Business Valuation and Taxes Procedure Law and Perspective phần 10 pps

Chapter 24
Questions to Ask
Business Valuation Experts
Summary
Qualifications
Financial Statement Adjustments and Analysis
Economic and Industry Data
Site Visits and Interviews
General Questions about Methodology
Discount and Capitalization Rates in the Income Approach
Projections Used in the Income Approach
The Market Approach
Asset-Based Approach
Entity-Level Discounts
Minority Interest Discounts/Control Premiums
Discounts for Lack of Marketability
Voting/Nonvoting Stock
Questions about Contradictory Prior Testimony
SUMMARY
This chapter consists of a partial list of questions that are useful to ask potential valuation ex-
perts. The questions are applicable in all types of valuation cases including family law, state
dissenting stockholder or minority oppression actions, bankruptcy cases, ad valorem cases,
and tax cases, regardless of the standard of value.
QUALIFICATIONS
Are you employed? Where?
Please describe your employment history.
Please describe your educational background.
Did your work experience allow you to get involved in ____________?
Did you have occasion to focus on ____________?
400
Since you began your career, what work have you done in the area of ____________?

Do you have a copy of your curriculum vitae?
Please describe any articles you published.
Have you ever been recognized as an expert in any court on the subject of ____________?
Have you previously authored articles, presented opinions in any form, or offered any tes-
timony that is contrary to the opinion you intend to give here?
What professional designations do you hold that relate to business valuation?
American Society of Appraisers
❐ FASA
❐ ASA
❐ AM
Institute of Business Appraisers
❐ MCBA
❐ CBA
❐ BVAL
American Institute of Certified Public Accountants
❐ ABV
National Association of Certified Valuation Analysts
❐ CVA
❐ GVA
CFA Institute
❐ CFA
The Canadian Institute of Chartered Business Valuators
❐ FCBV
❐ CBV
What percentage of your time do you spend doing business valuations? If less than 100
percent, what do you do with the rest of your time?
Qualifications 401
FINANCIAL STATEMENT ADJUSTMENTS AND ANALYSIS
What adjustments to the subject company’s financial statements did you make?
For each adjustment, why did you make it and how did you arrive at the amount?

Were there any adjustments you considered making, but didn’t? If so, why not?
If you used the market approach, what adjustments did you make to the guideline com-
pany financial statements? (If none, why not? Analysts should be able to say that they
have reviewed guideline company statements and determined that no adjustments
were necessary.)
ECONOMIC AND INDUSTRY DATA
Many valuation reports have lengthy economic and industry analysis sections, but no dis-
cussion of their impact on value. The questions should establish the connection between
conditions external to the company and the conclusion of value. They should also reveal in-
consistencies, if any.
What industry sources did you use?
How specifically did the data in the industry sources impact your conclusion of value?
What economic information sources did you use?
How, specifically, did your economic analysis impact your conclusion of value?
SITE VISITS AND INTERVIEWS
What did you learn about the subject company on your site visits and interviews?
How did what you learned affect your methodology and/or your value conclusion?
GENERAL QUESTIONS ABOUT METHODOLOGY
For which method(s) did you use the market value of invested capital (MVIC) procedure,
and for which did you use the equity procedure?
For each, why was that the best procedure to apply in this case?
DISCOUNT AND CAPITALIZATION RATES
IN THE INCOME APPROACH
Note: In the income approach, the capitalization rate is a function of the discount rate. Specif-
ically, the capitalization rate is equal to the discount rate, minus the long-term sustainable
402 QUESTIONS TO ASK BUSINESS VALUATION EXPERTS
growth rate in the variable being capitalized (net cash flow, net income, pretax earnings, etc.).
Therefore, to arrive at a capitalization rate in the income approach the analyst should first de-
velop the discount rate applicable to the variable, then estimate the long-term sustainable
growth rate for the variable and subtract the estimated long-term growth rate from the dis-

count rate.
In the market approach and the excess earnings method, capitalization rates are developed
differently from those in the income approach. In the market approach, the capitalization rate
is the reciprocal of the valuation multiplier for the variable. In the excess earnings method,
two capitalization rates are used, one a reasonable return on tangible assets and the other a
capitalization rate for the excess earnings, if any. Although developed differently in the vari-
ous approaches, a capitalization rate for any given economic variable developed for one ap-
proach should be reconcilable with the capitalization rate for the same variable used in the
income approach.
How did you develop your equity discount rate?
Components
Source for each component
To what income variable is your equity discount rate applicable?
How did you develop your weighted average cost of capital?
What components did you include in the capital structure?
One or more classes of equity
One or more classes of debt
How did you estimate the cost for each component?
Sources
Rationale
What weight did you assign to each component?
How did you arrive at the relative weights?
There are two issues here:
1. Market values or book values. They should be at market value.
2. Existing capital structure or proposed capital structure.
This is controversial, but usually should be at existing cap structure for minority interests
and some industry average for controlling interests, because minority has no power to
change the capitalization structure, but controlling interest does.
If the capitalization method was used, what growth rate, if any, did you subtract from the
discount rate to arrive at the capitalization rate?

