Business Valuation

Determining the value of a private company is not just a matter of accounting. It is also a legal decision, requiring examination of the relevant statutes, regulations, and case law to determine the type of appraisal required.

Business Valuation is a complete, in-depth guide for the practitioner. It explains both the standards of value prescribed by law and the complex methods employed to meet those standards in virtually every context — corporate and tax law, litigation, trusts and estates law, ESOP transactions, and more. It also discusses the reporting requirements of major accounting associations. Topics covered include: choosing the appropriate appraisal method; ratios and cash flow measures; discounts and premiums; corporate, tax, ERISA, bankruptcy, and trusts and estates law issues; expert valuation opinions in litigation; and business valuation report requirements.

Whether you are advising a client on a fairness opinion or calculating the weighted average cost of capital, you will find both legal insight and nuts-and-bolts advice. Novices and experts alike will profit from this detailed look at valuation standards and techniques.

CHAPTER 1
Introduction
- 1.01 Business Valuation in the Legal Context
- 1.02 The Lawyer's Role in Business Appraisal
- 1.03 Selection of the Business Appraiser

CHAPTER 2
Valuation Standards, Premises, Approaches, and Methods
- 2.01 Standards of Value
[1] Fair Market Value
[2] Fair Value
[3] Investment Value
- 2.02 Premises of Value
[1] Going Concern
[2] Assemblage of Assets
[3] Orderly Liquidation
[4] Forced Liquidation
- 2.03 Overview of Valuation Approaches and Methods
[1] Income Approach
[2] Market Approach
[3] Asset Approach

CHAPTER 3
Financial Statements
- 3.01 Financial Statement Overview
[1] Generally Accepted Accounting Principles
[2] Levels of Assurance
- 3.02 Balance Sheet
[1] Classification of Assets, Liabilities, and Owners' Equity
[2] Uses of the Balance Sheet
- 3.03 Income Statement
[1] Elements of the Income Statement
[2] Uses of the Income Statement
- 3.04 Statement of Cash Flows
[1] Elements of the Statement of Cash Flows
[2] Uses of the Statement of Cash Flows
- 3.05 Financial Statement Analysis
[1] Key Financial Ratios
[2] Uses of Financial Ratios
- 3.06 Cash Flows Used in Business Valuation
[1] Net Cash Flow to the Firm
[2] Net Cash Flow to Equity

CHAPTER 4
The Income Approach
- 4.01 Present Value Concepts
[1] Present Value of a Single Cash Flow
[2] Present Value of an Annuity
[3] Present Value of a Perpetuity
[4] Present Value of a Growing Annuity
[5] Present Value of a Growing Perpetuity
- 4.02 Single-Period Capitalization Method
[1] Value of a Non-Growing Business
[2] Value of a Growing Business
[3] Mid-Year Convention
- 4.03 Discounted Cash Flow Method
[1] Two-Stage DCF Model
[2] Discrete Forecast Period
[3] Terminal Period
[4] Mid-Year Convention
- 4.04 Invested Capital Procedure
[1] Nature of Invested Capital
[2] Discounted Cash Flow Method Illustration
- 4.05 Direct Equity Procedure
[1] Basis for the Procedure
[2] Discounted Cash Flow Method Illustration

CHAPTER 5
Cost of Capital
- 5.01 Cost of Equity
[1] Capital Asset Pricing Model
[2] Modified CAPM
[3] Build-Up Method
- 5.02 Cost of Debt
- 5.03 Weighted Average Cost of Capital
[1] Determining the Capital Structure
[2] Calculating the WACC

CHAPTER 6
Forecasting Future Cash Flows
- 6.01 Financial Statement Normalizing Adjustments
[1] Adjustments for Non-Operating Assets
[2] Adjustments for Owner's Discretionary Items
[3] Adjustments for Non-Recurring Events
[4] Adjustments for Discontinued Operations
[5] Examples of Normalizing Adjustments
- 6.02 Forecasted Financial Statements
[1] Revenues
[2] Pro Forma Income Statements
[3] Operating Expenses
[4] Depreciation
[5] Capital Expenditures
[6] Working Capital
[7] Interest-Bearing Debt
[8] Example of Cash Flow Forecast

