Financial valuation applications and models, 4th edition

The authors come from all over the United States and Canada and are members of many professional valu-ation and financial associations, including the American Institute of Certified Publ

Financial Valuation

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Financial Valuation

Applications and Models

Fourth Edition with Website

JAmES R HiTcHNER

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Library of Congress Cataloging-in-Publication Data:

Names: Hitchner, James R., author.

Title: Financial valuation: applications and models, + website / James R

Hitchner.

Description: Fourth Edition | Hoboken: Wiley, 2017 | Series: Wiley finance

| Revised edition of the author’s Financial valuation, c2011 | includes

index.

identifiers: LccN 2016053398| iSBN 978-1-119-28660-8 (hardback) | iSBN

978-1-119-31231-4 (epub) | iSBN 978-1-119-31233-8 (epdf) | iSBN 978-1-119-36281-4 (obook) Subjects: LcSH: corporations—Valuation.

classification: Lcc HG4028.V3 H583 2017 | DDc 658.15—dc22 Lc record available at

https://lccn.loc.gov/2016053398

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

To my son, Jason Earle Hitchner.

Contents

Acknowledgments xxxvii Preface xvii

ChAPtEr 1

Addendum 2—International Glossary of Business

Addendum 3—AICPA Glossary of Additional Terms, Statements

on Standards for Valuation Services VS Section 100 26

Common Operational Premises Underlying the Standard of Value 39

viii Contents

Measurement 56Conclusion 57

ChAPtEr 3

Guideline Public Company and Guideline Company

Summary 75

ChAPtEr 4

Tax-Affecting the Earnings of Subchapter S Corporations and

Addendum 1—Commonly Used Financial Ratios:

Contents ix

Adjustments for GAAP Departures and Extraordinary,

Adjustments for Nonoperating Assets and Liabilities

Adjustments for Synergies from Mergers and Acquisitions 126Determination of Future Benefit Stream (Cash Flows) 127

Conclusion 163Addendum 1—Application of the Direct Equity Method (DEM)

Addendum 3—Best Practices: The Terminal Year of a

ChAPtEr 6

Addendum 1—SPARC: Strategy/People/Architecture/Routines/Culture 250Addendum 2—Twenty Ways to Calculate the Cost of Equity Capital:

x Contents

ChAPtEr 7

Background 271

Developing the WACC (Appreciating the Differences between

Due Diligence: Company-Country-Currency-Sector Framework 282

Advantages and Disadvantages of the Market Approach 296

Adjustments to the Guideline and Subject Companies 316Concluding Remarks on Choosing Guideline Companies 323

Adjusting Pricing Multiples for Differences in Growth 333

Summary 341

ChAPtEr 9

Theory 343Application 344

Addendum 2—Understanding Machinery and Equipment Appraisals 375

Contents xi

ChAPtEr 10

Conclusion 409

Types of Valuation Engagements and Related Reports 496

Appendix B—Valuation Representation/Certification 580Appendix C—Professional Qualifications of the Appraiser 581

xii Contents

ChAPtEr 12

Other Business Valuation Standards and Credentials 593Summary 597Addendum 1—Standards: A Summary of the AICPA’S BV Standards 598

Noncontrolling Interests in Pass-Through Entities 639

ChAPtEr 15

Other Characteristics of Family Limited Partnerships 728State Law, Property Rights, and Their Importance to the

Contents xiii

ChAPtEr 16

Conclusion 800

ChAPtEr 18

Introduction 801Purposes 801Requirements 802

Accounting Standards for ESOP Companies with Acquisition Debt 816

Role of Noncompete Agreements in Determining Personal versus

Trifurcation of Goodwill and the Concept of Tradeable

xiv Contents

Valuation of the S Corporation and Other Pass-Through Entities 846

Valuation Methodology and the Application of Discounts 849

Summary 852

ChAPtEr 20

Contents xv

Canadian Requirements Applicable to Expert Witnesses 920

“Rules” for the Testifying Expert When on the Witness Stand 922Conclusion 929

ChAPtEr 24

Introduction 931

Statements on Standards for Valuation Services VS Section 100 968Case Study: Determining the Value of Goodwill and Other

ChAPtEr 25

ChAPtEr 26

Can Lost Profits Exceed the Fair Market Value of the Business? 1028

Considerations in Securities Class Action Litigation 1036Conclusion 1040

ChAPtEr 27

A: Valuation for Public Companies and/or Financial Reporting 1043

F: Valuation of Early-Stage Technology Companies 1044G: Valuation Issues Related to Stock Options and Other

Valuation Issues for Specific Healthcare Industry Niches 1076Public and Private Healthcare Services Companies by Niche 1087

ChAPtEr 29

Background on Drivers of Compensation Assignments 1089

ChAPtEr 30

Construction 1099Oil and Gas Exploration and Production Valuations 1111Radio 1124

Restaurants 1144

Addendum 1—An Interview with a Business Broker-Valuator 1168

ChAPtEr 31

Introduction 1182Regional Economic Data (as of September 1, 20X5)  1189

Index 1229

It’s hard to believe that almost 14 years have passed since we published the first

edi-tion of Financial Valuaedi-tion: Applicaedi-tions and Models (FVAM) When I started this

book, it was my intention to design it to accomplish two main goals The first and most obvious one was to gather a group of respected valuation practitioners from all over the country and from the various valuation and appraisal associations to coauthor a text on valuation and to have a consensus view and presentation Given the strong personalities of the authors, this was no easy task As one of my coauthors said to me in the beginning, “Jim, what you are doing is equivalent to trying to herd cats.” Well, he was right However, I believe we met this goal in all three editions, and I credit my coauthors in their willingness to be open-minded and to change their opinions when a better way was presented

My second goal was to use this text and the companion Financial Valuation Workbook for business valuation education Both texts are the foundation for

the American Institute of Certified Public Accountants (AICPA) five-day National Business Valuation School, which is offered around the country, and the National Association of Certified Valuation Analysts (NACVA) three-day Advanced Valua-tion: Applications and Models course, also offered around the country I want to thank all the instructors and staff of both organizations What a wonderful group of people to work and consult with

FVAM is an all-encompassing valuation text that presents the application of

financial valuation theory in an easily understood manner Although valuation theory

is thoroughly discussed, the focus is on applications, models, and methods FVAM

contains numerous examples and methods that will assist the reader in navigating

a valuation project, along with hundreds of short, easily understandable “ValTips.” These ValTips alert the reader to important and often controversial issues

We have assembled 30 highly visible and well-respected valuation professionals

to discuss and agree upon the proper methods of valuation and to collectively present the group’s views and positions on business valuation concepts and, most important, applications Each author is the coauthor of the entire book The authors come from all over the United States and Canada and are members of many professional valu-ation and financial associations, including the American Institute of Certified Public Accountants (AICPA), the American Society of Appraisers (ASA), the CFA Institute, the Institute of Business Appraisers (IBA), and the National Association of Certified Valuators and Analysts (NACVA) Many hold multiple designations or certifications:

■ 20 Accredited in Business Valuation (ABV) with the AICPA

■ 18 Accredited Senior Appraisers (ASA) with the ASA

■ 2 Certified Business Appraisers (CBA) with the IBA

■ 4 Chartered Financial Analysts (CFA) with the CFA Institute

Preface

■ 3 Certified Fraud Examiners (CFE) with the ACFE

■ 15 Certified in Financial Forensics (CFF) with the AICPA

■ 21 Certified Public Accountants (CPA)

■ 10 Certified Valuation Analysts (CVA) with the NACVA

■ 4 Chartered Global Management Accountants (CGMA)

■ 1 Canadian Institute of Chartered Business Valuators (CICBV)

Collectively, they have several hundred years of valuation and related financial experience This text is the first time such a large group of diverse valuation practitioners has been assembled to agree on the application of valuation principles and methods There is no other text like this Given the often judgmental nature of valuation and the strong opinions that seem to go with being a valuation analyst, this was no easy task

