Business valuation discounts and premiums / Shannon P. Pratt.

Format:

Book

Author/Creator:

Pratt, Shannon P.

Contributor:

Charles R. Anderson Endowment Fund.

Language:

English

Subjects (All):

Business enterprises--Valuation.

Business enterprises.

Physical Description:

xxviii, 404 pages : illustrations ; 24 cm

Place of Publication:

New York : J. Wiley, [2001]

Summary:

The most frequently contested money issue in business valuation disputes relates to discounts and premiums. When a valuation is conducted, the three basic approaches are the income approach, the market approach, and the asset approach, and different discounts or premiums may be applicable, depending on the basic valuation approach used. It is essential for every business appraiser to become well-versed in discounts and premiums, when they apply, and how to quantify them. In Business Valuation Discounts and Premiums, Shannon Pratt, one of the nation's leading business valuation consultants, brings together for the first time the collective wisdom and knowledge about all of the major business valuation discounts and premiums.

Clearly written and thorough, this book offers you guidance that applies to every major evaluation case you might face in any deal. Most useful in this book are the many never-before-published new studies that provide real-world benchmarks that can be applied to your own cases. Detailed, authoritative, and complete in its coverage, Business Valuation Discounts and Premiums demystifies one of the more complex challenges faced by business appraisers, and arms you with the understanding and techniques you need to perform your job to the satisfaction of all involved.

Contents:

1. Overview of Business Valuation Discounts and Premiums and the Bases to Which They Are Applied 1

Discounts and Premiums Reflect Relative Risk and Relative Growth 2

Discounts and Premiums Are Big-Money Issues 2

"Entity-Level" versus "Shareholder-Level" Discounts and Premiums 3

How the Valuation Approaches Used Affect the Level of Value 11

Use of Public Company Data to Quantify Discounts and Premiums 12

How the Standard of Value Affects Discounts and Premiums 13

2. Minority Discounts and Control Premiums 17

Relevant Definitions 18

Basic Minority/Control Value Relationship 19

Prerogatives of Control 20

Factors Affecting Degree of Control 21

How the Valuation Methodology Affects the Minority Discount or Control Premium 29

Do Publicly Traded Minority Stock Prices Reflect Control Value? 33

How the Purpose of the Valuation Affects Minority Discounts or Control Premiums 40

3. Empirical Data Regarding Minority Discounts and Control Premiums 45

Premiums Paid in Acquisitions 45

Identifying Industries with Higher or Lower Control Premiums 56

Caveats Regarding Use of Control Premium Data 59

Percentage Discounts from Net Asset Value 61

4. Minority Discounts and Control Premiums in the Courts 64

Gift, Estate, and Income Tax Cases 66

Discounts for Lack of Control in Employee Stock Ownership Plan Cases 68

Dissenting Shareholder Cases 69

Shareholder Oppression Cases 72

Marital Dissolution Cases 74

Bankruptcy Case 75

5. Discounts for Lack of Marketability for Minority Interests: Concept and Evidence 78

Public Market Benchmark for Marketability 78

Empirical Evidence to Quantify Discounts for Lack of Marketability 80

Restricted Stock Studies 80

Pre-Initial Public Offering Discount for Lack of Marketability Studies 83

Regulatory and Court Recognition of Empirical Marketability Discount Studies 87

6. Synopsis of Restricted Stock Studies 90

Securities and Exchange Commission Institutional Investor Study 91

Gelman Study 98

Trout Study 98

Moroney Study 99

Maher Study 99

Standard Research Consultants Study 99

Silber Study 101

FMV Opinions Study 101

Management Planning Study 102

Johnson Study 105

Columbia Financial Advisors Study 108

7. John Emory Pre-Initial Public Offering Discount for Lack of Marketability Studies

Complete Underlying Data 111

Study #1 January 1980-June 1981 112

Study #2 January 1985-June 1986 113

Study #3 August 1987-January 1989 113

Study #4 February 1989-July 1990 113

Study #5 August 1990-January 1992 113

Study #6 February 1992-July 1993 124

Study #7 January 1994-June 1995 124

Study #8 November 1995-April 1997 124

Study #9 Dot-Com Companies, May 1997-March 2000 125

8. Factors Affecting Discounts for Lack of Marketability for Minority Interests 152

Size of Distributions 153

Prospects for Liquidity 157

Pool of Potential Buyers 158

Risk Factors 160

9. Discounts for Lack of Marketability for Controlling Interests 165

Discounts for Lack of Marketability for Controlling Interests: A Controversial Concept 167

"Control, Marketable" Is an Oxymoron 167

Bases from Which Controlling Interest Discounts for Lack of Marketability May Be Deducted 168

