My co-author, Travis W. Harms, CFA, CPA/ABV, and I have been doggedly insisting that business valuation questions, issues, premiums, discounts, and more be viewed through the combined lens of expected cash flow, its expected growth, and the risks associated with achieving the expected cash flows.
Until the latter 1990s, it was thought that buyers of companies paid premiums (over publicly-traded prices of targets) for elements of control. The current view is that buyers of companies pay for expected changes, post-acquisition, in combined cash flows and potentially reduced risk. Unfortunately, the valuation literature appears slow to recognize this change in thinking from paying for control (or lack thereof) to paying for relevant value based on the expected cash flows of a business or an interest in a business from the viewpoints of market participants at the respective levels.
I have heard many appraisers suggest that one should not normalize owner compensation when valuing minority interests “because the minority shareholder cannot change compensation.” I’d like to address this issue in this post.
In the final post in this series, we examine the actual marketability discounts concluded in statutory fair value matters since about 1985. The analysis will differentiate between appellate-level and trial court cases that stand and were not appealed. The results will likely be surprising for those interested in statutory fair value in New York.
In this second post on the New York case Friedman vs. Beway, we look at what happened at the Supreme Court (the lower court in New York) in Beway to inform what happened at the Court of Appeals.
This post provides a review of the 1995 New York Appellate Division, First Department case of Beway, which addressed certain “principles” guiding statutory fair value determinations in New York. It points out what appears to me to be a significant inconsistency in the treatment of marketability discounts based on the guidance from Beway. As will be shown, “equal treatment of all shares of the same class of stock” is not really equal treatment.
There were significant changes in Standards Rule 9-4 of the Uniform Standards of Professional Appraisal Practice regarding the development of business appraisals between 2005 USPAP and 2006 USPAP. The changes relate to moving from following procedures and considering approaches to a focus on developing “credible appraisal results” and analyzing “the effect on value, if any” or a number of quite specific valuation factors.
There were changes to Standards Rule 9-4(a) and 9-4(b) that shift emphasis to credible appraisal results and to introduce a focus on intangible assets for the first time. Standards Rules 9-4(c) and 9-4(d) were completely new and require appraisers to “analyze the effect on value” of a number of very specific factors that we will discuss in this post.
Appraisers who must follow USPAP, and that includes all members of the American Society of Appraisers and any appraisers conducting appraisals for gift and estate tax purposes or for other purposes involving the federal government, these standards apply. The rules apply, practically, to almost all appraisers, including those holding ABV and CVA designations.
And now for a bold conclusion at the outset: Many appraisers who focus on using restricted stock studies and pre-IPO studies as a basis for determining marketability discounts for illiquid minority interests have historically not been and are currently not providing standards-compliant appraisals for their clients.
And that’s a problem.
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.
A recent case in the Court of Appeals of Indiana focused on a misunderstood valuation issue, the so-called “marketability discount applicable to a controlling interest” in a company. In this post we take a look at the case and place the so-called discount in a new light.
While I have always focused on trying to make presentations for judges as understandable as possible, I have been thinking about this topic a good bit during the past year. By the time the year is over, I will have spoken on this topic of simplifying complex financial information for judges and juries a number of times around the country. Sometimes, it is a single graphic that helps convey the reasonableness of a complex series of opinions. This post is about one such graphic.
The issue of a premium for an S corporation at the enterprise level has been tried in a tax case, and the conclusion is none. This case marks a virtually complete valuation victory for the taxpayer. It also marks a threshold in the exhausting controversy over tax-affecting tax pass-through entities and applying artificial S corporation premiums when appraising S corporations (or other pass-through entities). This post provides an extensive review of the case.