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Chapter 1

Defining Value in the Relevant Context: Definitions of Value 1

Commonly Used Definitions of Value 2
Fair Market Value 2
Fair Value under State Statutes 5
Fair Value for Financial Reporting 6
Investment Value 8
Intrinsic or Fundamental Value 9
Other Terms Referring to Value 11
Acquisition Value 11
Book Value 11
Going-Concern Value 12
Enterprise Value 12
Liquidation Value 12
Strategic Value (Synergistic Value) 12
Transaction Value 13
Sources of Authority for Definition of Value 13
Statutory Law 14
Federal Statutes 14
State Statutes 15
Legally Binding Rules and Regulations 15
Contractual Definitions of Value 15
Non–Legally Binding Administrative Rulings 16
Precedential Court Decisions 16
Direction from the Court 17
Direction from the Lawyer 17
Use of IRS Authority in Non-Tax Situations 18
Opinions of Other Lawyers and Appraisers 18

Chapter 2

Value to Whom? Levels and Premises of Value 19

Levels of Value 19
Premises of Value 21

Chapter 3

Overview of Business Valuation Approaches, Methods, and Procedures 23

Approaches and Methods Not Totally Discrete 23
Hierarchy of Approaches, Methods, and Procedures 24
Basic Appraisal Approaches 24
Methods Used within Appraisal Approaches 25
Income Approach Methods 25
Market Approach Methods 25
Asset Approach Methods 26
Summary of Business Appraisal Approaches and Methods 27
Business Appraisal Procedures 28
Invested Capital versus Equity 28
Ambiguities of Business Valuation Terminology 28
Summary 30

Chapter 4

Financial Statement Terminology Used in Business Appraisal 31

The Basic Financial Statements 31
Balance Sheet Concepts 34
Common Equity 34
Invested Capital 34
Capital Structure 35
Book Value 35
Book Value per Share 35
Tangible Book Value versus Total Book Value 35
Net Working Capital 36
Miscellaneous Expense Concepts 36
Noncash Charges 36
Owner's Compensation (Including Disclosed or Hidden Perks) 36
Levels of Economic Income 36
Sales (Net Revenues) 37
Discretionary Earnings (Also Called Seller's Discretionary Cash Flow [SDCF] and Owner's Cash Flow [OCF]) 37
Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) 38
Earnings before Interest and Taxes (EBIT) (Also Called Operating Income) 38
Gross Cash Flow 38
Debt-Free Net Income (DFNI) 39
Debt-Free Cash Flow (DFCF) 39
Pretax Income 39
Net Income 40
Primary versus Diluted Net Income per Share 40
Net Cash Flow to Invested Capital 40
Net Cash Flow to Equity 41
Variables Affecting Net Cash Flow 42
Capital Expenditures 42
Changes in Net Working Capital 42
Changes in Debt 43
Cash versus Accrual Basis Accounting 43
Accrual Basis Accounting 43
Cash Basis Accounting 43
Conversion from Cash to Accrual Basis 43
Summary 44

Chapter 5

The Income Approach 45

The Concept of Discounting 47
The Concept of Capitalizing 48
The Basic Capitalized Cash Flow Model 49
The Constant Income Capitalization Model 49
The Income Capitalization Growth Model (Gordon Growth Model) 50
The Basic Discounted Cash Flow Model 52
The Discounted Cash Flow Model for a Limited Life Investment 52
The Discounted Cash Flow Model Using a "Terminal Value" 53
Capitalization Model versus Market Multiples for Estimating Terminal Value 57
Concept and Estimation of Discount Rates 58
The Concept of the Discount Rate 58
Elements of the Discount Rate: A Risk-Free Rate and a Premium for Risk 59
Estimating Discount Rates for Fixed-Income Securities 59
Estimating Equity Discount Rates: The Buildup Model 60
The Risk-Free Rate 60
The Equity Risk Premium 60
The Size Premium 61
Specific Company Risk Adjustment 61
Industry Risk Premia 62
Summary Illustration of the Equity Discount Rate Using the Buildup Model 62
Estimating Equity Discount Rates: The Capital Asset Pricing Model 63
Definition of Beta 63
Computation of Beta 64
Betas for Privately Held Companies 64
Incorporating Beta into the Equity Risk Premium 64
The Size Premium (Small Stock Premium) in CAPM 66
Specific Company Risk Adjustment in CAPM 66
Summary Illustration of the Equity Discount Rate Using CAPM 66
Concept and Estimation of Capitalization Rates 68
The Concept of a Capitalization Rate 68
Elements of the Capitalization Rate 68
Estimating Equity Capitalization Rates 68
Valuing Invested Capital versus Valuing Equity 69
The Concept of Weighted Average Cost of Capital 70
The Basic WACC Computation Model 70
Derivation of Weights for WACC 71
Preference for Net Cash Flow in Income Approach 72
Net Cash Flow Matches Empirical Data 73
Net Cash Flow Is What You Get 73
Use of Net Cash Flow Keeps Income Approach Discrete 73
References 78
Basic Income Approach References 78
Cost of Capital Data References 79