We hope we continue to advance the profession by providing our agreed-upon views

We invite other practitioners to comment on this edition and/or assist in future editions

of this book We will never gain consensus in everything in the valuation profession; however, we do hope to shorten the long list of controversies and disagreements This text represents the state-of-the-art in the business valuation profession as it evolves This book includes basic, intermediate, and advanced topics, including:

■ Advanced company risk analysis

■ Income, estate, and gift taxes

■ Marital dissolution

■ Employee stock ownership plans (ESOPs)

■ Financial reporting

■ Family limited partnerships

■ Healthcare and other industries

■ Intellectual property

■ Commercial damages

■ High-tech issues

■ Reasonable compensation

FVAM is targeted to the following professionals and groups, who are typically

exposed to financial valuation issues:

■ Appraisal associations and societies

Some chapter highlights include:

Chapter 6, Cost of Capital/Rates of Return, has been greatly expanded and includes new thinking and research on risk premiums, beta, and data sources It also includes a section titled “20 Ways to Calculate the Cost of Equity Capital.”Chapter 7, International Cost of Capital, is a completely new chapter that delves deeply into the various methods and data sources used in the valuation of companies outside the U.S

Chapter 8, Market Approach, has been updated and includes new thoughts on the use of transaction databases

Chapter 10, Valuation Discounts and Premiums, expands on discounts, ing new quantitative models for discounts for lack of marketability It also includes a new method for using restricted stock transaction data

includ-Chapter 11, Report Writing, includes a new valuation report that is in ance with the business valuation standards of the AICPA (SSVS), ASA, IBA, NACVA, and USPAP

compli-Chapter 12, Business Valuation Standards, has been updated to include the use

of calculation engagements and calculation reports

Chapter 13, Pass-Through Entities, has been updated and expanded to include the use of the discount rate to capture value in a pass-through entity.Chapter 22, Reasonable Compensation, is a completely new chapter that pres-ents the methods, models, and tools to determine reasonable compensation.Chapter 26, Business Damages, has been rewritten and expanded

Chapter 29, Healthcare Compensation, is a completely new chapter devoted to calculation of fair market compensation

Chapter 31, Valuation Views, has been completely rewritten and includes a detailed case study and report that delves into controversial issues

This book also includes a companion website, which can be found at www wiley.com/go/FVAM4E, which includes additional chapter addendums referenced throughout the book

Financial valuations are very much affected by specific facts and circumstances Consequently, the views expressed in these written materials do not necessarily reflect the professional opinions or positions that the authors would take in every business valuation assignment or in providing business valuation services in connec-tion with an actual litigation matter Every situation is unique, and differing facts and circumstances may result in variations of the applied methodologies Furthermore, valuation theory, applications, and methods are continually evolving and at a later date may be different than what is presented here Nothing contained in these writ-ten materials shall be construed as the rendering of valuation advice, the rendering of

xx Preface

a valuation opinion, the rendering of an opinion of a particular valuation position,

or the rendering of any other professional opinion or service Business valuation services are necessarily fact-sensitive, particularly in a litigation context Therefore, the authors urge readers to apply their expertise to particular valuation fact patterns that they encounter, or to seek competent professional assistance as warranted in the

circumstances Jim Alerding, Rosanne Aumiller, Jeff Balcombe, Neil Beaton, Melissa Bizyak, Marcie Bour, Jim Budyak, Carol Carden, Stacy Collins, Larry Cook, Don Drysdale, Ed Dupke, Jay Fishman, Chris Hamilton, Tom Hilton, Jim Hitchner, Vince Kickirillo, Mark Kucik, Eva Lang, Harold Martin, Ed Moran, Ray Moran, Kate Morris, Shannon Pratt, Ron Seigneur, Stacey Udell, Sam Wessinger, Richard Wise, Don Wisehart, Kevin Yeanoplos.

Disclaimer Excluding Any Warranties: This book is designed to provide

guid-ance to analysts, auditors, and management but is not to be used as a substitute for professional judgment Procedures must be altered to fit each assignment The reader takes sole responsibility for implementation of material from this book The implied warranties of merchantability and fitness of purpose and all other warranties, whether expressed or implied, are excluded from this transac-tion and shall not apply to this book Neither the authors, editors, reviewers, nor publisher shall be liable for any indirect, special, or consequential damages

James R Hitchner, CPA/ABV/CFF, ASA, is the managing director of Financial

Valuation Advisors, Inc in Ventnor City, New Jersey He is also president of the Financial Consulting Group, LLC, a national association of professional services firms dedicated to excellence in valuation, financial, and litigation/forensic consult-ing He is CEO of Valuation Products and Services, LLC, a company that develops educational resources for valuation analysts and fraud/forensics practitioners He holds the American Institute of Certified Public Accountants (AICPA) specialty des-ignations of Accredited in Business Valuation (ABV) and Certified in Financial Fo-rensics (CFF) and is an Accredited Senior Appraiser (ASA) with the American Society

of Appraisers Mr Hitchner has over 37 years of experience in valuation services

He has often testified as a qualified expert witness on valuations in federal and state courts in numerous states

He has coauthored over 20 courses, taught over 60 courses, published over 100 articles, and made over 350 conference presentations and webinars Mr Hitchner is

editor/coauthor of the book Financial Valuation Applications and Models (FVAM), 4th edition (2017), coauthor of the book Financial Valuation Workbook (FVW), 4th edition (2017), and coauthor of the book Valuation for Financial Reporting: Fair Value, Business Combinations, Intangible Assets, Goodwill, and Impairment Analysis, 3rd edition (2011)—all published by John Wiley & Sons He is coauthor of PPC’s Guide to Business Valuations, 27th edition (2017), published by Thomson Reuters, and coauthor of A Consensus View, Q&A Guide to Financial Valuation (2016), published by Valuation Products and Services, LLC He is editor in chief of Financial Valuation and Litigation Expert, a bimonthly journal that presents views and tools

from some of the leading experts in valuation, forensics/fraud, and litigation services

Mr Hitchner is an inductee in the AICPA Business Valuation Hall of Fame and was twice a recipient of the AICPA’s Business Valuation Volunteer of the Year award

He was also one of the only four members of the original AICPA Business Valuation Standards Writing Task Force and served the entire six years up to the June 2007 official release of the standards Mr Hitchner is past chairman of the Business Valua-tion Committee of the Georgia Society of CPAs, past member of the AICPA Business Valuation Subcommittee, past member of the AICPA ABV Exam Committee, and past chairman of the ABV Exam Review Course Committee He has a Bachelor of Science degree in engineering from the University of Pittsburgh and Master of Busi-ness Administration degree from Rider University

About the Editor

R James (Jim) Alerding, CPA/ABV, ASA, is the owner of Alerding Consulting,

LLC, in Indianapolis, Indiana He is a CPA and holds the AICPA specialty tion of Accredited in Business Valuation (ABV) and is an Accredited Senior Appraiser (ASA) with the American Society of Appraisers Mr Alerding has over 46 years of financial/accounting/investment experience, including over 35 years of business valuation experience He has taught over 40 valuation courses, published numer-ous articles, and made over 100 business valuation presentations He has been recognized as an expert witness in numerous states and in state and federal courts across the United States and has testified approximately 500 times in depositions and trials Mr Alerding was a member of the writing task force for the AICPA Statement

designa-on Standards for Valuatidesigna-on Services No 1 (VS100), a past member of the AICPA Business Valuation Subcommittee, and an AICPA Business Valuation Hall of Fame Member He is a summa cum laude graduate of Xavier University with a bachelor’s degree in accounting

Rosanne J Aumiller, CPA/ABV/CFF, ASA, is a director at Grant Thornton LLP

in Cleveland, Ohio. Ms Aumiller provides business valuation services, expert timony, consulting, and analysis for parties in litigation. She has over 25 years of professional experience. Prior to joining Grant Thornton, she provided these services while a principal at boutique financial consulting and valuation firms, during her 10 years at a regional accounting firm and while employed for several years at Key Bank

tes-in the Valuation Services group She holds the AICPA specialty designations of credited in Business Valuation (ABV) and Certified in Financial Forensics (CFF) and

Ac-is an Accredited Senior AppraAc-iser (ASA) with the American Society of AppraAc-isers

Ms Aumiller has over 20 years of experience in valuation services and has testified

as an expert witness She has served as a member of the AICPA FVS Executive mittee, the AICPA Business Valuation Committee, and the AICPA ABV Credential Committee Ms Aumiller is a current member of the Cleveland Metropolitan Bar

Com-Association Foundation She is also a contributing editor of the AICPA FVS Digest.

