Shannon P. Pratt

The Market Approach to Valuing Businesses (eBook, PDF)

• Format: PDF

Produktbeschreibung

Your Best Approach to Determining Value If you're buying, selling, or valuing a business, how can you determine its true value? By basing it on present market conditions and sales of similar businesses. The market approach is the premier way to determine the value of a business or partnership. With convincing evidence of value for both buyers and sellers, it can end stalemates and get deals closed. Acclaimed for its empirical basis and objectivity, this approach is the model most favored by the IRS and the United States Tax Court-as long as it's properly implemented. Shannon Pratt's The Market Approach to Valuing Businesses, Second Edition provides a wealth of proven guidelines and resources for effective market approach implementation. You'll find information on valuing and its applications, case studies on small and midsize businesses, and a detailed analysis of the latest market approach developments, as well as: * A critique of US acquisitions over the last twenty-five years * An analysis of the effect of size on value * Common errors in applying the market approach * Court reactions to the market approach and information to help you avoid being blindsided by a litigation opponent Must reading for anyone who owns or holds a partial interest in a small or large business or a professional practice, as well as for CPAs consulting on valuations, appraisers, corporate development officers, intermediaries, and venture capitalists, The Market Approach to Valuing Businesses will show you how to successfully reach a fair agreement-one that will satisfy both buyers and sellers and stand up to scrutiny by courts and the IRS.

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Produktdetails

• Verlag: Wiley-Scrivener
• Seitenzahl: 432
• Erscheinungstermin: 3. Januar 2006
• Englisch
• ISBN-13: 9780471775416
• Artikelnr.: 37352565

Autorenporträt

Shannon P. Pratt, CFA, FASA, MCBA, CM&AA, is the Chairman and CEO of Shannon Pratt Valuations, Inc. a premier business valuation firm located in Portland Oregon, and is the founder and Editor Emeritus of Business Valuation Resources, LLC. Over a distinguished career of close to four decades, he has performed valuation engagements for M&A, ESOPs, gift and estate taxation, marital dissolution, shareholder oppression and dissent, and numerous other purposes. He has conducted numerous fairness and solvency opinions, has testified in a wide variety of federal and state courts across the country, and frequently participates in arbitration and mediation proceedings. Dr. Pratt is one of the most successful and respected authors in his field. He is the author or coauthor of several industry standards, including Valuing a Business: The Analysis and Appraisal of Closely Held Companies, Valuing Small Businesses and Professional Practices, The Market Approach to Valuing Businesses, Standards of Value, Business Valuation and Taxes, The Lawyer's Business Valuation Handbook, and Cost of Capital.

