Foreword xvii Preface xix Highlights of This Book xix Who Should Read This Book? xix About the Book xix Acknowledgments xxiii PART I FOUNDATIONS: VALUING A BUSINESS 1 CHAPTER 1 Fundamental Concepts for Defining Value 3 Standard of Value 3 Level of Value 9 Premise of Value 11 Conclusion 12 CHAPTER 2 Defining the Engagement 13 The Importance of Defining the Engagement 13 Defining the Client 15 The First Call 15 The Subject Entity and Entity Type 16 Entity Distinctions and Entity Significance in the Valuation 18 State of Entity Organization or Incorporation 19 Principal Business Location 19 Description of the Subject Interest 20 Purpose and Intended Use of the Valuation 21 Date of the Valuation 23 Scope of the Work Product 24 Summary Assignment Definition Table 26 The As-Of Date of the Appraisal and the Date of the Appraisal Report--Added Thoughts and Perspective 26 Conclusion 28 CHAPTER 3 Information Collection and Due Diligence 29 Importance of the Information Collection and Due Diligence Phase 29 Industry and Economic Considerations 30 Financial Information and Analysis 31 The Management Interview 35 Preparation 37 Agenda of a Typical Management Interview 38 Conclusion 40 CHAPTER 4 An Overview of Valuation Approaches 41 Recognized Valuation Approaches 41 Methodology and Level of Value, Direct and Indirect Methodology 42 CHAPTER 5 Valuation Approaches: The Cost Approach 47 The Cost Approach 47 Typical Adjustments in the Cost Approach (Using Tangible Net Asset Value Methods) 53 To Tax Affect or Not 54 CHAPTER 6 The Income Approach to Value 59 Direct Capitalization and Discrete Projection Methods 60 Reconciliation of Income Methods to Market Methods 61 Typical Adjustments to the Income Statement 62 Adjustments That Correspond to Balance Sheet Treatments 63 Reconciling or Reclassifying Interim-Period Measures to Fiscal-Period Measures 63 Income Statement Adjustments and Considerations 65 Matching the Cost of Capital to the Benefit Stream 69 Developing the Cost of Capital 70 Summary Examples of Developing the Cost of Equity Capital 74 Growth Rate of Earnings/Net Cash Flow 77 Finishing the Direct Capitalization Equation 83 Developing the Single-Period Benefit (Ongoing Earnings and Ongoing Net Cash Flow) and Preparation for the Discounted Future Benefits Method 84 Example of a Single-Period Capitalization to Derive the Market Value of Total Invested Capital 86 The Discounted Future Benefits Method (DFB) 88 Conclusion 93 CHAPTER 7 The Market Approach 95 Valuation Methods under the Market Approach 96 Rules of Thumb 97 Transactions Method 98 Guideline Public Company Method 99 The Fundamental Adjustment 105 Guideline Transactions Method 110 CHAPTER 8 Correlation of Value 113 Global Considerations in the Correlation Process 113 Examples of Correlating a Value Indication 118 Conclusion 124 CHAPTER 9 Valuation Discounts and Premiums 125 The Levels of Value Revisited 125 Perspective on the Control Premium 127 Control Premiums--Substance Over Form 129 Perspective on the Minority Interest Discount 130 Marketability Discounts 132 Conclusion 133 PART II BUSINESS VALUATION STANDARDS 135 CHAPTER 10 Uniform Standards of Professional Appraisal Practice (USPAP) 137 Overview of USPAP Valuation Standards 138 USPAP Ethics Rule 139 2010-11 USPAP Competency Rule 140 2010-11 USPAP Scope of Work Rule 141 2010-11 USPAP Jurisdictional Exception Rule 142 USPAP Business Appraisal Review (USPAP Standard 3) 142 Business Appraisal Development: USPAP Standard 9 146 Business Appraisal Report Standards USPAP Standard 10 148 USPAP Certification Requirement 149 USPAP Statements on Appraisal Standards and Advisory Opinions 150 CHAPTER 11 American Society of Appraisers (ASA) Business Valuation Standards 153 ASA BVS General Preamble 153 ASA BVS-I (General Requirements for Developing a Business Valuation) 154 ASA BVS-II (Financial Statement Adjustments) 156 ASA BVS-III (Asset-Based Approach to Business Valuation) 156 ASA BVS-IV (Income Approach to Business Valuation) 157 ASA BVS-V (Market Approach to Business Valuation) 158 ASA BVS-VI (Reaching a Conclusion of Value) 159 ASA BVS-VII (Valuation Discounts and Premiums) 159 ASA BVS-VIII (Comprehensive Written Business Valuation Report) 160 ASA BVS-IX (Intangible Asset Valuation) 161 ASA SBVS-1 (Guideline Public Company Method) 161 ASA SBVS-2 (Merger