SENIOR JUDGE DAVID LARO was appointed to the United States Tax Court, confirmed by the Senate, and invested as a federal judge in November 1992. He formerly practiced law in Flint and Ann Arbor, Michigan, for twenty-four years, specializing in tax law. Senior Judge Laro was chairman and CEO of a publicly traded international company, and he cofounded Republic Bancorp, a Michigan bank holding company. He is an adjunct professor of law at Georgetown University Law School and a visiting professor at the University of San Diego Law School. SHANNON P. PRATT is one of the most successful and respected authors in the field of business valuations. He has authored many industry standard books, including Cost of Capital, Fourth Edition; Business Valuation Discounts and Premiums, Second Edition; and The Market Approach to Valuing Businesses, Second Edition, all published by Wiley. Over a distinguished career of more than four decades, he has performed valuation engagements for M&A, ESOPs, and numerous other purposes. He is also Editor Emeritus of Shannon Pratt's Business Valuation Update, the premier monthly newsletter in the field of business valuation. Dr. Pratt is CEO of Shannon Pratt Valuations, a business valuation firm located in Portland, Oregon.

• Foreword to Second Edition xvForeword: Legal Practitioner’s Perspective xviiForeword: Law Professor’s Perspective xixForeword: Business Appraiser’s Perspective xxiPreface to the New Edition xxiiiOrigin of the Book xxiiiAuthors Provide Own Perspectives xxivTopics Covered xxivAcknowledgments xxviiAbout the Authors xxixChapter 1 Standards of Business Valuation 1Summary 1Introduction 2Sources for Defining Value 3Definitions of Value 7Premise of Value 17Conclusion 18Chapter 2 Subsequent Events 19Summary 19Key Question 19Valuation Date 20Subsequent Events—Exceptions 21Conclusion 27Chapter 3 Business Valuation Experts 28Summary 28Introduction 29Proving Business Value 29The Expert Appraiser 30Types of Experts 31Various Roles of Experts 32Business Valuation Litigation Witnesses 32Admissibility of Evidence Underlying Expert Opinions 33Limitations to Admissibility 35Reliability of the Expert 36Minimum Thresholds for the Business Valuation Expert 38Sarbanes-Oxley Act of 2002 40Attorney Assistance to the Expert 40Qualified Appraiser 43Concerns about Expert Testimony 44Court-Appointed Expert 46Conclusion 48Appendix: Expert Credentials and Qualifications 49Chapter 4 Sources of Law and Choice of Courts 58Summary 58Structure of the American Legal System 59Tax Law 60Tax Litigation 62Conclusion 66Chapter 5 Burden of Proof in Valuation Controversies 67Summary 67Burden of Proof 69Who Bears the Burden of Proof? 71Burden of Proof: Exceptions to the General Rule 71Chapter 6 Penalties and Sanctions 76Summary 76Introduction 77Valuation Penalties 78Preparer and Appraiser Penalties 81General Penalties 82Discretionary Sanctions 84Chapter 7 How the Form of Entity Affects Valuation 86Summary 86Introduction 87Corporations 88General Partnerships 89Limited Partnerships 89Limited Liability Companies 91Sole Proprietorships 91Tax Classifications 91Valuation Considerations 92Entity-Level Discounts 94Choice of Jurisdiction 95Conclusion 97Chapter 8 Valuation of S Corporations and Other Pass-Through Tax Entities: Minority and Controlling Interests 98Introduction 98Case Law Background 100S Corporation Minority Interest Appraisals 104Comparison of Minority Interest Theories—A Summary of the Issues 106S Corporation Controlling Interest Appraisals 108General S Corporation Appraisal Considerations 110Conclusion 110Chapter 9 Transfer Pricing 112Summary 112Introduction 113Conclusion 123Chapter 10 Customs Valuation 124Summary 124Introduction 125Customs Valuation Methods and Concepts 125Related-Party Transactions 130Conclusion 132Chapter 11 Adjustments to Financial Statements 133Summary 133Separating Nonoperating Items from Operating Items 134Addressing Excess Assets and Asset Deficiencies 135Handling Contingent Assets and Liabilities 135Adjusting Cash-Basis Statements to Accrual-Basis Statements 136Normalizing Adjustments 136Controlling Adjustments 137Conclusion 139Chapter 12 