CHAPTER 7
The Market Approach
- 7.01 Methods Within the Market Approach
[1] Guideline Public Company Method
[2] Merger and Acquisition Method
- 7.02 Identifying Guideline Public Companies
- 7.03 Developing Market Multiples
- 7.04 Selecting Appropriate Multiples to Value the Subject Company
- 7.05 Calculating the Value of the Subject Company

CHAPTER 8
The Asset Approach
- 8.01 The Asset Approach
[1] Adjusted Book Value Method
[2] Excess Earnings Method
- 8.02 Premises of Value
[1] Going Concern
[2] Assemblage of Assets
[3] Orderly Liquidation
[4] Forced Liquidation

CHAPTER 9
Valuation Discounts and Premiums
Aaron M. Stumpf
- 9.01 Overview
[1] Levels of Value Framework
[2] Impact of Valuation Approach Applied
[3] Impact of Standard of Value Applied
- 9.02 Control Premium and Discount for Lack of Control
[1] Factors Impacting Degree of Control
[2] Empirical Studies
- 9.03 Discount for Lack of Marketability
[1] Factors Impacting Degree of Marketability
[2] Empirical Studies
- 9.04 Other Valuation Discounts
[1] Nonvoting Discount
[2] Blockage Discount
[3] Undivided Interest Discount
[4] Key Person Discount
[5] Contingent Liability Discount
[6] Built-in Gains Tax Discount
[7] Portfolio Discount

CHAPTER 10
Estate and Gift Tax Valuation
Aaron M. Stumpf
- 10.01 Overview of Estate and Gift Tax
[1] Federal Estate Tax
[2] Federal Gift Tax
[3] Generation-Skipping Transfer Tax
[4] Guidance for Gift and Estate Tax Valuation
- 10.02 Standard of Value is Fair Market Value
[1] Hypothetical Willing Buyer/Seller
[2] Cash or Cash Equivalent Price
[3] Prevailing Economic and Market Conditions
- 10.03 Valuation Date Considerations
[1] Valuation Date for Gifts
[2] Valuation Date for Estates
[3] Subsequent Events
- 10.04 Adequate Disclosure of Gifts
- 10.05 Revenue Rulings
[1] Guidance for Valuation of Closely Held Businesses
[2] Valuing Intangible Assets
[3] Excess Earnings Method
[4] Marketability Discounts
[5] Preferred Stock
[6] Minority Discounts and Family Attribution Issues
- 10.06 Special Valuation Rules
[1] Recapitalizations and Senior Equity Interests
[2] Retained Life Annuity and Unitrust Interests
[3] Buy/Sell Agreements, Leases, and Operating Agreements
[4] Lapsing Voting Rights and Other Restrictions
- 10.07 Other Gift and Estate Tax Valuation Issues
[1] Tax Affecting S Corporations
[2] Built-in Gains Tax Liabilities
[3] Buy/Sell Agreements

CHAPTER 11
Valuation in Marital Dissolution
Justin L. Cherfoli
- 11.01 Introduction
- 11.02 Standard of Value/Premise of Value
- 11.03 Valuation Date
- 11.04 Application of Valuation Discounts
- 11.05 Availability of Information / Discovery Issues
- 11.06 Adjustment for Reasonable Compensation
- 11.07 Consideration of Taxes on Capital Gains and Other Tax Liabilities
- 11.08 Use of Buy-Sell Agreements, Operating Agreements, and the Like

CHAPTER 12
Valuation in Shareholder and Partner Disputes
Justin L. Cherfoli
- 12.01 Introduction
- 12.02 Dissenting Shareholder and Minority Oppression Actions
[1] Dissenting Shareholder Actions
[2] Minority Oppression Actions
[3] Other Shareholder and Partner Dispute Matters
- 12.03 Standard of Value
[1] Fair Value Distinguished From Fair Market Value
[2] Other Standards of Value
- 12.04 Premise of Value
- 12.05 Valuation Date
- 12.06 Approaches to Value
- 12.07 Concept of Fairness
[1] Absolute Versus Relative Fairness
[2] Procedural Fairness
- 12.08 Availability of Information/Discovery Issues
- 12.09 The Forensic Accountant

