This post compares and contrasts different ways of applying the Direct Market Data Method (DMDM) in our appraisals. The DMDM is part of the Market Approach, in which we develop value indications from sales of guideline companies drawn from sources like the IBA Market Data File, BizComps, and / or Pratt’s Stats.
I write about this [...]
Under the fair market value standard governing federal tax-related valuations, premiums and discounts for (lack of) control and marketability for fractional interests are permitted by Revenue Rulings 93-12 and 77-287. There are instances (such as tiered discounts) in which their permissibility is arguable, but otherwise their legitimacy is indisputable. There are differences of opinion as [...]
Two phenomena (things that can be observed and measured) are correlated if they move together. Children’s ages and heights are positively correlated; they increase together. Prices of fixed-coupon bonds and market interest rates are negatively correlated; when rates rise, prices fall, and vice versa.
Just because things are correlated does not mean that they are related [...]
A newly minted estate attorney was reviewing my appraisal of a non-marketable minority limited interest in a real estate partnership which also relied on an independent appraisal of the real estate. The attorney had studied the real estate appraisal as well as my report, and noted that the real estate appraiser used the Market, Income [...]
The Justification of Purchase (JOP) test tells us that an equity value is economically reasonable if, the interest purchased for that value:
Pays owner-managers reasonable (usually fair market) compensation.
Adequately services (interest and principal) assumed and acquisition debt.
Generates a satisfactory return on investment (dividends and appreciation).
For small buy-a-job businesses, only the first two criteria are relevant.
How does [...]
Pop quiz #1: when a business redeems a shareholder’s interest, should the redemption price be calculated before or after the effect of the redemption?
Answer: before, because:
The fact that the company is the buyer should have no bearing on the price.
Stated another way, the price should be the same as if a third party bought the [...]
Today I had a very interesting discussion with a fellow appraiser who is valuing an oil and gas exploration / development firm for divorce purposes. The subject company acquires oil and gas rights for specific properties all across the U.S. It then organizes limited partnerships to finance drilling and, if oil and gas are found, [...]
How many valuations have you done in which you could not get industry data? This happens to me maybe one in twenty times. (I use First Research, IbisWorld and BizMiner, in addition to contacting trade associations.) This usually happens with companies that offer highly specialized products and services or which serve unique, small markets. It [...]
My entire career has involved financial analysis in various applications: bank lending, business analysis, securities analysis, and business valuation. Perhaps the biggest lesson I have learned from my training and experience is:
“If you do not understand the cash flows and risks, you can’t be confident of your conclusion.”
To understand, we need to know:
The amount(s) and [...]
Financial theory and common sense tell us that business owners can use debt to increase the value of the equity in their companies. If they can borrow at 7% and earn 10% on the incremental assets, they will increase earnings and cash flow, provided of course that they really can earn more than their borrowing [...]