Chapter 6

The Market Approach 81

Market Approach Concept and Overview 81
Valuing Controlling versus Minority Interests 81
Valuing Total Invested Capital versus Direct Valuation of Equity 83
Using Sales of Entire Companies or Publicly Traded Guideline Companies 83
Sources of Market Approach Data 84
Sales of Public Companies 84
Sales of Private Companies 85
Guideline Public Company Data 85
Developing Market Multiples for Valuation 86
Invested Capital Multiples 86
Equity Multiples 87
Time Periods for Company Financial Statement Data 89
Criteria for Selecting Guideline Companies 89
How Many Guideline Companies? 90
Illustration of Developing Guideline Company Market Multiples 91
Deciding Where Subject Company Multiples Should Fall Relative to Observed Ranges 94
Relationship Between Market Multiples and Capitalization Rates 94
Multiples Selected Should Be Based on Comparative Analysis 95
Different Multiples May Be Higher or Lower Relative to Guideline Companies 96
Relative Weights to Accord Various Multiples 98
Illustration of Valuation by Market Approach 98
Variations for Smaller Companies and Professional Practice Valuations 99
Involvement of the Owner/Manager 100
Availability of Comparative Accounting Data 100
Prior Transactions, Offers, and Buy-Sell Agreements 104
Arm's-Length Negotiations 104
Prior Transactions 104
Offers to Buy 104
Buy-Sell Agreements 105
Alternative Definition of Market Value in Some Fair Value Cases 105
References 105
Basic Market Approach References 105
Private Company Sale Databases 107
Public Company Transaction and Sale Data 107

Chapter 7

The Asset-Based Approach 109

Basic Concept of the Asset-Based Approach 109
Discrete versus Collective Revaluation 109
Steps in the Adjusted Net Asset Value Method 110
Valuation Premises for Adjusting Balance Sheet Values 111
Illustrative Adjusted Net Asset Value 111
Breakup Value 111
When Are Asset-Based Methods Used? 112
Asset-Based Approach References 113

Chapter 8

The Excess Earnings Method 115

Background of the Excess Earnings Method 115
Basic Steps in the Excess Earnings Method 116
Applying the Excess Earnings Method 117
A "Sanity Check" for Validity of an Excess Earnings Method Value 119
Critique of Revenue Ruling 68-609 121
Use of Historical Averages Impractical 121
"Required Return on Tangible Assets" Ambiguous 121
No Definition of "Earnings" 124
No Guidance for Intangibles Capitalization Rate 124
Common Errors in Applying the Excess Earnings Method 124
Undefined Earnings Stream 125
Unsupported Normalized Earnings Stream 125
Failure to Allow for Owner's Compensation 125
Unsupported Net Tangible Asset Value 125
Unsupported or Unrealistic Required Rate of Return on Tangible Assets 125
Unsupported or Unrealistic Capitalization Rate for Excess Earnings 126
Using Rates in the Revenue Ruling 68-609 Illustration Instead of Currently Supportable Rates 126
Claiming that the IRS Recommends Use of the Excess Earnings Method 126
Summary 126
Excess Earnings Method References 127

Chapter 9

Rules of Thumb 129

Transaction Databases with Price/Revenue and Price/Discretionary Earnings Ratios 129
Rules of Thumb Disclaimers 129
General Nature of Rules of Thumb 130
Rules of Thumb Not Cash-Equivalent Prices 131
Rule of Thumb Examples 131
Checking Alleged Rules of Thumb Against Actual Transactions 131
Court Reaction to Rules of Thumb 133
References and Sources 134
Basic Rules of Thumb References 134
Transaction Databases with Price/Revenue and Price/Discretionary Earnings Ratios 135

