value.
      • Fair Value.
      • Investment Value.
      • Intrinsic Value.
      • Going Concern Value.
      • Liquidation Value.
      • Book Value.
    • How Does the Definition of Value Affect a Valuation Engagement?
  • 202 VALUATION PRINCIPLES
    • The Value of a Business Is Equal to the Present Worth of the Future Benefits of Ownership
    • Value Is Not Always a Single Number
    • Value Is Based on a Specific Point in Time--The Valuation Date
    • Applying the Principles to a Valuation Engagement
      • Defining the Subject Being Valued.
      • Defining Future Benefits.
  • 203 VALUATION APPROACHES AND METHODS
    • Valuation Approaches
      • Income Approach.
      • Market Approach.
      • Asset Based Approach.
      • Approaches versus Methods.
      • Types of Valuation Methods.
    • Discounted Future Returns and Capitalized Returns Methods
      • Discounted Future Returns Methods.
      • Capitalized Returns Methods.
      • Discount and Capitalization Rates.
      • Income Approach Valuation Methods.
    • Value Multiples Involving Guideline Data
      • What Are Value Multiples?
      • Applying Value Multiples Methods.
      • Price of Equity versus Market Value of Invested Capital (MVIC).
      • Multiple of Discretionary Earnings.
      • Rules of Thumb.
      • Company Specific Methods.
    • Underlying Asset Methods
      • Net Asset Value Method.
      • Liquidation Value Method.
      • Excess Earnings Method.
  • 204 SELECTING VALUATION METHODS
    • Authoritative Literature
      • Uniform Standards of Professional Appraisal Practice.
      • Revenue Ruling 59-60.
    • The Selection Process
    • Step 1--Consider the Requirements of the Engagement
      • Purpose of the Engagement and Definition of Value.
      • Legal Requirements.
      • Type of Ownership Interest.
      • Data Availability.
    • Step 2--Consider Industry and Company Factors
      • Industry Considerations.
      • Company Factors.
    • Step 3--Determine Whether Asset-based Methods and/or Earnings-based Methods Are Appropriate
    • Step 4--Consider Whether Guideline Data Is Available
    • Step 5--Choosing Asset-based Valuation Methods
    • Step 6--Choosing Earnings-based Methods
      • Considering Expected Future Net Cash Flow or Earnings.
      • Guideline Data and Other Considerations.
      • Benefit Streams.
      • Choosing a Benefit Stream.
      • Benefit Stream with Net Normalized Losses.
    • Case Study--Selecting Valuation Methods
      • Background.
      • Asset-based versus Earnings-based Methods.
      • Considering Value Multiples Methods Based on Guideline Data.
      • Considering Expected Future Net Cash Flow or Earnings.
    • Always Use Judgment
  • 205 VALUATION METHODS RELATING TO VERY SMALL BUSINESSES
    • What Is a Very Small Business?
      • Purchase and Sale Characteristics of Very Small Businesses.
    • Valuation Methods Relating to Very Small Businesses
      • Multiple of Discretionary Earnings Method.
      • Excess Earnings Method.
      • Guideline Transaction Method.
    • Methods That May Not Be Particularly Useful in Valuing Very Small Businesses
  • APPENDIX 2A: Glossary of Valuation Terms
  • APPENDIX 2B: Summary of Revenue Rulings
  • APPENDIX 2C: Factors to Consider in Selecting Valuation Methods
  • APPENDIX 2D: Notation System Used in This Guide

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CHAPTER 3: PRE-ENGAGEMENT PROCEDURES

  • 300 INTRODUCTION
    • Pre-engagement Procedures Are Also Important for Accountants and Analysts in Industry
    • What Are Pre-engagement Procedures?
  • 301 ENGAGEMENT ACCEPTANCE
    • What Data Should Be Considered and What Assessments Should Be Made before Accepting the Engagement?
      • Assessing Professional Competence.
      • Understanding the Nature and Risks of the Engagement.
      • Conflicts of Interest and Independence.
      • Selecting Valuation Methods.
      • Assessing Engagement Feasibility and Acceptance Considerations.
  • 302 PREPARING WORK PROGRAMS
    • What Is a Work Program?
    • How Should a Work Program Be Formatted?
    • Authors' Suggested Work Program--the FSP
  • 303 DEVELOPING TIME AND FEE BUDGETS
  • 304 ENGAGEMENT LETTERS
    • Establishing an Understanding with the Client
    • Content
    • Engagement Letters for Litigation Support Services
  • 305 PROCEDURES FOR INDUSTRY ACCOUNTANTS AND ANALYSTS
    • Evaluating Whether to Perform a Valuation Internally
    • Preparing Work Programs
    • Time and Resource Budgets
    • Communicating the Engagement Plan
      • Matters to Be Covered in the Communication.
  • 306 EXAMPLE OF PRE-ENGAGEMENT DOCUMENTATION
  • APPENDIX 3A: Illustrative Engagement Acceptance Form Business Valuation Engagement
  • APPENDIX 3B: Illustrative Engagement Letter

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CHAPTER 4: DATA GATHERING AND ANALYSIS

  • 400 INTRODUCTION
  • 401 DATA GATHERING
    • What Type of Data Should Be Gathered?
    • Collect Data That Is Available or Determinable as of the Valuation Date
    • Use a Checklist to Determine What Is Available
  • 402 INTERNAL COMPANY INFORMATION
    • Financial Information
    • Historical Financial Statements for Five Years
      • What If Financial Statements Have Not Been Prepared for the Last Five Years?
      • What If the Company Changed Its Legal Status during Recent Years?
      • What If the Company Being Valued Has Ownership Interests in Other Companies?
      • Interim Financial Statements.
    • Subsequent Events
      • Known or Knowable.
      • Subsequent Period Financial Statements.
    • Tax Returns
    • Prospective Financial Information
    • Other Financial Information
    • Preliminary Analysis of the Financial Information
    • Completeness of the Information
    • Usability of the Data
      • Consolidated Financial Statements May Be Inadequate.
      • What If the Financial Information Is Incomplete or Unusable?
    • Apparent Departures from GAAP
      • The Consultant's Responsibility for Detecting GAAP Errors.
      • Reviewing the Accountant's Report for GAAP Errors.
      • What If a CPA Has Not Been Associated with the Financial Statements?
    • Legal Documents Concerning Ownership Information
    • Operational Data
      • The Company's Website.
      • Site Visits.
      • Interviews.
      • Other Documents.
    • Get a Receipt for the Return of Client Documents
    • Assessing the Data Obtained
  • 403 ECONOMIC, INDUSTRY, AND MARKET DATA
    • What Type of Data Is Needed?
      • Relating the Need for External Data to the Method to Be Used.
      • Identifying Key External Factors.
      • Relating Key External Factors to Data Requirements.
      • Major Sources of External Data.
    • National Economic Data
      • Possible Sources of National Economic Data.
    • Regional and Local Economic and Demographic Data
    • Industry Data
      • General Industry Data.
      • Comparative Financial Data.
    • Assessing Economic and Industry Data
      • How Do Those Assessments Affect the Valuation?
    • Market Data
    • Electronic Resources
    • Applying Economic, Industry, and Market Data to the Valuation
  • 404 REVIEW AND ADJUSTMENT OF THE FINANCIAL STATEMENTS
    • A General Discussion about Adjustments
      • How Are Adjustments Posted and Presented?
      • Adjustments to the Balance Sheet and Income Statement May Not Be Linked.
    • GAAP Adjustments
      • Common GAAP Departures.
      • Adjusting Tax Returns.
      • A Special Problem--Unrecorded Revenue.
      • Comparability of Accounting Principles.
    • Normalization Adjustments
    • Adjustments Related to the Balance Sheet
      • Nonoperating Assets, Excess Assets, and Asset Shortages.
      • Related Party Loans.
    • Income Statement Adjustments
      • Owner's Compensation.
      • Benefits.
      • Family Members.
      • Nonoperating Income and Expenses.
      • Nonrecurring Income and Expenses.
      • Related Party Leases.
      • Fee Arrangements.
    • Income Taxes
      • Determining the Company's Taxes Based on the Tax Rates of a Known Purchaser.
      • Determination of Tax Provisions for Partnerships, Proprietorships, and S Corporations.
  • 405 FINANCIAL STATEMENT ANALYSIS
    • Comparing Financial Statement Data
    • Ratio Analysis
    • Peer Comparisons
    • Reviewing Prospective Information
  • 406 PROCEDURES FOR INDUSTRY ANALYSTS AND ACCOUNTANTS
    • Data Gathering
    • Data Analysis and Adjustment
  • 407 CASE STUDY ON BUSINESS VALUATION
    • Background
    • Financial Statement Adjustments
      • Income Statement Adjustments.
      • Balance Sheet Adjustments.
  • APPENDIX 4A: Suggested Sources of External Data
  • APPENDIX 4B: Sample Pages from Selected Data Sources
    • APPENDIX 4B-1: Sample Pages from Done Deals
    • APPENDIX 4B-2: Sample Page from BIZCOMPS
    • APPENDIX 4B-3: Sample Pages from Financial Studies of the Small Business
    • APPENDIX 4B-4: Sample Page from Pratt's Stats
  • APPENDIX 4C: Electronic Sources of Business Valuation Data
  • APPENDIX 4D: Illustrative Company and Industry Background Information Form
  • APPENDIX 4E: Case Study--Balance Sheet Data
    • APPENDIX 4E-1: SJM Restaurants, Inc. Balance Sheets with Common Size Data (Unadjusted) (Unaudited)
    • APPENDIX 4E-2: SJM Restaurants, Inc. Balance Sheet Adjustments (Unaudited)
    • APPENDIX 4E-3: SJM Restaurants, Inc. Normalized Balance Sheets with Common Size Data (Unaudited)
  • APPENDIX 4F: Case Study--Income Statement Data
    • APPENDIX 4F-1: SJM Restaurants, Inc. Income Statements with Common Size Data (Unadjusted) (Unaudited)
    • APPENDIX 4F-2: SJM Restaurants, Inc. Operating Expense Detail--(Unadjusted) (Unaudited)
    • APPENDIX 4F-3: SJM Restaurants, Inc. Income Statement Adjustments (Unaudited)
    • APPENDIX 4F-4: SJM Restaurants, Inc. Normalized Income Statements with Common Size Data (Unaudited)
  • APPENDIX 4G: SJM Restaurants, Inc. Normalized Financial Ratios (Unaudited)
  • APPENDIX 4H: National Economic Analyses
    • APPENDIX 4H-1: National Economic Analysis (2008-2010)
    • APPENDIX 4H-2: National Economic Analysis (2007-2009)
    • APPENDIX 4H-3: National Economic Analysis (2006-2008)
    • APPENDIX 4H-4: National Economic Analysis (2005-2007)
    • APPENDIX 4H-5: National Economic Analysis (2004-2006)
    • APPENDIX 4H-6: National Economic Analysis (2003-2005)
    • APPENDIX 4H-7: National Economic Analysis (2002-2004)

