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Understanding Business Valuation: A Practical Guide to Valuing Small to Medium Sized Businesses

Author: Gary R. Trugman, CPA, ABV, MCBA, ASA, MVS
Publisher: AICPA
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Description

Second Edition

Gary Trugman's new bestseller takes up where the original left off in bringing real-world experience and simplifying a technical and complex area of practice – business valuation – a timely topic in today's uncertain times.

Written for the CPA by a CPA, this book gives you all of the important, topical information in an informal, easy-to-read style. The second edition has been greatly expanded – by over 300 pages. It's a must have for those seeking to learn more about this discipline and provide value-added services to their clients.

You will find the following forms and checklists in the book:

  • Conflict of Interest Verification
  • Mutual Retained Business Valuation Retainer Agreement
  • Accounting Practice Document checklist
  • Checklists for guideline companies
  • Guideline Public Companies worksheets
  • Valuation reports

A CD containing sample reports is also included!

Also available in CPE self-study format -

Table of Contents

  • Introduction
    • Steps of an Appraisal xviii
    • Notation System Used in This Book
  • Chapter 1
    • Overview of Business Evaluation
    • Chapter Goals
    • Introduction
    • A Walk Down Memory Lane
    • Why Are Businesses Appraised?
    • Who Values Businesses?
    • Professional Appraisal Organizations
    • Business Appraisal Standards
    • Conclusion
  • Chapter 2
    • Getting Started
    • Chapter Goals
    • Introduction
    • Learning About the Engagement
    • Deciding Whether to Accept the Engagement
    • Engagement Letters
    • Five Steps of an Appraisal Assignment
    • The Initial Document Request
    • Conclusion
  • Chapter 3
    • Appraisal Principles and Theory
    • Chapter Goals
    • Principles of Appraisal
    • Definitions of Value
    • How the Purpose of the Valuation Influences the Standard of Value
    • Internal Revenue Service Influence on Appraisals
    • Conclusion
  • Chapter 4
    • Data Gathering
    • Chapter Goals
    • What Items Affect Value?
    • Internal Information
    • Financial Information
    • External Information
    • Data Gathering--Mostly Electronic?
    • The On-Site Interview
    • Conclusion
  • Chapter 5
    • Data Analysis
    • Chapter Goals
    • Introduction
    • Economic Analysis
    • Industry Analysis
    • Subject Company Analysis
    • Financial Analysis
    • Financial Statement Adjustments
    • Conclusion
  • Chapter 6
    • The Market Approach--Part I
    • Chapter Goals
    • Introduction
    • Guideline Public Company Method
    • Using Valuation Multiples
    • Valuing Invested Capital Instead of Equity
    • Advantages of Using the Guideline Public Company Method
    • Disadvantages of Using the Guideline Public Company Method
    • The Guideline Public Company Method Illustrated
    • Conclusion
  • Chapter 7
    • The Market Approach--Part II
    • Chapter Goals
    • Overview
    • Transaction (Merger and Acquisition) Method
    • Transaction Analysis--Qualitative and Quantitative
    • Let's Get Back to Theory
    • Internal Transactions
    • Industry Method
    • Conclusion
  • Chapter 8
    • The Asset-Based Approach
    • Chapter Goals
    • Introduction