Discount and Capitalization Rates in the Income Approach 403
How did you arrive at the growth rate that you used?
If the discounting method was used, how did you arrive at the terminal value? (market
multiples, Gordon Growth Model, liquidation value, etc.)
If market multiples were used, what variable did you use a multiple of? Why was that the
best variable to use in this case? How did you arrive at the multiples used?
If the Gordon Growth Model was used, how did you arrive at the sustainable growth rate
following the specific projection period?
If liquidation value was used, how did you arrive at the liquidation value?
PROJECTIONS USED IN THE INCOME APPROACH
What income variable did you use in the numerator of your discounting or capitalization
method (net cash flow, net income, etc.)?
Why was that the best measure of economic benefits to use in this case?
What was the basis for using that (those) amount(s) in the numerator?
MARKET APPROACH
What methods did you use within the market approach?
❐ Guideline publicly traded method
❐ Guideline transaction (merger & acquisition) method
❐ Prior transactions or offers
❐ Buy/sell agreement
❐ Rules of thumb
What population of guideline transactions did you consider?
What databases did you use in your search for guideline transactions?
What were the criteria (parameters) for selection of guideline companies?
How (and why) did you select the variables to be used in the market approach (net cash
flow, net income, book value, adjusted book value, etc.)?
For each variable, how (and why) did you select the multiple to apply to the subject
company?
How (and why) did you select the weightings to apply to each variable?
404 QUESTIONS TO ASK BUSINESS VALUATION EXPERTS

ASSET-BASED APPROACH
What assets did you adjust? Why?
Did you tax-affect the adjustments? Why or why not?
For each adjustment, what was the basis for the amount of the adjustment?
Did you bring any assets onto the balance sheet that were not there before? Why or why
not? What was the basis for the amount assigned to each?
What liabilities did you adjust? Why?
For each liability adjustment, did you tax-affect the adjustment? Why or why not?
Did you bring any actual or contingent liabilities onto the balance sheet that were not
there before? Why or why not? What was the basis for the amount assigned to each?
ENTITY-LEVEL DISCOUNTS
If the appraiser applied any of the following discounts:
• Key person
• Contingent liability
• Portfolio (nonhomogeneous assets)
• Trapped-in capital gains
Why did you apply that particular discount?
How did you quantify the amount of the discount?
MINORITY INTEREST DISCOUNTS/CONTROL PREMIUMS
What data did you rely on to quantify the minority discount or control premium?
Why was this data appropriate in this case?
How did you quantify the amount of the minority discount/control premium?
DISCOUNTS FOR LACK OF MARKETABILITY
What data did you rely on to quantify the discount for lack of marketability?
❐ Restricted stock studies or databases (list studies or databases relied on)
❐ Pre-IPO studies or databases (list studies or databases relied on, i.e., Emory, Valu-
ation Advisors)
❐ Partnership Profiles (state which issue, and dates of transactions covered)
Discounts for Lack of Marketability 405
Did you use averages from the studies or did you select specific transactions that most

closely matched your subject?
If specific transactions were used, what were the criteria for selection of the transactions?
Why were the data on which you relied appropriate for the particular subject?
What factors affected the size of the discount? (e.g., risk factors, size of block/expected
holding period)
VOTING/NONVOTING STOCK
If nonvoting stock, what data did you use to quantify the discount from the voting stock?
How did you arrive at the amount of the discount?
QUESTIONS ABOUT CONTRADICTORY PRIOR TESTIMONY
In some cases, the expert may have given prior testimony contradicting the expert’s current
litigation position. If so, it would be appropriate to read from the opinion or testimony in the
prior case and ask something like, “Did you say this?”
1
406 QUESTIONS TO ASK BUSINESS VALUATION EXPERTS
1
The most comprehensive search of experts’ testimony in business valuation cases is found at BVLibrary.com.
Even if the experts are not named in the case opinion, the staff of Business Valuation Resources researches the
names of the experts and adds them to the case opinions.
Appendix A
IRS Business
Valuation Guidelines
1
TABLE OF CONTENTS
1.0 Introduction
2.0 Development Guidelines
2.1 Planning
2.2 Identifying
2.3 Analyzing
2.4 Workpapers
2.5 Reviewing

