Chapter 6 Flashcards
What is the term for companies utilized in the market approach?
Guideline public companies
What are the three most common methods under the market approach?
Prior transactions of company’s own stock
GPC method
M&A method (transaction method, guideline company transaction method, direct market data method)
What is rule of thumb indicator?
Typical industry benchmark based on experience, observation, hearsay, or combination that provide a sanity check of the value indications but should not be used as the only method
What does Revenue Ruling 59-60 indicate about the market approach?
That it should be considered in valuations for gift and estate tax purposes
What do Tax Court opinions historically indicate about the market approach?
That it should be the primary focus and that opinions have been rejected for ignoring market data. More recently judges have been more critical of the approach.
Why is the market approach useful and relevant?
Places all indications of value into the larger context of the market realities and subjects them to stringent reasonableness checks
When is the market approach not useful under the prior transaction method?
1) prior transactions not at arms-length
2) not enough information to be useful
3) too dated or under substantially different economic conditions
When is the market approach not useful under the GPC method?
1) sufficient financial information unavailable for GPCs (thinly traded stocks/penny stocks)
2) Narrow, unique niche of subject company
3) Not similar enough to subject company
4) If subject company is a small business such as a professional practice or service provider (lawyer, beauty salon, gas station, grocery store, car wash) - should consider transaction method
When is the market approach not useful under the M&A/transaction method?
1) narrow, unique niche of subject company
2) too few transactions in the industry grouping
3) too dated or under substantially different economic conditions
4) limited or conflicting information available about the transactions
What records should a valuation analyst keep when performing a market approach analysis?
Steps performed, companies considered, accepted, and rejected, reasons were/were not used, and sources
What is the definition of market approach?
A general way of determining a value indication of a business, business ownership interest, security, or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities, or intangible assets that have been sold
What is the definition of a market multiple?
Market value of a company’s stock or invested capital divided by a company’s measure
Under what method(s) are guideline companies identified?
GPC method or M&A method
What is the definition of invested capital?
The sum of equity and debt in a business enterprise with debt typically being all interest-bearing debt or long-term, interest-bearing debt
Revenue Ruling 59-60 specifically refers to the ______ marketplace for the market approach
Public
Although Revenue Ruling 59-60 specifically refers to the public marketplace for the market approach, should the private marketplace be considered?
Yes
What are the four contentions that are typically discussed in case law with respect to the market approach?
1) are the public companies sufficiently comparable to the subject company
2) what specific factors make the companies similar
3) what adjustments are appropriate tot he market multiple
4) which market multiple is most appropriate
What agreements should be considered when the valuation analyst analyzes prior sales of the companies own stock?
Buy-sell agreements, stock redemption agreements, and other enforceable documents
What may buy-sell agreements, stock redemption agreements, and other enforceable documents create?
A ready market for the sale of stock by requiring the company or other shareholders to purchase stock under certain circumstances (like disability/death)
Are buy-sell agreements binding for estate tax purposes?
They may not be binding
Are buy-sell agreements binding for marital dissolution purposes?
They may not be binding
What is the principle issue when considering prior sales of a company’s stock?
Whether the transaction was at arms-length (also noted in Revenue Ruling 59-60)
Why are the terms of the sale considered when analyzing prior stock transactions?
Confirm terms reflect a cash equivalent value
Prior transactions of stock sales are particularly useful when there are _____ transactions
Many