Chapter 10

Personal versus Enterprise Goodwill 137

Distinction Between Enterprise and Personal Goodwill 138
Enterprise Goodwill Characteristics 138
Personal Goodwill Characteristics 138
Case Examples 139
Divorce Cases 139
Tax Cases 139
References 140

Chapter 11

Reasonable Compensation 141

Determining Reasonable Compensation 141
Sources of Information 142
Tax Court and Reasonable Compensation 144
Summary 145
References 146

Chapter 12

Financial Statement Adjustments 147

Reasons for Financial Statement Adjustments 147
Normalizing Adjustments 148
Nonrecurring Items 149
Discontinued Operations 149
Inventory Accounting Methods 150
Depreciation and Depletion Methods and Schedules 151
Net Operating Losses Carried Forward 151
Reserve and Allowance Accounts 151
Other Normalizing Adjustments 152
Control Adjustments 153
Reasonable Compensation 153
Insider Transactions 153
Separating Operating Assets from Nonoperating and Excess Assets 154
Comparisons with Other Entities 154
Treatment of Nonoperating and Excess Assets 155
Cash versus Accrual Accounting 155
Illustrative Financial Statement Adjustments 156
Income Statement Adjustments 157
Balance Sheet Adjustments 158
Financial Statement Adjustment References 159

Chapter 13

Comparative Financial Statement Analysis 161

Introduction 162
Tools of Financial Statement Analysis 162
Horizontal Analysis 163
Trend Analysis 164
Vertical Analysis 169
Analysis of Profitability 175
Analysis of Liquidity 182
Analysis of Long-Term Solvency 184
Industry Data Resources 186
Summary 187
Comparative Financial Statement Analysis References 187
Books 187
Databases 188

Chapter 14

Economic and Industry Analysis 189

National Economy—Recent Status 190
National Economy—Outlook 193
Regional Information 195
International Information 197
Industry—General Data 197
Industry—Composite Company Data 198
Summary 202

Chapter 15

Discounts and Premiums 203

Distinguishing the Minority Factor from the Marketability Factor 204
Minority versus Control 206
The Minority Owner's Situation 206
Degrees of Minority versus Control Ownership 207
Quantifying Minority or Lack of Control Discounts 208
Discounts for Lack of Marketability 212
The Concept of Marketability 212
Degrees of Marketability or Lack Thereof 213
Other Factors Affecting Discounts for Lack of Marketability 214
Benchmark for Marketability 214
Evidence Quantifying Lack of Marketability Discounts: Restricted Stock Studies 215
FMV Opinions Database 219
LiquiStat Database 219
Evidence Quantifying Lack of Marketability Discounts: Pre-IPO Studies 220
Emory & CoPre-IPO Studies (formerly Baird & CoPre-IPO Studies) 221
Valuation Advisors Discount for Lack of Marketability Studies 222
Court Recognition of Marketability Discount Studies 222
Trend Away from "Benchmarking" 225
Discounts for Lack of Marketability for Controlling Interests 226
How the Applicable Definition of Value Affects the Minority/Control and Discount for Lack of Marketability Adjustments 227
Fair Market Value 227
Fair Value 228
Investment Value 228
How the Valuation Method Used Affects Premiums and Discounts 228
Income Approach 228
Market Approach 229
Asset Approach and Excess Earnings Method 230
Other Discounts at the Entity Level 230
Key Person Discount 230
Portfolio Discount 230
Trapped-in Capital Gains Discount 231
Litigation Risk 233
Environmental Risk 233
Other Discounts or Premiums at the Shareholder Level 234
Voting versus Nonvoting Shares 234
Blockage 235
References 235
Basic Discount and Premiums References 235
References for Premium and Discount Court Cases 236
Widely Used Premium and Discount Data References 236

Chapter 16

Reconciliation of Value Indications 239

Overview of the Reconciliation Process 239
Does the Conclusion Appraise the Right Property? 240
Major Considerations in the Reconciliation Process 241
Reconciling Divergent Results Among Business Valuation Methods 242
Weighting of Valuation Method Results 243
Explicit Weighting 245
Implicit Weighting 246
Final Value Estimate 247
References for Reconciliation of Value Indications 247

