A Reviewer's Handbook to Business Valuation Practical Guidance to the Use and Abuse of a Business Appraisal

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  • Edition: 6th
  • Format: Hardcover
  • Copyright: 2011-05-03
  • Publisher: Wiley
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Thorough guidance and detailed analysis of the valuation business engagementDiscussing the practical aspects of business valuation that arise in the context of a tax valuation, this book provides you with detailed analysis of the valuation business engagement process. Detailed discussion is included of various cases outlining errors that appraisers have made in appraisal reports, as well as in-depth discussion of the current appraisal industry issues that are impacting tax valuations. Examines concepts and topics including level of value, the role of estate planners in the business valuation process, the use of appraisers in estate planning and litigation, and the appraiser identification/selection process Provides insight into the nature of the major appraisal trade associations Offers insights into preventing errors from getting into appraisal reportsThis helpful guide provides you with the detailed discussion you need on the various business valuation standards that have been promulgated by the Appraisal Standards Board as well as several appraisal trade associations.

Author Biography

L. Paul Hood Jr., JD, LLM, has worked over twenty years as a practicing lawyer, specializing in the areas of tax and estate planning. His professional speaking engagements include presentations at a number of law schools and for numerous professional organizations. He is a former adjunct professor of estate and gift tax, and his published works have appeared in many publications.

Timothy R. Lee, ASA, leads Mercer Capital's Corporate Valuation Group. Mercer Capital is a premier business valuation and transaction advisory firm, serving a national and international client base. Mr. Lee has extensive experience in providing corporate valuation and investment banking services to hundreds of clients in an array of industries.