Factors Affecting Controlling Interest Discounts for Lack of Marketability 170

Public Versus Private Company Acquisition Multiples 172

Court Treatment of Controlling Interest Discounts for Lack of Marketability 173

10. Quantitative Marketability Discount Model 178

What Is the Quantitative Marketability Discount Model? 179

Quantitative Marketability Discount Model: Base Case 181

Quantifying the Quantitative Marketability Discount Model Base Case 185

Marketable Minority Valuation Concepts 186

Nonmarketable Minority Valuation Concepts 188

Expected Growth and Expected Returns 190

11. Marketability Discounts in the Courts 196

Gift and Estate Tax Cases 197

Employee Stock Ownership Plan Case 199

Dissenting Shareholder Cases 200

Minority Oppression Cases 202

Marital Dissolution Cases 203

12. Voting versus Nonvoting Stock 208

Voting versus Nonvoting Stock Scenarios 209

Empirical Studies Show Little Differential for Small Minority Interests 209

Transactions Involving Premiums for Control Blocks 211

Court Cases Involving Voting versus Nonvoting Stock 220

13. Key Person Discounts 224

Empirical Evidence Supports Key Person Discount 225

Factors to Consider in Analyzing the Key Person Discount 226

Quantifying the Magnitude of the Key Person Discount 227

Internal Revenue Service Recognizes Key Person Discount 228

U.S. Tax Court Cases Involving Key Person Discounts 229

Key Person Discounts in Marital Dissolutions 233

14. Discounts for Trapped-In Capital Gains Taxes 237

Rationale for Trapped-In Capital Gains Tax Discount 237

"General Utilities Doctrine" 238

Tax Court Recognizes Trapped-In Capital Gains 239

Internal Revenue Service Acquiesces to Trapped-In Capital Gains Discount 241

Subsequent Tax Cases Regularly Recognize Trapped-In Capital Gains Tax Discount 241

Trapped-In Capital Gains in Dissenting Stockholder Actions 243

Trapped-In Capital Gains in Bankruptcy Court 243

Trapped-In Capital Gains Taxes in Marital Dissolutions 244

Treatment of Capital Gains Tax Liability in S Corporations 247

15. Blockage Discounts 250

Blockage Is Distinct from Restricted Stock 251

Factors to Analyze in Quantifying Blockage Discount 252

Must Consider Ways of Selling Stock 254

"Price Pressure" and "Market Exposure" 254

Block Buyer Could Ameliorate Blockage Discount 254

Blockage Discounts Recognized in Estate and Gift Tax Regulations 255

Blockage Discounts in U.S. Tax Court 255

16. Nonhomogeneous Assets ("Portfolio") Discounts 260

Portfolio Discount Principle 260

Empirical Evidence Supporting Portfolio Discounts 261

How to Value Companies with Disparate Portfolios 264

Quantifying the Portfolio Discount 265

Portfolio Discounts in the U.S. Tax Court 265

17. Discounts for Environmental, Litigation, and Other Contingent Liabilities 269

Concept of the Contingent Liability Discount 269

Financial Accounting Standard #5 May Provide Guidance in Quantifying Contingent Liabilities 270

Treatment of Contingencies in the U.S.

Tax Court 270

18. Discount Adjustments for Limited Partnership Interests and Other Asset Management Entities 273

Partnership Features 275

Other State Law and Regulatory Issues 276

Compliance with Federal Income Tax Regulations 276

Compliance with Federal Transfer Tax Regulations 277

Analysis of Ownership and Classes of Interests 277

Analysis of Underlying Adjusted Net Asset Value 278

Analysis of Income Capacity Value 278

Valuation of Noncontrolling Entity Interests 279

Discounts for Lack of Control and Marketability 281

Court Cases Regarding Limited Partnership Values 289

19. Premium and Discount Issues in Undivided Interest Valuations 292

Description and Characteristics of Undivided Interests 293

Appraisal of Assets in Fee-Simple Interest 296

Factors Affecting the Value of an Undivided Interest 300

Valuation Adjustments for Undivided Interests 302

Court Decisions Related to Undivided Interest Discounts 309

20. Common Errors in Applying Discounts and Premiums 316

Using Synergistic Acquisition Premiums to Quantify Premiums for Control 317

Assuming That the Discounted Cash Flow Valuation Method Always Produces a Minority Value 317

Assuming That the Guideline Public Company Method Always Produces a Minority Value 317

Valuing Underlying Assets Rather Than Stock or Partnership Interests 318

Using Minority Interest Marketability Discount Data to Quantify Marketability Discounts for Controlling Interests 318

Using Only Restricted Stock Studies (and Not Pre-Initial Public Offering Studies) as Benchmark for Discounts for Lack of Marketability 319

Inadequate Analysis of Relevant Factors 319

Indiscriminate Use of Average Discounts or Premiums 319

Applying (or Omitting) a Premium or Discount Inappropriately for the Legal Context 320

Applying Discounts or Premiums to the Entire Capital Structure Rather Than Only to Equity 320

Quantifying Discounts or Premiums Based on Past Court Cases 320

Using an Asset Appraiser to Quantify Discounts or Premiums for Stock or Partnership Interests 321

Appendix D How Much Can Marketability Affect Security Values? 351

Appendix E Internal Revenue Service Revenue Ruling 77-287 360

Appendix F Securities and Exchange Commission Rules 144 and 144A 366.

Notes:

Includes bibliographical references and index.

Local Notes:

Acquired for the Penn Libraries with assistance from the Charles R. Anderson Endowment Fund.

ISBN:

0471394483

OCLC:

46952219