Chapter 17

Valuations for Federal Tax Matters 249

Fair Market Value 250
Fair Market Value Assumes Adequate Knowledge 252
Must Consider Both Buyer and Seller—and Both Must Be Hypothetical 252
Qualifications of Appraisers 253
Burden of Proof 255
Adequate Disclosure of Gifts 257
Access to Sites, Management, and Records 258
Arm's-Length Transactions 258
Approaches to Value 259
Market Approach 259
Income Approach 261
Asset-Based Approach 263
Discounts 263
Discounts for Lack of Marketability (Minority Blocks) 263
Gradually Increasing Marketability Discounts 264
Increasing Reliance on Empirical Data 264
Combined Minority and Lack of Marketability Discounts 268
Discounts for 50 Percent Interest 268
Discounts for Lack of Marketability (Controlling Interests) 269
Discounts for Lack of Control (Minority Discount) 270
Blockage 271
Key Person Discount 272
Nonvoting versus Voting Stock 273
Premiums 273
Trapped-in Capital Gains Taxes 274
Charitable Contributions 276
Contingent Liabilities 278
Subsequent Events and Information 278
Proximity of Financial Information to Valuation Date 279
Subsequent Sales 280
Buy-Sell Agreements 283
Weighting of Valuation Method Results 286
Pressure to Settle 288
References for Valuations for Federal Tax Matters 288
Articles and Books 288
Web Sites 289

Chapter 18

Shareholder and Partner Disputes 291

"Fair Value" Standard in Most Dissent and Dissolution Suits 293
"Delaware Block Rule" Expanded 294
All Relevant Factors Must be Considered 296
Strategic Value 297
Discounts or Premiums Often Major Issue 298
Discounts for Lack of Marketability and Lack of Control 298
Discounts Left to Court's Discretion 298
Extraordinary Circumstances 299
Rejection of Shareholder-Level Discounts 300
Discounts Permitted 302
Control Premiums 302
Other Discount Issues 304
Discounts for Trapped-in Capital Gains 304
Lack of Combinatorial Value Discount 305
Lack of "Entire Fairness" May Broaden Remedies 305
Fair Value Is Not Fair Market Value 307
States Borrow Other States' Precedents 308
Timely Actions Essential 309
References for Shareholder and Partner Disputes 309

Chapter 19

Marital Dissolution Valuations 311

Standard of Value for Marital Dissolutions 311
Premise of Value315
Appreciation—Active versus Passive 315
Valuation Date 316
Goodwill 317
Buy-Sell Agreements 326
Covenants Not to Compete 331
Minority and Marketability Discounts 332
Trapped-in Capital Gains Taxes 334
Adequacy of Evidence 337
Access to Records 337
The Persistent Problem of "Double-Dipping" 338
References for Marital Dissolution 341

Chapter 20

Fair Value for Financial Reporting 343

Definition of Fair Value 344
Disclosures 347
Differences from Fair Market Value 348

Chapter 21

Employee Stock Ownership Plans 351

General Principles 351
Valuation Principles 352
Adequate Consideration 352
When Appraisals Are Required 353
Independence of Appraiser 353
IRS Audit Guidelines 354
Control versus Minority Interest 356
Lack of Marketability Discount 356
ESOP Financial Statement Adjustments 357
Repurchase Liability: Redemption or Recirculation 358
Relevant Case Law 359
Charles SFoltz vU.SNews & World Report, Inc.359
Las Vegas Dodge, IncvUnited States360
Howard vShay .360
Reich vValley National Bank of Arizona361
Gary LEyler vCommissioner362
Henry vChamplain Enterprises .364
Chao vHall Holding Co, Inc.365
Keach vU.STrust Co.367
Armstrong vLaSalle Bank National Association .368
Summary 370
References 370
Articles 370
Books 371
Associations 373

Chapter 22

Valuing Professional Practices and Small Service Businesses 375

Trade-off between Cash and Terms 375
Easy Terms 376
Earnouts 376
Valuation Approaches and Methods 378
Income Approach 378
Market Approach 378
Excess Earnings Method 379
Asset-Based Methods 379
Rules of Thumb 379

Chapter 23

Valuing S Corporations and Other Pass-through Entities 381

Value and Taxes 381
Legislative Intent: Understanding the Tax Avoided by the S Corporation 382
Valuing S Corporations by the Income Approach Requires Usage of Market Return Rates Derived from Public C Corporations 384
Public C Corporation versus S Corporation Pricing under the Income Approach—an Example 385
Value of the Avoided Dividend Tax 388
Specific S Corporation Issues under Other Valuation Approaches and Methods 389
References 389