3.0 Resolution Guidelines
3.1 Objective
3.2 Arriving at Conclusions
4.0 Reporting Guidelines
4.1 Overview
4.2 Report Contents
4.3 Statement
INTERNAL REVENUE SERVICE BUSINESS VALUATION GUIDELINES
1.0 Introduction
The purpose of this document is to provide guidelines applicable to all IRS personnel engaged
in valuation practice (herein referred to as “valuators”) relating to the development, resolution
and reporting of issues involving business valuations and similar valuation issues. Valuators
must be able to reasonably justify any departure from these guidelines.
This document incorporates by reference, the ethical and conduct provisions, contained
in the office of government ethics (OGE) standards of ethical conduct, applicable to all IRS
employees.
407
1
These Guidelines are continually updated. The latest version may be obtained by calling the IRS at (954) 423-7346.
2.0 Development Guidelines
2.1 Planning
2.1.1 Valuators will adequately plan and their managers will supervise the staff in-
volved in the valuation process.
2.1.2 Quality planning is a continual process throughout the valuation assignment.
2.2 Identifying
2.2.1 In developing a valuation conclusion, valuators should define the assignment
and determine the scope of work necessary by identifying the following:
2.2.1.1 Subject to be valued
2.2.1.2 Interest to be valued
2.2.1.3 Effective date of valuation

2.2.1.4 Purpose of valuation
2.2.1.5 Use of valuation
2.2.1.6 Statement of value
2.2.1.7 Standard and definition of value
2.2.1.8 Assumptions
2.2.1.9 Limiting conditions
2.2.1.10 Scope limitations
2.2.1.11 Restrictions, agreements and other factors that may influence value
2.2.1.12 Sources of information
2.3 Analyzing
2.3.1 In developing a valuation conclusion, valuators should obtain and analyze
the relevant information necessary to accomplish the assignment, including:
2.3.1.1 The nature of the business and the history of the enterprise from its
inception
2.3.1.2 The economic outlook in general and the condition and outlook of
the specific industry in particular
2.3.1.3 The book value of the stock or interest and the financial condition
of the business
2.3.1.4 The earning capacity of the company
2.3.1.5 The dividend-paying capacity
2.3.1.6 Whether or not the enterprise has goodwill or other intangible value
2.3.1.7 Sales of the stock or interest and the size of the block of stock to be
valued
2.3.1.8 The market price of stocks or interests of corporations or entities
engaged in the same or a similar line of business having their stocks
or interests actively traded in a free and open market, either on an
exchange or over-the-counter
2.3.1.9 Other information deemed to be relevant
2.3.2 The three generally accepted valuation approaches are the asset-based ap-
proach, the market approach and the income approach. Consideration should

be given to all three approaches. Professional judgment should be used to se-
lect the approach(es) ultimately used and the method(s) within such ap-
proach(es) that best indicate the value of the business interest.
2.3.3 Historical financial statements should be analyzed and, if necessary, adjusted
to reflect the appropriate asset value, income, cash flows and/or benefit
408 APPENDIX A
stream, as applicable, to be consistent with the valuation methodologies se-
lected by the valuator.
2.3.4 The valuator should select the appropriate benefit stream, such as pre-tax or
after-tax income and/or cash flows, and select appropriate discount rates,
capitalization rates or multiples consistent with the benefit stream selected
within the relevant valuation methodology.
2.3.5 The valuator will determine an appropriate discount and/or capitalization
rate after taking into consideration all relevant factors, such as:
2.3.5.1 The nature of the business
2.3.5.2 The risk involved
2.3.5.3 The stability or irregularity of earnings
2.3.5.4 Other relevant factors
2.3.6 As appropriate for the assignment, and if not considered in the process of de-
termining and weighing the indications of value provided by other proce-
dures, the valuator should separately consider the following factors in
reaching a final conclusion of value:
2.3.6.1 Marketability, or lack thereof, considering the nature of the busi-
ness, business ownership interest or security, the effect of relevant
contractual and legal restrictions, and the condition of the markets
2.3.6.2 Ability of the appraised interest to control the operation, sale, or
liquidation of the relevant business
2.3.6.3 Other levels of value considerations (consistent with the standard of
value in section 2.2.1.6) such as the impact of strategic or synergis-
tic contributions to value

