Business Valuation: An Integrated Theory (Wiley Series in Finance)

Praise for Business Valuation, Second Edition "The Second Edition of Business Valuation: An Integrated Theory manages to present the theoretical analysis of valuation from the first edition and expand on that discussion by providing additional guidance on implementing the relevant valuation theories, notably in its expanded discussion of the Quantitative Marketability Discount Model." -Dr. David Tabak NERA Economic Consulting Your Essential Valuations Reference Whether you are an accountant, auditor, financial planner, or attorney, Business Valuation: An Integrated Theory, Second Edition enables you to understand and correctly apply fundamental valuation concepts. Thoroughly revised and expanded, the Second Edition demystifies modern valuation theory, bringing together various valuation concepts to reveal a comprehensive picture of business valuation. With the implementation of new accounting pronouncements mandating the recognition of numerous assets and liabilities at fair value, it has become critical for CPAs charged with auditing financial statements to understand valuation concepts. With thoughtful and balanced treatment of both theory and application, this essential guide reveals: \* The "GRAPES of Value"-Growth, Risk and Reward, Alternative Investments, Present Value, Expectations, and Sanity \* The relationship between the Gordon Model and the discounted cash flow model of valuation \* The basis for commonly applied, but commonly misunderstood valuation premiums and discounts \* A practical perspective on the analysis of potential business acquisitions Grounded in the real world of market participants, Business Valuation, Second Edition addresses your need to understand business valuation, providing a means of articulating valuation concepts to help you negotiate value-enhancing transactions. If you want to get back to valuation basics, this useful reference will become your guide to defining the various levels of value and developing a better understanding of business appraisal reports Business Valuation: An Integrated Theory, Second Edition 3 Contents 5 Introduction 11 THE INTEGRATED THEORY OF BUSINESS VALUATION DEFINED 11 THE INTEGRATED THEORY PROVIDES ANSWERS 13 WHO SHOULD READ THIS BOOK? 13 THE QUANTITATIVE MARKETABILITY DISCOUNT MODEL 16 Chapter 1: Discounted Cash Flow and the Gordon Model: The Very Basics of Value 17 INTRODUCTION 17 COMMON QUESTIONS 17 THE BASIC TOOLS OF VALUATION 18 DIVIDENDS, REINVESTMENT, & GROWTH 24 NET INCOME VS. NET CASH FLOW 35 PRACTICAL OBSERVATIONS 44 CONCLUSION 48 Chapter 2: The GRAPES of Value 49 INTRODUCTION 49 COMMON QUESTIONS 49 THE WORLD OF VALUE 49 GRAPES OF VALUE 50 CLARITY COMES SLOWLY 50 THE ORGANIZING PRINCIPLES 55 THE BASKET FOR GRAPES: THE PRINCIPLE OF KNOWLEDGE 65 CONCLUDING COMMENTS 65 Appendix 2-A: The Principles Crystallize 67 Appendix 2-B: Not So Random Thoughts Regarding the Business of Business Appraisal 69 Appendix 2-C: Not So Random Thoughts on the Business of Business Appraisal 2004 Edition 72 Chapter 3: The Integrated Theory of Business Valuation 77 INTRODUCTION 77 COMMON QUESTIONS 77 THE GORDON MODEL 79 EARLY VIEWS OF THE LEVELS OF VALUE 79 THE MARKETABLE MINORITY INTEREST LEVEL OF VALUE 81 THE CONTROL LEVELS OF VALUE 85 THE FINANCIAL CONTROL LEVEL OF VALUE 89 STRATEGIC CONTROL LEVEL OF VALUE 98 ENTERPRISE LEVELS VS. THE SHAREHOLDER LEVEL OF VALUE 103 THE NONMARKETABLE MINORITY LEVEL OF VALUE 106 THE MARKETABILITY DISCOUNT 109 APPLICATION OF MARKETABILITY DISCOUNTS TO CONTROLLING INTERESTS 110 THE INTEGRATED THEORY OF BUSINESS VALUATION 114 CONCLUSIONS 115 Appendix 3-A: Case Study—Acquisition Pricing and the Integrated Theory 117 (WHY MANY ACQUISITIONS DO NOT ENHANCE SHAREHOLDER VALUE) 117 BIDDING ANALYSIS 118 OPERATIONS’ STRATEGIC CONSIDERATIONS 119 CFO REFLECTIONS 120 Chapter 4: Adjustments to Income Statements: Normalizing and Control Adjustments 123 INTRODUCTION 123 COMMON QUESTIONS 124 THE INTEGRATED THEORY AND INCOME STATEMENT ADJUSTMENTS 125 TWO TYPES OF INCOME STATEMENT ADJUSTMENTS 126 INCOME STATEMENT ADJUSTMENTS AND THE RELEVANT DISCOUNT RATE 127 NORMALIZING ADJUSTMENTS ILLUSTRATED 130 CONTROL ADJUSTMENTS TO THE INCOME STATEMENT 133 POTENTIAL VALUE IMPACT OF EARNINGS ADJUSTMENTS 136 THE NATURE OF CONTROL PREMIUMS 138 CONCLUSION 141 Appendix 4-A: A Cautionary Tale 142 Chapter 5: Fundamental Adjustments to Market Capitalization Rates 145 INTRODUCTION 145 COMMON QUESTIONS 146 THE GRAPES OF VALUE REVIEWED 147 A CONCEPTUAL OVERVIEW OF FUNDAMENTAL ADJUSTMENTS 148 PRACTICAL TECHNIQUES FOR DEVELOPING FUNDAMENTAL ADJUSTMENTS 151 MARKETABILITY DISCOUNTS FOR CONTROLLING INTERESTS? 