Business Valuation: An Integrated Theory, 3rd Edition

Introduction xiii

What’s New in the Third Edition? xiv

Who Should Read This Book? xvii

Part One Conceptual Overview of the Integrated Theory

Chapter 1 The World of Value 3

Introduction 3

Common Questions 3

The World of Value 4

The Organizing Principles 5

Summary 16

Chapter 2 The Integrated Theory (Equity Basis) 19

Introduction 19

Common Questions 20

The Fundamental Valuation Model 21

The Conceptual Levels of Value 23

Symbolic Notation for the Integrated Theory 27

The Marketable Minority Interest Level of Value 29

Introduction to the Control Levels of Value 35

Strategic Control Level of Value 51

Firmwide Levels versus the Shareholder Level of Value 58

The Nonmarketable Minority Level of Value 60

The Integrated Theory of Business Valuation on an Equity Basis 67

Summary 67

Chapter 3 The Integrated Theory (Enterprise Basis) 71

Introduction 71

Comparing the Levels of Value: Equity and Enterprise Bases 73

Final Comparisons of the Equity and Enterprise Bases 77

Summary 79

Part Two Valuing Enterprise Cash Flows

Chapter 4 Income Approach (Cash Flows) 83

Introduction 83

Reconciling Single-Period Capitalization and Discounted Cash Flow Methods 84

Defining Enterprise Cash Flows 90

Defining Equity Cash Flows 95

Reinvestment Rates and Interim Growth Rates 99

Terminal Growth Rates 104

Expected Cash Flows and the Integrated Theory 108

Marketable Minority Interest Level: Public Company Equivalent 115

Financial Control Level: Private Equity Cash Flows 124

Strategic Control Level: Strategic Acquirer Cash Flows 128

Assessing the Reasonableness of Projected

Enterprise Cash Flows 136

Conclusion 139

Chapter 5 Income Approach (Discount Rate) 141

Introduction 141

Return Basics: Realized versus Required Returns 142

Components of the Weighted Average Cost of Capital 148

Market Participants and the WACC 165

The Levels of Value and the WACC 169

Assessing Overall Reasonableness 175

Chapter 6 Market Approach (Guideline Public Companies) 177

Introduction 177

Relationship of the Income and Market Approaches 178

What Do Observed Public Company Valuation Multiples Mean? 180

Adjusting Valuation Multiples for Differences in Risk and Growth 199

Guideline Public Company Multiples and the Enterprise Levels of Value 214

Assessing Overall Reasonableness 219

Chapter 7 Market Approach (Guideline Transactions) 221

Introduction 221

Attributes of Guideline Transaction Data 222

Drawing Valuation Inferences from Guideline Transaction Data 225

Minority Interest Discounts Inferred from Observed Control Premiums 240

Guideline Transaction Multiples and the Levels of Value 242

Assessing Overall Reasonableness 244

Appendix 7-A: A Historical Perspective on the Control Premium and Minority Interest Discount 247

Part Three Valuing Shareholder Cash Flows

Chapter 8 Restricted Stock Discounts and Pre-IPO Studies 271

Introduction 271

An Overview of Restricted Stock Discounts 275

Review of the FMV/Stout Restricted Stock Database 306

Pre-IPO Discounts 317

Conclusion 325

Chapter 9 Introduction to the QMDM (Quantitative Marketability Discount Model) 327

Introduction 327

Potential Valuation Approaches at the Shareholder Level 328

A Shareholder Level Discounted Cash Flow Model in Outline 331

Economic Factors Giving Rise to the Marketability Discount 338

Conclusion 346

Appendix 9-A: Liquidity and Marketability 349

Chapter 10 The QMDM Assumptions in Detail 359

Introduction 359

Assumption 1: Expected Holding Period for the Investment (HP) 360

Assumption 2A: Expected Dividend Yield (D %) 368

Assumption 2B: Expected Growth of Dividends (GD) 377

Assumption 2C: Timing of Dividend Receipt 378

Assumption 3A: The Expected Growth Rate in Value (GV) 379

Assumption 3B: Adjustments to the Terminal Value 385

Assumption 4: Required Holding Period Return (Rhp) 385

Conclusion 399

Chapter 11 Applying the QMDM 401

Introduction 401

Comprehensive Example of the QMDM in Use 401

Condensed QMDM Examples 414

The Uniform Standards of Professional Appraisal Practice and the QMDM 427

Chapter 12 Applying the Integrated Theory to Tax Pass-Through Entities 435

Introduction 435

The Nature of the S Corporation Benefit 437

The Firmwide Level Value of S Corporations 440

Other Observations Regarding Relative Value at the Firmwide Levels 443

The Shareholder Level Value of S Corporations 446

S Corporations and the Tax Cuts and Jobs Act of 2017 458

Conclusion 467

About the Authors 469

Index 477