Chapter 24

Valuation Reports 391

Appraisal Report 391
Introduction 392
Sources of Information 393
Qualitative Analysis of the Company 394
Ownership Interest 395
Quantitative Analysis 395
Normalization and Control Adjustments 396
Valuation Approaches and Methods Considered 397
Valuation Approaches and Methods Used 398
Valuation Adjustments 400
Nonoperating Items 400
Excess or Deficient Operating Assets 401
Representations of the Valuation Analyst 401
Qualifications of the Valuation Analyst 401
Conclusion of Value 402
Summary Report 402
Agreed-upon Calculation Report 403
Oral Report 403
Exceptions to the Report Contents 403

Chapter 25

Checklist for Reviewing a Business Valuation Report 405

Credentials of Report Preparer(s) 405

Chapter 26

Admissibility and Impact of Expert Business Valuation Evidence 431

Supreme Court Affirms Courts' "Gatekeeper" Role 432
Daubert vMerrell Dow Pharmaceuticals 432
General Electric CovJoiner .434
Kumho Tire CovCarmichael .434
Selecting and Evaluating the Appraiser 437
Professional Certifications and the Case for Peer Review 439
The CPA as Business Appraiser 440
Advantages 440
Disadvantages 441
The Financial Analyst as Business Appraiser 442
Advantages 443
Disadvantages 443
The Broker as Business Appraiser 444
Advantages 444
Disadvantages 444
The Academic as Business Appraiser 445
Advantages 445
Disadvantages 446
Court Cases Involving Appraiser Challenge 446
The Appraisal Opinion Must Stay within Expertise 450
Source Documents Must Be Those "Typically Relied Upon" by Appraisal Experts 451
Subjective Statements Must Be Documented 453
Superficial Treatment of Issues: The "Down and Dirty" Appraisal 454
Inaccurate or Inadequate Use of Accepted Methodologies—the Expert Must Be Reliable 456
Original and Personally Developed Appraisal Methods Create Risk 458
Admissible Expert Evidence versus the Weight Accorded to It 460
Conclusion 463

Chapter 27

Discovery and the Business Valuation Expert 465

Expert Witnesses: Disclosure Requirements and Written Appraisal Reports 469
Federal Rule of Civil Procedure 26(a)(2) 469
Jurisdictions That Follow or Deviate from FRCP 26(a)(2) 470
Requests for Production of Documents and Entry for Inspection and Interviews 471
Documents 471
Site Visit and Interviews 473
Lawyer's Role 474
Preparation 474
Mission 474
Information to Be Gathered 474
Individuals to Be Interviewed 475
Confidentiality 475
Adversarial Proceedings 475
Federal Rule of Civil Procedure 34476
Limitations on the Scope of Discovery 476
Sanctions for Failure to Comply with a Discovery Order 478
Subpoena for Production of Documents, Electronically Stored Information, or Tangible Things, or to Permit the Inspection of Premises 479
Subpoena of Expert's Work Papers 480
Interrogatories: Timing of Service and Limitations 481
Interrogatories Depend upon Written Report Requirement 481
Timing of Service 482
Limits on Number of Interrogatories That Can Be Served 482
Form of Response 483
Depositions: Timing of Request and Special Rules 483
Federal Rules of Civil Procedure 26(b)(4), 30, and 31 483
States That Do Not Allow Depositions of Expert Witnesses as a Matter of Course 485
Ensuring an Expert Is Deposition-Ready 485
Timely Disclosure and Duty to Supplement 486
Scope of Discovery—Some Specific Examples 489
Involving the Business Valuation Expert in Discovery 494
Preparing Discovery Requests 494
Preparing Deposition and Interrogatory Questions 494
Presence at Opposing Expert's Deposition 494
Involving Your Own Expert in Depositions of Opposing Experts 495
Rebutting the Opposition 496
Summary 497