2.3.6.4 Such other factors which, in the opinion of the valuator, are appro-
priate for consideration
2.4 Workpapers
2.4.1 Workpapers should document the steps taken, techniques used, and provide
the evidence to support the facts and conclusions in the final report.
2.4.2 Valuators will maintain a detailed case activity record (form 9984) which:
2.4.2.1 Identifies actions taken and indicates time charged
2.4.2.2 Identifies contacts including name, phone number, subject, commit-
ments, etc.
2.4.2.3 Documents delays in the examination
2.4.3 The case activity record, along with the supporting workpapers, should jus-
tify time spent is commensurate with work performed.
2.5 Reviewing
2.5.1 In reviewing a business valuation and reporting the results of that review, a
valuator should form an opinion as to the adequacy and appropriateness of
the report being reviewed and should clearly disclose the scope of work of
the review process undertaken.
2.5.2 In reviewing a business valuation, a valuator should:
2.5.2.1 Identify the taxpayer and intended use of the valuator’s opinions
and conclusions, and the purpose of the review assignment
2.5.2.2 Identify the report under review, the property interest being valued,
the effective date of the valuation, and the date of the review
IRS Business Valuation Guidelines 409
2.5.2.3 Identify the scope of work of the review process conducted
2.5.2.4 Form an opinion as to the completeness of the report under review
within the scope of work applicable in the review assignment
2.5.2.5 Form an opinion as to the apparent adequacy and relevance of the
data and the propriety of any adjustments to the data
2.5.2.6 Form an opinion as to the appropriateness of the valuation methods
and techniques used and develop the reasons for any disagreement

2.5.2.7 Form an opinion as to whether the analyses, opinions and conclu-
sions in the report under review are appropriate and reasonable, and
develop the reasons for any disagreement
2.5.2.8 In the event of a disagreement with the report’s factual representa-
tions, underlying assumptions, methodology or conclusions, con-
duct additional fact-finding, research and/or analyses necessary to
make corrections or revisions to arrive at an appropriate value for
the property.
3.0 Resolution Guidelines
3.1 Objective
3.1.1 The objective is to resolve the issue as early in the examination as possible.
Credible and compelling work by the valuator will facilitate resolution of is-
sues without litigation.
3.1.2 The valuator will work in concert with the internal customer and taxpayer to
resolve all outstanding issues.
3.2 Arriving at conclusions
3.2.1 Once the valuator has all the information to be considered in resolving the
issue, the valuator will use his/her professional judgment in considering this
information to arrive at a conclusion.
3.2.2 Valuators may not have all of the information they would like to have to de-
finitively resolve an issue. Valuators, therefore, should decide when they
have substantially enough information to make a proper determination.
3.2.3 Valuators will employ independent and objective judgment in reaching con-
clusions and will decide all matters on their merits, free from bias, advocacy
and conflicts of interest.
4.0 Reporting Guidelines
4.1 Overview
4.1.1 The primary objective of a valuation report is to provide convincing and
compelling support for the conclusions reached.
4.1.2 Valuation reports should contain all the information necessary to allow a

clear understanding of the valuation analyses and demonstrate how the con-
clusions were reached.
4.2 Report contents
4.2.1 The extent and content of the report prepared depends on the needs of each
case.
4.2.2 Valuation reports should clearly communicate the results and identify the in-
formation relied upon in the valuation process. The valuation report should
410 APPENDIX A
effectively communicate the methodology and reasoning, as well as identify
the supporting documentation.
4.2.3 Subject to the type of report being written, valuation reports should gener-
ally contain sufficient information relating to the items in sections 2.2 and
2.3, above, to ensure consistency and quality of valuation reports issued by
IRS valuators.
4.2.4 Reports written with respect to section 2.5.2.8, above, shall contain, at a
minimum, information relating to those items in sections 2.2 and 2.3 neces-
sary to support the revised assumptions, analyses, and/or conclusions of the
valuator.
4.3 Statement
4.3.1 Each written valuation report should contain a signed statement that is simi-
lar in content to the following:
To the best of my knowledge and belief:
• The statements of fact contained in this report are true and correct.
• The reported analyses, opinions, and conclusions are limited only by the reported assump-
tions and limiting conditions.
• I have no present or prospective interest in the property that is the subject of this report, and
I have no personal interest with respect to the parties involved.
• I have no bias with respect to the subject of this report or to the parties involved with this
assignment.
• My compensation is not contingent on an action or event resulting from the analyses, opin-

ions or conclusions in, or the use of, this report.
• My analyses, opinions, and conclusions were developed, and this report has been prepared
in conformity with the applicable Internal Revenue Service Valuation Guidelines.
IRS Business Valuation Guidelines 411
Appendix B
International Glossary of
Business Valuation Terms
1
Adjusted book value method A method within the asset approach whereby all assets and
liabilities (including off-balance-sheet, intangible, and contingent) are adjusted to their fair
market values. [NOTE: In Canada on a going-concern basis.]
Adjusted net asset method See Adjusted book value method.
Appraisal See Valuation.
Appraisal approach See Valuation approach.
Appraisal date See Valuation date.
Appraisal method See Valuation method.
Appraisal procedure See Valuation procedure.
Arbitrage pricing theory A multivariate model for estimating the cost of equity capital,
which incorporates several systematic risk factors.
Asset (asset-based) approach A general way of determining a value indication of a busi-
ness, business ownership interest, or security using one or more methods based on the value
of the assets net of liabilities.
Beta A measure of systematic risk of a stock; the tendency of a stock’s price to correlate
with changes in a specific index.
Blockage discount An amount or percentage deducted from the current market price of a
publicly traded stock to reflect the decrease in the per-share value of a block of stock that is of
a size that could not be sold in a reasonable period of time given normal trading volume.
Book value See Net book value.
Business See Business enterprise.
Business enterprise A commercial, industrial, service, or investment entity (or a combina-