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CHAPTER 5: CAPITALIZED AND DISCOUNTED RETURNS METHODS

  • 500 INTRODUCTION
    • Basic Principle
    • Precondition for Using the Discounted Future Returns Or the Capitalized Returns Methods
    • Important Characteristics of the Valuation Methods Discussed in This Chapter
    • Overview of the Discounted Future Returns Method
    • Overview of the Capitalized Returns Method
    • Which Method Is More Appropriate?
    • How the Material in This Chapter Is Organized
  • 501 DETERMINING WHICH VARIABLE TO DISCOUNT OR CAPITALIZE
  • 502 THE DISCOUNTED FUTURE RETURNS METHOD
    • Conditions Appropriate for the Discounted Future Returns Method
    • Conditions That May Make a Discounted Returns Method Inappropriate
    • Steps That Should be Completed under a Discounted Future Returns Method
    • Step 1--Obtain (Or Prepare) a Financial Forecast
      • What Is a Financial Forecast?
      • How Does a Forecast Differ from a Projection?
      • Is the Prospective Information Used in a Discounted Future Returns Method a Forecast Or a Projection?
      • Factors to Consider in Preparing Or Reviewing a Forecast.
      • The Financial Forecast Should Be Based on Assumptions about Normalized Operations.
      • What To Do When Management and the Consultant Cannot Agree on the Forecast.
      • Key Factors and Assumptions Must Be Identified.
      • Assumptions about Revenue and Receivables.
      • Forecasting the Effects of Inflation.
      • Forecasting Growth of Product Sales Levels.
      • Forecasting a Specific Company's Revenue Growth.
      • Revenue Factors for Certain Industries.
      • Accounts Receivable.
      • Assumptions about Cost of Sales and Inventory.
      • Assumptions about Other Costs.
      • Assumptions about Property and Equipment and Related Depreciation.
      • Assumptions about Debt and Equity.
      • Assumptions about Income Taxes.
      • The Key Factors and Assumptions Should Be Reasonable.
      • The Forecast Period Should Extend through the Year after a Stabilized Level of Operations Is Obtained.
      • Forecasting the Terminal Year.
      • Total Number of Years to Be Included in a Forecast.
      • If Possible, the Forecast Should Be Approved by the Responsible Party.
      • Do CPA Valuation Consultants Have Additional Presentation and Reporting Responsibilities for Forecasts?
      • The Consultant Should Consider Obtaining Other Resources on Preparing Forecasts.
      • Negative or Marginally Positive Forecasted Operating Results.
    • Illustration of a Financial Forecast
      • A Simplified Forecast Is Used.
      • Important Assumptions Made in Preparing the SJM Forecast.
    • Step 2--If Necessary and Applicable, Adjust the Financial Forecast for Any GAAP Differences or Normalization Adjustments
      • GAAP Adjustments.
      • Other Adjustments.
    • Step 3--If Necessary, Recompute (or Compute) Tax Provisions for Each Year In the Financial Forecast
    • Step 4--Adjust the Net Earnings Amounts for Each Future Year to Net Cash Flow (If Appropriate)
      • Formula for Converting Net Earnings to Net Cash Flow.
      • Add Back Noncash Charges.
      • Cash Receipts and Disbursements That Result from Balance Sheet Transactions.
    • Step 5--Estimate the Discount Rate
    • Step 6--Estimate the Value of the Company during the Terminal Year
      • The Gordon Growth Model.
    • Step 7--Discounting Future Operations to Arrive at an Estimate of Value
      • Discounting Techniques.
      • The Mid-year Discounting Convention.
      • Applying the Mid-year Convention by Specifying the Number of Months.
      • Using the Gordon Model with the Mid-year Convention.
      • Applying the Mid-year Convention by Modifying the Discount Factor.
    • Step 8--Perform "Sanity Checks"
    • Step 9--Adjust the Value for the Impact of Nonoperating Assets, Excess Assets, or Asset Shortages (If Necessary)
    • Step 10--Adjust the Estimated Value for Marketability Discounts, Control Premiums, or Minority Interest Discounts (If Necessary)
    • Illustration of the Discounted Net Cash Flow Method Using SJM Restaurants, Inc.
      • Determination of SJM's Terminal Value.
      • Determination of SJM's Operating Value.
      • Adding Back Nonoperating Assets.
  • 503 THE CAPITALIZED RETURNS METHOD
    • Steps That Should Be Completed under a Capitalized Returns Method
    • Step 1--Obtain (or Prepare) Financial Statements for a Representative Time Period
    • Step 2--If Necessary and Applicable, Adjust the Financial Statements for any GAAP Differences or Normalization Adjustments
    • Step 3--If Necessary, Recompute (or Compute) State and Federal Income Taxes
      • The Company's Tax Rates as of the Valuation Date Should Be Used.
      • Determining the Company's Taxes Based on the Tax Rates of a Known Purchaser.
      • Determination of Tax Provisions for Pass-through Entities.
    • Step 4--Adjust the Benefit Stream from Net Earnings to Net Cash Flow (If Necessary)
    • Step 5--Estimate the Cap Rate
    • Step 6--Determine the Period of Operations That Should Be Capitalized
      • The Most Recent Operations.
      • The Forecasted Next Year's Operations.
      • Average of Operations for Several Recent Years.
      • Net Profit Margin.
    • Step 7--Perform the Capitalized Returns Computation
      • Negative or Marginally Positive Cash Flow or Earnings.
    • Step 8--Perform "Sanity Checks"
    • Step 9--Determine the Appropriate Value for Nonoperating Assets, Excess Assets, and Asset Shortages (If Required)
      • Application of Step 9 (When Required).
    • Step 10--Adjust the Estimated Value for Marketability Discounts, Control Premiums, or Minority Interest Discounts (If Necessary)
    • The Capitalized Net Cash Flow Method Related to SJM Restaurants, Inc.
  • 504 DISCOUNT AND CAPITALIZATION RATES
    • Discount Rate Defined
    • Impact of the Standard of Value
    • Capitalization Rate Defined
    • Relationship Between Discount Rate and Capitalization Rate
  • 505 THE CAPITAL ASSET PRICING MODEL (CAPM)
    • Definition of Beta
    • Why the Discount Rate Developed by CAPM Is Applicable to Net Cash Flow
    • Steps to Implement the CAPM
      • Step 1--Risk-free Investment Rate.
      • Step 2--The Equity Risk Premium.
      • Step 3--Modify the Equity Risk Premium by Beta.
      • Illustration of the Industry-adjusted Equity Risk Premium per Guideline Companies Calculation.
      • Step 4--Risk Adjustment for Size in Relation to the Guideline Companies.
      • Step 5--Other Risk Factors in Relation to the Guideline Companies.
    • Summary of Capital Asset Pricing Model
    • Illustration of the Capital Asset Pricing Model for SJM Restaurants, Inc.
    • Discussion of the SJM Adjustment Factors in Exhibit 5-20
      • Some of the Components of the CAPM Method Have Been Previously Discussed.
      • Size-related Risk Adjustment.
      • Adjustments for Other Risk Factors.
  • 506 THE BUILD-UP METHOD FOR ESTIMATING THE DISCOUNT RATE AND THE RELATED CAP RATE
    • The Model
    • Discount Rate Is Applicable to After-tax Net Cash Flow.
    • Steps 1 and 2--Building up the Average Market Return
    • Step 3--Industry Risk Premium
    • Step 4--Risk Premium for Size
    • Step 5--The Specific Company Adjustment
      • Butler Pinkerton Model.
    • An Illustration of the Complete Build-up Computations for SJM Restaurants, Inc.
    • Discussion of the SJM Adjustment Factors in Exhibit 5-24
      • Some of the Components of the Build-up Method Have Been Previously Discussed.
      • Adjustments for Other Risk Factors.
  • 507 USING DUFF & PHELPS RISK PREMIUM REPORT DATA
    • Introduction to Duff & Phelps Studies
    • The Duff & Phelps Risk Premium Report Size Study Data
    • Using the Duff & Phelps Risk Premium Report Size Study in the Build-Up Method
    • Using the Duff & Phelps Risk Premium Report Size Study in the CAPM Method
    • Size Smaller Than the Smallest Size Premium Group
  • 508 CONVERTING A NET CASH FLOW DISCOUNT OR CAPITALIZATION RATE TO A RATE APPLICABLE TO SOME OTHER VARIABLE
  • 509 THE WEIGHTED AVERAGE COST OF CAPITAL (WACC)
  • 510 CHARACTERISTICS OF THE VALUES DETERMINED IN THIS CHAPTER
    • Minority versus Controlling Interests
      • Financial Information Adjusted Only for Normalization Factors Usually Relates to Minority Interests.
      • Estimating a Minority versus Control Value.
    • Marketability of the Company's Stock
    • Use of the Discounted and Capitalized Returns Method
  • APPENDIX 5A: Excerpt from Duff & Phelps, LLC Risk Premium Report 2008
  • APPENDIX 5B: Interest Rates: Money and Capital Markets 1998-2008
  • APPENDIX 5C: Subchapter S Corporation Valuation--A Simplified View
  • APPENDIX 5D: The ?Real' S Corp Debate: Impact of Embedded Tax Rates from Public Markets

