Valuing the Closely Held Firm (Financial Management Association Survey and Synthesis Series)

Contents......Page 10
List of Tables......Page 16
List of Special Terms and Expressions......Page 18
Cast of Characters......Page 24
1.0 Mike and Tom Begin Their Quest......Page 25
1.1 The Importance of Knowing the Value......Page 26
1.2 Specific Times That Require Valuation......Page 29
1.3 How We Proceed......Page 33
1.4 Ah! I’m Beginning to See Why!......Page 35
2.0 What’s It Worth?......Page 38
2.1 Differences in Valuation Methods between Public and Closely Held Firms......Page 39
2.2 Does a Going Concern Exist?......Page 40
2.3 Closely Held Firms Lack Separation of Manager and Owner......Page 43
2.4 Alternative Ways of Organizing a Firm: Adjustments for Taxes and Insider Compensation......Page 46
2.5 How Should “Excess” Returns Be Valued?......Page 53
2.6 An Adjustments Example......Page 56
2.7 Just a Pile of Assets?......Page 58
3.0 The Value of Assets......Page 62
3.1 Valuing a Firm Both Ways......Page 63
3.2 Valuing the Tangible Assets on a Balance Sheet......Page 65
3.3 What Is Being Bought Other Than Tangible Assets?......Page 74
3.4 Market Values for Uniform Parts......Page 80
3.5 Valuing the Nonuniform Tangible Parts......Page 83
3.6 Intangible Assets......Page 84
3.7 Liquidation Considerations......Page 87
3.8 Tempting Valuation Shortcuts......Page 88
3.9 When Book Value Is Not Market Value......Page 89
4.0 What Makes a Business a Going Concern?......Page 92
4.1 Valuation Process: Cash Flows, Timing, and Risk......Page 94
4.2 The Value of Current Operations......Page 96
4.3 Estimating Future Cash Flows......Page 103
4.4 Complications in Estimating Future ROE Values......Page 110
4.6 Watch the Cash Flow!......Page 116
5.0 The Value of Future Potential......Page 118
5.1 Separating Growth Opportunities from Current Excess Returns......Page 120
5.2 Subtleties of Identifying and Valuing Growth Opportunities......Page 123
5.3 An Example of the Value Created by Excess Returns......Page 124
5.4 Valuation in Parts: Present and Future......Page 126
5.5 Estimating the Value of Growth Opportunities......Page 128
5.6 What Happens When Real Growth Is Negative?......Page 135
5.7 Keeping Up with Growth or Not: The Manager’s Challenge......Page 138
5.8 Walk or Run: In Which Direction?......Page 139
6.0 Real Growth or an Illusion?......Page 140
6.1 Equivalence of Real and Nominal Approaches to Valuation......Page 142
6.2 Accounting Measures and Valuation Difficulties......Page 145
6.3 Inflation Lowers the Depreciation Tax Shield......Page 152
6.5 Real Value—or Inflated Mirage?......Page 155
7.0 Wrestling with Discount Rates......Page 158
7.1 Required Rate of Return for a Public Firm......Page 159
7.2 Required Rate of Return for a Closely Held Firm......Page 161
7.3 Methods Used to Estimate the Required Return......Page 162
7.4 Special Considerations for Closely Held Firms......Page 164
7.5 Leverage Differences......Page 170
7.6 An Estimate of the Required Rate of Return......Page 171
7.7 Applying the Discount Rate......Page 172
7.8 Discounts Redux......Page 173
8.0 Should Tom Sell to Tracey or Mike?......Page 176
8.1 Why Is the Firm for Sale?......Page 179
8.2 Know What You Are Getting......Page 181
8.3 Know What You Can Pay......Page 194
8.4 Reorganizing the Business......Page 202
8.5 Buying In? Remember to Price the Exit......Page 213
8.6 Selling and Buying......Page 215
9.0 So, How Do I Cash Out of This Business?......Page 218
9.1 Why Go Public? Why Not?......Page 220
9.2 Selling the Business outside the Family......Page 224
9.3 Insider Sales and Transfers......Page 233
9.4 Jointly Owned Businesses......Page 245
9.5 An Exit Plan Emerges......Page 247
10.0 A Different Way of Managing a Business......Page 250
10.1 What Has Been Learned about Valuation in General?......Page 252
10.2 What Has Been Learned about Valuing Closely Held Firms?......Page 255
10.3 What’s Left to Learn about Valuing Closely Held Firms?......Page 257
10.4 Implications for the Management of Closely Held Firms......Page 260
10.5 Lessons Learned?......Page 261
B......Page 264
E......Page 265
I......Page 266
P......Page 267
R......Page 268
V......Page 269
W......Page 270
Appendix 2. Useful Organizations and Web Sites......Page 272
Appendix 3. Annotated Bibliography......Page 274
Appendix 4. How the IRS Views Valuation of Closely Held Firms......Page 278
Appendix 5. Worksheets......Page 280
C......Page 284
I......Page 285
O......Page 286
T......Page 287
Z......Page 288