CHAPTER 13
Valuation for Employee Stock Ownership Plans
Mark R. Fournier
- 13.01 Overview of ESOPs
[1] Introduction
[2] Tax Motivation
- 13.02 ESOP Formation
[1] Non-Leveraged ESOP
[2] Leveraged ESOP
- 13.03 Repurchase Obligation
[1] Put Option
[2] Recycling vs. Redeeming Stock
- 13.04 When a Valuation is Required for ESOP Companies
[1] ESOP Transactions
[2] Administrative Purposes
- 13.05 Standard of Value
- 13.06 Requirements and Role of Appraiser
- 13.07 Valuation Methodology
- 13.08 Income Adjustments for ESOP Companies
- 13.09 Valuation Discounts and Premiums
[1] Control Premium
[2] Discount for Limited Marketability
- 13.10 ESOP Valuation Issues
[1] Post-Transaction Decline in Value
[2] ESOP Debt Tax Shield
[3] Repurchase Obligation
[4] Convertible Preferred Stock
- 13.11 Valuation Report for ESOP Purposes
- 13.12 Fairness Opinions for ESOP Transactions
[1] Adequate Consideration
[2] Relative Fairness
[3] More Specific Opinions
- 13.13 Challenges to ESOP Valuations

CHAPTER 14
Valuation in Bankruptcy
Jeffrey M. Risius
- 14.01 Overview
- 14.02 Adequate Protection Determination
- 14.03 Claims Determination
- 14.04 Plan Confirmation
- 14.05 Recovery Actions
- 14.06 Valuation Issues Specific to Bankruptcy
[1] Income Approach
[2] Market Approach

CHAPTER 15
Discovery and Admissibility of Valuation Evidence
- 15.01 Introduction
- 15.02 Pretrial Disclosure of Expert Witnesses
[1] Disclosure Requirements Under Federal Rule of Civil Procedure 26(a)(2)
[2] The Expert Report
- 15.03 Depositions of Expert Witnesses
[1] Testifying Experts
[2] Non-Testifying Experts
- 15.04 Supplementation of Expert Discovery Responses
- 15.05 Disclosure of Communications Between Experts and Retaining Counsel
- 15.06 Admissibility of Valuation Expert Opinions
[1] Federal Rule of Evidence 702
[2] Federal Rule of Evidence 703

CHAPTER 16
The Business Valuation Report
- 16.01 Introduction
- 16.02 AICPA Statement on Standards for Valuation Services
[1] The Detailed Report
[2] The Summary Report
[3] The Calculation Report
- 16.03 Uniform Standards of Professional Appraisal Practice
[1] The Appraisal Report
[2] The Restricted Use Appraisal Report
- 16.04 American Society of Appraisers
- 16.05 National Association of Certified Valuation Analysts
[1] The Summary Report
[2] The Detailed Report
[3] The Calculation Report
- 16.06 Institute of Business Appraisers
[1] The Letter Report
[2] The Formal Report

Index

Ronald S. Longhofer



Ronald S. Longhofer, CFA, CPA/ABV, CFE, is principal of RSL Financial Consulting, LLC, Plymouth, Michigan. He holds JD and MBA degrees from the University of Michigan. His 28-year career at the Detroit-based law firm of Honigman Miller Schwartz and Cohn LLP included terms as Chair of the Litigation Department and Head of the Corporate and Securities Litigation Practice Group. He is an Adjunct Professor at the Wayne State University Law School, where he teaches business valuation. Following his tenure at the Honigman firm, he was a Director in the Valuation and Litigation Advisory Services Group at Stout Risius Ross, Inc. at its Detroit area office. His current firm provides business valuation, litigation support and alternative dispute resolution services. Mr. Longhofer is a member of the Michigan State Bar, the American Institute of Certified Public Accountants, the Michigan Association of Certified Public Accountants, the CFA Institute, and the Association of Certified Fraud Examiners.