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CHAPTER 6: VALUATION METHODS BASED ON GUIDELINE COMPANY DATA

  • 600 INTRODUCTION
    • Terminology
      • Measures of Central Tendency or Dispersion.
    • Use of These Methods as a "Sanity Check" for the Results of Other Methods
    • Common Problems in the Use of Guideline Companies Methods
    • Resources Needed by the Valuation Consultant
    • The Importance of a Guideline Company's Stock Price
  • 601 OVERVIEW OF THE GUIDELINE METHODS VALUATION PROCESS
    • Comparison of this Work Program to the Capitalized Returns Work Program
    • Steps 1 through 3--Obtaining and Adjusting Financial Statements of the Company Being Valued
      • Obtaining Financial Information about the Company Being Valued.
      • Adjusting the Historical Financial Statements for GAAP Differences or Normalization Adjustments.
      • Recompute (or Compute) State and Federal Income Taxes.
    • Step 4--Identifying Guideline Data
      • What Is Potential Guideline Data?
      • Identifying Major Competitors.
      • Determining the Appropriate SIC/NAICS Codes.
      • Identification and Analysis of Guideline Data.
      • Must a Guideline Company Be Identical to the Company Being Valued?
      • Documentation of the Selection and Analysis of Guideline Data.
      • Illustrations of Guideline Company and Guideline Transaction Selections and Analysis.
    • Steps 5 and 6--Adjusting Financial Information (Including Computation of the Income Tax Provision) for Each Guideline Public Company and Guideline Transaction
      • Sources of Information about Potential Guideline Data.
      • Adjusting Financial Information of Each Guideline Company.
      • Pretax versus After-tax Adjustments.
      • Types of Adjustments That May Be Required.
      • Recomputing (or Computing) the State and Federal Income Taxes of Each Company.
      • Illustrations of Financial Information for the Guideline Methods.
    • Steps 7 and 8--Selecting the Appropriate Value Multiples
      • Determination of the Appropriate Stock Price.
      • Determination of the Measure of Operating Results for the Appropriate Time Period or Financial Position as of the Valuation Date.
      • Price/Earnings Multiple.
      • Price/Dividend Multiple.
      • Price/Revenues Multiple.
      • Price/Book Value Multiple.
      • Price/Net Asset Value Multiple.
      • Characteristics of Guideline Data When the P/NAV Method Is Used.
      • Market Value of Invested Capital (MVIC) Multiples.
      • Deciding How the Time Period Will Be Determined.
      • Operations for the Most Recent 12 Months (or Four Quarters).
      • Operations for the Most Recent Fiscal Year.
      • Projected Operations.
      • Average of Historical Operations.
    • Steps 9 through 12--Application of Guideline Methods
      • Computing Multiples Based on Adjusted Financial Information.
      • Determining the Appropriate Value Multiples.
      • Adjusting the Selected Value Multiple.
      • Documentation of Value Multiple Computations.
      • Illustrations of Value Multiple Calculations Using SJM Restaurants, Inc.
    • Steps 13 through 16--Applying Final Adjustments and "Sanity Checks"
      • Determining Which Values Should Be Accorded How Much Weight.
      • Performing "Sanity Checks"
      • Determining the Appropriate Value for Nonoperating Assets, Excess Assets, and Asset Shortages (If Required).
      • Adjusting the Estimated Value for Marketability Discounts, Control Premiums, or Minority Interest Discounts (If Necessary).
  • 602 THE GUIDELINE PUBLIC COMPANIES METHOD
    • Under What Circumstances Should the Valuation Consultant Consider Using the Guideline Public Companies Method?
      • Company Characteristics.
    • Using SIC/NAICS Codes to Identify Potential Guideline Public Companies
      • Securities and Exchange Commission's Website.
      • Standard & Poor's Register--Public Corporations.
      • Standard & Poor's Corporation Records.
      • On-line Databases.
    • Using Other Sources to Identify Potential Guideline Public Companies
    • Narrowing the List of Potential Guideline Public Companies
    • Obtaining Information about the Potential Guideline Public Companies
      • EDGAR.
    • Illustration of the Guideline Public Companies Method Using SJM Restaurants, Inc.
      • Guideline Public Companies Selection and Analysis--Step 4.
      • Description of the Four Guideline Public Companies.
      • Financial Information for the Guideline Public Companies--Steps 5 and 6.
      • Value Multiple Calculations--Steps 7 through 12.
      • Applying Final Adjustments and "Sanity Checks"--Steps 13 through 16.
  • 603 THE GUIDELINE TRANSACTION (MERGER AND ACQUISITION) METHOD
    • Sources of Transaction Data
      • Done Deals
      • BIZCOMPS
      • Pratt's Stats
      • Public Stats.
      • Mergerstat/BVR Control Premium Study
      • The IBA Market Database.
      • Financial Post Crosbie: Mergers & Acquisition in Canada.
      • ZEPHYR.
      • Mergerstat Review.
      • The Cogent Valuation M&A Database.
      • GF Data Resources.
      • Understanding the Transaction Databases.
    • Choosing a Multiple from the Database Results
    • Cautions of Using Guideline Transaction Data
      • Definition of Price.
      • Definition and Reliability of Earnings.
      • Reported Revenues.
      • Similarity of Guideline Companies.
      • Acceptable Number of Guideline Transactions.
      • Level of Reliance.
    • Illustration of Guideline Transaction Method Using SJM Restaurants, Inc.
      • Guideline Transaction Selection and Analysis--Step 4.
      • Financial Information for the Guideline Transaction Target Companies--Steps 5 and 6.
      • Value Multiple Calculations--Steps 7 through 12.
      • Applying Final Adjustments and "Sanity Checks"--Steps 13 through 16.
  • 604 MARKET VALUE OF INVESTED CAPITAL PROCEDURE
    • Using Invested Capital Techniques to Value Equity
  • 605 CHARACTERISTICS OF THE VALUES DETERMINED IN THIS CHAPTER
    • Minority versus Controlling Interests
      • Basing the Type of Value on the Guideline Company's Price.
      • Unadjusted Financial Information Usually Relates to Minority Interests.
      • Determining a Minority versus Control Value.
      • Marketability of the Company's Stock
      • Use of Valuation Methods That Are Based on Guideline Data
  • APPENDIX 6A: Case Study Information--Total Entertainment Restaurant Corporation
    • APPENDIX 6A-1: Total Entertainment Restaurant Corporation Consolidated Statements of Operations
    • APPENDIX 6A-2: Total Entertainment Restaurant Corporation Consolidated Statements of Operations--Percent of Total Operating Revenue
    • APPENDIX 6A-3: Total Entertainment Restaurant Corporation Consolidated Balance Sheets
    • APPENDIX 6A-4: Total Entertainment Restaurant Corporation Consolidated Balance Sheets--Percent of Assets
  • APPENDIX 6B: Case Study Information--J. Alexander's Corporation and Subsidiaries
    • APPENDIX 6B-1: J. Alexander's Corporation and Subsidiaries Consolidated Statements of Income
    • APPENDIX 6B-2: J. Alexander's Corporation and Subsidiaries Consolidated Statements of Income--Percent of Total Operating Revenue
    • APPENDIX 6B-3: J. Alexander's Corporation and Subsidiaries Consolidated Balance Sheets
    • APPENDIX 6B-4: J. Alexander's Corporation and Subsidiaries Consolidated Balance Sheets--Percent of Total Assets
  • APPENDIX 6C: Case Study Information--BUCA, Inc. and Subsidiaries
    • APPENDIX 6C-1: BUCA, Inc. and Subsidiaries Consolidated Statements of Operations
    • APPENDIX 6C-2: BUCA, Inc. and Subsidiaries Consolidated Statements of Operations--Percent of Total Operating Revenue
    • APPENDIX 6C-3: BUCA, Inc. and Subsidiaries Consolidated Balance Sheets
    • APPENDIX 6C-4: BUCA, Inc. and Subsidiaries Consolidated Balance Sheets--Percent of Total Assets
  • APPENDIX 6D: Case Study Information--Mexican Restaurants, Inc. and Subsidiaries
    • APPENDIX 6D-1: Mexican Restaurants, Inc. and Subsidiaries Consolidated Statements of Income
    • APPENDIX 6D-2: Mexican Restaurants, Inc. and Subsidiaries Consolidated Statements of Income--Percent of Total Operating Revenue
    • APPENDIX 6D-3: Mexican Restaurants, Inc. and Subsidiaries Consolidated Balance Sheets
    • APPENDIX 6D-4: Mexican Restaurants, Inc. and Subsidiaries Consolidated Balance Sheets--Percent of Total Assets