    • Common Applications of the Asset-Based Approach
    • Advantages and Disadvantages of the Asset-Based Approach
    • Valuation Methods
    • Working With Other Appraisers
    • How to Locate and Recognize Specialists
    • Conclusion
  • Chapter 9
    • The Income Approach
    • Chapter Goals
    • Introduction
    • Value Is From an Investor's Viewpoint
    • Advantages and Disadvantages of the Income Approach
    • Selecting Benefit Streams
    • Using Pretax or After-Tax Information
    • Debt-Free or After-Debt
    • Using Cash Flow Instead of Earnings
    • Defining Cash Flow
    • Projecting Future Benefit Streams
    • The Acceptance of Forecasts and Projections
    • Income Approach Methods
    • Conclusion
  • Chapter 10
    • Discount Rates and Capitalization Rates
    • Chapter Goals
    • Introduction
    • Discount Rates
    • Capitalization Rates
    • Deriving Discount and Capitalization Rates Applicable to Net Income Directly From the Market
    • Back to the Real World
    • Conclusion
  • Chapter 11
    • Premiums and Discounts
    • Chapter Goals
    • Introduction
    • Control Premium
    • Lack of Control (Minority) Discounts
    • Discount for Lack of Marketability
    • Small Company Discount
    • Discount From Net Asset Value
    • Key Person Discount
    • Application of Discounts and Premiums
    • Other Premiums and Discounts
    • Conclusion
  • Chapter 12
    • Revenue Ruling 59-60
    • Chapter Goals
    • Revenue Ruling 59-60
    • Conclusion
  • Chapter 13
    • The Valuation Report
    • Chapter Goals
    • Introduction
    • Components of a Valuation Report
    • Types of Valuation Reports
    • Preparing the Business Valuation Report
    • Defending the Business Valuation Report
    • Common Errors in Business Valuation Reports
    • The Reconciliation Process
    • Conclusion
  • Chapter 14
    • Estate and Gift Valuations
    • Chapter Goals
    • Introduction
    • Revenue Ruling 59-60
    • Chapter 14 Guidelines
    • The Valuation Report
    • The Family Limited Partnership Report
    • Court Cases
    • As Appraisers, Do We Go for the Big Discounts?
    • Conclusion
  • Chapter 15
    • Divorce Valuations
    • Chapter Goals
    • Introduction
    • The Role of the Appraiser
    • Definition of Value
    • Valuation Dates
    • Valuation Methods
    • Data Gathering and Analysis
    • The Valuation Process
    • Normalizing the Financial Statements
    • More About Valuation Methods
    • Reaching a Conclusion of Value
    • Divorce Valuations of Professional Practices
    • Non-Compete Agreements
    • Valuation of Other Marital Assets
    • Conclusion
  • Chapter 16
    • Professional Practice Valuations
    • Chapter Goals
    • Overview
    • Why Are Professional Practices Valued?
    • Characteristics of the Professional Practice
    • Professional Practice Versus Other Business
    • Valuations
    • The Valuation Process
    • Valuation Calculations: Unique Aspects
    • Conclusion
  • Chapter 17
    • Shareholder Disputes
    • Chapter Goals
    • Overview
    • Dissenting Shareholder Matters
    • Oppressed Shareholder Matters
    • Fair Value
    • The Valuation Date
    • Fair Value Methodology
    • Conclusion
  • Chapter 18
    • My Favorite Court Cases
    • Chapter Goals
    • Overview
    • Estate of Joyce C. Hall v. Commissioner
    • Estate of Samuel I. Newhouse v. Commissioner
    • Charles S. Foltz v.U.S. News and World Report, Inc.