Chapter 28

Buy-Sell Agreements 499

Types of Agreements 499
Entity Purchase Agreements 499
Cross-Purchase Agreements 499
Hybrid Agreements 500
Tag-Along Rights 500
Types of Valuation Provisions 500
Fixed Price 500
Formula 500
Negotiation Among Parties 500
"Shotgun" Agreements 500
Independent Outside Appraisal 500
Drafting a Good Buy-Sell Agreement 501
Definition of Value 501
The "As of" Date 503
Appraiser Qualifications 503
Appraiser Selection and Procedures 503
Single-Appraiser Scenario 503
Multiappraiser Scenario 504
Funding and Payment Mechanisms 505
Dealing with the Agreement When the Triggering Event Occurs 509
The Effect of the Agreement on Valuations for Purposes Other Than the Agreement Itself 510
References 510

Chapter 29

Alternative Dispute Resolution 513

Alternative Dispute Resolution Act of 1998 515
Advantages of Arbitration versus Litigation 515
Choosing Arbitrators or Mediators 516
Arbitrators 516
Mediators 516
Process for Selecting Arbitrators 516
Instructions to Arbitrators 517
Communications with Parties and Lawyers 518
Field Visit 518
Hearings 518
Reporting an Arbitration Conclusion 519
Alternative Dispute Resolution in Marital Dissolution 519
Alternative Dispute Resolution in Federal Tax Disputes 520
Alternative Dispute Resolution References 522
Books and Publications 522
Professional Arbitration and Mediation Organizations 522

Chapter 30

Business Valuation Standards and Credentials 525

Organizations Offering Professional Accreditation 525
Other Organizations Offering Business Valuation Guidance 532
Business Valuation Professional Standards 534
Uniform Standards of Professional Appraisal Practice (USPAP) 534
Other Professional Organization Standards 535
Internal Revenue Service Authority 535

Chapter 31

Cross-examining a Business Valuation Expert 537

Background and Qualifications (Chapter 30) 538
Education 538
Professional Credentials 538
Experience 539
Assignment (Chapters 1 and 2) 539
Work Done 540
Sources of Information 540
Economic and Industry Information (Chapter 14) 540
Company Information 542
Financial Statement Adjustments (Chapter 12) 542
Comparative Financial Statement Analysis (Chapter 13) 543
Overall Valuation Methodology (Chapter 3) 544
Income Approach (Chapter 5) 544
Market Approach (Chapter 6) 546
The Asset Approach (Chapter 7) 548
Discounts and/or Premiums (Chapter 15) 548
Synthesis and Conclusion of Value (Chapter 16) 549