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CHAPTER 7: UNDERLYING ASSETS, EXCESS EARNINGS, AND OTHER METHODS

  • 700 INTRODUCTION
  • 701 UNDERLYING ASSETS METHODS
    • What Are Underlying Assets Methods?
    • When Should Underlying Assets Methods Be Applied?
      • NAV Method.
      • LV Method.
      • Excess Earnings Method.
    • Engagement Considerations When an Underlying Assets Method Is Used
      • Deciding Whether an Asset Appraiser Is Needed.
      • Determining the Qualifications of an Asset Appraiser.
      • What If the Client Will Not Hire an Appraiser?
      • Defining the Premise of Value.
      • Determining Whether Special Procedures Are Required.
    • Reporting Considerations
  • 702 NET ASSET VALUE METHOD
    • Overview of the Method
    • Step 1--Obtain the Company's Balance Sheet
      • When a Tax Basis Balance Sheet May Be More Appropriate.
      • When the GAAP Basis Balance Sheet May Be More Appropriate.
    • Step 2--Adjusting the Balance Sheet for Omitted Assets and Liabilities or When the Balance Sheet Date and the Valuation Date Differ
      • Omitted Assets and Liabilities.
      • Intangible Assets and Contingent Liabilities.
    • Steps 3 and 4--Adjusting Assets and Liabilities to Appraised Value
    • Step 5--Make Income Tax Adjustments (If Appropriate)
      • Special Considerations If There Is a Known Buyer.
      • Disclose Tax Assumptions in the Valuation Report.
    • Step 6--Adjusting for Senior Equity Securities
    • Step 7--Perform "Sanity Checks" to Determine the Reasonableness of the Estimated Value
    • Step 8--Adjust for Applicable Discounts
    • Invested Capital versus Equity
    • Case Study
  • 703 LIQUIDATION VALUE METHOD
    • Overview of the Method
    • Steps 1 and 2--Obtain the Company's Balance Sheet and Adjust It (If Necessary)
    • Step 3--Determining the Approach to Liquidation
    • Step 4--Determine the Gross Proceeds from Liquidation
    • Step 5--Reduce Gross Proceeds for Direct and Indirect Expenses
    • Step 6--Add or Subtract Operating Profits or Losses during the Liquidation Period
    • Step 7--Subtract the Liquidation Values of Liabilities
    • Step 8--Add or Subtract Income Tax Provision or Benefit
    • Step 9--Subtract the Liquidation Preference Value of any Senior Equity Securities
    • Step 10--Discount the Net Proceeds to Present Value
    • Step 11--Determine the Need for Discounts
    • Adjustments for Invested Capital Valuations
    • Case Study
    • Using the LV Method in Going Concern Situations
  • 704 EXCESS EARNINGS METHOD
    • Conceptual Basis for the Method
    • Applying the Method
    • Step 1--Obtain the Company's Financial Statements and Make GAAP and Normalization Adjustments
    • Step 2--Determine the Value of the Company's Net Tangible Assets
    • Step 3--Determine a Reasonable Rate of Return on the Company's Net Tangible Assets
      • Building up a Market Rate with Financial Market Data.
      • Using Prevailing Industry Rates.
    • Step 5--Calculate Excess Earnings
    • Step 6--Determine an Excess Earnings Capitalization Rate
    • Steps 7 and 8--Capitalize the Company's Excess Earnings and Add This Amount to Its Net Tangible Assets
    • Step 9--Perform "Sanity Checks" to Determine the Reasonableness of the Estimated Value
    • Step 10--Determine an Appropriate Value for Excess Assets, Nonoperating Assets or Asset Shortages (If Necessary)
    • Step 11--Determine the Need for Minority Interest Discounts or Other Discounts
    • Case Study on the Excess Earnings Method
    • Variation on the Excess Earnings Method
    • Applying the Excess Earnings Method on an Invested Capital Basis
      • Rates of Return Using the Invested Capital Basis.
    • Cautions about Using the Excess Earnings Method
      • Limitations of the Method.
      • Common Errors in Applying the Excess Earnings Method.
  • 705 MULTIPLE OF DISCRETIONARY EARNINGS METHOD
    • Characteristics of the Method
    • Applying the Method
    • Step 1--Determine the Company's Normalized Pretax Earnings for an Appropriate Period
    • Step 2--Add the Owner's Total Compensation and Benefits
    • Step 3--Add Interest Expense and Any Noncash Charges
    • Step 4--Deduct Interest Income
    • Step 5--Determine an Appropriate Valuation Multiple
      • Basing the Multiple on Guideline Company Data.
      • Developing a Multiple Based on Business Risk Characteristics.
      • Stability of Historical Earnings.
      • Business and Industry Growth Prospects.
      • Type of Business.
      • Quality of Location and Facilities.
      • Stability and Skills of Employees.
      • Competition.
      • Diversification of Products, Services, and Geographic Markets.
      • Desirability and Marketability for Type of Business.
      • Depth of Management.
      • Availability of Capital and/or Terms of Sale.
      • Measuring the Risk Characteristics.
    • Step 6--Multiply Discretionary Earnings by the Factor in Step 5 to Determine the Value of the Company's Operating Assets
    • Step 7--Perform "Sanity Checks" to Determine the Reasonableness of the Value Determined in Step 6
    • Step 8--If Necessary, Adjust the Value Determined in Step 6 for Net Working Capital, Excess Assets, Nonoperating Assets, and Debt
    • Step 9--Determine if the Value Computed Should Be Adjusted for Minority Interest Discounts or Other Discounts
    • Limitations of the Multiple of Discretionary Earnings Method
    • Case Study
  • 706 RULES OF THUMB
    • Limitations of Rules of Thumb
  • 707 COMPANY SPECIFIC METHODS
    • Transactions in the Company's Stock
    • Enforceable Contracts
  • APPENDIX 7A: Revenue Ruling 68-609
  • APPENDIX 7B: Income Tax Considerations for the Net Asset Value and Liquidation Value Methods
  • APPENDIX 7C: The Problem with Rules of Thumb in the Valuation of Closely-held Entities
  • APPENDIX 7D: Value in Use

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CHAPTER 8: WRAPPING UP THE ENGAGEMENT

  • 800 INTRODUCTION
    • Many Engagement Wrap-up Procedures Should Be Performed by Both Valuation Consultants and Analysts in Industry
    • What Specific Procedures Should Be Performed during This Phase of an Engagement?
  • 801 SELECTING A SINGLE VALUE FROM A RANGE OF VALUES
    • Weighting of Values Determined Using Two or More Methods
    • Mathematical versus Subjective Weightings
      • Description of the Mathematical Weighting Technique.
      • Description of the Subjective Weighting Technique.
      • What Does Revenue Ruling 59-60 Say about the Mathematical Weighting Technique?
      • Does This Imply That Mathematical Weights Should Not Be Used?
      • Special Disclosures That Should Be Made When the Mathematical Weighting Technique Is Used.
      • Which Technique Should Be Used by Valuation Consultants?
    • Factors That Should Be Considered in Determining the Relative Weightings of Valuation Methods
      • The Nature of the Business and Its Assets.
      • The Purpose of the Valuation and the Definition of Value.
      • The Premise or Premises of Value and Ownership Characteristics.
      • Quantity and Quality of Available Data.
      • Summary of Factors to Consider in Weighting the Results of More Than One Valuation Method.
    • Illustration of Weighting Using SJM Restaurants, Inc.
      • Discounted Net Cash Flow Method.
      • Guideline Companies Valuation Methods.
      • Excess Earnings Valuation Method.
      • Arriving at a Single Value Estimate.
  • 802 APPLYING "SANITY CHECKS" TO THE ESTIMATES OF VALUE
    • Several Types of Sanity Checks Might Be Used
      • Rechecking the Logic and Math.
      • Comparing the Company Being Valued to Other Companies.
      • Testing the Reasonableness of the Value from a Buyer's Perspective.
      • Computing the Payback Period.
      • Illustration of the Payback Period Computation.
      • Arriving at a Conclusion about a Payback Period.
      • Testing the Reasonableness of a Value Estimate from an Adversary Perspective.
  • 803 APPLICATION OF PREMIUMS AND/OR DISCOUNTS
    • Types of Premiums and Discounts
    • Control Premiums and Minority Interest Discounts
      • Controlling versus Minority Interests.
      • Comparison of Control Premium to Minority Interest Discount.
      • Distinguishing between a Controlling and a Minority Interest.
      • Factors Affecting the Degree of Control That Can Be Exercised.
      • Cumulative versus Noncumulative Voting.
      • Contractual Restrictions.
      • Effects of Regulation, Including State Statutes.
      • Effects of Distribution of Ownership.
      • Summary of Factors Affecting Degree of Control.
      • Quantifying Minority Interest Discounts and Control Premiums.
      • Determining Whether a Control Premium or Minority Interest Discount Is Needed.
      • Determining the Level of a Control Premium or a Minority Interest Discount.
    • Discounts for Lack of Marketability
      • Distinction between Minority Interest Discount and Discount for Lack of Marketability.
      • Need for Such Discounts in Valuing Closely Held Companies.
      • Factors Affecting the Required Level of a Discount for Lack of Marketability.
    • Studies Designed to Determine the Required Level of a Discount for Lack of Marketability
      • Two Types of Empirical Studies.
      • Restricted ("Letter") Stock Studies.
      • Relationship between Size of Block and Discount for Lack of Marketability.
      • Using Restricted Stock Studies to Estimate a Discount.
      • Studies of Transactions in Closely Held Stocks Prior to IPOs.
      • Acceptance of the Studies by the Courts.
      • Cost of Flotation.
      • Quantitative Marketability Discount Model (QMDM).
      • Selecting a Discount for Lack of Marketability.
      • Recognition by IRS and the Courts of Discount for Lack of Marketability.
    • Discount for Lack of Voting Rights
      • Swing Vote Premium.
    • Other Discounts
    • Business Valuation Discounts and Premia Databases
    • Applying Discounts and Premiums to SJM Restaurants, Inc.
      • Discounted Net Cash Flow Method.
      • Guideline Public Companies Method.
      • Guideline Transaction Method.
      • Excess Earnings Method.
      • Determining the Value of a Specific Ownership Interest.
  • 804 OBTAINING A REPRESENTATION LETTER
    • Reasons for Obtaining a Representation Letter
    • What If a Representation Letter Cannot Be Obtained?
    • Illustrative Representation Letter
  • 805 WORKPAPER DOCUMENTATION, PERFORMING THE APPROPRIATE WORKPAPER REVIEWS, AND RESOLVING PROFESSIONAL DISPUTES
    • Workpaper Documentation
    • Engagement Review
      • Performing the Engagement Review.
      • Engagement Review Checklist.
    • Resolving Professional Disputes
  • 806 PERFORMING ADDITIONAL ADMINISTRATIVE MATTERS DURING THE WRAP-UP PHASE
  • 807 PROCEDURES FOR INDUSTRY ACCOUNTANTS AND ANALYSTS
    • Some Wrap-up Procedures Are Different from Those Previously Discussed
      • Representation Letters.
      • Reviews of Workpapers and Report Drafts.
      • Discussing the Valuation Results with the Appropriate Level of Management.
      • Summary of Engagement Wrap-up Procedures.
  • 808 OPPORTUNITIES TO PROVIDE ADDITIONAL SERVICES
    • Divorce-related Services
    • Litigation Support Services
    • Estate Planning Services
    • Services Related to Buying and Selling a Business
  • APPENDIX 8A: Control Premiums and Minority Discounts: The Need for Specific Economic Analysis from Shannon Pratt's Business Valuation Update
  • APPENDIX 8B: Quantitative Marketability Discount Model: Discussion and Illustrative Case Study Example