Jeff Balcombe, CPA/ABV/CFF/CGMA, CFA, ASA, is president, chief executive

officer, and partner of BVA Group, a nationally recognized litigation, valuation, and financial advisory firm Mr Balcombe leads the firm’s management committee and all aspects of the firm’s services, including valuations, financial advisory services, and dispute consulting Mr Balcombe has testified dozens of times on issues related

to economic damages and lost profits analyses, patent and copyright infringement, misappropriation of trade-secret violations, purchase price disputes, wrongful con-tract termination, shareholder disputes, financial fraud allegations, securities class actions, and valuation issues, including solvency and matters ranging from small com-mercial disputes to conflicts with over $25 billion at stake Mr Balcombe has been

About the Authors

xxiv About the Authors

involved in hundreds of valuations performed for various purposes, including cial reporting, tax, ESOPs, solvency opinions, and fairness opinions. Although he has broad industry experience, Mr Balcombe has led numerous assignments in the energy industry in particular. Additionally, he writes about the insurance industry for the International Risk Management Institute and is on the panel of experts for the

finan-Financial & Valuation Litigation Expert journal.

Neil J Beaton, CPA/ABV/CFF, CFA, ASA, is a managing director with Alvarez

& Marsal Valuation Services, LLC Mr Beaton specializes in the valuation of public and privately held businesses and intangible assets for purposes of litigation support (shareholder disputes, lost profits claims, marriage dissolutions, and others), acquisi-tions, sales, buy-sell agreements, ESOPs, incentive stock options, and estate planning and taxation He also performs economic analysis for personal injury claims, wrong-ful termination, and wrongful death actions Mr Beaton earned a BA in economics from Stanford University and a master’s degree in finance from National Univer-sity He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA), and Accredited Senior Appraiser (ASA) Additionally, he is Accredited in Business Valuation (ABV) and Certified in Financial Forensics (CFF) Mr Beaton is a fre-quent lecturer at universities, is an instructor for various business valuation courses, and speaks nationally on business valuation with a special emphasis on early-stage and high-technology companies Mr Beaton has written two books on early-stage company valuation, has contributed to a number of other books on valuation and damages issues, and has written numerous articles on these topics He is a former co-chair of the AICPA’s Valuation of Private Equity Securities Task Force, a for-mer member of the AICPA’s ABV Exam Committee, and has served on the AICPA’s

Mergers & Acquisitions Disputes Task Force He is currently a member of the ness Valuation Update Editorial Advisory Board, a member of the Board of Experts for the publication, Financial Valuation and Litigation Expert, and on the Editorial Board of the National Association of Certified Valuation Analysts’ Value Examiner.

Busi-Melissa Bizyak, CPA/ABV/CFF, CVA, is a partner in charge of business

valu-ation and litigvalu-ation support services for Grossman Yanak & Ford in Pittsburgh, Pennsylvania She has practiced in public accounting for over 20 years and has sig-nificant experience in business valuation and tax-related issues for privately held concerns and their owners Ms Bizyak’s business valuation experience is diverse, including valuations of companies in the manufacturing, oil and gas, and technol-ogy industries These valuations have been performed for various purposes such as financial reporting, equitable distributions, buy-sell transactions, dissenting share-holder disputes, employee stock ownership plans (ESOPs) value enhancement, and gift and estate tax purposes She also provides litigation support services including expert witness testimony Ms Bizyak is a certified public accountant She holds the AICPA specialty designations of Accredited in Business Valuation (ABV) and Certi-fied in Financial Forensics (CFF) She earned the AICPA Certificate of Achievement

in business valuation and is a Certified Valuation Analyst (CVA) Ms Bizyak is also a member and past chair of the Executive Advisory Board of the National Association

of Certified Valuators and Analysts (NACVA)

Marcie D Bour, CPA/ABV, CVA, CFE, MAFF, ABAR, is a partner at Yip

Associ-ates, a forensic accounting and financial investigations firm With over 30 years of professional experience, she serves as the firm’s Valuation Services Practice Leader

About the Authors xxv

Ms Bour has served on a number of national boards including the National tion of Certified Valuators and Analysts’ Executive Advisory Board and its Litiga-tion Forensics Board She also served as the chair of the Board of Governors of the Institute of Business Appraisers Ms Bour is an instructor in the area of economic damages, having led a team to develop NACVA’s workshop “Business Interruption Losses and Claims.” She has moderated a number of webinars on the topic of busi-ness income losses for insurance claims She has spoken at valuation conferences on lost profits damages and valuation issues In addition to her involvement with pro-fessional organizations, Ms Bour has been involved with the Florida Bar as a mem-ber of a Bar Grievance Committee, serving three, three-year terms She also served a three-year term on a Florida Bar Unlicensed Practice of Law Committee Ms Bour has testified at deposition or trial in economic damage, shareholder dispute, matri-monial, usury, and criminal sentencing cases Her valuation and litigation experience covers a wide variety of industries Ms Bour graduated from Emory University with

Associa-a BBA, eAssocia-arning distinction in Associa-accounting Her business vAssocia-aluAssocia-ation credentiAssocia-als include the Accredited in Business Valuation (ABV) from the AICPA, and the Certified Valu-ation Analyst (CVA), Master Analyst in Financial Forensics (MAFF), and Accredited

in Business Appraisal Review (ABAR) from NACVA She is a CFE Certified Fraud Examiner (CFE), Business Valuator Accredited for Litigation (BVAL—retired desig-nation), and has a Certification in Distressed Business Valuation (CDBV)

James T Budyak, CPA/ABV, CFA, ASA, is senior vice president at Valuation

Research Corporation (VRC), an independent, full-service business valuation firm headquartered in Milwaukee, Wisconsin, that has provided objective, supportable conclusions of value for domestic and international clients of all sizes and industries since 1975 through its global network of nearly 1,000 valuation professionals Mr Budyak holds the designations of certified public accountant (CPA), Accreditation

in Business Valuation (ABV), and Accredited Senior Appraiser (ASA), and is a tered Financial Analyst® (CFA®) charterholder Mr Budyak has over 30 years of val-uation services experience, specializing in allocation of purchase price engagements, corporate tax and closely held business valuations, fairness and solvency opinions, bankruptcies and restructurings, and litigation support He has extensive experience with financial reporting and income tax audits, and has been deposed on valuation matters He is a past-elected board member of the American Society of Appraisers Business Valuation Committee (BVC) and the Milwaukee Investment Analysts Soci-ety He has served clients in most major industries, studied dozens of countries and visited over 40, and authored numerous articles and speeches on the international cost of capital

Char-Carol Carden, CPA/ABV, ASA, CFE is a principal with Pershing, Yoakley &

Associates and provides business valuation and related consulting services to a wide variety of business organizations, primarily in the healthcare industry She has per-formed appraisals of businesses and securities for a wide variety of purposes such

as mergers, acquisitions, joint ventures, management service agreements, and other intangible assets She is also a nationally recognized speaker and writer on health-care valuation topics In addition to being a Certified Public Accountant, she has also earned the Accredited in Business Valuation (ABV) credential from the American Institute of Certified Public Accountants, the Accredited Senior Appraiser (ASA) cre-dential from the American Society of Appraisers, and the Certified Fraud Examiner (CFE) credential from the Association of Certified Fraud Examiners She was the

xxvi About the Authors

chair of the Executive Committee for Forensic and Valuation Services from 2013 to

2016 and former chair of the Business Valuation Committee for the AICPA, former chair of the 2010 National AICPA Business Valuation Conference, and was on the planning committee for the 2011 AICPA National Healthcare Conference She was inducted into the Business Valuation Hall of Fame of the AICPA in 2013