Table of Contents

Highlights of this Book
Who Should Read this Book?
About the Book
Foundations: Valuing a Business
Fundamental Concepts for Defining Value
Standard of Value
Level of Value
Premise of Value
Defining the Engagement
The Importance of Defining the Engagement
Defining the Client
The First Call
The Subject Entity and Entity Type
Entity Distinctions and Entity Significance in the Valuation
State of Entity Organization or Incorporation
Principal Business Location
Description of the Subject Interest
Purpose and Intended Use of the Valuation
Date of the Valuation
Scope of the Work Product
Summary Assignment Definition Table
The As of Date of the Appraisal and the Date of the Appraisal Report - Added Thoughts and Perspective
Information Collection and Due Diligence
Importance of the Information Collection and Due Diligence Phase
Industry and Economic Considerations
Financial Information and Analysis
The Management Interview
Agenda of a Typical Management Interview
An Overview of Valuation Approaches
Recognized Valuation Approaches
Methodology and Level of Value, Direct and Indirect Methodology
Valuation Approaches: The Cost Approach
The Cost Approach
Typical Adjustments in the Cost Approach (using Tangible Net Asset Value Methods)
To Tax Affect or Not
The Income Approach to Value
Direct Capitalization and Discrete Projection Methods
Reconciliation of Income Methods to Market Methods
Typical Adjustments to the Income Statement
Adjustments That Correspond to Balance Sheet Treatments
Reconciling or Reclassifying Interim Period Measures to Fiscal Period Measures
Income Statement Adjustments and Considerations
Matching the Cost of Capital to the Benefit Stream
Developing the Cost of Capital
Summary Examples of Developing the Cost of Equity Capital
Growth Rate of Earnings / Net Cash Flow
Finishing the Direct Capitalization Equation
Developing the Single-Period Benefit ("Ongoing Earnings" and "Ongoing Net Cash Flow") and Preparation for the Discounted Future Benefits Method
Example of a Single Period Capitalization to Derive the Market Value of Total Invested Capital
The Discounted Future Benefits Method (DFB)
The Market Approach
Valuation Methods under the Market Approach
Rules of Thumb
Transactions Method
Guideline Public Company Method
The Fundamental Adjustment
Guideline Transactions Method
Correlation of Value
Global Considerations in the Correlation Process
Examples of Correlating a Value Indication
Valuation Discounts and Premiums
The Levels of Value Revisited
Perspective on the Control Premium
Control Premiums - Substance Over Form
Perspective of the Minority Interest Discount
Marketability Discounts
Business Valuation Standards
Uniform Standards of Professional Appraisal Practice (USPAP)
Overview of USPAP Valuation Standards
USPAP Ethics Rule 2010-11
USPAP Competency Rule 2010-11
USPAP Scope of Work Rule 2010-11
USPAP Jurisdictional Exception Rule
USPAP Business Appraisal Review (USPAP Standard 3)
Business Appraisal Development: USPAP Standardp. 9
Business Appraisal Report Standards USPAP Standardp. 10
USPAP Certification Requirement
USPAP Statements on Appraisal Standards and Advisory Opinions
American Society of Appraisers (ASA) Business Valuation Standards
ASA BVS General Preamble
ASA BVS-I (General Requirements for Developing a Business Valuation)
ASA BVS-II (Financial Statement Adjustments)
BVS-III (Asset-Based Approach to Business Valuation)
ASA BVS-IV (Income Approach to Business Valuation)
ASA BVS-V (Market Approach to Business Valuation)
ASA BVS-VI (Reaching a Conclusion of Value)
ASA BVS-VII (Valuation Discounts and Premiums)
ASA BVS-VIII (Comprehensive Written Business Valuation Report)
ASA BVS-IX (Intangible Asset Valuation)
ASA SBVS-1 (Guideline Public Company Method)
ASA SBVS-2 (Merger and Acquisition Method)
PG-1 (Litigation Support: Role of the Independent Financial Expert)
PG-2 (Valuation of Partial Ownership Interests)
The American Institute of Certified Public Accountants (AICPA) Statement on Standards for Valuation Services
Introduction and Scope
Overall Engagement Considerations
Valuation Approaches and Methods
Detailed Report
Summary Report
Calculation Report
Oral Report
National Association of Certified Valuation Analysts (NACVA) Professional Standards
Preamble; General and Ethical Standards
Valuation Services
Development Standards
Reporting Standards
The Institute of Business Appraisers (IBA) Business Appraisal Standards
Standard One: Professional Conduct and Ethics
Standard Two: Oral Appraisal Reports
Standard Three: Expert Testimony
Standard Four: Letter Form Written Appraisal Reports
Standard Five: Formal Written Appraisal Reports
Preliminary Reports
Canadian Institute of Chartered Business Valuators Practice Standards
Practice Standardp. 110
Valuation Reports
Practice Standardp. 120
Scope of Work
Practice Standardp. 130
File Documentation
Practice Standardp. 210
Advisory Reports
Practice Standardp. 220
Scope of Work for Advisory Reports
Practice Standardp. 230
File Documentation for Advisory Reports
Practice Standardp. 310
Expert Reports
Practice Standardp. 320
Scope of Work for Expert Reports
Practice Standardp. 330
File Documentation Standards in Expert Reports
Standardp. 410
Limited Critique Reports
Practice Standardp. 420
Scope of Work for Limited Critique Reports
Practice Standardp. 430
File Documentation Standards for Limited Critique Reports
Practice Bulletins
Internal Revenue Service (IRS) Business Valuation Standards
- Introduction
Development Guidelines
Resolution Guidelines
Reporting Guidelines
Addendum A USPAPp. 3
Comparison Chart
Addendum B USPAPp. 9
Comparison Chart
Lessons from the Trenches
Alleged Errors of Omission by Appraisers
Failure to Comply With USPAP
Valuation Credentials
Too Much Involvement by Counsel in the Appraisal Report Preparation
Standard of Value
Valuation Date
The Subject Property Interest
Sources of Data
Pure Reliance on Case Law
Site Visits and Management Interviews
Failure to Provide Sufficient Explanation
Disregard of Material Facts
Failure to Find Available Information
Failure to Adequately Support Selection of Beta
Improper Sampling Techniques
Off Financial Statement Items
Failure to Sufficiently Explain Assumptions
Insufficient Due Diligence
Failure to Make Inquiries With Significant Third Parties
Failure to List All Appraisers' Qualifications
Failure to Consider the Small-Stock Premium
Failure to Factor in Income Tax
Failure to Set Forth the Adjustments to Financial Statements in the Appraisal Report
Failure to Have Work be Susceptible of Replication
Failure to Identify the Multiples Selected
Failure to Discuss Weightings in the Appraisal Report
Failure to Distinguish Between Tax and Book Depreciation
Failure to List Guideline Companies
Failing to Separate Operating and Nonoperating Aspects of a Company