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CHAPTER 9: VALUATION REPORTS

  • 900 INTRODUCTION
  • 901 GENERAL GUIDELINES FOR ALL REPORTS
    • Professional Requirements
    • AICPA Standards
      • Statement on Standards for Valuation Services.
      • Standards for Consulting Services.
    • ASA Guidelines
    • The Appraisal Foundation Standards
    • ASA Business Valuation Committee Standards
    • IBA Business Appraisal Standards
    • NACVA Professional Standards
    • Other Guidelines
      • IRS Guidelines.
    • Applying Authoritative Guidance to Litigation Services and Expert Testimony
      • Do the AICPA Standards Apply to Litigation Service Engagements?
      • ASA Requirements.
      • The Appraisal Foundation Requirements.
      • IBA Requirements.
      • Federal Rules of Civil Procedure.
      • Other Considerations for Litigation Services Engagements.
  • 902 FINANCIAL INFORMATION IN VALUATION REPORTS
    • General Considerations for Presenting Financial Information
      • Location of the Financial Information.
      • Labeling the Financial Information.
    • Presenting Historical Financial Information
      • What Financial Information Should Be Presented?
      • How Many Years Should Be Presented?
      • How Much Detail Should Be Presented?
    • Presenting Normalized Financial Data and Adjustments
    • Presenting Prospective Financial Information
    • CPA's Reporting Responsibilities for Historical Financial Information in Valuation Reports
      • Source of the Financial Information.
      • Were Financial Statements Submitted?
      • Intended Use of the Valuation Report.
      • Valuation Reports Used for Litigation Services.
      • Valuation Reports for General Third-party Use.
      • Valuation Reports for Restricted Use.
      • What Constitutes Restricted Use?
    • CPA's Reporting Responsibilities for Prospective Financial Information in Valuation Reports
    • CPA's Reporting Responsibilities for Normalized Financial Statements
    • Non-CPA Valuation Consultants' Responsibilities for Financial Information Presented in Valuation Reports
    • Use of Financial Statements Accompanied by Another CPA's Report
  • 903 DETAILED, WRITTEN REPORTS
    • Report Contents
    • Introduction
    • Company Background and History
    • Economic and Industry Data
    • Financial Analysis of the Company
      • Financial Statement Data.
    • Search for Guideline Companies
    • Valuation Methods
    • Valuation Analysis/Calculations
    • Valuation Conclusion
    • Addenda
      • Statement of Independence and Objectivity.
      • List of the Consultant's Qualifications.
      • Assumptions and Limiting Conditions.
      • Description of Data Sources.
      • Other Addenda Material.
    • Signatures
  • 904 SUMMARY REPORTS
    • Authoritative Guidance
      • When Are Summary Reports Appropriate?
      • When Are Summary Reports Not Appropriate?
      • Contents.
  • 905 CALCULATION REPORTS FOR CPA VALUATION CONSULTANTS
    • Authoritative Guidance
  • 906 ORAL REPORTS
  • 907 REPORTING BY INDUSTRY ACCOUNTANTS/ANALYSTS
    • How Do Internal Reports Differ from Consultants' Reports?
    • Contents of Internal Reports
      • Introduction.
      • Company, Economic, and Industry Data.
      • Financial Analysis of the Company.
      • Valuation Methods.
      • Valuation Analysis/Calculations.
      • Valuation Conclusion.
      • Other Comments.
      • Addenda.
  • 908 WRITING GOOD VALUATION REPORTS
    • What Makes a Report Well-written?
    • Common Errors in Valuation Reports
      • Failure to Follow the Standard of Value.
      • Inconsistencies.
      • Arithmetic Errors.
      • Insufficient Support.
      • Overreliance on Rules of Thumb.
      • Inadequate Data.
      • Failure to Consider Guideline Companies Methods.
  • 909 UPDATING VALUATION REPORTS
    • Valuation Considerations
    • Reporting
  • APPENDIX 9A: Sample Detailed Valuation Report--SJM Restaurants, Inc.
  • APPENDIX 9B: Sample Summary Report--SJM Restaurants, Inc.
  • APPENDIX 9C: Example Worksheets from PPC's Business Valuation Specialistr

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CHAPTER 10: ESTATE AND GIFT TAX VALUATIONS

  • 1000 INTRODUCTION
    • The Valuation Consultant's Role
      • Filing Estate or Gift Tax Returns.
      • Tax Dispute Resolution.
    • Burden of Proof
      • Estate Planning.
    • Developing an Estate and Gift Tax Valuation Practice
  • 1001 OVERVIEW OF ESTATE AND GIFT TAXATION
    • Determining the Taxable Estate
      • Total Gross Estate (Line 1).
      • Total Allowable Deductions (Line 2).
      • Taxable Estate (Line 3c).
      • Adjusted Taxable Gifts (Line 4).
    • Calculating the Estate Tax
      • Tentative Tax on the Amount on Line 5 (Line 6).
      • Total Gift Tax Payable with Respect to Gifts Made by the Decedent after December 31, 1976 (Line 7).
      • Applicable Credit Amount (Line 11).
      • Net Estate Tax (Line 16).
      • Sample Tax Calculation.
    • Filing Form 706
      • Due Date.
    • Determining Taxable Gifts
      • Gifts Defined.
      • Gift Splitting.
    • Filing Form 709
      • Disclosing Discounts.
      • Due Date.
    • Recipient's Tax Basis of a Bequest or a Gift
      • Relationship of Fair Market Value to the Donor's Tax Basis.
      • Calculating a Recipient's Tax Basis.
      • Considerations When Fair Market Value Exceeds the Donor's Tax Basis.
      • Avoid Gifting Property When Fair Market Value Is Less Than the Donor's Tax Basis.
    • State Inheritance Taxes
    • Penalties for Undervaluation on Estate and Gift Tax Returns
      • Penalties against Taxpayers.
      • Penalties against Appraisers.
      • Penalties against Preparers.
  • 1002 VALUATION OF BUSINESS INTERESTS INCLUDED IN ESTATE OR GIFT TAX RETURNS
    • Definition of Value
      • Statutory Definition.
      • Cash or Cash Equivalent Price.
      • Willing Buyers and Sellers.
      • Prevailing Economic and Market Conditions.
      • Valuation of Unlisted Securities.
      • Guideline Company Transactions.
    • Valuation Date
      • Valuation Date for Estates.
      • Valuation Date for Gifts.
    • IRS Rulings and Regulations
      • The Hierarchy of Tax Rules.
      • Revenue Ruling 59-60.
      • Revenue Ruling 65-193.
      • Revenue Ruling 68-609.
      • Revenue Ruling 77-287.
      • Revenue Ruling 80-213.
      • Revenue Ruling 83-120.
      • Revenue Ruling 93-12.
    • Premiums and Discounts
      • Control Premiums and Minority Interest Discounts.
      • Controlling Interests.
      • Minority Interests.
      • Swing Blocks.
      • Discounts for Lack of Marketability.
      • Discount When the Decedent Was a Key Person.
      • Blockage Discounts.
      • Environmental Liability Discount.
      • Fractional Interests Discounts.
      • Disclosing Discounts.
    • Company Specific Methods
      • Previous Sales of Shares in a Closely Held Business.
      • Buy-sell Agreements.
      • Liquidation Value.
    • Gifts with Restrictions and Adjustment Clauses
      • Restrictions.
      • Valuation Adjustment Clauses.
    • Case Law
      • Estate of Jung.
      • Estate of Fleming.
      • Estate of Davis.
      • Eisenberg v. Commissioner.
      • Estate of Simplot.
  • 1003 ESTATE FREEZES
    • Overview
    • Estate Freeze Law and Regulations
    • Valuation Considerations
    • Valuing Preferred Stock
      • IRC Chapter 14 Departs from Strict Fair Market Value Standard.
      • Dividends.
      • Revenue Ruling 83-120.
      • Identify Publicly Traded Preferred Stock Issues.
      • Compare the Company Being Valued to the Identified Publicly Traded Preferred Stock Issues.
      • Determine the Appropriate Dividend Yield and Dividend and Interest Coverage Ratio for the Company Being Valued.
    • An Illustration of Valuing Preferred Stock in an Estate Freeze Recapitalization
    • Valuing a Common Stock Interest
      • Minimum Value.
    • Reverse Freeze Partnerships
  • 1004 RECENT GIFT AND ESTATE COURT DECISIONS
    • Year 2008 Court Decisions
      • Premise of Value.
    • Court Decisions from Prior Years
      • Valuation Methods.
      • Valuation Discounts.
      • No Expert Valuation.
      • Valuation Premiums.
      • Valuation Date.
      • Trapped-in Capital Gains.
      • Tax Affecting.
      • Weighting of Approaches and Methods.
      • Evidence.
      • Buy-sell Agreements.
      • Burden of Proof.
      • Other Topics.
  • 1005 SUMMARY
    • Possibility of Challenge
    • Preference for Guideline Companies as the Basis for Value
      • Selecting a Valuation Method.
    • Transactions between Family Members
  • APPENDIX 10A: "IRS Publishes Final Regulations for ?Adequate Disclosure' of Gifts," from Shannon Pratt's Business Valuation Update
  • APPENDIX 10B: "Special Report: IRS Adequate Disclosure Final Regulations Respond to Extensive Comments"

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CHAPTER 11: VALUING PROFESSIONAL PRACTICES

