As we continue in this series on Revenue Ruling 59-60 and fair market value, we now analyze the factors used to describe the standard of value. In this post, we discuss Revenue Ruling 59-60’s “basic eight” factors for consideration in fair market value determinations. In addition, we dig into the “critical three” factors mentioned in Revenue Ruling 59-60 – common sense, informed judgment, and reasonableness.
In this fourth post in our series on Appraisal Review, we discuss definitions of fair market value. Fair market value is the most common standard of value employed by business appraisers. It is the standard for gift and estate tax and charitable giving matters as well as for many other appraisal requirements involving the federal government. And it is the most frequently used standard of value in buy-sell agreements and in other business arrangements requiring opinions of value. Despite its frequent employment, it is my observation that fair market value is not nearly as well-understood by business appraisers, attorneys, and courts as it should be.
The levels of value chart for business valuation relates the various “levels” of value to one another on a conceptual basis. It was first published in 1990. This chart recognized what the markets and business valuation analysts had roughly understood for some time about “levels” of value of businesses.
So what do the conceptual levels of value have to do with fair market value and what does all this have to do with appraisal review? We review two levels of value charts containing three and four conceptual levels, respectively. In an appraisal, it is critical to specify the appropriate level of value. In appraisal review, it is perhaps even more critical to understand appraisal assignments and reach reasonable conclusions regarding the appropriate level of value. How else can a reviewer reach a valid opinion regarding the quality and appropriateness of the work of another appraiser? How else can a reviewer reach a valid opinion regarding the reasonableness of the conclusion of a report under review? And we have not yet attempted to define fair market value.
After a break of more than two months, I’m back to ChrisMercer.net. This blog and its predecessors has been the beginning point of exposure for most of my thinking for many years. With this post, we turn to a new primary topic of focus — appraisal review. As you will see, there is a great deal more to the concept of appraisal review than a few methods or techniques to be employed. I’m looking forward to the coming exploration of appraisal review.
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.
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.
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.
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.
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.
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.