Comparative Financial Statement Analysis 140Summary 140Comparable Ratio Analysis 142Common Size Statements 147Tying the Financial Statement Analysis to the Value Conclusion 147Conclusion 148Chapter 13 Economic and Industry Analysis 149Summary 149Objective of Economic and Industry Analysis 150International Economic Analysis 150National Economic Analysis 150Regional and Local Economic Analysis 151Industry Analysis 151Conclusion 153Partial Bibliography of Sources for Economic and Industry Analysis 153Chapter 14 Site Visits and Interviews 159Summary 159Site Visits 159Management Interviews 160Interviews with Persons Outside the Company 160Conclusion 161Chapter 15 The Income Approach 162Summary of Approaches, Methods, and Procedures 162Introduction to the Income Approach 163Net Cash Flow: The Preferred Measure of Economic Benefit in the Income Approach 164Discounting versus Capitalizing 166Relationship between Discount Rate and Capitalization Rate 166Projected Amounts of Expected Returns 172Developing Discount and Capitalization Rates for Equity Returns 172Weighted Average Cost of Capital (WACC) 176The Midyear Convention 177The Income Approach in the Courts 179Conclusion 185Appendix: An Illustration of the Income Approach to Valuation 186Chapter 16 The Market Approach 195Summary 196The Market Approach 196Revenue Ruling 59-60 Emphasizes Market Approach 196The Guideline Public Company and the Guideline Transaction (Merger and Acquisition) Method 197How Many Guideline Companies? 202Selection of Guideline Companies 204Documenting the Search for Guideline Companies 206Choosing Multiples Based on Objective Empirical Evidence 206What Prices to Use in the Numerators of the Market Valuation Multiples 206Choosing the Level of the Valuation Multiple 207Selecting Which Valuation Multiples to Use 209Assigning Weights to Various Market Multiples 211Sample Market Valuation Approach Tables 211Other Methods Classified Under the Market Approach 211Conclusion 216Appendix: An Illustration of the Market Approach to Valuation 217Chapter 17 The Asset-Based Approach 243Summary 243Adjusted Net Asset Value Method 243Excess Earnings Method (The Formula Approach) 244Conclusion 248Chapter 18 Entity-Level Discounts 249Summary 249Trapped-In Capital Gains Discount 250Key Person Discount 256Portfolio (Nonhomogeneous Assets) Discount 263Discount for Contingent Liabilities 267Conclusion 269Chapter 19 Minority Discounts/Control Premiums 271Summary 271Minority Discounts/Control Premiums 271Conclusion 278Chapter 20 Discounts for Lack of Marketability 279Summary: General Introduction to Shareholder-Level Discounts and Premiums 280Definition of Marketability 281Benchmark for Marketability Is Cash in Three Days 281Investors Cherish Liquidity, Abhor Illiquidity 282Degrees of Marketability or Lack Thereof 283Empirical Evidence to Quantify Discounts for Lack of Marketability: Restricted Stock Studies 283Empirical Evidence to Quantify Discounts for Lack of Marketability: Pre-IPO Studies 290Criticisms of the Pre-IPO Studies 292Factors Affecting the Magnitude of Discounts for Lack of Marketability 294Use of the Databases for Quantifying Discounts for Lack of Marketability 297Discounts for Lack of Marketability for Controlling Interests 300Option Pricing as Indicator of DLOM 305Discounts for Lack of Marketability in the Courts 309Conclusion 319Partial Bibliography of Sources for Discounts for Lack of Marketability 320Chapter 21 Other Shareholder-Level Discounts 321Summary 321Voting versus Nonvoting Shares 321Blockage 324Discounts for Undivided Fractional Interests in Property 330Conclusion 332Chapter 22 Personal versus Enterprise Goodwill 333Summary 333Definitions of Goodwill 334Tax Implications 334Indications of Personal versus Enterprise Goodwill 334Landmark Cases 335Excerpt from Personal Goodwill Appraisal Report 339Conclusion 342Chapter 23 Weighting of Approaches 343Summary 343Theory and Practice 343Mathematical versus Subjective Weighting 344Examples of Weighting of Approaches 345Conclusion 347Chapter 24 IRS Positions 348Summary 348Introduction 349Rev. Rul. 59-60 350Rev. Rul. 65-192 358Rev. Rul. 65-193 362Rev. Proc. 66-49 