Stacy Preston Collins, CPA/ABV/CFF, is a managing director with Financial

Re-search Associates She is a frequent speaker and author on business valuation, sic accounting, and related issues Her experience includes marital dissolution cases, corporate litigation, estate planning valuations, and transactions She has provided expert witness testimony on valuation/forensic accounting issues in several states

foren-Ms Collins is a charter member of the Forensic and Business Valuation Division of the American Academy of Matrimonial Lawyers (AAML) Foundation She has been

a faculty member for several years with the Family Law Trial Advocacy Institute, sponsored by the National Institute of Trial Advocacy and the American Bar Associ-ation, and the AAML’s Institute for Family Law Associates Ms Collins is past chair

of the AICPA’s Family Law Task Force, a former member of the AICPA’s Forensic and Litigation Services Committee, and was the 2010 AICPA FLS Volunteer of the Year

Larry R Cook, CPA/ABV/CFF, CBA, CVA, focuses on valuation and financial

consulting to private companies and their owners, as well as assists in family law matters in the division of complex marital estates With over 40 years of business and valuation experience, Mr Cook has testified as an expert in valuation, usury, and family law matters, as well as in a public hearing before the Department of Labor

on fiduciary responsibility quandaries He has authored the book Financial tion of Employee Stock Ownership Plan Shares, written articles, and participated as

Valua-a speValua-aker/instructor for courses on diverse finValua-anciValua-al topics for nValua-ationValua-al, stValua-ate, Valua-and local events Mr Cook has served in many capacities with the AICPA as chair of the initial ABV Credential Committee, member of the Management Consulting Execu-tive Committee, member of the Specialization Subcommittee, and original member

of the Business Valuation Subcommittee His service to the profession also includes national, state, and local organizations He was a member of the Board of Directors

of the Texas Society of CPAs, the Board of Director of the Houston Chapter of CPAs, the original Business Valuation Standards for Professional Practice Committee of the Institute of Business Appraisers, regional governor of the IBA, and on the qualifica-tions review committee of the IBA A native Texan, he is a graduate (BBA) of the first class (1972) of accounting majors from Sam Houston State University

Don M Drysdale, CPA/ABV, ASA, is the managing member of Gibraltar

Busi-ness Valuations with offices in Longmont, Colorado (Denver area), Lisle, Illinois (Chicago area), and Clearfield, Utah (Salt Lake City area) He is a certified public accountant in Arizona and Utah and holds the AICPA specialty designation of Accred-ited in Business Valuation (ABV) He is also an Accredited Senior Appraiser (ASA) with the American Society of Appraisers, and is a member of the Appraisal Issues Task Force Mr Drysdale has 30 years of financial and accounting experience, with 20-plus years of providing business valuation services He has considerable experience in lecturing to academic and professional organizations, including the University of Arizona, the University of Utah, the American Institute of Certified Public Accountants, the American Society of Appraisers, the National Association of Certified Valuation Analysts, the Institute of Business Appraisers, the Arizona Society of CPAs,

About the Authors xxvii

the Utah Association of CPAs, and others He has a Bachelor of Arts degree in counting from Weber State University

ac-Edward J Dupke, CPA/ABV/CFF/CGMA, ASA, is president and CEO of Dupke

Consulting, LLC, based in Sun City West, Arizona He holds the AICPA specialty designations of Accredited in Business Valuation (ABV), Certified in Financial Foren-sics (CFF), and Chartered Global Management Accountant (CGMA) He also holds the Accredited Senior Appraiser (ASA) designation from the American Society of Appraisers Mr Dupke is a former chairman of the AICPA Business Valuation Com-mittee and a former chairman of the Michigan Association of CPAs He has over 35 years of professional experience in public accounting and business valuation prac-tice He has been qualified as an expert witness in both state and federal courts and

is a regular instructor in business valuation at both the state and national level Mr Dupke is a former member of the AICPA Board of Directors and chaired the AICPA task force writing the first business valuation standard for AICPA members He is a member of the AICPA Business Valuation Hall of Fame He is the recipient of special recognition awards from both the AICPA and the Michigan Association of CPAs for his work on the business valuation standards He is a contributing author to several

valuation specialty texts and a member of the panel of experts of Financial tion and Litigation Expert In 2008, he was named by Accounting Today magazine

Valua-as one of the top 100 most influential CPAs He holds a Bachelor of Science degree

in business administration from Wayne State University

Jay E Fishman, FASA, is a managing director of Financial Research Associates

and has been actively engaged in the appraisal profession since 1974 He specializes

in the valuation of business enterprises and their intangible assets Mr Fishman has coauthored several books, including the highly acclaimed guide to business valua-tions (with Shannon Pratt and James Hitchner) and standards of value (with Shan-non Pratt and William Morrison) He has also written numerous articles on business valuation as well as qualifying as an expert witness and providing testimony in 12 states He has taught courses on business valuation to the Internal Revenue Service, the National Judicial College, the Hong Kong Society of Accountants, and on behalf

of the World Bank in St Petersburg, Russia He recently taught courses in Moscow, Russia, for Kwinto Management and for the Slovenian Institute of Auditors in Ljubljana, Slovenia He holds bachelor’s and master’s degrees from Temple University

as well as an MBA from LaSalle University Mr Fishman is a fellow of the American Society of Appraisers, a fellow of the Royal Institution of Chartered Surveyors, a former chairman of the Business Valuation Committee of the American Society of

Appraisers, editor of the Business Valuation Review, chair of ASA’s Government

Relations Committee, a former trustee of the Appraisal Foundation, and a member

of the Appraisal Standards Board of the Appraisal Foundation He recently pleted a six-year term as a member of the Appraisal Practice Board of the Appraisal Foundation He recently was awarded the Chairman’s Public Service Award from the Appraisal Foundation The award was established in 2005 to recognize individuals who have worked with the foundation for the benefit of the appraisal profession and who, in the process, have gone above and beyond the call of duty

com-Chris Hamilton, CPA, CFE, CVA, DABFA, is President and Principal of the Arxis

Group, headquartered in Simi Valley, CA Most of his professional time is spent in the areas of business valuations, forensic accounting, and litigation-related engagements

xxviii About the Authors

He has served as an expert in hundreds of civil, criminal, probate, and family court matters involving valuation, tracing, damage calculations, fraud, and accounting He has consulted on merger and acquisition transactions as well as highly specialized analysis and valuation of intangible assets as elements of the broader goodwill of a business He has presented courses at national conferences, training institutes and seminars on topics including fraud, business valuation, and forensic accounting He

is also part of the team teaching the Advanced Business Valuation courses around the country for the National Association of Certified Valuation Analysts (NACVA) He

is regularly asked by civic and business groups to speak on a variety of topics related

to his experience and expertise and is regularly published on topics ranging from forensic accounting to advanced valuation of damages and businesses

Thomas E Hilton, MS, CPA/ABV/CFF, CVA, CGMA, is director of the Forensic

& Valuation Services Group at Anders LLP in St Louis, Missouri He is licensed to practice in the states of Missouri, Illinois, and Florida He has testified regarding forensic accounting and valuation matters in federal and state venues in Missouri, Florida, Arkansas, and Illinois Mr Hilton has served as a member of the board of directors of the American Institute of Certified Public Accountants, as a member of the board of the AICPA Foundation, as chair of the AICPA Forensic and Valuation Services Executive Committee, and as a member of AICPA Governing Council He serves as an adjunct professor of forensic accounting in the John Cook School of Business at St Louis University He has presented extensively at national and state conferences and has published articles on forensic accounting, litigation, and valua-tion topics In 2005 and 2006, Mr Hilton was named one of the Top 100 Most In-

fluential Practitioners by CPA Magazine He was inducted into the AICPA Business

Valuation Hall of Fame in 2004 In 2003, Mr Hilton was named a CPA All-Star in

the business valuation discipline by CPA Magazine He holds a Bachelor of Science

in business administration from the University of Missouri–St Louis and a Master of Science in finance from St Louis University