Appendix A: Glossary of Business Valuation Terms 551

Appendix B: Business Appraisal Professional Organizations 571

Appendix C: General Bibliography 581

Table of Cases 597

Index 615

Table of Exhibits

Exhibit 2-1: "Levels of Value" in Terms of Characteristics of Ownership 20
Exhibit 3-1: Schematic Diagram of Business Valuation Approaches and Methods 27
Exhibit 3-2: Value of Invested Capital and Direct Valuation of Equity Procedures 29
Exhibit 4-1: Widget Corporation Financial Data 32
Exhibit 4-2: Levels of Financial Statement Preparation 34
Exhibit 5-1: Terms and Notations Commonly Used in the Income Approach 46
Exhibit 5-2: Discounted Present Value of an Annuity 48
Exhibit 5-3: Schematic Diagram Illustrating Beta 65
Exhibit 5-4: The Midyear Discounting Convention 74
Exhibit 5-5: The Midyear Convention in the Capitalization Method 75
Exhibit 5-6: The Midyear Convention in the Discounting Method 77
Exhibit 6-1: Major Market Approach Business Valuation Scenarios 82
Exhibit 6-2: Marvel Corporation Financial Data 91
Exhibit 6-3: Marvel Corporation Invested Capital Valuation Multiples 92
Exhibit 6-4: Marvel Corporation Invested Capital Valuation Multiples 93
Exhibit 6-5: Widget Corporation and Guideline Companies Comparative Financial Analysis 97
Exhibit 6-6: Widget Corporation Guideline Company Invested Capital Multiples 100
Exhibit 6-7: Widget Corporation Valuation Using Invested Capital Multiples 101
Exhibit 6-8: Widget Corporation Guideline Company Equity Multiples 102
Exhibit 6-9: Widget Corporation Valuation Using Equity Multiples 103
Exhibit 7-1: Alpha Company Adjusted Net Asset Value 112
Exhibit 8-1: Illustration of Excess Earnings Method 117
Exhibit 8-2: Definitions of Goodwill 120
Exhibit 8-3: A "Sanity Check" for a Value Indicated by the Excess Earnings Method 121
Exhibit 8-4: Revenue Ruling 68-609 122
Exhibit 9-1: Rules of Thumb for Valuation 132
Exhibit 11-1: 12-Point Checklist for Valuation Appraisers 143
Exhibit 11-2: Tax Court's Examples of the Factor Test 144
Exhibit 12-1: Meteor Manufacturing, IncAdjustments to Income Statements 156
Exhibit 12-2: Meteor Manufacturing, IncAdjustments to Balance Sheet 157
Exhibit 13-1: Nucor Corporation Two-Year Balance Sheet and Income Statement 165
Exhibit 13-2: Nucor Corporation Horizontal Analysis of Balance Sheet and Income Statement 166
Exhibit 13-3: Nucor Corporation and Oregon Steel Mills IncSales Figures in Dollars 167
Exhibit 13-4: Nucor Corporation and Oregon Steel Mills IncSales Figures in Percentages 167
Exhibit 13-5: Oregon Steel Mills Sales Figures 168
Exhibit 13-6: Trend of Oregon Steel Mills Sales 168
Exhibit 13-7: Growth of Oregon Steel Mills Sales 169
Exhibit 13-8: Trend and Growth of Oregon Steel Mills Sales 170
Exhibit 13-9: L.BFoster, Oregon Steel Mills, and Nucor Corporation 2007 Balance Sheet and Income Statement 171
Exhibit 13-10: L.BFoster, Oregon Steel Mills, and Nucor Corporation Common-Size Balance Sheet and Income Statement 172
Exhibit 13-11: L.BFoster, Oregon Steel Mills, and Nucor Corporation Common-Size Balance Sheet and Income Statement with 2007 Industry Statistics 173
Exhibit 13-12: Selected Nucor Corporation Financial Information 175
Exhibit 13-13: Nucor Corporation Return on Assets .175
Exhibit 13-14: Hypothetical Return on Assets 176
Exhibit 13-15: Effect of Asset Levels 177
Exhibit 13-16: Nucor Corporation Profit Margin, Turnover, and Return on Assets 2003–2007 178
Exhibit 13-17: Nucor Corporation Common-Size Income Statement 2003–2007 178
Exhibit 13-18: Nucor Corporation Common-Size Balance Sheet 2003–2007 180
Exhibit 13-19: Nucor Corporation Turnover Ratios 2003–2007 180
Exhibit 13-20: Return on Equity and Debt to Equity 181
Exhibit 13-21: Effect of Debt to Equity Ratio 182
Exhibit 13-22: Nucor Corporation Liquidity Ratios 2003–2007 183
Exhibit 13-23: Nucor Corporation Solvency Ratios 2003–2007 185
Exhibit 14-1: 2007 GDP in Billions of Current Dollars 192
Exhibit 14-2: All-Urban Consumer Price Index 1982-84 = 100 193
Exhibit 14-3: Impact from Variable versus Fixed Costs 194
Exhibit 14-4: Per Capita Real GDP by State, 2006 196
Exhibit 14-5: 2006 Personal Income 196
Exhibit 14-6: Selected Historical and Forecasted Revenue Growth Rates 199
Exhibit 14-7: Selected Industry Common-size Financial Statements and Ratios 201
Exhibit 15-1: "Levels of Value" in Terms of Characteristics of Ownership 205
Exhibit 15-2: Summary of Restricted Stock Studies 217
Exhibit 15-3: LiquiStat™ Discounts for Restricted Stocks 220
Exhibit 15-4: The Value of Marketability as Illustrated in Initial Public Offerings of Common Stock 221
Exhibit 15-5: Valuation Advisors' Lack of Marketability Discount Study™ Transaction Summary Results by Year from 1999–2007 223
Exhibit 20-1: APB and FASB Pronouncements Amended By SFAS 157 344
Exhibit 22-1: Present Value of $1,000 at Various Market Rates of Interest 377
Exhibit 27-1: Summary of Discovery Rules 466
Exhibit 27-2: Preliminary Documents and Information Checklist for Business Valuation of Typical Corporation 472
Exhibit 28-1: "Levels of Value" in Terms of Characteristics of Ownership 502
Exhibit 28-2: Treatment of Life Insurance Proceeds in Valuation 506
Exhibit 30-1: Professional Accreditation Criteria 526
Exhibit 30-2: Professional Accreditation Quick Reference List 533