363Rev. Rul. 68-609 366Rev. Proc. 77-12 368Rev. Rul. 77-287 370Rev. Rul. 83-120 376Rev. Rul. 85-75 379Rev. Rul. 93-12 381Tax Advice Memorandum 9436005 383Rev. Proc. 2003-51 386Rev. Proc. 2007-41 390Rev. Rul. 2008-35 393Chapter 25 Business Appraisal Reports 399Summary 400Business Valuation Report-Writing Standards 400Elements of the Business Valuation Report 412Organization of the Report 418Qualities of a Good Appraisal Report 418Conclusion 419Chapter 26 Valuation of Options 420Summary 420Introduction and Background 421General Principles of Option Valuation 422Specific Rules for Valuing Options 427Conclusion 433Chapter 27 Questions to Ask Business Valuation Experts 434Summary 434Qualifications 434Financial Statement Adjustments and Analysis 435Economic and Industry Data 436Site Visits and Interviews 436General Questions about Methodology 436Discount and Capitalization Rates in the Income Approach 436Projections Used in the Income Approach 438The Market Approach 438Asset-Based Approach 438Entity-Level Discounts 438Minority Interest Discounts/Control Premiums 439Discounts for Lack of Marketability 439Voting/Nonvoting Stock 439Questions about Contradictory Prior Testimony 439Appendix A International Glossary of Business Valuation Terms 441Appendix B Bibliography 447Books 447Articles and Papers 448Periodicals 450Mergers and Acquisitions Databases 451Discount for Lack of Marketability Databases 452Table of Cases 453Index 461

SENIOR JUDGE DAVID LARO was appointed to the United States Tax Court, confirmed by the Senate, and invested as a federal judge in November 1992. He formerly practiced law in Flint and Ann Arbor, Michigan, for twenty-four years, specializing in tax law. Senior Judge Laro was chairman and CEO of a publicly traded international company, and he cofounded Republic Bancorp, a Michigan bank holding company. He is an adjunct professor of law at Georgetown University Law School and a visiting professor at the University of San Diego Law School. SHANNON P. PRATT is one of the most successful and respected authors in the field of business valuations. He has authored many industry standard books, including Cost of Capital, Fourth Edition; Business Valuation Discounts and Premiums, Second Edition; and The Market Approach to Valuing Businesses, Second Edition, all published by Wiley. Over a distinguished career of more than four decades, he has performed valuation engagements for M&A, ESOPs, and numerous other purposes. He is also Editor Emeritus of Shannon Pratt's Business Valuation Update, the premier monthly newsletter in the field of business valuation. Dr. Pratt is CEO of Shannon Pratt Valuations, a business valuation firm located in Portland, Oregon.

• Foreword to Second Edition xvForeword: Legal Practitioner’s Perspective xviiForeword: Law Professor’s Perspective xixForeword: Business Appraiser’s Perspective xxiPreface to the New Edition xxiiiOrigin of the Book xxiiiAuthors Provide Own Perspectives xxivTopics Covered xxivAcknowledgments xxviiAbout the Authors xxixChapter 1 Standards of Business Valuation 1Summary 1Introduction 2Sources for Defining Value 3Definitions of Value 7Premise of Value 17Conclusion 18Chapter 2 Subsequent Events 19Summary 19Key Question 19Valuation Date 20Subsequent Events—Exceptions 21Conclusion 27Chapter 3 Business Valuation Experts 28Summary 28Introduction 29Proving Business Value 29The Expert Appraiser 30Types of Experts 31Various Roles of Experts 32Business Valuation Litigation Witnesses 32Admissibility of Evidence Underlying Expert Opinions 33Limitations to Admissibility 35Reliability of the Expert 36Minimum Thresholds for the Business Valuation Expert 38Sarbanes-Oxley Act of 2002 40Attorney Assistance to the Expert 40Qualified Appraiser 43Concerns about Expert Testimony 44Court-Appointed Expert 46Conclusion 48Appendix: Expert Credentials and Qualifications 49Chapter 4 Sources of Law and Choice of Courts 58Summary 58Structure of the American Legal System 59Tax Law 60Tax Litigation 62Conclusion 66Chapter 5 Burden of Proof in Valuation Controversies 67Summary 67Burden of Proof 69Who Bears the Burden of Proof? 