tion thereof) pursuing an economic activity.
Business risk The degree of uncertainty of realizing expected future returns of the business
resulting from factors other than financial leverage. See Financial risk.
Business valuation The act or process of determining the value of a business enterprise or
ownership interest therein.
412
1
Compiled by American Institute of Certified Public Accountants, American Society of Appraisers, Canadian Insti-
tute of Chartered Business Valuators, National Association of Certified Valuation Analysts, and The Institute of
Business Appraisers. Used with permission.
Capital asset pricing model (CAPM) A model in which the cost of capital for any stock or
portfolio of stocks equals a risk-free rate plus a risk premium that is proportionate to the sys-
tematic risk of the stock or portfolio.
Capitalization A conversion of a single period of economic benefits into value.
Capitalization factor Any multiple or divisor used to convert anticipated economic bene-
fits of a single period into value.
Capitalization of earnings method A method within the income approach whereby eco-
nomic benefits for a representative single period are converted to value through division by a
capitalization rate.
Capitalization rate Any divisor (usually expressed as a percentage) used to convert antici-
pated economic benefits of a single period into value.
Capital structure The composition of the invested capital of a business enterprise, the mix
of debt and equity financing.
Cash flow Cash that is generated over a period of time by an asset, group of assets, or busi-
ness enterprise. It may be used in a general sense to encompass various levels of specifically
defined cash flows. When the term is used, it should be supplemented by a qualifier (for ex-
ample, “discretionary” or “operating”) and a specific definition in the given valuation context.
Common size statements Financial statements in which each line is expressed as a percent-
age of the total. On the balance sheet, each line item is shown as a percentage of total assets,
and on the income statement, each item is expressed as a percentage of sales.

Control The power to direct the management and policies of a business enterprise.
Control premium An amount or a percentage by which the pro rata value of a controlling
interest exceeds the pro rata value of a noncontrolling interest in a business enterprise, to re-
flect the power of control.
Cost approach A general way of determining a value indication of an individual asset by
quantifying the amount of money required to replace the future service capability of that asset.
Cost of capital The expected rate of return that the market requires in order to attract funds
to a particular investment.
Debt-free We discourage the use of this term. See Invested capital.
Discount for lack of control An amount or percentage deducted from the pro rata share of
value of 100 percent of an equity interest in a business to reflect the absence of some or all of
the powers of control.
Discount for lack of marketability An amount or percentage deducted from the value of
an ownership interest to reflect the relative absence of marketability.
Discount for lack of voting rights An amount or percentage deducted from the per-share
value of a minority interest voting share to reflect the absence of voting rights.
Discount rate A rate of return used to convert a future monetary sum into present value.
Discounted cash flow method A method within the income approach whereby the present
value of future expected net cash flows is calculated using a discount rate.
Discounted future earnings method A method within the income approach whereby the
present value of future expected economic benefits is calculated using a discount rate.
Economic benefits Inflows such as revenues, net income, and net cash flows.
International Glossary of Business Valuation Terms 413
Economic life The period of time over which property may generate economic benefits.
Effective date See Valuation date.
Enterprise See Business enterprise.
Equity The owner’s interest in property after deduction of all liabilities.
Equity net cash flows Those cash flows available to pay out to equity holders (in the form
of dividends) after funding operations of the business enterprise, making necessary capital in-
vestments, and increasing or decreasing debt financing.

Equity risk premium A rate of return added to a risk-free rate to reflect the additional risk
of equity instruments over risk-free instruments (a component of the cost of equity capital or
equity discount rate).
Excess earnings That amount of anticipated economic benefits that exceeds an appropriate
rate of return on the value of a selected asset base (often net tangible assets) used to generate
those anticipated economic benefits.
Excess earnings method A specific way of determining a value indication of a business,
business ownership interest, or security determined as the sum of (a) the value of the assets
derived by capitalizing excess earnings and (b) the value of the selected asset base. Also fre-
quently used to value intangible assts. See Excess earnings.
Fair market value The price, expressed in terms of cash equivalents, at which property
would change hands between a hypothetical willing and able buyer and a hypothetical willing
and able seller, acting at arm’s length in an open and unrestricted market, when neither is un-
der compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
[NOTE: In Canada, the term price should be replaced with the term highest price.]
Fairness opinion An opinion as to whether the consideration in a transaction is fair from a
financial point of view.
Financial risk The degree of uncertainty of realizing expected future returns of the business
resulting from financial leverage. See Business risk.
Forced liquidation value Liquidation value, at which the asset or assets are sold as quickly
as possible, such as at an auction.
Free cash flow We discourage the use of this term. See Net cash flow.
Going concern An ongoing operating business enterprise.
Going-concern value The value of a business enterprise that is expected to continue to op-
erate into the future. The intangible elements of going concern value result from factors such
as having a trained workforce, an operational plant, and the necessary licenses, systems, and
procedures in place.
Goodwill That intangible asset arising as a result of name, reputation, customer loyalty, lo-
cation, products, and similar factors not separating identified.
Goodwill value The value attributable to goodwill.

