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The Market Approach to Valuing Businesses
Shannon P. Pratt (Author)
9780471696544, Wiley
Hardback, published 16 December 2005
432 pages
23.7 x 16.2 x 3.5 cm, 0.821 kg
Your Best Approach to Determining Value If you're buying, selling, or valuing a business, how can you determine its true value? By basing it on present market conditions and sales of similar businesses. The market approach is the premier way to determine the value of a business or partnership. With convincing evidence of value for both buyers and sellers, it can end stalemates and get deals closed. Acclaimed for its empirical basis and objectivity, this approach is the model most favored by the IRS and the United States Tax Court-as long as it's properly implemented. Shannon Pratt's The Market Approach to Valuing Businesses, Second Edition provides a wealth of proven guidelines and resources for effective market approach implementation. You'll find information on valuing and its applications, case studies on small and midsize businesses, and a detailed analysis of the latest market approach developments, as well as: Must reading for anyone who owns or holds a partial interest in a small or large business or a professional practice, as well as for CPAs consulting on valuations, appraisers, corporate development officers, intermediaries, and venture capitalists, The Market Approach to Valuing Businesses will show you how to successfully reach a fair agreement-one that will satisfy both buyers and sellers and stand up to scrutiny by courts and the IRS.
List of Exhibits xv Foreword xix Preface xxi Acknowledgments xxv Notation System Used in This Book xxvii Introduction xxxi Part I. Defining Market Multiples and Market Approach Methods 1 1. Defining Market Value Multiples 3 Common Equity Only versus Total Invested Capital Multiples 5 Computing Market Value of Equity Multiples 9 Commonly Used Market Value of Equity Multiples 10 Computing Market Value of Invested Capital (MVIC) Multiples 15 Commonly Used MVIC Multiples 17 Time Periods to Measure Financial Variables 22 Relationship between Market Multiples and Capitalization Rates 23 Summary 23 2. The Guideline Public Company Method 25 Scope of Market 26 Availability of Public Company Data 26 Analytical Data for Public Companies 29 The Guideline Public Company Basic Procedure 31 Premiums and Discounts 33 Summary 34 3. The Guideline Transaction (Merged and Acquired Company) 35 Method Differences in Transaction Structure 36 Scope of Market 38 Availability of Merged and Acquired Company Transaction Data 38 How Far Back in Time Are Transactions Relevant? 40 The Guideline Merger and Acquisition Basic Procedure 41 Premiums and Discounts 41 Summary 42 ix 4. Other Market Methods 44 Past Transactions 44 Offers to Buy 46 Rules of Thumb 46 Buy-Sell Agreements 48 Summary 49 Part II. Finding and Analyzing Comparative Market Transaction Data 51 5. Finding Public Company Market Transaction Data 53 Edgar 54 Secondary Sources for SEC Reporting Companies 54 Publicly Registered Limited Partnership Data 55 Sources for Nonreporting Companies 55 Summary 56 6. Finding Merger and Acquisition Market Data 57 Large Transactions 58 Middle Market and Small Transactions 63 Very Small Transactions 69 Summary 74 7. Adjusting Financial Statements 76 Choosing the Time Periods for Comparative Statements 77 Objectives of Financial Statement Adjustments 78 Adjustments for Nonoperating or Excess Assets 79 Nonrecurring Items 81 Adjustments for Accounting Comparability 83 Adjustments for “Insider” Anomalies 84 Adjustments for Income Taxes in Pass-through Entities 85 and S Corporations Summary 85 8. Comparative Financial Analysis 87 Types of Comparative Financial Analysis 88 Sources of Comparative Financial Analysis 89 Types of Ratios 101 Summary 117 Part III. Compiling Market Value Tables and Reaching a Value Conclusion 121 9. Compiling Useful Market Value