71Burden of Proof: Exceptions to the General Rule 71Chapter 6 Penalties and Sanctions 76Summary 76Introduction 77Valuation Penalties 78Preparer and Appraiser Penalties 81General Penalties 82Discretionary Sanctions 84Chapter 7 How the Form of Entity Affects Valuation 86Summary 86Introduction 87Corporations 88General Partnerships 89Limited Partnerships 89Limited Liability Companies 91Sole Proprietorships 91Tax Classifications 91Valuation Considerations 92Entity-Level Discounts 94Choice of Jurisdiction 95Conclusion 97Chapter 8 Valuation of S Corporations and Other Pass-Through Tax Entities: Minority and Controlling Interests 98Introduction 98Case Law Background 100S Corporation Minority Interest Appraisals 104Comparison of Minority Interest Theories—A Summary of the Issues 106S Corporation Controlling Interest Appraisals 108General S Corporation Appraisal Considerations 110Conclusion 110Chapter 9 Transfer Pricing 112Summary 112Introduction 113Conclusion 123Chapter 10 Customs Valuation 124Summary 124Introduction 125Customs Valuation Methods and Concepts 125Related-Party Transactions 130Conclusion 132Chapter 11 Adjustments to Financial Statements 133Summary 133Separating Nonoperating Items from Operating Items 134Addressing Excess Assets and Asset Deficiencies 135Handling Contingent Assets and Liabilities 135Adjusting Cash-Basis Statements to Accrual-Basis Statements 136Normalizing Adjustments 136Controlling Adjustments 137Conclusion 139Chapter 12 Comparative Financial Statement Analysis 140Summary 140Comparable Ratio Analysis 142Common Size Statements 147Tying the Financial Statement Analysis to the Value Conclusion 147Conclusion 148Chapter 13 Economic and Industry Analysis 149Summary 149Objective of Economic and Industry Analysis 150International Economic Analysis 150National Economic Analysis 150Regional and Local Economic Analysis 151Industry Analysis 151Conclusion 153Partial Bibliography of Sources for Economic and Industry Analysis 153Chapter 14 Site Visits and Interviews 159Summary 159Site Visits 159Management Interviews 160Interviews with Persons Outside the Company 160Conclusion 161Chapter 15 The Income Approach 162Summary of Approaches, Methods, and Procedures 162Introduction to the Income Approach 163Net Cash Flow: The Preferred Measure of Economic Benefit in the Income Approach 164Discounting versus Capitalizing 166Relationship between Discount Rate and Capitalization Rate 166Projected Amounts of Expected Returns 172Developing Discount and Capitalization Rates for Equity Returns 172Weighted Average Cost of Capital (WACC) 176The Midyear Convention 177The Income Approach in the Courts 179Conclusion 185Appendix: An Illustration of the Income Approach to Valuation 186Chapter 16 The Market Approach 195Summary 196The Market Approach 196Revenue Ruling 59-60 Emphasizes Market Approach 196The Guideline Public Company and the Guideline Transaction (Merger and Acquisition) Method 197How Many Guideline Companies? 202Selection of Guideline Companies 204Documenting the Search for Guideline Companies 206Choosing Multiples Based on Objective Empirical Evidence 206What Prices to Use in the Numerators of the Market Valuation Multiples 206Choosing the Level of the Valuation Multiple 207Selecting Which Valuation Multiples to Use 209Assigning Weights to Various Market Multiples 211Sample Market Valuation Approach Tables 211Other Methods Classified Under the Market Approach 211Conclusion 216Appendix: An Illustration of the Market Approach to Valuation 217Chapter 17 The Asset-Based Approach 243Summary 243Adjusted Net Asset Value Method 243Excess Earnings Method (The Formula Approach) 244Conclusion 248Chapter 18 Entity-Level Discounts 249Summary 249Trapped-In Capital Gains Discount 250Key Person Discount 256Portfolio (Nonhomogeneous Assets) Discount 263Discount for Contingent Liabilities 267Conclusion 269Chapter 19 Minority Discounts/Control Premiums 271Summary 271Minority Discounts/Control Premiums 271Conclusion 278Chapter 20 Discounts for Lack of Marketability 279Summary: General Introduction to Shareholder-Level Discounts and Premiums 280Definition of Marketability 281Benchmark for Marketability Is Cash in Three