James R Hitchner, CPA/ABV/CFF, ASA, is the managing director of Financial

Valuation Advisors, Inc in Ventnor City, New Jersey He is also president of the nancial Consulting Group, LLC, a national association of professional services firms dedicated to excellence in valuation, financial, and litigation/forensic consulting He

Fi-is CEO of Valuation Products and Services, LLC, a company that develops tional resources for valuation analysts and fraud/forensics practitioners He holds the American Institute of Certified Public Accountants (AICPA) specialty designa-tions of Accredited in Business Valuation (ABV) and Certified in Financial Forensics (CFF) and is an Accredited Senior Appraiser (ASA) with the American Society of Ap-praisers Mr Hitchner has over 37 years of experience in valuation services He has often testified as a qualified expert witness on valuations in federal and state courts

About the Authors xxix

and coauthor of A Consensus View, Q&A Guide to Financial Valuation (2016), published by Valuation Products and Services, LLC He is editor in chief of Financial Valuation and Litigation Expert, a bimonthly journal that presents views and tools

from some of the leading experts in valuation, forensics/fraud, and litigation services

Mr Hitchner is an inductee in the AICPA Business Valuation Hall of Fame and was twice a recipient of the AICPA’s Business Valuation Volunteer of the Year award

He was also one of the only four members of the original AICPA Business Valuation Standards Writing Task Force and served the entire six years up to the June 2007 official release of the standards Mr Hitchner is past chairman of the Business Valua-tion Committee of the Georgia Society of CPAs, past member of the AICPA Business Valuation Subcommittee, past member of the AICPA ABV Exam Committee, and past chairman of the ABV Exam Review Course Committee He has a Bachelor of Science degree in engineering from the University of Pittsburgh and Master of Busi-ness Administration degree from Rider University

Vincent M Kickirillo, CFA, CVA, is a managing director at VMG Health and

is based in the Dallas office He specializes in providing financial, valuation, and transaction advisory services to clients in the healthcare industry His clients have included hospitals, health systems, ambulatory surgery centers, imaging centers, cath labs, radiation therapy centers, and other healthcare entities He has also provided expert testimony related to the value of companies in the healthcare industry Prior

to joining VMG Health, Mr Kickirillo worked as a director for FTI Consulting, Inc.,

as a director in KPMG’s Valuation and Litigation practices, and as a staff and senior analyst in the Financial Advisory Services practice at Ernst & Young In those roles,

Mr Kickirillo has provided advisory services to firms in various industries, including healthcare, manufacturing, retailing, distribution, technology, telecommunications, financial, Internet, and professional services He has provided professional services for the purposes of merger, acquisition, divestiture, management planning, tax plan-ning, litigation, and bankruptcy Mr Kickirillo has provided testimony regarding valuation and other financial issues He has extensive experience in valuation of businesses; financial securities, such as common stock and derivatives; intellectual property, such as patents, trademarks, and trade names; and other specific assets

Mr Kickirillo received a Bachelor of Business Administration from the University

of Texas at Austin and a Master of Business Administration from Southern ist University He holds the Chartered Financial Analyst (CFA) designation and is a Certified Valuation Analyst (CVA)

Method-Mark G Kucik, CPA, CVA, CMA, is founder of the Kucik Valuation Group,

LLC, of Chicago, Illinois, specializing in business valuations of family-owned and closely held securities for use in estate tax planning, financial statement reporting, estate tax returns, gift tax returns, buy/sell agreements, purchase/sale transactions, employee stock ownership plans (ESOPs), economic damages, and matrimonial and shareholder disputes He is an instructor in the NACVA’s Training Development Team He was awarded the NACVA’s Outstanding Member award, NACVA’s Circle

of Light award, NACVA’s Outstanding Instructor award, and Instructor of Great Distinction award Mr Kucik teaches NACVA’s Business Valuations: Fundamentals, Techniques & Theory, Applications and Calculations of the Income and Asset App-roaches, Advanced Valuation: Applications and Models, and business valuation standards courses around the country He also presents valuation seminars through-out the Chicago area He is a member of the International Glossary Task Force He

xxx About the Authors

serves on NACVA’s Executive Advisory Board and NACVA’s Standards Committee

He is a Certified Valuation Analyst (CVA), and a member of the American Institute

of Certified Public Accountants (AICPA) and the Illinois CPA Society (ICPAS) Mr Kucik is a graduate of Loyola University of Chicago

Eva M Lang, CPA/ABV, ASA, is president of the Financial Consulting Group,

a nationwide alliance of business valuation and consulting firms, and serves as managing director of Valuation Products & Services She earned the designation

of Accredited Senior Appraiser (ASA) with the American Society of Appraisers and the Accredited in Business Valuation (ABV) credential from the AICPA Ms Lang has been involved in numerous projects in the areas of business valuation, financial analysis, and valuation education since beginning her valuation career

in 1988 with Mercer Capital She is an active leader in the valuation sion, having served on the business valuation committees of both the American Institute of CPAs and the American Society of Appraisers (ASA) She is a past member of the ASA Business Valuation Standards Committee and has served on CPA committees at the state level in the areas of estate planning, litigation ser-vices, and management consulting services She is a nationally recognized expert

profes-on Internet research for business valuatiprofes-on and litigatiprofes-on services Ms Lang is

the coauthor of The Best Websites for Financial Professionals, published by John

Wiley & Sons, and has written for numerous financial publications, including

the AICPA CPA Expert, The Practicing CPA, the Journal of Accountancy, and Financial Valuation and Litigation Expert In 2004, she was named to the AICPA

Business Valuation Hall of Fame for her contributions to the advancement of the business valuation profession

Harold G Martin Jr., CPA/ABV/CFF, ASA, CFE, is the partner-in-charge of the

Valuation and Forensic Services Department for Keiter, a certified public accounting and consulting firm in Richmond, Virginia, and an adjunct faculty member of the College of William and Mary Raymond A Mason School of Business He holds the AICPA specialty designations of Accredited in Business Valuation (CPA/ABV) and Certified in Financial Forensics (CPA/CFF), is an Accredited Senior Appraiser (ASA) with the American Society of Appraisers, and is a Certified Fraud Examiner (CFE) with the Association of Fraud Examiners He has over 30 years of experience and has appeared as an expert witness in federal and state courts, has served as a federal court-appointed forensic accountant for receiverships, and has served as a court-appointed neutral business appraiser He is a member of the AICPA Business Valua-tion Hall of Fame and is also a two-time recipient of the AICPA Business Valuation Volunteer of the Year award He is a former member of the AICPA Business Valua-tion Committee, former chair of the AICPA National Business Valuation Conference Steering Committee, former commissioner of the AICPA National Accreditation Commission, former editor of the AICPA ABV e-Alert, and former editorial adviser

and contributing author for the AICPA CPA Expert. He serves as an instructor for

the AICPA National Business Valuation School, AICPA ABV Exam Review Course, and AICPA Expert Witness Skills Workshop. He created and serves as chair of the Virginia Society of Certified Public Accountants Annual Business Valuation, Fraud, and Litigation Services Conference He is a former member of the VSCPA’s Board of Directors and former chair of the Business Valuation and Litigation Services Com-mittees. He is a frequent speaker and writer on valuation and forensic accounting

He is a coauthor of Financial Valuation: Applications and Models, 1st–4th eds.,

About the Authors xxxi

a contributing author to Cost of Capital: Estimation and Applications, 2nd–4th eds., an expert panelist for Financial Valuation and Litigation Expert, an Editorial Board member for Business Valuation Update, and a member of the Editorial Task Force for VSCPA Disclosures He has presented at numerous seminars, including the

Federal Bureau of Investigation Supervisor Forensic Accountant Summit Mr Martin received his AB in English from the College of William and Mary and an MBA from Virginia Commonwealth University

Edward F Moran Jr., MBA, CVA, CBA, ABAR, recently retired partner at Horne,

LLP, has been advising restaurant businesses and franchises on accounting and ation issues for almost 40 years Mr Moran has valued or participated in hundreds

valu-of industry sales, mergers, purchases, exchanges, and estate planning and gift

en-gagements He has been quoted in the Wall Street Journal and is published in the Valuation Examiner, CPA Expert, Valuation Strategies, Franchise News, and Busi- ness Appraisal Practice, among others He is author of BVR’s Guide to Restaurant Valuations, 2010 edition Mr Moran recently retired as a Certified Business Appraiser