Guideline public company method A method within the market approach whereby market
multiples are derived from market prices of stocks of companies that are engaged in the same
or similar lines of business, and that are actively traded on a free and open market.
Income (income-based) approach A general way of determining a value indication of a
business, business ownership interest, security, or intangible asset using one or more methods
that convert anticipated economic benefits into a present single amount.
414 APPENDIX B
Intangible assets Nonphysical assets such as franchises, trademarks, patents, copyrights,
goodwill, equities, mineral rights, securities and contracts (as distinguished from physical as-
sets) that grant rights and privileges, and have value for the owner.
Internal rate of return A discount rate at which the present value of the future cash flows
of the investment equals the cost of the investment.
Intrinsic value The value that an investor considers, on the basis of an evaluation or
available facts, to be the “true” or “real” value that will become the market value when
other investors reach the same conclusion. When the term applies to options, it is the differ-
ence between the exercise price or strike price of an option and the market value of the un-
derlying security.
Invested capital The sum of equity and debt in a business enterprise. Debt is typically (a)
all interest-bearing debt or (b) long-term interest-bearing debt. When the term is used, it
should be supplemented by a specific definition in the given valuation context.
Invested capital net cash flows Those cash flows available to pay out to equity holders (in
the form of dividends) and debt investors (in the form of principal and interest) after funding
operations of the business enterprise and making necessary capital investment.
Investment risk The degree of uncertainty as to the realization of expected returns.
Investment value The value to a particular investor based on individual investment require-
ments and expectations. [NOTE: In Canada, the term used is value to the owner.]
Key person discount An amount or percentage deducted from the value of an ownership
interest to reflect the reduction in value resulting from the actual or potential loss of a key per-
son in a business enterprise.
Levered beta The beta reflecting a capital structure that includes debt.

Limited appraisal The act or process of determining the value of a business, business own-
ership interest, security, or intangible asset with limitations in analyses, procedures, or scope.
Liquidity The ability to quickly convert property to cash or pay a liability.
Liquidation value The net amount that would be realized if the business is terminated and
the assets are sold piecemeal. Liquidation can be either “orderly” or “forced.”
Majority control The degree of control provided by a majority position.
Majority interest An ownership interest greater than 50 percent of the voting interest in a
business enterprise.
Market (market-based) approach A general way of determining a value indication of a
business, business ownership interest, security, or intangible asset by using one or more meth-
ods that compare the subject to similar businesses, business ownership interests, securities, or
intangible assets that have been sold.
Market capitalization of equity The share price of a publicly traded stock multiplied by
the number of shares outstanding.
Market capitalization of invested capital The market capitalization of equity plus the
market value of the debt component of invested capital.
Market multiple The market value of a company’s stock or invested capital divided by a
company measure (such as economic benefits, number of customers).
Marketability The ability to quickly convert property to cash at minimal cost.
Marketability discount See Discount for lack of marketability.
International Glossary of Business Valuation Terms 415
Merger and acquisition method A method within the market approach whereby pricing
multiples are derived from transactions of significant interests in companies engaged in the
same or similar lines of business.
Midyear discounting A convention used in the discounted future earnings method that re-
flects economic benefits being generated at midyear, approximating the effect of economic
benefits being generated evenly throughout the year.
Minority discount A discount for lack of control applicable to a minority interest.
Minority interest An ownership interest less than 50 percent of the voting interest in a busi-
ness enterprise.