163 THE LITERATURE REGARDING FUNDAMENTAL ADJUSTMENTS 166 CONCLUSION 167 Chapter 6: Developing Appropriate Discount Rates 169 INTRODUCTION 169 COMMON QUESTIONS 170 THE ADJUSTED CAPITAL ASSET PRICING MODEL 170 DISCOUNT RATE SENSITIVITY AND JUDGMENT 175 JUDGMENT AND REASONABLENESS AND THE ACAPM 176 THE ACAPM AND SHAREHOLDER LEVEL VALUATIONS 179 CONCLUSION 179 Appendix 6-A: Overview of the Capital Asset Pricing Model (CAPM) 181 Chapter 7: Introduction to the QMDM: The Shareholder Level of Value 185 INTRODUCTION 185 COMMON QUESTIONS 185 POTENTIAL APPROACHES TO SHAREHOLDER LEVEL VALUATION 186 THE QMDM: A SHAREHOLDER LEVEL DCF MODEL 188 THE STRUCTURE OF THE SHAREHOLDER LEVEL DCF MODEL 189 A VISUAL REPRESENTATION OF THE SHAREHOLDER LEVEL DCF MODEL 192 CONCLUSION 199 Appendix 7-A: A Further Look at Pre-IPO and Restricted Stock Studies 201 PRE-IPO STUDIES 201 RESTRICTED STOCK STUDIES 202 Chapter 8: The QMDM Assumptions in Detail 205 INTRODUCTION 205 COMMON QUESTIONS 205 Assumption #1: Expected Holding Period (for the Investment) (HP) 206 Assumption #2A: Expected Dividend Yield (D%) 212 ASSUMPTION #2B: EXPECTED GROWTH OF DIVIDENDS (GD) 218 ASSUMPTION #2C: TIMING OF DIVIDEND RECEIPT 219 Assumption #3A: The Expected Growth Rate in Value (GV) 220 ASSUMPTION #3B: ADJUSTMENTS TO THE TERMINAL VALUE 225 Assumption #4: Required Holding Period (Rate of) Return (Rhp) 225 Chapter 9: Applying the QMDM 245 INTRODUCTION 245 COMPREHENSIVE EXAMPLE OF THE QMDM IN USE 245 CONDENSED QMDM EXAMPLES 254 THE UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE AND THE QMDM 263 Chapter 10: Application of the Integrated Theory to Tax Pass-Through Entities 269 INTRODUCTION 269 CONCLUSION 285 Index 287 Praise for Business Valuation: An Integrated Theory, 2nd Edition'The Second Edition of Business Valuation: An Integrated Theory manages to present the theoretical analysis of valuation from the first edition and expand on that discussion by providing additional guidance on implementing the relevant valuation theories, notably in its expanded discussion of the Quantitative Marketability Discount Model.'—Dr. David Tabak, NERA Economic Consulting Your Essential Valuations Reference Whether you are an accountant, auditor, financial planner, or attorney, Business Valuation: An Integrated Theory, 2nd Edition enables you to understand and correctly apply fundamental valuation concepts. Thoroughly revised and expanded, the Second Edition demystifies modern valuation theory, bringing together various valuation concepts to reveal a comprehensive picture of business valuation. With the implementation of new accounting pronouncements mandating the recognition of numerous assets and liabilities at fair value, it has become critical for CPAs charged with auditing financial statements to understand valuation concepts. With thoughtful and balanced treatment of both theory and application, this essential guide reveals: The'GRAPES of Value'-Growth, Risk and Reward, Alternative Investments, Present Value, Expectations, and Sanity The relationship between the Gordon Model and the discounted cash flow model of valuation The basis for commonly applied, but commonly misunderstood valuation premiums and discounts A practical perspective on the analysis of potential business acquisitions Grounded in the real world of market participants, Business Valuation, 2nd Edition addresses your need to understand business valuation, providing a means of articulating valuation concepts to help you