Failing to Lay Foundation for Small Stock Premium
Failing to Justify Capitalization or Discount Rates
Failure to Think like an Investor
Failure to Define Capital Structure
Failure to Adequately Consider the "Willing Buyer"
Failure to Adequately Consider the "Willing Seller"
Failure to Accurately Describe the Subject Property
Failure to Properly Classify the Subject Company
Failure to Explain the Basis for a Valuation Discount
Failure to Properly Consider the Subject Company's Growth Rate
Failure to Explain Market Multiples Selected For Guideline Companies
Failure to Explain Equal Weighting of Conclusions of Value
Failure to Consider Differences between the Subject Company and the Guideline Companies
Failure to Utilize Data From a Guideline Company That the Appraiser's Own Summary Chart Reflects is Closest to the Subject Company
Failure to Explain the Selection of the Range of Performance Ratios Selected
Failure to Adequately Explain Why Companies Selected as Guideline Companies are in Fact Comparable to the Subject Company
Failure to Explain Why so Few Comparable Properties or Guideline Companies Were Selected
Alleged Errors of Commission
Retrospective Appraisals
Use of Past Publications of an Appraiser Against the Appraiser
Using Untested Methodology
Improper Reliance Upon a Draft Appraisal
Conclusion of Value Offends Common Sense
Mathematical Errors
Double Counting
Conflicting Conclusions of Value
Sole Reliance upon a Valuation Model
Incorrect Usage of the Discounted Cash Flow Method
Skewed Assumptions
Overemphasis on Buy-Sell Restrictions among Related Parties
Using Historic Book Value of Assets in Net Asset Value Approach Even Though Asset Appraisals Had Been Obtained
Misapplication of Pre and Post Tax Figures
Ignoring the "Hypothetical" Nature of the Willing Buyer or Willing Seller
Inconsistent Use of Commercially Available Data
Use of Commercially Available Data That Warns of its Statistical Inaccuracy
Misstatement of Methodology Employed by Appraisers on Whose Work the Appraiser Has Relied
Undue Reliance Upon the Work of Another Appraiser
Using a Valuation Method without Laying a Foundation That It Is a Legitimate Method (for example, The Business Broker Method Using Data from the IBA Market Database)
Improper Reliance on a Study That Does Not Completely Provide All of the Relevant Data
Failure to Apply Discussion of Economic Factors to the Subject Company
Using Commercially Available Data in a Manner Contrary To How The Data Source Says The Data Should Be Used
Failure to Proofread Report Prior to Issuance
Apparently Conflicting Assumptions Used for the Same General Purposes without Sufficient Explanation
Use of Different Valuation Methods in Valuing the Same Interest in Valuation Reports Offered at Different Times without Adequate Explanation
Making Improper Adjustments to Financial Statements
Reliance upon the Pre-IPO Studies and the Restricted Stock Studies to Determine the Discount for Lack of Marketability for a Controlling Interest
Misreading or Failing to Properly Consider Rev. Rul. 59-60
Failure to Accurately State the Number of Shares Outstanding in the Subject Company
Inconsistency in Valuation Methodology Expressed in Testimony Versus the Appraiser's Methodology as Expressed in another Writing
Unreasonably Low Projections
Failure to Add Back Depreciation Included in Computation of Costs-of-Goods-Sold in the Computation of EBDIT
Combining the Discount for Lack of Control with the Discount for Lack of Marketability
Utilizing an Assumed Income Tax Rate That Differed From the Actual Past Tax Rates of the Subject Company
Disconnect between Assumption as to When Revenues or Expenses Would be Received or Incurred and When Those Items Were Actually Received or Incurred
Error in Computing Terminal Value when Using the Income Approach
Discounting an Income Stream Only at or Close to the Risk-Free Rate
Modifying or Abandoning Positions Taken in the Written Appraisal Report during the Appraiser's Testimony
Referring to a Standard Industrial Code in the Appraisal Report without Identifying That Number in the Report
Relying Upon Guideline Companies That Were Not Comparable to the Subject Company
Preparing and Utilizing Earnings Projections That Vary Significantly From the Earnings Projections Prepared by the Subject Company
Use of Only One Year's worth of Guideline Company Data
Inappropriate Employment of a Discount to Make a Conclusion of Value under One Valuation Approach Come Out More in Line With the Conclusion of Value Reached Under another Valuation Approach
Failing to Properly Calculate a Valuation Discount
Inappropriate Use of a Price-to-Asset Multiple Where the Difference between Book Value and Asset Fair Market Value is not Close
Selection of Too Few Guideline Companies or Comparable Properties
Selection of Too Few Performance Measures in the Guideline Company Method
Cherry Picking Valuation Multiples
Using an Inexcusably Old Comparable Sale
Inappropriate Reliance upon Governance Document Restrictions in Establishment of Valuation Multiples
Stating the Wrong Date from a Comparable Sale
Mismatching the Valuation Dates of the Guideline Companies and the Subject Company in Computing Price Multiples
Defining "Guideline Company" Too Narrowly
Ten Burning Issues within the Appraisal Profession
Methods of Determining the Discount for Lack of Marketability
Applicability of Discount for Lack of Marketability to a Controlling Interest
Validity of Discount for Imbedded Capital Gains
Shift of "Comparability" from the Publicly Traded Arena to the Private Arena
Efficient Market Hypothesis and Exceptions (for example, Small Firm Effect)
Value of Control vs. Value of Synergy
Do Public Company Stock Prices Indicate a Marketable, Minority or a Marketable, Control Position?
S Corporation Tax-Affecting
Factoring Financial Statement Adjustments When Estimating the Value of a Noncontrolling Interest
Validity of the Capital Asset Pricing Model for Valuing Interests in Closely Held Businesses
Random Practical Valuation Tips and Thoughts
Discovery and Privileges
Attorney-Client Privilege
Attorney Work Product Privilege
Tax Practitioner Privilege
A Free Standing, Complete Report, or a Mere Letter or Restricted Use Appraisal Report? Those Business Appraisers Must Be Identified in Time
Should a Business Appraiser Always Follow USPAP?
How Much Input Can a Client's Advisor Have in the Preparation of a Business Appraisal Report?
Types of Appraisers; Appraisal Associations
Random Strategy Tips
Appraisal Standards Chart
Information Request List
Management Interview Checklist
Sample Engagement Letter
Business Valuation Texts
Business Valuation Journals and Newsletters
Cost of Capital
Equity Risk Premiums
About the Authors
About the Website
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