Multiple The inverse of the capitalization rate.
Net book value With respect to a business enterprise, the difference between total assets
(net of accumulated depreciation, depletion, and amortization) and total liabilities as they ap-
pear on the balance sheet (synonymous with Shareholder’s Equity). With respect to a specific
asset, the capitalized cost less accumulated amortization or depreciation as it appears on the
books of account of the business enterprise.
Net cash flows When the term is used, it should be supplemented by a qualifier. See Equity
net cash flows and Invested capital net cash flows.
Net present value The value, as of a specified date, of future cash inflows less all cash out-
flows (including the cost of investment) calculated using an appropriate discount rate.
Net tangible asset value The value of the business enterprise’s tangible assets (excluding
excess assets and non-operating assets) minus the value of its liabilities.
Nonoperating assets Assets not necessary to ongoing operations of the business enterprise.
[NOTE: In Canada, the term used is redundant assets.]
Normalized earnings Economic benefits adjusted for nonrecurring, noneconomic, or other
unusual items to eliminate anomalies and/or facilitate comparisons.
Normalized financial statements Financial statements adjusted for nonoperating assets
and liabilities and/or for nonrecurring, noneconomic, or other unusual items to eliminate
anomalies and/or facilitate comparisons.
Orderly liquidation value Liquidation value at which the asset or assets are sold over a
reasonable period of time to maximize proceeds received.
Premise of value An assumption regarding the most likely set of transactional circum-
stances that may be applicable to the subject valuation (e.g., going concern, liquidation).
Present value The value, as of a specified date, of future economic benefits and/or proceeds
from sale, calculated using an appropriate discount rate.
Portfolio discount An amount or percentage deducted from the value of a business
enterprise to reflect the fact that it owns dissimilar operations or assets that do not fit well
together.
Price/earnings multiple The price of a share of stock divided by its earnings per share.
Rate of return An amount of income (loss) and/or change in value realized or anticipated

on an investment, expressed as a percentage of that investment.
Redundant assets See Nonoperating assets.
Report date The date conclusions are transmitted to the client.
416 APPENDIX B
Replacement cost new The current cost of a similar new property having the nearest equiv-
alent utility to the property being valued.
Reproduction cost new The current cost of an identical new property.
Required rate of return The minimum rate of return acceptable by investors before they
will commit money to an investment at a given level of risk.
Residual value The value as of the end of the discrete projection period in a discounted fu-
ture earnings model.
Return on equity The amount, expressed as a percentage, earned on a company’s common
equity for a given period.
Return on investment See Return on invested capital and Return on equity.
Return on invested capital The amount, expressed as a percentage, earned on a company’s
total capital for a given period.
Risk-free rate A rate of return available in the market on an investment free of default risk.
Risk premium A rate of return added to a risk-free rate to reflect risk.
Rule of thumb A mathematical formula developed from the relationship between price and
certain variables based on experience, observation, hearsay, or a combination of these; usually
industry specific.
Special interest purchasers Acquirers who believe they can enjoy post-acquisition
economies of scale, synergies, or strategic advantages by combining the acquired business in-
terest with their own.
Standard of value The identification of the type of value being used in a specific engage-
ment (e.g., fair market value, fair value, investment value).
Sustaining capital reinvestment The periodic capital outlay required to maintain opera-
tions at existing levels, net of the tax shield available from such outlays.
Systematic risk The risk that is common to all risky securities and cannot be eliminated
through diversification. The measure of systematic risk in stocks is the beta coefficient.

Tangible assets Physical assets (such as cash, accounts receivable, inventory, property plant
and equipment, etc.).
Terminal value See Residual value.
Transaction method See merger and acquisition method.
Unlevered beta The beta reflecting a capital structure without debt.
Unsystematic risk The portion of total risk specific to an individual security that can be
avoided through diversification.
Valuation The act or process of determining the value of a business, business ownership in-
terest, security, or intangible asset.
Valuation approach A general way of determining a value indication of a business,
business ownership interest, security, or intangible asset using one or more valuation
methods.
Valuation date The specific point in time as of which the valuator’s opinion of value ap-
plies (also referred to as effective date or appraisal date).
Valuation method Within approaches, a specific way to determine value.
International Glossary of Business Valuation Terms 417
Valuation procedure The act, manner, and technique of performing the steps of an ap-
praisal method.
Valuation ratio A fraction in which a value or price serves as the numerator and financial,
operating, or physical data serve as the denominator.
Value to the owner [NOTE: In Canada, see Investment value.]
Voting control De jure control of a business enterprise.
Weighted average cost of capital (WACC) The cost of capital (discount rate) determined
by the weighted average, at market value, of the cost of all financing sources in the business
enterprise’s capital structure.
418 APPENDIX B
Appendix C
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419
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420 APPENDIX C
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Group, 1998.