    • Bernard Mandelbaum et al. v. Commissioner
    • Mad Auto Wrecking Inc. v. Commissioner
    • Conclusion
  • Chapter 19
    • Economic Damages
    • Chapter Goals
    • Introduction
    • Lost Profits
    • The Lost Profits Analysis
    • Conclusion
  • Appendix 1
    • AICPA Statement on Consulting Services Standards I
    • Introduction
    • Definitions
    • Standards for Consulting Services
    • Consulting Services for Attest Clients
    • Effective Date
  • Appendix 2
    • IBA Standards
    • Foreword
    • Founding Standards Committee
    • Preamble
    • Format
    • Standard One: Professional Conduct & Ethics
    • Standard Two: Oral Appraisal Reports
    • Standard Three: Expert Testimony
    • Standard Four: Letter Form Written Appraisal Reports
    • Standard Five: Formal Written Appraisal Reports
    • Standard Six: Preliminary Reports
  • Appendix 3
    • ASA Standards
    • BVS-I. General Requirements for Developing a Business Valuation
    • BVS-II. Financial Statement Adjustments
    • BVS-III. Asset-Based Approach to Business Valuation
    • BVS-IV. Income Approach to Business Valuation
    • BVS-V. Market Approach to Business Valuation
    • BVS-VI. Reaching a Conclusion of Value
    • BVS-VII. Comprehensive Written Business Valuation Report
    • Definitions
    • SBVS-1. The Guideline Company Valuation Method
  • Appendix 4
    • NACVA Professional Standards
    • Contents
    • Preamble
    • General Standards
    • Development Standards
    • Reporting Standards
    • Other Guidelines and Requirements
    • Effective Date
    • Appendix I: AICPA Code of Professional Conduct Rules
  • Appendix 5
    • International Glossary of Business Valuation Terms
  • Appendix 6
    • Revenue Ruling 59-60
    • Rev. Rul. 59-60, 1959-1 C.B. 237 IRC Sec. 2031
    • Headnote
    • Text
  • Appendix 7
    • Revenue Ruling 65-192
    • Rev. Rul. 65-192
    • Full Text
  • Appendix 8
    • Revenue Ruling 65-193
    • Rev. Rul. 65-193, 1965-2 C.B. 370, IRC Sec. 2031
    • Text
  • Appendix 9
    • Revenue Procedure 66-49
    • Rev. Proc. 66-49
    • Headnote
    • Full Text
  • Appendix 10
    • Revenue Ruling 68-609
    • Rev. Rul. 68-609, 1968-2 C.B. 327 IRC Sec. 1001
    • Headnote
    • Text
  • Appendix 11
    • Revenue Procedure 77-12
    • Rev. Proc. 77-12, 1977-1 C.B. 569
    • Text
  • Appendix 12
    • Revenue Ruling 77-287
    • Rev. Rul. 77-287, 1977-2 C.B. 319 IRC Sec. 2031
    • Headnote
    • Text
  • Appendix 13
    • Revenue Ruling 83-120
    • Rev. Rul. 83-120, 1983-2 C.B. 170 IRC Sec. 2512
    • Headnote
    • Text
  • Appendix 14
    • Revenue Ruling 85-75
    • Rev. Rul. 85-75, 1985-1 C.B. 376 IRC Sec. 6659
    • Headnote
    • Text
  • Appendix 15
    • Revenue Ruling 93-12
    • Rev. Rul. 93-12, 1993-7 I.R.B. 13, 1/26/93
    • Headnote
    • Full Text
  • Appendix 16
    • Technical Advice Memorandum 94-36005
    • Full Text
  • Appendix 17
    • Private Letter Ruling 91-50001
    • Full Text
  • Appendix 18
    • Equitable Distribution Value of Small, Closely Held Businesses and Professional Practices
    • Abstract
    • Contents
    • Introduction
    • History and Review of the Literature
    • Theory and Methods
    • Argument
    • Replies to Opposition
    • Summary and Conclusion
    • Works Cited and Consulted
  • Appendix 19
    • Business Valuation Resources
    • Books, Periodicals, and More
    • Government Regulatory Material
    • Organizations
    • Sources of Data
  • Index

