PPC's Guide to Business Valuations

By Jay E. Fishman, Shannon P. Pratt, James R. Hitchner and J. Clifford Griffith

This guide, co-authored by Jay Fishman and Shannon Pratt is crucial to your BV practice to ensure you have the most current and comprehensive guidance. It takes you through each step of a valuation engagement and includes a case study of a restaurant valuation.
1500 pages

Contents

INTRODUCTORY MATERIAL
CHAPTER 1: OVERVIEW OF A BUSINESS VALUATION ENGAGEMENT
CHAPTER 2: OVERVIEW OF VALUATION TERMS AND METHODOLOGY
CHAPTER 3: PRE-ENGAGEMENT PROCEDURES
CHAPTER 4: DATA GATHERING AND ANALYSIS
CHAPTER 5: CAPITALIZED AND DISCOUNTED RETURNS METHODS
CHAPTER 6: VALUATION METHODS BASED ON GUIDELINE COMPANY DATA
CHAPTER 7: UNDERLYING ASSETS, EXCESS EARNINGS, AND OTHER METHODS
CHAPTER 8: WRAPPING UP THE ENGAGEMENT
CHAPTER 9: VALUATION REPORTS
CHAPTER 10: ESTATE AND GIFT TAX VALUATIONS
CHAPTER 11: VALUING PROFESSIONAL PRACTICES
CHAPTER 12: VALUATIONS FOR DIVORCE ENGAGEMENTS
CHAPTER 13: LITIGATION SUPPORT SERVICES
CHAPTER 14: FAMILY LIMITED PARTNERSHIPS
CHAPTER 15: FAIR VALUE UNDER SHAREHOLDER DISSENT AND OPPRESSION ACTIONS
CHAPTER 16: VALUING NON-TRADED FINANCIAL OPTIONS
CHAPTER 17: INTANGIBLE ASSETS
BUSINESS VALUATIONS CHECKLISTS AND PRACTICE AIDS
Continuing Professional Education
CPE & Training Solutions
INDEX

INTRODUCTORY MATERIAL

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

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

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

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

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)

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

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

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

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

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

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"

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

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

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

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

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

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

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

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