Days 281Investors Cherish Liquidity, Abhor Illiquidity 282Degrees of Marketability or Lack Thereof 283Empirical Evidence to Quantify Discounts for Lack of Marketability: Restricted Stock Studies 283Empirical Evidence to Quantify Discounts for Lack of Marketability: Pre-IPO Studies 290Criticisms of the Pre-IPO Studies 292Factors Affecting the Magnitude of Discounts for Lack of Marketability 294Use of the Databases for Quantifying Discounts for Lack of Marketability 297Discounts for Lack of Marketability for Controlling Interests 300Option Pricing as Indicator of DLOM 305Discounts for Lack of Marketability in the Courts 309Conclusion 319Partial Bibliography of Sources for Discounts for Lack of Marketability 320Chapter 21 Other Shareholder-Level Discounts 321Summary 321Voting versus Nonvoting Shares 321Blockage 324Discounts for Undivided Fractional Interests in Property 330Conclusion 332Chapter 22 Personal versus Enterprise Goodwill 333Summary 333Definitions of Goodwill 334Tax Implications 334Indications of Personal versus Enterprise Goodwill 334Landmark Cases 335Excerpt from Personal Goodwill Appraisal Report 339Conclusion 342Chapter 23 Weighting of Approaches 343Summary 343Theory and Practice 343Mathematical versus Subjective Weighting 344Examples of Weighting of Approaches 345Conclusion 347Chapter 24 IRS Positions 348Summary 348Introduction 349Rev. Rul. 59-60 350Rev. Rul. 65-192 358Rev. Rul. 65-193 362Rev. Proc. 66-49 363Rev. Rul. 68-609 366Rev. Proc. 77-12 368Rev. Rul. 77-287 370Rev. Rul. 83-120 376Rev. Rul. 85-75 379Rev. Rul. 93-12 381Tax Advice Memorandum 9436005 383Rev. Proc. 2003-51 386Rev. Proc. 2007-41 390Rev. Rul. 2008-35 393Chapter 25 Business Appraisal Reports 399Summary 400Business Valuation Report-Writing Standards 400Elements of the Business Valuation Report 412Organization of the Report 418Qualities of a Good Appraisal Report 418Conclusion 419Chapter 26 Valuation of Options 420Summary 420Introduction and Background 421General Principles of Option Valuation 422Specific Rules for Valuing Options 427Conclusion 433Chapter 27 Questions to Ask Business Valuation Experts 434Summary 434Qualifications 434Financial Statement Adjustments and Analysis 435Economic and Industry Data 436Site Visits and Interviews 436General Questions about Methodology 436Discount and Capitalization Rates in the Income Approach 436Projections Used in the Income Approach 438The Market Approach 438Asset-Based Approach 438Entity-Level Discounts 438Minority Interest Discounts/Control Premiums 439Discounts for Lack of Marketability 439Voting/Nonvoting Stock 439Questions about Contradictory Prior Testimony 439Appendix A International Glossary of Business Valuation Terms 441Appendix B Bibliography 447Books 447Articles and Papers 448Periodicals 450Mergers and Acquisitions Databases 451Discount for Lack of Marketability Databases 452Table of Cases 453Index 461

SENIOR JUDGE DAVID LARO was appointed to the United States Tax Court, confirmed by the Senate, and invested as a federal judge in November 1992. He formerly practiced law in Flint and Ann Arbor, Michigan, for twenty-four years, specializing in tax law. Senior Judge Laro was chairman and CEO of a publicly traded international company, and he cofounded Republic Bancorp, a Michigan bank holding company. He is an adjunct professor of law at Georgetown University Law School and a visiting professor at the University of San Diego Law School. SHANNON P. PRATT is one of the most successful and respected authors in the field of business valuations. He has authored many industry standard books, including Cost of Capital, Fourth Edition; Business Valuation Discounts and Premiums, Second Edition; and The Market Approach to Valuing Businesses, Second Edition, all published by Wiley. Over a distinguished career of more than four decades, he has performed valuation engagements for M&A, ESOPs, and numerous other purposes. He is also Editor Emeritus of Shannon Pratt's Business Valuation Update, the premier monthly newsletter in the field of business valuation. Dr. Pratt is CEO of Shannon Pratt Valuations, a business valuation firm located in Portland, Oregon.