Excerpts

Introduction

This book has been methodically organized to help you get the most out of it that you possibly can. Each chapter contains lots of new stuff since the last edition, so you might want to go through them all in sequence. The chapters are set up as follows:

  • Chapter 1 provides background stuff regarding why businesses are appraised, who appraises them, and the various appraisal organizations and their standards. Although you probably fit into one of the categories discussed, you should be aware of the other types of appraisers and their standards, since you will most likely run across them in your endeavors.
  • Chapter 2 gets you started in the appraisal process. In this chapter, I discuss the things that you must know to start an assignment. Chapter 2 includes information about engagement letters, conflicts of interest, internal work programs, and the initial document request.
  • Chapter 3 takes you through the basic appraisal principles and theory behind the stuff that we are trying to figure out how to do. We will learn that the term value has many different meanings in business valuation, and we will discuss some of the more important meanings. Since so much of the valuation work we do involves taxes, this chapter will also point out the influence of the Internal Revenue Service on what we do.
  • Chapter 4 includes a discussion of internal and external sources of information that will be gathered by the appraiser. Numerous references are provided as to where you can locate information. This chapter lists all types of neat sites on the Internet for doing the required research.
  • Chapter 5 walks you through the process of what to do with the data that was gathered during the appraisal process. This chapter includes a discussion of economic, industry, company, and financial analysis.
  • Chapter 6 presents the first part of market approach to valuation. The underlying theory for the market approach is presented in this chapter. The balance of the chapter concentrates on the guideline public company method, including more detail on how to perform the analysis involving publicly traded companies. You will have to read this chapter to find out about SGLPTL.
  • Chapter 7 presents the second half of the market approach. This chapter includes a detailed discussion of the guideline transaction method, including a description of the various databases available to find merger and acquisition information involving closely held businesses. This chapter takes you step by step through the process of using this method. Rules of thumb are also discussed in this chapter.
  • Chapter 8 presents the asset-based approach to valuation. Here also, several methods are explored, and there is a discussion of how to find and communicate with other types of appraisers.
  • Chapter 9 presents the income approach to valuation. For small and medium-sized businesses, this chapter may be one of the most important. Single-period and multi-period models are presented. Forecasting financial information is also included in this chapter since it is the very essence of this approach to valuation.
  • Chapter 10 is the chapter that everyone will want to turn to! Discount rates and capitalization rates are discussed. Since I have been reading about this topic for years, waiting for someone to give me the correct answer, and nobody has, I wrote my own chapter. Lots of theory and, hopefully, practical guidance has been included in this chapter.
  • Chapter 11 includes a discussion on valuation premiums and discounts. Learn when to use different premiums and discounts, as well as how to support your opinion. This revised chapter now includes a discussion on some of the more controversial issues still being debated among practitioners.
  • Chapter 12 contains an annotated version of Revenue Ruling 59-60. This revenue ruling is so important that I decided to include it as a separate chapter. You can never get enough of a Revenue Ruling that is over 40 years old but has the makings of being the best writing in business valuation of all time (even counting my book).
  • Chapter 13 addresses the appraisal report. Learn how to prepare and defend the report, and learn some tips regarding presentation techniques.
  • Chapter 14 is brand new. This chapter addresses valuation assignments that are performed for estate and gift tax purposes. Learn about the Chapter 14 (of the Internal Revenue Code) requirements, the adequate disclosure requirements, and family limited partnership valuations.
  • Chapter 15 is also brand new. This chapter covers issues involved in divorce valuations. Valuations performed as part of a divorce assignment entail very unique considerations for the appraiser.
  • Chapter 16 is also new. This chapter contains a discussion on unique aspects of valuing professional practices. Learn what factors should be considered in valuing different types of professional practices, making these assignments different from valuing an operating company. Also included in this chapter is a detailed analysis on the valuation of work in process for a contingent-fee law firm.
  • Chapter 17 is another new one. Shareholder disputes are covered here, including issues involving the fair value standard of value.
  • Chapter 18 is a discussion of some of my favorite court cases. In fact, the name of this chapter is "My Favorite Court Cases." Pretty catchy, isn't it? This chapter has a few really good court cases that will help you understand some important issues regarding valuation.
  • Chapter 19 is not only a new one, but it contains a discussion about economic damages. Since so many business valuation techniques are used in this type of analysis, I decided to include it in the new edition.
  • And finally, the accompanying CD-ROM contains some reports for you to plagiarize. I only hope that you will give our firm proper attribution. Several sample reports are included so that you can see the difference between the different types of reports.

While the material in this book is not necessarily unique, it has been organized in a manner that is intended to provide you with a logical analysis of the appraisal process. Many of the exhibits contain actual sections of appraisal reports, to help emphasize the subject matter. Make sure you read them!

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Hardcover 2002
Product# 056600
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