Tables 123 Two Distinct Alternatives in Market Multiples 124 Examples of Market Value Tables 125 Summary 133 10. Selecting, Weighting, and Adjusting Market Value Multiples 137 Size and Nature of Company 137 Availability of Data 139 Dispersion of Market Value Multiples 139 The Harmonic Mean as a Measure of Central Tendency 139 Adjusting from Observed Market Value Multiples 140 Illustrative Estimate of Value Using Mathematical Weighting 141 Summary 142 11. Control Premiums and Minority Discounts 143 Prerogatives of Control Ownership 144 Quantifying Control Premiums and Minority Discounts 145 How the Standard of Value Affects Control Premiums and/or Minority Discounts 148 The Control versus Minority Issue Covers a Spectrum 150 Summary 151 12. Discounts for Lack of Marketability 153 Defining Discount for Lack of Marketability 153 Applying the Discount for Lack of Marketability 154 Market Evidence Regarding the Discount for Lack of Marketability for Minority Interests 155 Regulatory and Court Acceptance of Empirical Lack of Marketability Studies 158 Factors Affecting Magnitudes of Marketability Discounts 162 Discounts for Lack of Marketability for Controlling Interests 163 Summary 163 Part IV. Sample Market Approach Cases 167 13. Small-size Service Company Sample Case: Sub Shop 169 Business Description 169 Valuation Assignment 170 Economic Outlook 170 Financial Statement Analysis 170 Identification and Selection of Market Data 177 Identification and Selection of Valuation Multiples 188 Valuation of Wildcat Subs 190 Reconciling Value Conclusions 194 Addendum if Valuing for Other Purposes 194 14. Medium-size Service Company Sample Case— Software Developer 195 Valuation Assignment 196 Economic Outlook 197 Fundamental Position of the Company 198 Selection of Market Data 200 Financial Statement Analysis 203 Identification and Application of Valuation Multiples 221 Valuation of Colossal Software 232 Part V. Important Aspects of Using the Market Approach 239 15. Reconciling Market Approach Values with Income and Asset Approach Values 241 Did We Appraise the Correct Property? 241 Conformance to the Required Definition of Value 242 Relative Adequacy and Reliability of Data 242 Check for Errors 243 Check Assumptions 243 Relationship between Market Multiples and Discount or Capitalization Rates 243 What to Do When Reconciliation Efforts Fail 247 Explicit versus Implicit Weighting 249 Summary 250 16. Does Size Matter? Evidence from Empirical Data 252 Evidence from Market Approach Data 252 Evidence from Income Approach Data 255 Summary 262 17. Common Errors in Implementing the Market Approach 263 Inadequate Selection of Guideline Companies 264 Indiscriminate Use of Average (or Median) Multiples 265 Failing to Consider Guideline Company Financial Statement Adjustments 265 Failure to Conduct a Site Visit and Management Interviews 266 Making Inappropriate or Unsupported Financial Statement Adjustments 267 Applying Multiples to Inconsistently Defined Data 268 Failure to Match Time Periods 268 Reliance on Rules of Thumb 269 Failure to Account for Excess or Deficient Cash 270 Failure to Adjust for Differences in Deal Terms and Structure 271 “Assets Plus .” Rules 272 Failing to Apply Appropriate Discounts and Premiums 272 Summary 273 18. The Dismal Track Record of U.S. Market Acquisitions 274 Acquirers Tend to Overpay 274 Why Buyers Overpay: The Hubris Effect 276 The Frog-kissing Princess 278 Summary 279 19. The Market Approach in the Courts 280 U.S. Tax Court 280 Marital Dissolutions 286 Bankruptcy 287 Condemnation 288 Dissenting Stockholder, Minority Oppression, and Other Shareholder Disputes 288 Summary 292 Appendixes 297 Appendix A Bibliography 299 Appendix B Data Resources 309 Appendix c International Glossary of Business Valuation Terms 331 Appendix d The Quantitative Marketability Discount Model 339 Appendix E Pratt’s Stats™ Data Contributors 351 Index 377
Subject Areas: Finance & accounting [KF]