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422 APPENDIX C
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PERIODICALS
Business Entities. Warren, Gorman & Lamont, division of RIA, 395 Hudson St., New York, NY 10014;
800/950-1216, Ext. 1, or 800/431-9025, option 1; www.riahome.com. Published bimonthly.
Business Valuation Data and Publications Directory. Business Valuation Resources, 7412 S.W.
Beaverton-Hillsdale Hwy, Suite 106, Portland, OR 97225; ph: 888/BUS-VALU (888/287-8258) or
503/291-7963; fax: 800/846-2291 or 503/291-9755; www.BVResources.com. Published annually.
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Business Valuation Review. Business Valuation Committee of the American Society of Appraisers, P.O.
Box 101896, Denver, CO 80250; ph: 303/744-7866; fax: 303/744-7796. Published quarterly.
Direct Investments Spectrum (formerly Partnership Spectrum). Partnership Profiles, Inc., P.O. Box
7938, Dallas, TX 75209; 800/634-4614; www.dispectrum.com. Published bimonthly.
Estate Planning. Warren, Gorman & Lamont, division of RIA, 395 Hudson St., New York, NY 10014;
800/950-1216, Ext. 1, or 800/431-9025, option 1; www.riahome.com. Published monthly.
Financial Analysts Journal. CFA Institute (formerly Association for Investment Management and Re-
search), 560 Ray C. Hunt Dr., Charlottesville, VA 22903-2981; ph: 800/247-8132 or 434/951-5442;
fax: 434/951-5262; www.aimrpubs.org/shared/PubsSubscription.html. Bimonthly publication.
Indiana Law Review. Indiana University School of Law—Indianapolis, Lawrence W. Inlow Hall,
530 W. New York St., Indianapolis, IN 46202-3225; ph: 317/274-4440 or 317/274-4039;
www.indylaw.indiana.edu/ilr/. Published quarterly.
Journal of Applied Finance. Financial Management Association International, University of South
Florida, College of Business Administration, 4202 E. Fowler Ave., Tampa, FL 33620; ph:
813/974-2084; fax: 813/974-3318; www.fma.org. Published semi-annually (Spring/Summer and
Fall/Winter).
Journal of Financial Economics. Elsevier Science, Customer Service Dept., 6277 Sea Harbor Dr.,
Orlando, FL 32887-4800; ph: 877/839-7126 or 407/345-4020; fax: 407/363-1354; www.else
vier.com/wps/find/journalbibliographicinfo.cws_home/505576/description#bibliographicinfo.
Published quarterly.
Journal of Taxation. Warren, Gorman & Lamont, division of RIA, 395 Hudson St., New York, NY

10014; 800/950-1216, Ext. 1, or 800/431-9025, option 1; www.riahome.com. Published monthly.
Judges & Lawyers Business Valuation Update. No longer being published. Back issues available from
Business Valuation Resources, 7412 S.W. Beaverton-Hillsdale Hwy, Suite 106, Portland, OR 97225;
ph: 888/BUS-VALU (888/287-8258) or 503/291-7963; fax: 800/846-2291 or 503/291-9755;
www.BVResources.com.
Law & Contemporary Problems. Duke University School of Law, Duke Law Publications, Box 90364,
Science Drive/Towerview Rd., Durham, NC 27708; ph: 919/613-7101; www.law.duke.edu/jour-
nals/lcp/. Published quarterly.
Mergerstat Review. FactSet Mergerstat, 2150 Colorado Avenue, Suite 150, Santa Monica, CA 90404;
ph: 800/455-8871; fax: 310/829-4855; www.Mergerstat.com. Published annually.
Shannon Pratt’s Business Valuation Update, monthly, Business Valuation Resources, 7412 S.W.
Beaverton-Hillsdale Hwy, Suite 106, Portland, OR 97225; ph: 888/BUS-VALU (888/287-8258) or
503/291-7963; fax: 800/846-2291 or 503/291-9755; www.BVResources.com.
The Tax Magazine. CCH, 4025 W. Peterson Ave., Chicago, Ill. 60646; 800/449-8114. www.cch.com.
Published monthly.
The Journal of Corporation Law. University of Iowa, College of Law, Iowa City, IA 52242; ph:
319/335-9061; fax: 319/335-9019; www.uiowa.edu/~lawjcl/. Published quarterly.
Trust and Estates. Primedia, 249 W. 17th St., 3rd floor, New York, NY 10011; 212/462-3586.
www.trustsandestates.com. Published monthly.
Valuation Case Digest. Valuation Information, Inc., 8898 Commercial Rd., Suite 3C, Commerce,
Michigan 48382. 248/366-8518. Published quarterly.
Valuation Strategies. Warren, Gorham & Lamont, a division of RIA, 395 Hudson St., New York, NY
10014; ph: 800/950-1216, Ext. 1, or 800/431-9025, option 1; www.riahome.com. Published bimonthly.
Value Matters. Mercer Capital, 5860 Ridgeway Center Parkway, Suite 400, Memphis, Tenn. 38120;
ph: 901/685-2120; fax: 901/685-2199; www.mercercapital.com/Publications/ValueMatters/archive
/Default.htm. New postings continuously.
424 APPENDIX C