(CBA) from the Institute of Business Appraisers; as a Certified Public Accountant (CPA) and Accredited in Business Valuation (ABV) from the AICPA; and Certified Valuation Analyst (CVA) and Accredited in Business Appraisal Review (ABAR) from the National Association of Certified Valuation Analysts. In addition to a Master of Business Administration degree from the University of Pittsburgh, Mr Moran holds a Bachelor of Arts degree in economics (with a minor in statistics) from Georgetown University and a Bachelor of Science degree in business administration (with a major

in accounting) from the University of Arizona, where he now assists teaching tion courses to students in the MBA and Master’s in finance courses

valua-Raymond E Moran, ASA, MRICS, is the CEO of MG Valuation Mr Moran

specializes in valuations for cross-border mergers and acquisitions, and business in China and Asia-Pacific Prior to forming MG Valuation, Mr Moran was managing director of American Appraisal’s Asia/Pacific operations He serves on the Board of the International Institute of Business Valuers and chairs its marketing committee,

promoting global business valuation education Mr Moran is past editor of the ASA Machinery & Technical Specialties Journal and past member of RICS Americas Plant

Machinery Committee His professional designations include senior member of the American Society of Appraisers and member of the Royal Institution of Chartered Surveyors Mr Moran is a frequent speaker and author on valuation issues in North America, Europe, and Asia

Katherine E Morris, MBA, ASA, is the president of Morris Valuation

Consult-ing, Inc., providing valuation and consulting services to a variety of industries With over 20 years of experience, Ms Morris has provided valuation analyses of business and intangible assets for diverse purposes, including financial reporting under State-ment of Financial Accounting Standards Nos 805 and 820 and reporting under IFRS, estate and gift tax reporting, merger and acquisition planning, and in the context of litigation and property tax disputes Ms Morris has performed work on behalf of the Internal Revenue Service and the Attorney General of the State of Georgia, as well as work to be presented to the Internal Revenue Service, the Department of Justice, and Office of the Inspector General Through the course of her career, she has performed analyses on a wide variety of entities, including hospitals, physician practices, imaging centers and biotechnology companies, auto dealerships, technology and management

xxxii About the Authors

consulting companies, telecommunication companies, financial institutions, ance companies, hotel and restaurant chains, building and consumer products retail-ers, wholesalers, manufacturers, a port, a power plant, and a petroleum refinery Ms Morris was formerly with Phillips Hitchner Group, Inc., Ernst & Young, Financial Valuation Advisors, Inc., and American Appraisal, Inc She is also a managing director with Valuation Products and Services, LLC Ms Morris received a Bachelor of Science from the Georgia Institute of Technology and an MBA from Georgia State University

insur-Shannon P Pratt, DBA, FASA, CFA, MCBA, CMA, MCBC, is the chairman and

CEO of Shannon Pratt Business Valuations, Inc., a nationally recognized business tion firm headquartered in Portland, Oregon He is also the founder and editor emeritus

valua-of Business Valuation Resources, LLC He earned a doctorate valua-of business tion, finance, from Indiana University and a Bachelor of Arts, business administration, from the University of Washington Dr Pratt is an Accredited Senior Appraiser and Fellow (FASA) of the American Society of Appraisers and is also accredited in Appraisal Review and Management (ARM) He is a Chartered Financial Analyst (CFA) and a Master Certified Business Appraiser (MCBA), and is Accredited in Business Appraisal Review (ABAR) by the Institute of Business Appraisers He is also a Master Certified Business Counselor (MCBC), and is Certified in Mergers and Acquisitions (CM&AA) with the Alliance of Merger and Acquisition Advisors

administra-Dr Pratt is a life member of the American Society of Appraisers and its ness Valuation Committee, a lifetime member emeritus of the Advisory Committee

Busi-on ValuatiBusi-ons of the ESOP AssociatiBusi-on, and the first life member of the Institute of Business Appraisers He is a recipient of the magna cum laude award of the National Association of Certified Valuation Analysts for service to the business valuation pro-fession Dr Pratt is a past trustee of the Appraisal Foundation

Dr Pratt is the author of Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 5th edition (McGraw-Hill, 2008); coauthor, Valuing Small Businesses and Professional Practices, 3rd edition (McGraw-Hill, 1998); coauthor, Guide to Business Valuations, 26th edition (Practitioners Publishing Corporation, 2016); coauthor of the following Wiley books: Cost of Capital: Applications and Examples, 5th edition (2014), Standards of Value, 2nd edition (2013), Business Valuations and Federal Taxes: Procedure, Law, and Perspective, 2nd edition, with Judge David Laro (2010); and author of the following Wiley books: Business Val- uation Discounts and Premiums, 2nd edition (2008); Business Valuation Body of Knowledge: Exam Review and Professional Reference, 2nd edition (2003); and The Market Approach to Valuing Businesses, 2nd edition (2005) He is the coauthor of The Lawyer’s Business Valuation Handbook, 2nd edition (2013) and The Lawyer’s Guide to the Cost of Capital (2014), both published by the American Bar Associa-

tion He has also published nearly 200 articles on business valuation topics

Ronald L Seigneur, CPA/ABV/CFF, ASA, CVA, CGMA, is a partner in Seigneur

Gustafson LLP, a CPA firm located in Lakewood, Colorado He holds the AICPA specialty designations of Accredited in Business Valuation (ABV) and Certified in Financial Forensics (CFF), is a Senior Appraiser (ASA) with the American Society of Appraisers, and is a Certified Valuation Analyst (CVA) with the National Associa-tion of Certified Valuation Analysts Mr Seigneur has over 30 years of experience working with complex valuation and litigation support matters He has published over 100 articles on business valuation and related subjects and has developed and taught a number of intermediate and advanced business valuation courses for the AICPA, NACVA, and state bar associations He is a past chair of the AICPA ABV

About the Authors xxxiii

Credential Committee and has been a member of the AICPA BV Committee and the AICPA Consulting Services Executive Committee Mr Seigneur was the 2009–2010 chair of the Colorado Society of CPAs He is a fellow of the College of Law Practice Management and is an adjunct professor at the University of Denver College of Law, where he teaches financial, management, and leadership courses He holds a BA in hotel, restaurant, and institutional management from Michigan State University and

an MBA in corporate policy and finance from the University of Michigan

Stacey Udell, CPA/ABV/CFF, CVA, is a partner in the public accounting firm of

Gold Gerstein Group LLC She specializes in valuation and litigation support vices, but also provides accounting, tax, and consulting services for closely held and family businesses She is currently a member of the AICPA’s Forensic and Litigation Services Committee, chair of the AICPA’s Family Law Task Force, and co-chair of the 2016 and 2017 AICPA Forensic and Valuation Services Conferences Ms Udell has been a member of the planning committee since the 2013 conference She was

ser-a founding member of the AICPA’s CFF exser-aminser-ation development committee from its inception through 2014 Ms Udell was vice president of the New Jersey State NACVA Chapter from 2008 to 2013, past chairperson of the NACVA Litigation Fo-rensics Board, a founding member of the course development team for the Advanced Matrimonial Litigation Support Workshop, and a member of the course develop-ment team for the Matrimonial Litigation Support Workshop Ms Udell is on the panel of experts of the Financial Litigation and Valuation Expert publication and is

co-author of the BVR/AHLA Guide to Healthcare Industry Valuation, The prehensive Guide to Economic Damages, and the Family Law Services Handbook.