  • 1100 INTRODUCTION
    • Reasons for Practice Valuation
      • Purchase or Sale of Entire Practice.
      • Purchase or Sale of Partial Interest.
      • Divorce.
    • How Professional Practices Differ from Other Businesses
      • Professional Licenses.
      • Reliance on the Professional.
      • Nature of Services Performed.
      • Nature of the Client Base.
      • Typical Accounting Policies.
      • Limited Pool of Buyers.
      • Value Heavily Dependent on Intangibles.
    • How This Chapter Is Organized
  • 1101 DATA GATHERING
    • HIPAA Challenges
    • Financial Information
      • Departures from GAAP.
    • Legal Documents
    • Operational Data
    • Service Mix
      • Degree of Specialization.
      • Diversification.
      • Proprietary Products or Information.
      • Accuracy of Coding Services in a Medical Practice.
    • Client Base
      • Client Retention.
      • Analyzing Client Retention.
      • Transition.
      • Special Retention Factors.
      • Professional Referrals versus Other Client Sources.
      • Contractual Relationships.
    • Operations
      • Technology Trends.
    • Payer Mix
    • Revenue Producing Staff
      • Dental Practices.
      • Medical Practices.
      • Accounting Practices.
    • Historical Allocations of Compensation among the Owners of the Practice
    • Economic, Industry, and Market Data
      • Location and Demographics.
      • Healthcare Markets Are Highly Localized.
      • Location and Demographics Are Not Always Critical.
      • Industry Information.
      • Industry Data.
      • Competition.
      • Competition Is Not Always from within the Profession.
    • When the Buyer Is Known
      • Compatibility of Operations.
      • Key Employees.
      • Owner's Work Habits.
  • 1102 ADJUSTMENTS TO FINANCIAL INFORMATION
    • Cash versus Accrual Accounting
    • Reasonable Compensation
    • Leaseholds
    • Owner Receivables/Payables
    • Nonrecurring/Nonoperating Items
      • Cash.
      • Receivables.
      • Work in Progress.
      • Contingent Work in Progress.
      • Supplies.
      • Prepayments.
      • Furniture, Fixtures, and Leasehold Improvements.
    • Accrued Expenses and Deferred Revenues
    • Contingencies
    • When Historical Accrual Information Is Not Available
    • Converting from Cash to Accrual--An Illustration
  • 1103 VALUATION METHODS
    • Discounted and Capitalized Returns
      • Discounted Future Returns.
      • Capitalized Returns.
    • Guideline Company Methods
      • Sources of Transaction Data.
      • Criteria for Comparability.
      • Value Multiples from Guideline Transactions.
      • What Does the Estimated Value Represent?
      • Consider Transaction Terms.
    • Net Asset Value, Excess Earnings, and Other Methods
      • Intangible Assets.
      • Net Asset Value Method.
      • Excess Earnings Method.
      • Multiple of Discretionary Earnings Method.
      • Rules of Thumb.
      • Earnouts.
      • Past Transactions.
      • Buy-sell Agreements.
  • 1104 PROFESSIONAL VERSUS PRACTICE GOODWILL
    • Professional Goodwill
      • Professional Licenses.
    • Practice Goodwill
      • Noncompete Agreements.
    • Treatment of Professional and Practice Goodwill in Divorce Valuations
    • Treatment of Professional Goodwill in Partnership Dissolution Valuations
  • 1105 WRAPPING UP THE ENGAGEMENT
    • Weighting of Valuation Methods
      • Nature of the Business and Its Assets.
      • Purpose of the Valuation and Definition of Value.
      • The Premise or Premises of Value.
      • Quantity and Quality of Data Available.
    • "Sanity Checks"
    • Premiums and/or Discounts
      • Control Premiums.
      • Minority Interest Discounts.
      • The Effect of Buy-sell Agreements.
      • Discounts for Lack of Marketability.
      • Law Practices and Discounts for Lack of Marketability.
  • 1106 RECENT PROFESSIONAL PRACTICE COURT DECISIONS
    • Year 2008 Court Decisions
      • Professional Goodwill v. Practice Goodwill.
      • Partnership/Shareholder Agreements and Contingencies.
      • No Expert Valuation.
    • Court Decisions from Previous Years
      • Valuation Discounts.
      • Goodwill.
      • Professional (or Personal) Goodwill versus Practice Goodwill.
      • Shareholder and Buy-sell Agreements.
      • Reasonable Compensation.
      • Normalization Adjustments.
      • No Expert Valuation.
      • Tax Consequences.
      • Valuation Methods.
      • Evidence.
      • Noncompete Agreements.
      • Other Topics.
  • 1107 SUMMARY
  • APPENDIX 11A: Selected Professional Practice Valuation Bibliography
  • APPENDIX 11B: Internet Websites for Healthcare Research
  • APPENDIX 11C: Factors to Consider in Valuing Health Care Practices
  • APPENDIX 11D: Glossary of Health Care Terms
  • APPENDIX 11E: Medical Privacy--National Standards to Protect the Privacy of Personal Health Information

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CHAPTER 12: VALUATIONS FOR DIVORCE ENGAGEMENTS

  • 1200 INTRODUCTION
    • Participants in a Divorce Case
    • Challenges of Divorce Engagements
      • The Importance of Objectivity.
      • Different Earnings Streams and Double Dipping.
      • Choosing Valuation Methods.
  • 1201 MARITAL AND SEPARATE PROPERTY
    • Community Property versus Equitable Distribution States
      • Community Property.
      • Equitable Distribution.
    • Distinguishing between Marital and Separate Property
      • What Is Marital Property?
      • What Is Separate Property?
    • Special Issues Regarding Separate Property
      • Property Acquired in Exchange for Separate Property.
      • The Increase in Value of Separate Property.
      • Commingled Property.
      • Transmuted Property.
    • Earnings from Separate Property
    • The Consultant's Role
      • Caution--Consult with the Client's Attorney.
  • 1202 STANDARDS OF VALUE AND VALUATION DATES
    • Defining the Standard of Value
    • Valuation Dates in Marital Dissolution Matters
      • Marriage Date.
      • Date of Gift or Inheritance.
      • Date of Separation.
      • Date the Lawsuit Was Filed.
      • Date Stipulated to by the Parties.
      • Date of Trial.
      • Date Specified by the Court.
  • 1203 PRE-ENGAGEMENT AND PLANNING PHASE
    • Reputation of Potential Client's Attorney
    • Availability of Needed Information
      • Problems Often Encountered in Obtaining Needed Records and Documents.
    • Anticipated Deadlines
    • Fee and Collection Issues
      • Responsible Party.
      • Retainers and Collections.
      • Executing a Security Agreement to Ensure Payment.
  • 1204 DATA GATHERING AND ANALYSIS PHASE
    • The Discovery Phase
    • Document Request List
      • Protective Orders and Confidentiality Agreements.
    • Facility Visits and Interviews
    • Interrogatories and Depositions
  • 1205 GOODWILL ISSUES
    • Celebrity Goodwill
    • Enhanced Earnings Concepts
    • Noncompete Agreements
  • 1206 REPORTING AND WRAP-UP
    • Representation Letters
    • Updating Valuation Reports
    • Expert Witness Testimony
  • 1207 RECENT DIVORCE CASE DECISIONS
    • Year 2008 Court Decisions
      • Discounts for Lack of Marketability and Lack of Control, Standard of Value, and Evidence.
      • Goodwill.
      • Appreciated Value.
    • Prior Year Court Decisions
      • Valuation Discounts.
      • Goodwill.
      • Valuation Methods.
      • No Expert Valuation.
      • Non-compete Agreements.
      • Standard of Value.
      • Reliability of Data.
      • Tax Consequences.
      • Evidence.
      • Determination of Marital Property.
      • Valuation Date.
      • Double Dipping.
      • Shareholder and Buy-sell Agreements.
      • Other Topics.
  • APPENDIX 12A: State-by-state Property Division Information

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CHAPTER 13: LITIGATION SUPPORT SERVICES