Inhaltsangabe

List of Exhibits xv
Foreword xix
Preface xxi
Acknowledgments xxv
Notation System Used in This Book xxvii
Introduction xxxi
Part I. Defining Market Multiples and Market Approach Methods 1
1. Defining Market Value Multiples 3
Common Equity Only versus Total Invested Capital Multiples 5
Computing Market Value of Equity Multiples 9
Commonly Used Market Value of Equity Multiples 10
Computing Market Value of Invested Capital (MVIC) Multiples 15
Commonly Used MVIC Multiples 17
Time Periods to Measure Financial Variables 22
Relationship between Market Multiples and Capitalization Rates 23
Summary 23
2. The Guideline Public Company Method 25
Scope of Market 26
Availability of Public Company Data 26
Analytical Data for Public Companies 29
The Guideline Public Company Basic Procedure 31
Premiums and Discounts 33
Summary 34
3. The Guideline Transaction (Merged and Acquired Company) 35
Method
Differences in Transaction Structure 36
Scope of Market 38
Availability of Merged and Acquired Company Transaction Data 38
How Far Back in Time Are Transactions Relevant? 40
The Guideline Merger and Acquisition Basic Procedure 41
Premiums and Discounts 41
Summary 42
ix
4. Other Market Methods 44
Past Transactions 44
Offers to Buy 46
Rules of Thumb 46
Buy-Sell Agreements 48
Summary 49
Part II. Finding and Analyzing Comparative Market Transaction Data 51
5. Finding Public Company Market Transaction Data 53
Edgar 54
Secondary Sources for SEC Reporting Companies 54
Publicly Registered Limited Partnership Data 55
Sources for Nonreporting Companies 55
Summary 56
6. Finding Merger and Acquisition Market Data 57
Large Transactions 58
Middle Market and Small Transactions 63
Very Small Transactions 69
Summary 74
7. Adjusting Financial Statements 76
Choosing the Time Periods for Comparative Statements 77
Objectives of Financial Statement Adjustments 78
Adjustments for Nonoperating or Excess Assets 79
Nonrecurring Items 81
Adjustments for Accounting Comparability 83
Adjustments for "Insider" Anomalies 84
Adjustments for Income Taxes in Pass-through Entities 85
and S Corporations Summary 85
8. Comparative Financial Analysis 87
Types of Comparative Financial Analysis 88
Sources of Comparative Financial Analysis 89
Types of Ratios 101
Summary 117
Part III. Compiling Market Value Tables and Reaching a Value Conclusion 121
9. Compiling Useful Market Value Tables 123
Two Distinct Alternatives in Market Multiples 124
Examples of Market Value Tables 125
Summary 133
10. Selecting, Weighting, and Adjusting Market Value Multiples 137
Size and Nature of Company 137
Availability of Data 139
Dispersion of Market Value Multiples 139
The Harmonic Mean as a Measure of Central Tendency 139
Adjusting from Observed Market Value Multiples 140
Illustrative Estimate of Value Using Mathematical Weighting 141
Summary 142
11. Control Premiums and Minority Discounts 143
Prerogatives of Control Ownership 144
Quantifying Control Premiums and Minority Discounts 145
How the Standard of Value Affects Control Premiums and/or Minority
Discounts 148
The Control versus Minority Issue Covers a Spectrum 150
Summary 151
12. Discounts for Lack of Marketability 153
Defining Discount for Lack of Marketability 153
Applying the Discount for Lack of Marketability 154
Market Evidence Regarding the Discount for Lack of Marketability for
Minority Interests 155
Regulatory and Court Acceptance of Empirical Lack of Marketability Studies
158
Factors Affecting Magnitudes of Marketability Discounts 162
Discounts for Lack of Marketability for Controlling Interests 163
Summary 163
Part IV. Sample Market Approach Cases 167
13. Small-size Service Company Sample Case: Sub Shop 169
Business Description 169
Valuation Assignment 170
Economic Outlook 170
Financial Statement Analysis 170
Identification and Selection of Market Data 177
Identification and Selection of Valuation Multiples 188
Valuation of Wildcat Subs 190
Reconciling Value Conclusions 194
Addendum if Valuing for Other Purposes 194
14. Medium-size Service Company Sample Case- Software Developer 195
Valuation Assignment 196
Economic Outlook 197
Fundamental Position of the Company 198
Selection of Market Data 200
Financial Statement Analysis 203
Identification and Application of Valuation Multiples 221
Valuation of Colossal Software 232
Part V. Important Aspects of Using the Market Approach 239
15. Reconciling Market Approach Values with Income and Asset Approach
Values 241
Did We Appraise the Correct Property? 241
Conformance to the Required Definition of Value 242
Relative Adequacy and Reliability of Data 242
Check for Errors 243
Check Assumptions 243
Relationship between Market Multiples and Discount or Capitalization Rates
243
What to Do When Reconciliation Efforts Fail 247
Explicit versus Implicit Weighting 249
Summary 250
16. Does Size Matter? Evidence from Empirical Data 252
Evidence from Market Approach Data 252
Evidence from Income Approach Data 255
Summary 262
17. Common Errors in Implementing the Market Approach 263
Inadequate Selection of Guideline Companies 264
Indiscriminate Use of Average (or Median) Multiples 265
Failing to Consider Guideline Company Financial Statement Adjustments 265
Failure to Conduct a Site Visit and Management Interviews 266
Making Inappropriate or Unsupported Financial Statement Adjustments 267
Applying Multiples to Inconsistently Defined Data 268
Failure to Match Time Periods 268
Reliance on Rules of Thumb 269
Failure to Account for Excess or Deficient Cash 270
Failure to Adjust for Differences in Deal Terms and Structure 271
"Assets Plus ." Rules 272
Failing to Apply Appropriate Discounts and Premiums 272
Summary 273
18. The Dismal Track Record of U.S. Market Acquisitions 274
Acquirers Tend to Overpay 274
Why Buyers Overpay: The Hubris Effect 276
The Frog-kissing Princess 278
Summary 279
19. The Market Approach in the Courts 280
U.S. Tax Court 280
Marital Dissolutions 286
Bankruptcy 287
Condemnation 288
Dissenting Stockholder, Minority Oppression, and Other Shareholder Disputes
288
Summary 292
Appendixes 297
Appendix A Bibliography 299
Appendix B Data Resources 309
Appendix c International Glossary of Business Valuation Terms 331
Appendix d The Quantitative Marketability Discount Model 339
Appendix E Pratt's Stats(TM) Data Contributors 351
Index 377