and Acquisition Method) 162 PG-1 (Litigation Support: Role of the Independent Financial Expert) 163 PG-2 (Valuation of Partial Ownership Interests) 163 CHAPTER 12 The American Institute of Certified Public Accountants (AICPA) Statement on Standards for Valuation Services 165 Introduction and Scope 165 Overall Engagement Considerations 165 Development 168 Valuation Approaches and Methods 170 Detailed Report 176 Summary Report 180 Calculation Report 181 Oral Report 181 CHAPTER 13 National Association of Certified Valuation Analysts (NACVA) Professional Standards 183 Preamble--General and Ethical Standards 183 Valuation Services 184 Development Standards 184 Reporting Standards 185 Miscellany 186 CHAPTER 14 The Institute of Business Appraisers (IBA) Business Appraisal Standards 187 Standard One: Professional Conduct and Ethics 187 Standard Two: Oral Appraisal Reports 190 Standard Three: Expert Testimony 190 Standard Four: Letter Form Written Appraisal Reports 191 Standard Five: Formal Written Appraisal Reports 192 Preliminary Reports 193 CHAPTER 15 Canadian Institute of Chartered Business Valuators Practice Standards 195 Practice Standard 110--Valuation Reports 195 Practice Standard 120--Scope of Work 198 Practice Standard 130--File Documentation 200 Practice Standard 210--Advisory Reports 201 Practice Standard 220--Scope of Work for Advisory Reports 202 Practice Standard 230--File Documentation for Advisory Reports 202 Practice Standard 310--Expert Reports 202 Practice Standard 320--Scope of Work for Expert Reports 204 Practice Standard 330--File Documentation Standards in Expert Reports 205 Practice Standard 410--Limited Critique Reports 207 Practice Standard 420--Scope of Work for Limited Critique Reports 209 Practice Standard 430--File Documentation Standards for Limited Critique Reports 210 Practice Bulletins 210 CHAPTER 16 Internal Revenue Service (IRS) Business Valuation Standards 215 IRM 4.48.4.1--Introduction 215 IRM 4.48.2--Development Guidelines 215 IRM 4.48.4.

3--Resolution Guidelines 218 IRM 4.48.4.4--Reporting Guidelines 218 Addendum A USPAP 3 Comparison Chart 219 Addendum B USPAP 9 Comparison Chart 220 PART III LESSONS FROM THE TRENCHES 221 CHAPTER 17 Alleged Errors of Omission by Appraisers 223 Failure to Comply with USPAP 224 Valuation Credentials 225 Too Much Involvement by Counsel in the Appraisal Report Preparation 225 Standard of Value 225 Valuation Date 226 The Subject Property Interest 227 Bias 228 Sources of Data 229 Independence 230 Pure Reliance on Case Law 230 Site Visits and Management Interviews 231 Failure to Provide Sufficient Explanation 232 Disregard of Material Facts 232 Failure to Find Available Information 233 Failure to Adequately Support Selection of Beta 234 Improper Sampling Techniques 235 Off Financial Statement Items 236 Failure to Sufficiently Explain Assumptions 236 Insufficient Due Diligence 237 Failure to Make Inquiries with Significant Third Parties 237 Failure to List All Appraisers'' Qualifications 238 Failure to Consider the Small-Stock Premium 238 Failure to Factor in Income Tax 239 Failure to Set Forth the Adjustments to Financial Statements in the Appraisal Report 239 Failure to Produce a Replicatable Report 240 Failure to Identify the Multiples Selected 240 Failure to Discuss Weightings in the Appraisal Report 240 Failure to Distinguish between Tax and Book Depreciation 240 Failure to List Guideline Companies 241 Failing to Separate Operating and Nonoperating Aspects of a Company 241 Failing to Lay Foundation for Small Stock Premium 241 Failing to Justify Capitalization or Discount Rates 242 Failure to Think Like an Investor 242 Failure to Define Capital Structure 243 Failure to Adequately Consider the ''''Willing Buyer'''' 243 Failure to Adequately Consider the Willing Seller 243 Failure to Accurately Describe the Subject Property 244 Failure to Properly Classify the Subject Company 244 Failure to Explain the Basis for a Valuation Discount 245 Failure to Properly Consider the Subject Company''s Growth Rate 245 Failure to Explain Market Multiples Selected for Guideline Companies 245 Failure to Explain Equal Weighting of Conclusions of Value 246 Failure to Consider Differences between the Subject Company and the Guideline Companies 246 Failure to Utilize Data from a Guideline Company That the Apprais.