Com-Samuel Y Wessinger is the managing director of Peachtree Valuation LLC in

Atlanta, Georgia He has 28 years of professional experience, including 24 years

of valuation and financial advisory experience Mr Wessinger has provided tion and advisory services to private and public companies in a variety of matters for many different purposes, including dissenting shareholder, oppression, securi-ties fraud, divorce and other litigation, as well as for tax and financial reporting

valua-He has qualified as an expert witness in state and federal court and has testified in several states Mr Wessinger has written articles on valuation and related subjects for professional publications, and has spoken on valuation topics to valuation pro-fessionals, CPAs, and attorneys He received his Master in Business Administration degree from the Colgate Darden Graduate School of Business Administration at the University of Virginia and a Bachelor of Arts degree, with distinction, in political and social thought from the University of Virginia

Richard M Wise, CPA, FCA, FCBV, FASA, MCBA, CFF, CVA, C.Arb., is a

gradu-ate of McGill University and a partner specializing in business valuation and financial litigation in MNP’s Montréal office He has more than 40 years of experience perform-ing valuations for corporate, transactional, litigation, and taxation purposes, and writes and lectures extensively across Canada and the United States, having presented more than 200 conference papers in both countries and authored 150 published technical articles Mr Wise was president of the Canadian Institute of Chartered Business Valu-ators, international governor of the American Society of Appraisers (ASA), technical

editor of the business valuation column in CA Magazine, and was recently chair of the

ASA Business Valuation Standards Committee He has also been retained as a valuation advisor to the Federal Department of Justice, the Canada Revenue Agency, the Québec Financial Markets Authority, Revenu Québec, Attorney General of Ontario, and the

xxxiv About the Authors

Public Trustee of Ontario, and has testified as an expert in more than 200 financial valuation and related litigation cases across Canada and in the United States Mr Wise

is recognized as an Expert Witness in Tax Litigation by Who’s Who Legal: Corporate Tax (2014, 2015 and 2016) He is certified in Financial Forensics by the American In-

stitute of Certified Public Accountants Mr Wise was special assistant to the Minister

of National Revenue in Ottawa and then partner-in-charge of taxation and business valuation at Deloitte until he founded Wise, Blackman LLP in 1979, which merged

with MNP in 2011 He is coauthor of the Guide to Canadian Business Valuations

(Carswell | Thomson Reuters) Mr Wise had served on several boards and committees

of professional societies and various charitable organizations and was inducted into the ASA College of Fellows in 2006 In 2012, he was presented with the Queen Elizabeth II Diamond Jubilee Medal by the Governor General for his 35 years of leadership in the Canadian valuation profession

Donald P Wisehart, ASA, CPA/ABV/CFF, CVA, MST, is the owner of Wisehart

Inc., a CPA/consulting firm located in Kingston, Rhode Island, and a founding member

of the Financial Consulting Group, LLC He is an Accredited Senior Appraiser (ASA), holds two AICPA specialty designations of Accredited in Business Valuation (ABV) and Certified in Financial Forensic (CFF), and is a Certified Valuation Analyst (CVA) with the National Association of Certified Valuation Analysts (NACVA) Mr Wisehart has over 40 years of professional experience, including 25 years of business valuation ex-perience He has lectured extensively on business valuation topics, and developed and taught many business valuation courses, two of which were required courses for the NACVA certification program He has testified as an expert witness in valuation litiga-tion cases, and has served as the chairman of the Education Board for NACVA and as

a member of the American Institute of Certified Public Accountants (AICPA) ABV dential Committee He has taught at several colleges and universities and served as the first president of the Rhode Island Business Appraisal Group He received a bachelor’s degree from Kent State University and a master of taxation degree from Bryant College

Cre-Kevin R Yeanoplos, CPA/ABV/CFF, ASA, is a Shareholder and the Director of

Valuation Services for Brueggeman and Johnson Yeanoplos, P.C., with offices in attle, Phoenix, and Tucson that specializes in the areas of business and intellectual property valuation, financial analysis, and litigation support Over the last three de-cades, Mr Yeanoplos has assisted clients around the country with the valuation of

Se-a diverse Se-arrSe-ay of intSe-angibles including pSe-atents, trSe-ademSe-arks, Se-and song cSe-atSe-alogs, to name a few, whether it be for divorce or other litigation, financial reporting, gift and estate taxes, mergers and acquisitions, or ESOPs, among others A popular and expe-rienced presenter, he frequently lectures throughout the United States on the topics of valuation, applied finance, and financial analysis, including presentations to the Fed-eral Bureau of Investigation, the American Institute of Certified Public Accountants (AICPA), the American Society of Appraisers (ASA), the State Bars of Arizona and Utah, and many other professional organizations He has been a faculty member for the AICPA’s National Business Valuation School for close to 20 years and is currently

on the faculty of the National Institute for Trial Advocacy Throughout his sional career, Mr Yeanoplos has volunteered his time and talents to give back to the public and his profession, including prior service as a Commissioner on the AICPA’s National Accreditation Commission, Chair of the AICPA’s ABV Credential Commit-tee, Board Member of the Arizona Society of CPAs, and Chair of the Arizona Board of Appraisal, among others He was recently appointed to the Arizona Commission on

profes-About the Authors xxxv

Judicial Performance Review by the Arizona Supreme Court The AICPA honored Mr Yeanoplos’s contributions by naming him its 2006 Business Valuation Volunteer of the Year and inducting him into the AICPA Business Valuation Hall of Fame in 2010 When he’s not chasing down the value of the invaluable, you can find Mr Yeanoplos running around the country on a 200-mile Ragnar Relay, using his business acumen

as a board member for a local theatre or radio station, volunteering for the Special Olympics, advocating for royalty reform as a member of the National Academy of Recording Arts and Sciences, or interviewing the likes of Roger Daltrey, Cyndi Lauper, and Brian Wilson as a beat writer for AXS Entertainment

Contributing Authors: The following people provided valuable insight and

knowledge to the authors and assisted in the preparation of parts of this text and/

or addendums:

Dr Ashok Abbott West Virginia University, Business Valuation, Inc.

LuAnne Anderson The Financial Valuation Group of Florida, Inc.

Patrick Bice Oregon Business Properties, Inc.

Melinda Bradnan Michael Bradnan & Associates

Michael L Bradnan Michael Bradnan & Associates

Frank “Chip” Brown Willamette Management Associates

Steve Campana Honkamp Krueger & Co., P.C.

Derick O Champagne The Washington Trust Company

Brenda M Clarke Seigneur Gustafson LLP

J Richard Claywell J Richard Claywell

Jennifer Dmytriw, CPA Financial Research Associates

David Dufendach Alvarez & Marsal

Nancy Fannon Meyers, Harrison & Pia, LLC

Carl-Henry Geschwind

Roger Grabowski Duff & Phelps

Robert Grossman Grossman Yanak & Ford LLP

William A Hanlin Jr IACVA, Hanlin Moss Yi

James Harrington Duff & Phelps

xxxvi About the Authors

Jeremy T Hess

Laura Kelley

Robert Kleeman OnPointe Financial Valuation Group LLC

Derald L Lyons Lyons & Seacrest, P.C.

Michael J Mard The Financial Valuation Group of Florida, Inc.

Gilbert E Matthews Sutter Securities Inc.

Michael J Mattson The Griffing Group

Warren D Miller Beckmill Research LLC

Eric Nath

Deborah Patry

Michelle Patterson Sutter Securities Inc.

Brian K Pearson Valuation Advisors LLC

Patricia A Perzel Perzel & Eckard Forensic CPA’s, LLC

Laura Pfeiffenberger Meyers, Harrison & Pia, LLC

Adam T Portacci, CVA VMG Health

Robert Raney

Jerry Ross

Dr Keith F Sellers Daniels College of Business, University of Denver

Leonard Sliwoski Sliwoski & Stumphf, Minnesota State University–Moorhead

John J Stockdale

Peter N Thacker Jr Joyner, Kirkham, Keel & Robertson, P.C.

Chris Treharne Gibraltar Business Appraisals

Linda B Trugman Trugman Valuation Associates, Inc.