  • 1300 INTRODUCTION
    • Consultant's Role in Litigation Support Services
      • Expert Consultant's Work-product Privilege.
      • Retaining and Compensating the Expert.
    • Types of Litigation Support Engagements
    • Independence Considerations for Litigation Services
    • Overview of Chapter Contents
  • 1301 OVERVIEW OF THE LITIGATION PROCESS
    • Investigation and Pleadings
    • Discovery
      • Requests for Production of Documents.
      • Interrogatories.
      • Requests for Admissions.
      • Subpoenas.
      • Depositions.
      • Expert's Role in Depositions.
      • Site Interviews and Visits.
    • Motion Practice and Negotiation
      • Motion for Summary Judgment.
      • Motion in Limine.
      • Daubert Challenge.
      • General Electric v. Joiner.
      • Kumho Tire.
      • Impact of a Daubert Challenge.
      • Defending Methodology from a Daubert Challenge.
      • Settlement Negotiations.
    • Trial and Appeal
  • 1302 PREPARING FOR EXPERT WITNESS TESTIMONY
    • Understanding Significant Aspects of the Case
      • When the Expert's Testimony Will Hurt the Client's Case.
    • Documenting Support for Opinions
      • Reporting When the Valuation Consultant Serves as an Expert Witness.
    • Possessing Good Witness Behavioral Skills
      • Communication Skills.
      • Recalling Pertinent Facts.
      • Thinking under Pressure.
      • Concentration and Endurance.
  • 1303 GENERAL GUIDELINES FOR PRESENTING EXPERT WITNESS TESTIMONY
    • Opportunities to Testify
    • Answering Questions
      • Tell the Truth.
      • Do Not Guess.
      • Using Notes.
      • Do Not Memorize.
      • Prepare for Testimony.
      • Listen.
      • Don't be Argumentative--Know Which Truths to Defend.
    • Advocacy
      • Answering a Judge's Questions.
    • Witness Behavior
      • Dress Conservatively.
      • Videotaped Depositions.
      • Be on Time.
      • Behavior When Not Testifying.
      • Contact with Jurors.
  • 1304 PRESENTING DEPOSITION TESTIMONY
    • Introduction
    • Preparing for Deposition Testimony
    • Providing Deposition Testimony
      • Objection Raised by the Client's Attorney.
      • Answering Questions at Depositions.
      • Questions from the Client's Attorney.
  • 1305 DIRECT EXAMINATION TESTIMONY
    • Expert's Qualifications
      • Is the Expert Qualified to Provide that Help?
      • Preparing an Effective Curriculum Vitae.
      • Opposing Attorney's Efforts to Disqualify the Expert Witness.
      • Weight Given to Testimony.
      • Relevance of Industry Experience.
      • Evidence about an Expert's Character.
    • Scope of Assignment
    • Materials Reviewed
    • Methods Used and Conclusions Reached
    • Presentation Style
      • Use of Visual Aids.
  • 1306 CROSS-EXAMINATION TESTIMONY
    • Introduction
    • The Witness's Conduct
      • Where to Look.
      • Taking the Initiative.
    • Presentation Style
      • Responding to Questions.
      • Avoid Arguing with the Attorney.
      • Repetitive or Irrelevant Questions.
      • Unnecessary Words.
      • Hypothetical Questions.
      • Didn't You Say Something Different at Your Deposition?
      • Dealing with Defensiveness.
      • Learning to Recognize Difficult Questions.
    • The Attorney's Conduct
      • Approaching the Witness.
      • The Shouting Attorney.
  • 1307 REDIRECT TESTIMONY
  • 1308 RECROSS TESTIMONY
  • 1309 REBUTTAL
  • 1310 RULES OF EVIDENCE
    • Background
    • Overview of the Rules
    • Relevancy of Evidence
      • Rule 401--Definition of Relevant Evidence.
      • Rule 402--Relevant Evidence Generally Admissible; Irrelevant Evidence Inadmissible.
      • Rule 403--Exclusion of Relevant Evidence on Grounds of Prejudice, Confusion, or Waste of Time.
    • Fact Witnesses
      • Rule 615--Exclusion of Witnesses.
    • Expert Testimony
      • Rule 701--Opinion Testimony by Lay Witnesses.
      • Rule 702--Testimony by Experts.
      • Rule 703--Bases of Opinion Testimony by Experts.
      • Rule 704--Opinion on Ultimate Issue.
      • Rule 705--Disclosure of Facts or Data Underlying Expert Opinion.
      • Rule 706--Court-appointed Experts.
    • Hearsay
      • Rule 803--Hearsay Exceptions; Availability of Declarant Immaterial.
    • Use of Originals
      • Rule 1001--Definitions.
      • Rule 1002--Requirement of Original.
      • Rule 1003--Admissibility of Duplicates.
      • Rule 1004--Admissibility of Other Evidence of Contents.
      • Rule 1005--Public Records.
      • Rule 1006--Summaries.
      • Rule 1007--Testimony or Written Admission of Party.
      • Rule 1008--Functions of Court and Jury.
  • 1311 RULES OF CIVIL PROCEDURE THAT APPLY TO EXPERT WITNESSES TESTIFYING IN CIVIL CASES
    • Depositions and Discovery
      • Rule 26--General Provisions Governing Discovery; Duty of Disclosure.
      • Written Reports.
      • Information Considered.
      • Supplementing the Written Report.
      • Publications.
      • List of Other Cases.
      • Are Written Reports Always Required?
      • Deposing the Expert.
      • Electronic Documents.
    • Depositions
      • Rule 30--Depositions upon Oral Examination.
    • Interrogatories
      • Rule 33--Interrogatories to Parties.
    • Requests for Document Production
      • Rule 34--Production of Documents and Things and Entry upon Land for Inspection and Other Purposes.
    • Sanctions for Nonproduction
      • Rule 37--Failure to Make Disclosure or Cooperate in Discovery; Sanctions.
  • 1312 FILING BRIEFS
  • 1313 ADMINISTRATIVE MATTERS
    • Characteristics of Litigation Support That Affect Administration
      • Time Schedules.
      • Testimony by Individuals.
      • Professional Standards.
    • Engagement Letters
    • Billing Arrangements
      • Retainers and Collection.
      • Executing a Security Agreement to Ensure Payment.
    • File Retention
    • Professional Liability When Performing Litigation Services
      • Background.
      • Not Understanding the Rules of Evidence and Rules of Civil Procedure.
  • 1314 ALTERNATIVE DISPUTE RESOLUTION AND NEUTRAL VALUATION
    • The Alternative Dispute Resolution Act of 1998
    • Uniform Mediation Act
    • Model Mediator Standards
    • Arbitration Legislation
    • Mediation
      • Identifying Major Issues to Be Resolved.
      • Determining Ways to Resolve the Issues.
      • Negotiating a Settlement.
      • Selecting a Mediator.
      • Hiring a Mediator.
      • Compensation.
    • Arbitration
      • The Arbitration Hearing.
      • Arbitration Characteristics of Particular Interest to an Expert.
      • Selecting an Arbitrator.
    • Combined Mediation/Arbitration
    • Neutral Valuation

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CHAPTER 14: FAMILY LIMITED PARTNERSHIPS

  • 1400 OVERVIEW
    • Introduction
    • Advantages of FLPs
    • Disadvantages of FLPs
    • IRS Attack on Family Limited Partnerships
      • Reason for Formation.
      • Disclosure of Discounts on IRS Form 709.
  • 1401 CONSULTANT'S ROLE IN THE FORMATION OF A FAMILY LIMITED PARTNERSHIP
    • Consultant's Role
    • Determining the State in Which to Register
    • Assisting in Structuring the Partnership Agreement
      • Term or Life of the Entity.
      • Ownership and Capitalization of the Entity.
      • Nature of Management Rights.
      • Extent of Voting and Other Rights.
      • Restrictions on Transferring Units.
      • Assignee Interest.
      • Methods to Allocate Income and Loss.
      • Cash Distribution Requirements.
      • Withdrawal Rights.
      • Business Purpose of the Partnership.
      • Caution about General Partner's Control.
    • Selecting the Assets to Be Contributed to the Partnership
      • Caution Regarding Stock in a Privately-held Company.
      • Caution Regarding Marketable Securities.
      • Assets Inappropriate for a Family Limited Partnership.
    • Other Formation Considerations Due to IRC Sec. 2036(a)
      • IRC Sec. 2036(a)(1).
      • IRC Sec. 2036(a)(2).
      • Defense against IRC Sec. 2036.
  • 1402 OVERVIEW OF VALUATION METHODOLOGY
    • Controlling or Noncontrolling Interest
    • Fair Market Value
    • Valuation Approaches
      • Income Approach.
      • Market Approach.
      • Asset Based Approach.
    • Summary of Valuation Methodology
    • IRS Scrutiny
      • Restrictions in the Partnership Agreement.
  • 1403 VALUATION PROCEDURES
    • Information Gathering
    • Determining Net Asset Value
    • Income Approach Overview
      • Developing a Reasonable Rate of Return.
      • Marketable Securities.
      • Real Estate.
      • Combination of Assets.
      • Risk Premium.
      • Forecasting Income and Expenses.
      • Calculating a Value.
    • Market Approach Overview
      • Selecting Comparable Entities for Marketable Securities.
      • Selecting Comparable Entities for Real Estate.
      • Understanding Market Data.
    • Resulting Indication of Value
  • 1404 FLP VALUATION EXAMPLES
    • FLP Owning Marketable Securities
      • Income Approach--MS Partnership.
      • Forecasting Future Revenues and Expenses.
      • Calculating a Value.
      • Alternative Value Assuming Liquidation Horizon.
      • Market Approach--MS Partnership.
      • Reconciliation.
    • FLP Owning Income Producing Real Estate
      • Income Approach--RIPE Partnership.
      • Forecasting Future Revenues and Expenses.
      • Calculating a Value.
      • Market Approach--RIPE Partnership.
      • Reconciliation.
    • FLP Owning Nonincome Producing Real Estate
      • Income Approach--NPRE Partnership.
      • Forecasting Future Revenues and Expenses.
      • Calculating a Value.
      • Market Approach--NPRE Partnership.
      • Reconciliation.
  • 1405 DISCOUNT FOR LACK OF MARKETABILITY
    • Overview
    • Duration of Holding Period--Bonds
    • Illiquidity Risk--REITs v. Publicly Held Limited Partnerships
    • Restricted Stocks
    • Summary
  • 1406 REPORTING
    • Content
    • Frequency of Updating Reports
  • 1407 IRC CHAPTER 14 CONSIDERATIONS
    • Background
    • IRC Chapter 14 Provisions
      • Lapsing Rights.
      • Liquidation Rights.
      • Comparability Requirement.
      • Enforceability.
      • Transfer Rules.
      • State Law Exception.
  • 1408 RECENT FAMILY LIMITED PARTNERSHIP COURT CASES
    • Summary
    • Year 2008 Court Decisions
      • Discounts for Lack of Marketability and Lack of Control, Partnership Restrictions, Assignee Interest vs. Partnership Interest, and Indirect Gifts.
      • Business Purpose and Retained Control.
    • Court Decisions from Prior Years
      • Discounts for Lack of Marketability and Lack of Control.
      • Retained Control.
      • Partnership Issues.
      • Assignee Interest vs. Partnership Interest.
      • Improper Methodology.
      • Business Purpose.
  • APPENDIX 14A: Sources of External Data Related to Family Limited Partnerships
  • APPENDIX 14B: IRS Examination of an FLP

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CHAPTER 15: FAIR VALUE UNDER SHAREHOLDER DISSENT AND OPPRESSION ACTIONS

