The Principle of (Realistic) Expectations

In Forecasts for Business Appraisals

Business valuation is all about expectations for the future. However, those expectations, as reflected in forecasts prepared for business appraisals, must be realistic. This short post mentions the hockey-stick projections often seen in business appraisals and ask for realistic projections, whether they be explicit forecasts of future years’ performance, or implied forecasts in single-period income capitalization methods.

Restricted Stock Benchmarkers Beware

Benchmark Analysis Will Not Work for Even a Single Asset Holding Company

This post puts benchmarking analysis using averages of restricted stock studies to determine marketability discounts to the test and the test is failed. If cannot work for even a simple, single asset holding company interest. Read the post and you will not employ simple benchmark analysis again. The post is necessarily long. Print it off or bookmark it when you have time to read it and think about its implications.

Valuation Question From BV Resources

Minority Interest (Lack of Control) Discount

A question was posed in a recent issue of Business Valuation Update from BV Resources. Paraphrasing, if all shareholders are minority, should there be a discount for lack of control (from the marketable minority level)? The broader question is, whether all shareholders are minority or there is a controlling shareholder, should there be a discount for lack of control (from the marketable minority level)? The answer is the same as we conclude in this post.

Analyzing the BV Resources 2021 DLOM Survey

What Does it Mean for Appraisers Today?

BV Resources recently published a DLOM Survey. It had 10 questions and 202 responders. This post looks at several of the questions to infer the current state of the art in valuation regarding DLOMs. The post is longer than most but is worth your investment of time to read it and hopefully comment since the issue is key in all valuations of illiquid minority interests of companies.

Leveraging Private Companies to Accelerate Owner Liquidity and Returns

Leveraged Dividend Recapitalizations and Leveraged Share Repurchases

Now is an excellent time for closely held and family business boards to consider engaging in leveraged transactions to enhance shareholder liquidity and accelerate shareholder returns. The Biden Administration has not yet increased corporate or personal tax rates and interest rates are still low. Banks are seeking quality loans and your leveraged transaction might fit their bill. And perhaps your shareholders desire some liquidity from their ownership, even if you are not ready to don’t desire to sell your company.

In this post, two corporate finance tools available to owners of closely held and family businesses are discussed at length: Leveraged Dividend Recapitalizations and Leveraged Share Repurchases. These tools can be used to create liquidity outside the ownership of private businesses or interests in them.

Your Company Has a Dividend Policy

Dividend Policy. Every company has one. The question is, is it a good one in terms of meeting the needs of your company’s owners? This post explains the concept of Net Operating Cash Flow (NOCF) (after-tax), which is the source for debt repayment, for working capital for growth, for replacement capex, and for growth capex. It is also the source for economic distributions to owners. Whatever your board decides about the uses of NOCF, your dividend policy is either consciously made or it is residual in nature.

Normalizing for Excess Owner Compensation in Minority Interest Appraisals

Examining Valuation Questions in Light of the Integrated Theory of Business Valuation

Should business appraisers normalize excess owner compensation and perquisites, or agency costs, to market levels for similar services when valuing a non-controlling subject interest? In this post we discuss the answer to this question and the logic behind it. This post will be controversial for some readers, but we believe after reading it, you will agree.

RSD-6: The Expected Holding Period Premium for Restricted Stock Investors Is Caused by Incremental Risk Relative to Publicly Traded Shares of Issuers

This sixth post in a series on restricted stock discounts begins and ends by referencing all previous posts. The focus today is on the expected holding period premium, the key difference between restricted shares and otherwise identical publicly traded shares of restricted stock issuers. We discuss the reasons for restricted stock discounts and illustrate the calculation of expected holding period premiums implied by a sample restricted stock transaction.

Indiana Supreme Court Affirms the “Words on the Page” of a Mandatory Buyout Provision

Buy-sell agreements are often unclear regarding the interpretations of their buy-sell provisions. The subject matter of this post is a brand new Indiana Supreme Court ruling that found the valuation terms to be clear – and agreed to by all the parties. Appraised market value was considered to be the equivalent of fair market value. Since the valuation applied to the interest and not to the company, it was appropriate for the valuation expert to consider valuation discounts.