At Wiley I would like to thank Sheck Cho for his encouragement and patience

I would also like to thank Kate Morris for running this process, coordinating with the coauthors, editing, and technical assistance

Karen Warner and Janet Kern did a great job proofreading and editing and ing this text flow as well as it does

mak-I would also like to thank the following organizations or sources for the use of certain information:

John Wiley & Sons, Inc

Financial Consulting Group

Financial Accounting Standards Board

American Institute of Certified Public Accountants

Internal Revenue Service

Partnership Profiles, Inc

Business Valuation Resources, Inc

Duff & Phelps LLC

Institute of Business Appraisers

National Association of Certified Valuators and Analysts

American Society of Appraisers

Valuation Strategies

The Value Examiner

Business Valuation Review

Financial Valuation and Litigation Expert

Valuation Solutions, LLC

Valuation Products and Services, LLC

PPC’s Guide to Business Valuation

Hitchner, Pratt, and Fishman: A Consensus View—Q&A Guide to Financial Valuation

Acknowledgments

Financial Valuation: Applications and Models, Fourth Edition

By James R Hitchner Copyright © 2017 by John Wiley & Sons, Inc

1

Introduction to Financial Valuation

the demand for financial valuation services pertaining to ownership interests and

assets in nonpublic companies/entities and subsidiaries, divisions, or segments of public companies is ever-increasing Many textbooks discuss valuation issues per-taining to public companies and their stock prices Much of that information also can be used to value nonpublic companies Over the past 35 years or so, specific techniques, methods, applications, and models applicable to nonpublic entities and assets have emerged and been refined This text addresses this body of knowledge.Development of a valuation requires judgment on the part of the valuation analyst (analyst), which can lead to differences of opinion This book presents the consensus view of 30 of the leading valuation analysts in the country

Much of the notation system used in this text is that used by Dr Shannon P Pratt (a coauthor of this book) in his various publications.1 It has also been used

by the American Institute of Certified Public Accountants (AICPA), the National Association of Certified Valuators and Analysts (NACVA), the American Society of Appraisers (ASA), and the Institute of Business Appraisers (IBA) in their business valuation courses

As a quick reference guide to important factors and concepts, numerous

“ValTips” are found throughout the volume These ValTips are intended to provide guidance and insight on handling key issues as well as to provide best practice ideas

WhO VaLUeS BUSINeSSeS?

Many providers and/or users of business valuation services exist The AICPA unofficially estimates that tens of thousands of certified public accountants (CPAs) perform business valuations on at least a part-time basis Many of these are also full-time valuation practitioners Several of the national accounting firms also have valuation services groups Analysts and appraisers also practice out of various types

of organizations, including appraisal companies, valuation boutiques, and ing firms Valuations are also performed by investment bankers, usually as part of a transaction Owners and financial executives also participate in valuations of their

consult-1 Shannon P Pratt and Roger J Grabowski, Cost of Capital: Applications and Examples,

5th ed (Hoboken, NJ: John Wiley & Sons, 2014), appendix VI, “Notation System and Abbreviations Used in This Book.”

2 Financial Valuation

companies or segments of their companies This book attempts to provide a sound understanding of financial valuation for all users and providers of valuation services and to advance consensus views on some of the more troublesome aspects within the valuation profession

pUrpOSe OF a VaLUatION

Businesses or their assets are valued for a variety of reasons Some of the more mon purposes for valuation are:

com-■ Mergers and acquisitions

■ Litigation and ownership disputes

■ Estate, gift, and income tax

■ Marital dissolution

■ Dissenters’ rights cases

■ Shareholder oppression cases

■ Employee stock ownership plans (ESOPs)

■ Financial reporting

■ Allocation of purchase price

■ Goodwill impairment

■ Buy-sell agreements

■ Family limited partnerships

■ Reorganizations and bankruptcies

■ Limited liability companies

■ Limited liability partnerships

■ 100 percent controlling interest

■ Majority interests that possess control

■ Majority interests that do not possess control

■ 50 percent interest

■ Dominant minority interest

■ Nondominant minority interest

Introduction to Financial Valuation 3

The individual ownership characteristics of any interest in a company being valued must also be evaluated As such, it is important for an analyst to review cor-porate documents, including articles of incorporation, by-laws, buy-sell agreements, restrictive agreements, and the like A review of these documents, along with an under-standing of state rights, will indicate any particular rights that the interest enjoys

prOFeSSIONaL VaLUatION OrGaNIZatIONS

The following long-standing U.S professional organizations provide accreditation and education to members (some of whom are international members) in business valuation, particularly in closely held business interests and the valuation of intan-gible assets:

1 American Institute of Certified Public Accountants (AICPA)

2 American Society of Appraisers (ASA)

3 The Institute of Business Appraisers (IBA)

4 National Association of Certified Valuators and Analysts (NACVA)

These organizations are briefly described in Chapter 12

The International Society of Business Appraisers (ISBA; www.intlbca.com) has recently been formed and also provides accreditation and education to its members Canada has an active group devoted to business valuation as well: the Canadian Institute of Chartered Business Valuators (CICBV; www.cicbv.ca)

The International Institute of Business Valuers (iiBV; www.iibv.org) was formed

in 2010 for the purpose of providing business valuation education outside North America The iiBV is an association of valuation professional organizations (VPOs)

StaNDarDS OF VaLUe

Before analysts can attempt to value a business, they must identify and understand the applicable standard of value for the valuation of the subject interest (see Chap-ter 2) The standard of value is related to and determined by the purpose of the valuation

Relying on the wrong standard of value can result in a very different value than would have been concluded under the proper standard of value In a dispute setting, the use of the wrong standard of value for the jurisdiction can result in a possible dismissal of the value altogether

Valtip

The five primary standards of value are:

1 Fair market value (FMV)

2 Investment value

3 Intrinsic value

4 Financial Valuation

4 Fair value (state rights)

5 Fair value (financial reporting)

Fair Market Value

The U.S Treasury regulations define fair market value as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge

of relevant facts.”2

Fair market value for tax purposes also assumes a hypothetical willing buyer and a hypothetical willing seller In contrast, investment value identifies a particular buyer or seller and the attributes that buyer or seller brings to a transaction Fair market value also assumes an arm’s-length deal and that the buyer and seller are able and willing This is not the same as the definition of market value, an often-used real estate term For example, the Uniform Standards of Professional Appraisal Practice (USPAP) defines market value as “a type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of

a certain date, under specific conditions set forth in the definition of the term fied by the appraiser as applicable in an appraisal.”3

identi-Internal Revenue Service Revenue Ruling 59-60 (see Addendum 1 to this chapter for a checklist summary for Revenue Ruling 59-60) defines fair market value as “the price at which the property would change hands between a willing buyer and a will-ing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.”4

2 Treasury Regulation 20.2031-1.

3 USPAP, 2016–2017 edition, p 3, The Appraisal Foundation.

4 Rev Rul 59-60, 159-1 CB 237.

Although state courts may use the term fair market value in marital

dissolution cases, no states have specific and detailed definitions of fair market value

hypotheti-Introduction to Financial Valuation 5

length in an open and unrestricted market, where neither is under compulsion to buy

or sell and when both have reasonable knowledge of the relevant facts.”

This is obviously very similar to the definition of fair market value in the tax area Fair market value is used most often in tax situations It is also used in many buy-sell agreements and marital dissolution situations Unless otherwise noted, the standard of value discussed throughout this text is fair market value

Investment Value

The International Glossary defines investment value as “the value to a particular

investor based on individual investment requirements and expectations.” Investment value is the value to a particular investor, which reflects the particular and specific attributes of that investor The best example would be an auction setting for a com-pany in which there are five different bidders attempting to purchase the company More than likely each of the bidders will offer a different price because the prices are based on the individual outlook and synergies that each bidder brings to the transac-tion Investment value may also reflect more of the risk of a particular investor than the market consensus of the risk of the investment

Others define intrinsic value as the “true” or “real” worth of an item, based

on an evaluation of available facts It is sometimes called fundamental value It is

an analytical judgment of value based on perceived characteristics inherent in the investment (not characteristics particular to any one investor) Intrinsic value is not

applied often in valuations of nonpublic companies

Fair Value (State rights)

In most states, fair value refers to fair market value without discounts for lack

of control and lack of marketability The Model Business Corporation Act (MBCA)

of 1984 published by the American Bar Association (ABA) defined fair value as:The value of the shares immediately before the effectuation of the corpo-rate action to which the shareholder objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would