From the 2002 Family Firm Institute Annual Conference 
Speech given by Robert P. Oliver of Management Planning

Fundamental Valuation Approaches

• Income Approach
              Present Value of Future Benefits
  
• Cost Approach
            Asset-Based Approach
  
• Market Approach  

What is the purpose of the appraisal?

Guideline Company Approach

• Selection of Guideline Companies
        Define Criteria
  
• Adjustments to Reported Figures
  
• Comparative Financial Analysis
  
• Measurement of Earning Power
  
• Assessment of Investment Appeal
      Valuation Ratios

 Levels of Value

S Corporation Valuation Issues

• S Corps Generally Valued Like C Corps
  
• Mergers and Acquisition Market Does Not Recognize a Valuation Difference
  
• S Corp. Eliminated Double Tax
  
• ESOP Trust Is Tax-Exempt
         No Current Taxes Paid In 100% ESOP

 ESOP Appraisal Requirements

• ERISA and IRS Code require that an ESOP have at least an annual appraisal

• An independent appraiser must do the valuation

• ERISA defines “adequate consideration” as the transaction price  - fiduciary relies on independent appraisal

• The appraiser cannot be a fiduciary

 Definition of Fair Market Value

Revenue Ruling 59-60

The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to act and the latter is not under any compulsion to sell. Both parties have reasonable knowledge of relevant facts.

Department of Labor

The price at which the asset would change hands between a willing buyer and a willing seller when the former is not under any compulsion to sell and both parties are able, as well as willing, to trade and are well informed about the asset and the market for such asset.

 Discounts for Lack of Marketability

• Analysis of discounts in private placement transactions is best evidence

• Correlation between holding period and discount

• Normally 30% to 40% for privately held stock

• Guideline companies publicly traded

• Employee Put Right reduces DLOM

• Put only as good as financial strength of company

• Repurchase liability study

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