  • 1500 INTRODUCTION
  • 1501 WHAT ARE SHAREHOLDER DISSENT AND MINORITY OPPRESSION ACTIONS?
    • Shareholder Dissent Actions
      • Triggering Events.
      • Initiating Dissenters' Rights.
      • Caution.
    • Minority Oppression Actions
      • Who Is a Minority Shareholder?
      • Remedies to the Oppressed Shareholder.
  • 1502 STANDARD OF FAIR VALUE
    • Definition of Fair Value
      • Fair Value versus Fair Market Value.
    • "Excluding Any Appreciation or Depreciation in Anticipation of the Corporate Action."
    • Application of Discounts and/or Premiums
      • Caution.
      • Control Premiums.
    • The "Delaware Block Method" Approach to Fair Value
      • Background.
  • 1503 VALUATION DATE
    • The Complaint
  • 1504 PROCEDURAL FAIRNESS AND THE ROLE OF EXPERTS
    • Opportunities for Valuation Consultants
  • 1505 RECENT SHAREHOLDER DISSENT AND OPPRESSION COURT DECISIONS
    • Year 2008 Court Decisions
      • Discounts for Lack of Marketability and Lack of Control.
      • Trapped-in Capital Gains.
      • Standard of Value, Valuation Date, and Evidence.
      • Premise of Value.
      • Projected Performance and No Expert Valuation.
    • Court Decisions from Prior Years
      • Valuation Discounts.
      • Trapped-in Capital Gains.
      • Standard of Value.
      • Premise of Value.
      • Evidence.
      • Subsequent Events.
      • Control Premium.
      • Control Premium and Valuation Methods.
      • Other Topics.
  • 1506 SUMMARY

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CHAPTER 16: VALUING NON-TRADED FINANCIAL OPTIONS

  • 1600 INTRODUCTION
    • Option Terminology
    • Reasons for Valuations
    • How This Chapter Is Organized
  • 1601 STOCK OPTIONS
    • Definitions
    • The Value of Traded Stock Options
  • 1602 OPTION PRICING MODELS
    • Black-Scholes Model
      • Sources of Option Pricing Software.
    • Binomial Model
    • Factors That Create Value
    • Objective of Option Pricing Models
      • A Basic Example.
    • Illustration of the Black-Scholes Model
      • Intrinsic Value.
      • Time to Exercise.
      • Volatility.
      • Risk-free Rate of Interest.
      • Dividend Yield.
  • 1603 OTHER PUBLICLY TRADED ASSETS WITH OPTION COMPONENTS
    • Convertible Bonds
      • Using Convertible Bonds.
      • Valuing Convertible Bonds.
  • 1604 EXECUTIVE STOCK OPTIONS
    • Regulatory Guidance on Valuing Executive Stock Options
      • Financial Accounting Standards Board.
      • Securities and Exchange Commission.
      • Internal Revenue Service.
      • View of Some Courts.
    • Valuation Principles for Nontraded Executive Stock Options
      • Value Based on Time to Expiration or the Expected Holding Period.
      • Risk Aversion.
      • Proportion of Individual's Wealth.
      • Volatility of the Underlying Security.
      • Additional Marketability Issues.
    • Reload Options
      • Illustration.
    • Basic Information Request for Valuing Executive Stock Options
  • APPENDIX 16A: Glossary of Option Terminology
  • APPENDIX 16B: Stock Option Disclosure in Johnson & Johnson's 2006 Annual Report
  • APPENDIX 16C: Document Request Letter for Executive Stock Options

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CHAPTER 17: INTANGIBLE ASSETS

  • 1700 REASONS TO VALUE INTANGIBLE ASSETS
  • 1701 DEFINITIONS AND EXAMPLES OF INTANGIBLE ASSETS
    • Definitions
    • Differences between Tangible and Intangible Assets
      • Evidence versus Valuation.
      • Omnipresence.
      • Capacity Constraints.
      • High Returns.
  • 1702 THE CLASSIFICATIONS OF INTANGIBLE ASSETS
    • Identifiable versus Unidentifiable Intangible Assets
      • Identifiable Intangible Assets.
      • Unidentifiable Intangible Assets.
    • Functional Classifications
  • 1703 FAIR VALUE IN FINANCIAL REPORTING--WHAT IS IT?
    • Definition of Fair Value and Key Concepts Embodied in the Definition
      • Definition.
      • Key Concepts.
      • Fair Value Hierarchy.
    • Valuation Approaches Defined Under SFAS No. 157
    • Other Fair Value Guidance
  • 1704 ACCOUNTING AND FINANCIAL REPORTING REQUIREMENTS FOR INTANGIBLE ASSETS
    • Statement of Financial Accounting Standards No. 141R
      • Acquisition Method Replaces Purchase Method.
    • Statement of Financial Accounting Standards No. 142
      • Differences between SFAS No. 142 and Prior Accounting Guidance.
      • Implementation of SFAS No. 142.
    • Tax Treatment of Intangible Assets
  • 1705 INTANGIBLE ASSET VALUATION APPROACHES
    • The Cost Approach
    • The Market Approach
      • Guideline Sale Transaction Method.
      • Guideline License Method.
    • The Income Approach
      • Discounted Future Benefits Method.
      • Example.
      • Relief from Royalty Method.
      • Multi-period Excess Earnings Method.
      • Residual Method.
  • 1706 INTELLECTUAL PROPERTY
    • Property Rights
      • Patents.
      • Trademarks and Service Marks.
      • Copyrights.
    • Economic Attributes
      • Increase Revenue.
      • Decrease Costs.
      • Reduce Required Investments.
      • Reduce Time to Market.
      • Preventative Nonuse.
    • Licensing
    • Reasons for Intellectual Property Valuation
    • Valuation Approaches
    • Remaining Useful Life Analysis
      • Economic Life.
      • Economic Life versus Legal Life.
  • APPENDIX 17A: Patent Infringement Damages
  • APPENDIX 17B: Intangible Asset Valuation Bibliography

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BUSINESS VALUATIONS CHECKLISTS AND PRACTICE AIDS

  • VAL-PA-1: Work Programs
    • VAL-PA-1.1: Work Program
    • VAL-PA-1.2: Work Program--Internal Engagement
  • VAL-PA-2: Engagement Acceptance
    • VAL-PA-2.1: Engagement Acceptance Form
    • VAL-PA-2.2: Project Feasibility Assessment Form--Internal Engagement
    • VAL-PA-2.3: ET Interpretation 101-3 Independence Documentation Form
  • VAL-PA-3: Engagement Administration
    • VAL-PA-3.1: Sample Fee Estimate Worksheet
    • VAL-PA-3.2: Time and Resource Budget Form--Internal Engagement
    • VAL-PA-3.3: Potential Future Services Form
  • VAL-PA-4: Engagement Letters
    • VAL-PA-4.1: Sample Engagement Letter Drafting Form
    • VAL-PA-4.2: Sample Engagement Letter Drafting Form--Litigation Support Services
    • VAL-PA-4.3: Engagement Letter Addendum Drafting Form
    • VAL-PA-4.4: Security Agreement Drafting Form
  • VAL-PA-5: Data Acquisition
    • VAL-PA-5.1: Data Collection Checklist
    • VAL-PA-5.2: Document Request Letter
    • VAL-PA-5.3: Receipt for Return of Company Documents
    • VAL-PA-5.4: Case Fact Sheet
    • VAL-PA-5.5: Document Tracking Form
    • VAL-PA-5.6: Document Request Letter Drafting Form--Litigation Support Services
  • VAL-PA-6: Obtaining Background Information
    • VAL-PA-6.1: Company and Industry Background Information Form
    • VAL-PA-6.2: Professional Practice Background Information Form
    • VAL-PA-6.3: Family Limited Partnership Background Information Form
  • VAL-PA-7: Normalized Net Income Worksheet
  • VAL-PA-8: Ratio Analysis Worksheet
  • VAL-PA-9: Capitalized Returns Methods
    • VAL-PA-9.1: Valuation Procedures Checklist--Capitalized Returns Methods
    • VAL-PA-9.2: Discount and Capitalization Rate Worksheet--Build-up Method
    • VAL-PA-9.3: Discount and Capitalization Rate Worksheet--CAPM Method Using Guideline Public Companies
    • VAL-PA-9.4: Capitalized Returns Worksheet
  • VAL-PA-10: Valuation Procedures Checklist--Discounted Future Returns Methods
  • VAL-PA-11: Guideline Company Methods
    • VAL-PA-11.1: Valuation Procedures Checklist--Value Multiples Using Guideline Companies Methods
    • VAL-PA-11.2: Guideline Company Comparison Worksheet
    • VAL-PA-11.3: Value Multiple Computation Worksheet--Guideline Company Method
    • VAL-PA-11.4: Value Multiple Computation Worksheet--Guideline Transaction Method
    • VAL-PA-11.5: Determination of a Single Value Multiple Worksheet
  • VAL-PA-12: Excess Earnings Method
    • VAL-PA-12.1: Valuation Procedures Checklist--Excess Earnings Method
    • VAL-PA-12.2: Return on Net Tangible Assets Worksheet (Excess Earnings Method)
    • VAL-PA-12.3: Valuation Worksheet--Excess Earnings Method
  • VAL-PA-13: Valuation Procedures Checklist--Net Asset Value Method
  • VAL-PA-14: Valuation Procedures Checklist--Liquidation Value Method
  • VAL-PA-15: Multiple of Discretionary Earnings Method
    • VAL-PA-15.1: Valuation Procedures Checklist--Multiple of Discretionary Earnings Method
    • VAL-PA-15.2: Valuation Worksheet--Multiple of Discretionary Earnings Method
    • VAL-PA-15.3: Valuation Multiple Development Worksheet--Multiple of Discretionary Earnings Method
  • VAL-PA-16: Valuation Reports
    • VAL-PA-16.1: Valuation Report Checklist
    • VAL-PA-16.2: Valuation Report Drafting Form
    • VAL-PA-16.3: Valuation Report Drafting Form--Internal Engagement
  • VAL-PA-17: Representation Letters
    • VAL-PA-17.1: Sample Representation Letter Regarding Information Provided to the Valuation Consultant
    • VAL-PA-17.2: Sample Representation Letter--Internal Engagement
  • VAL-PA-18: Valuation Engagement Review Checklist
  • Continuing Professional Education
  • CPE & Training Solutions
  • INDEX

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