negotiate value-enhancing transactions. If you want to get back to valuation basics, this useful reference will become your guide to defining the various levels of value and developing a better understanding of business appraisal reports. "The Second Edition of "Business Valuation: An Integrated Theory" manages to present the theoretical analysis of valuation from the first edition and expand on that discussion by providing additional guidance on implementing the relevant valuation theories, notably in its expanded discussion of the Quantitative Marketability Discount Model"--Dr. David Tabak, NERA Economic Consulting, Your Essential Valuations Reference. Whether you are an accountant, auditor, financial planner, or attorney, "Business Valuation: An Integrated Theory, Second Edition" enables you to understand and correctly apply fundamental valuation concepts. Thoroughly revised and expanded, the Second Edition demystifies modern valuation theory, bringing together various valuation concepts to reveal a comprehensive picture of business valuation. With the implementation of new accounting pronouncements mandating the recognition of numerous assets and liabilities at fair value, it has become critical for CPAs charged with auditing financial statements to understand valuation concepts. With thoughtful and balanced treatment of both theory and application, this essential guide reveals: the "GRAPES of Value"--Growth, Risk and Reward, Alternative Investments, Present Value, Expectations, and Sanity; the relationship between the Gordon Model and the discounted cash flow model of valuation; the basis for commonly applied, but commonly misunderstood valuation premiums and discounts; and, a practical perspective on the analysis of potential business acquisitions. Grounded in the real world of market participants, "Business Valuation, Second Edition" addresses your need to understand business valuation, providing a means of articulating valuation concepts to help you negotiate value-enhancing transactions. If you want to get back to valuation basics, this useful reference will become your guide to defining the various levels of value and developing a better understanding of business appraisal reports Praise for Business An Integrated Theory, 2nd Edition "The Second Edition of Business An Integrated Theory manages to present the theoretical analysis of valuation from the first edition and expand on that discussion by providing additional guidance on implementing the relevant valuation theories, notably in its expanded discussion of the Quantitative Marketability Discount Model." Dr. David Tabak, NERA Economic Consulting Your Essential Valuations Reference Whether you are an accountant, auditor, financial planner, or attorney, Business An Integrated Theory, 2nd Edition enables you to understand and correctly apply fundamental valuation concepts. Thoroughly revised and expanded, the Second Edition demystifies modern valuation theory, bringing together various valuation concepts to reveal a comprehensive picture of business valuation. With the implementation of new accounting pronouncements mandating the recognition of numerous assets and liabilities at fair value, it has become critical for CPAs charged with auditing financial statements to understand valuation concepts. With thoughtful and balanced treatment of both theory and application, this essential guide Grounded in the real world of market participants, Business Valuation, 2nd Edition addresses your need to understand business valuation, providing a means of articulating valuation concepts to help you negotiate value-enhancing transactions. If you want to get back to valuation basics, this useful reference will become your guide to defining the various levels of value and developing a better understanding of business appraisal reports. The first book to show business appraisers why they do what they do and how everything is interrelated. Helping readers understand the why of business valuation, this book assembles the various valuation concepts into a theoretically and practical