• Foreword to Second Edition xvForeword: Legal Practitioner’s Perspective xviiForeword: Law Professor’s Perspective xixForeword: Business Appraiser’s Perspective xxiPreface to the New Edition xxiiiOrigin of the Book xxiiiAuthors Provide Own Perspectives xxivTopics Covered xxivAcknowledgments xxviiAbout the Authors xxixChapter 1 Standards of Business Valuation 1Summary 1Introduction 2Sources for Defining Value 3Definitions of Value 7Premise of Value 17Conclusion 18Chapter 2 Subsequent Events 19Summary 19Key Question 19Valuation Date 20Subsequent Events—Exceptions 21Conclusion 27Chapter 3 Business Valuation Experts 28Summary 28Introduction 29Proving Business Value 29The Expert Appraiser 30Types of Experts 31Various Roles of Experts 32Business Valuation Litigation Witnesses 32Admissibility of Evidence Underlying Expert Opinions 33Limitations to Admissibility 35Reliability of the Expert 36Minimum Thresholds for the Business Valuation Expert 38Sarbanes-Oxley Act of 2002 40Attorney Assistance to the Expert 40Qualified Appraiser 43Concerns about Expert Testimony 44Court-Appointed Expert 46Conclusion 48Appendix: Expert Credentials and Qualifications 49Chapter 4 Sources of Law and Choice of Courts 58Summary 58Structure of the American Legal System 59Tax Law 60Tax Litigation 62Conclusion 66Chapter 5 Burden of Proof in Valuation Controversies 67Summary 67Burden of Proof 69Who Bears the Burden of Proof? 71Burden of Proof: Exceptions to the General Rule 71Chapter 6 Penalties and Sanctions 76Summary 76Introduction 77Valuation Penalties 78Preparer and Appraiser Penalties 81General Penalties 82Discretionary Sanctions 84Chapter 7 How the Form of Entity Affects Valuation 86Summary 86Introduction 87Corporations 88General Partnerships 89Limited Partnerships 89Limited Liability Companies 91Sole Proprietorships 91Tax Classifications 91Valuation Considerations 92Entity-Level Discounts 94Choice of Jurisdiction 95Conclusion 97Chapter 8 Valuation of S Corporations and Other Pass-Through Tax Entities: Minority and Controlling Interests 98Introduction 98Case Law Background 100S Corporation Minority Interest Appraisals 104Comparison of Minority Interest Theories—A Summary of the Issues 106S Corporation Controlling Interest Appraisals 108General S Corporation Appraisal Considerations 110Conclusion 110Chapter 9 Transfer Pricing 112Summary 112Introduction 113Conclusion 123Chapter 10 Customs Valuation 124Summary 124Introduction 125Customs Valuation Methods and Concepts 125Related-Party Transactions 130Conclusion 132Chapter 11 Adjustments to Financial Statements 133Summary 133Separating Nonoperating Items from Operating Items 134Addressing Excess Assets and Asset Deficiencies 135Handling Contingent Assets and Liabilities 135Adjusting Cash-Basis Statements to Accrual-Basis Statements 136Normalizing Adjustments 136Controlling Adjustments 137Conclusion 139Chapter 12 Comparative Financial Statement Analysis 140Summary 140Comparable Ratio Analysis 142Common Size Statements 147Tying the Financial Statement Analysis to the Value Conclusion 147Conclusion 148Chapter 13 Economic and Industry Analysis 149Summary 149Objective of Economic and Industry Analysis 150International Economic Analysis 150National Economic Analysis 150Regional and Local Economic Analysis 151Industry Analysis 151Conclusion 153Partial Bibliography of Sources for Economic and Industry Analysis 153Chapter 14 Site Visits and Interviews 159Summary 159Site Visits 159Management Interviews 160Interviews with Persons Outside the Company 160Conclusion 161Chapter 15 The Income Approach 162Summary of Approaches, Methods, and Procedures 162Introduction to the Income Approach 163Net Cash Flow: The Preferred Measure of Economic Benefit in the Income Approach 164Discounting versus Capitalizing 166Relationship between Discount Rate and Capitalization Rate 166Projected Amounts of Expected Returns 172Developing Discount and Capitalization Rates for Equity Returns 172Weighted Average Cost of Capital (WACC) 176The Midyear Convention 177The Income Approach in the Courts 179Conclusion 185Appendix: An Illustration of the Income Approach to Valuation 186Chapter 16 The Market Approach 195Summary 196The Market Approach 196Revenue Ruling 59-60 Emphasizes Market Approach 196The Guideline Public Company and the Guideline Transaction (Merger and Acquisition) Method 197How Many Guideline Companies? 202Selection of Guideline Companies 204Documenting the Search for Guideline Companies 206Choosing Multiples Based on Objective Empirical Evidence 206What Prices to Use in the Numerators of the Market Valuation Multiples 206Choosing the Level of the Valuation Multiple 207Selecting Which Valuation Multiples to Use 209Assigning Weights to Various Market Multiples 211Sample Market Valuation Approach Tables 211Other Methods Classified Under the Market Approach 211Conclusion 216Appendix: An Illustration of the Market Approach to Valuation 217Chapter 17 The Asset-Based Approach 243Summary 243Adjusted Net Asset Value Method 243Excess Earnings Method (The Formula Approach) 244Conclusion 248Chapter 18 Entity-Level Discounts 249Summary 249Trapped-In Capital Gains Discount 250Key Person Discount 256Portfolio (Nonhomogeneous Assets) Discount 263Discount for Contingent Liabilities 267Conclusion 269Chapter 19 Minority Discounts/Control Premiums 271Summary 271Minority Discounts/Control Premiums 271Conclusion 278Chapter 20 Discounts for Lack of Marketability 279Summary: General Introduction to Shareholder-Level Discounts and Premiums 280Definition of Marketability 281Benchmark for Marketability Is Cash in Three Days 281Investors Cherish Liquidity, Abhor Illiquidity 282Degrees of Marketability or Lack Thereof 283Empirical Evidence to Quantify Discounts for Lack of Marketability: Restricted Stock Studies 283Empirical Evidence to Quantify Discounts for Lack of Marketability: Pre-IPO Studies 290Criticisms of the Pre-IPO Studies 292Factors Affecting the Magnitude of Discounts for Lack of Marketability 294Use of the Databases for Quantifying Discounts for Lack of Marketability 297Discounts for Lack of Marketability for Controlling Interests 300Option Pricing as Indicator of DLOM 305Discounts for Lack of Marketability in the Courts 309Conclusion 319Partial Bibliography of Sources for Discounts for Lack of Marketability 320Chapter 21 Other Shareholder-Level Discounts 321Summary 321Voting versus Nonvoting Shares 321Blockage 324Discounts for Undivided Fractional Interests in Property 330Conclusion 332Chapter 22 Personal versus Enterprise Goodwill 333Summary 333Definitions of Goodwill 334Tax Implications 334Indications of Personal versus Enterprise Goodwill 334Landmark Cases 335Excerpt from Personal Goodwill Appraisal Report 339Conclusion 342Chapter 23 Weighting of Approaches 343Summary 343Theory and Practice 343Mathematical versus Subjective Weighting 344Examples of Weighting of Approaches 345Conclusion 347Chapter 24 IRS Positions 348Summary 348Introduction 349Rev. Rul. 59-60 350Rev. Rul. 65-192 358Rev. Rul. 65-193 362Rev. Proc. 66-49 363Rev. Rul. 68-609 366Rev. Proc. 77-12 368Rev. Rul. 77-287 370Rev. Rul. 83-120 376Rev. Rul. 85-75 379Rev. Rul. 93-12 381Tax Advice Memorandum 9436005 383Rev. Proc. 2003-51 386Rev. Proc. 2007-41 390Rev. Rul. 2008-35 393Chapter 25 Business Appraisal Reports 399Summary 400Business Valuation Report-Writing Standards 400Elements of the Business Valuation Report 412Organization of the Report 418Qualities of a Good Appraisal Report 418Conclusion 419Chapter 26 Valuation of Options 420Summary 420Introduction and Background 421General Principles of Option Valuation 422Specific Rules for Valuing Options 427Conclusion 433Chapter 27 Questions to Ask Business Valuation Experts 434Summary 434Qualifications 434Financial Statement Adjustments and Analysis 435Economic and Industry Data 436Site Visits and Interviews 436General Questions about Methodology 436Discount and Capitalization Rates in the Income Approach 436Projections Used in the Income Approach 438The Market Approach 438Asset-Based Approach 438Entity-Level Discounts 438Minority Interest Discounts/Control Premiums 439Discounts for Lack of Marketability 439Voting/Nonvoting Stock 439Questions about Contradictory Prior Testimony 439Appendix A International Glossary of Business Valuation Terms 441Appendix B Bibliography 447Books 447Articles and Papers 448Periodicals 450Mergers and Acquisitions Databases 451Discount for Lack of Marketability Databases 452Table of Cases 453Index 461