Two new books make it easier to appraise a closely held company.
Evaluating a closely held business is apt to be as frustrating as picking shell chips out of a raw egg. The particulars are there, but every time you grab one something slides it back into the amorphous mix.
Maybe the challenge of the project (there are an estimated 2.49 million closely held U.S. corporations, not to mention countless noncorporate structures) explains the coincidence of two weighty books appearing simultaneously, like Newton and Leibniz investing the calculus at the same time. But anyway, here they are, enough to sway any business shelf at 3 lbs. 4 oz. each.
It's testimony to the tentative quality of the subject that Valuation and Valuation Planning for Closely Held Businesses and Valuing a Business -- The Analysis and Appraisal of Closely Held Companies don't always overlap. But they do always make sense. Of course, both address the same general questions: How can "fair market value" be determined? How do courts and the Internal Revenue Service view the various entities? But in the particulars -- in which both are authoritative -- they tend less to repeat than to complement. The former, for instance, is especially absorbed with tax planning and tax ruling, while the latter takes greater pains in showing how to extract and manipulate formal operating data.
Why this sudden outpouring of concern about an institution that has been with us since the dawn of capitalism? Because modern business and social pressures have more and more muddied what used to be the calm waters of backyard enterprise. Even the resolutions of buyouts and acquisitions tend to be more complicated these days, and certainly none but the tightest-held business is immune to involvement in divorce settlements, merger-dissenter rights, disgruntled-stockholder nuisance suits, and, sometimes, the desire to go private again after a bad experience in the public marketplace.
Investment analyst Shannon P. Pratt's meticulous Valuing a Business is the more technically detailed. Thus it is pertinent to accounting, legal, or banking interests attempting to evaluate a business's worth for, say, purchase agreements, partnership dissolutions, spin-offs, breach of contract cases, holding company asset values, and other fiscal matters. Pratt thoroughly probes the methodology of valuation with tables, mathematical models, case histories, and assorted supportive data, kept in manageable order by observations from his own experience.
Each sortie is exhaustive. Under the "discounted future earnings" (DFE) method, for example, he painstakingly dismisses the common notion that in a merger, different price/earnings multiples dilute the new entity's earnings-per-share calculations. A second part tells how to gather the applicable data, while a third brilliantly considers financial statement analysis -- a section that any chief financial officer would benefit from reviewing.
The remainder covers written presentation of valuation reports (in tax cases, for example, or for seeking a buyer). Pratt signs off his ambitious and intensively expounded undertaking with a collection of peripheral items, such as setting up ESOPs or estate-tax applications.
Written by a tax specialist, for corporate, partnership, and proprietorship businesses, Valuation Planning takes over more or less where Valuing leaves off. The same basic valuation factors -- comparison, earnings and dividends, discount situations, and so on -- are described, but more with an eye to tax predicaments than to accounting strategies. Through case law and simplified examples, Frank M. Burke, Jr., patches together an impressive quilt of Internal Revenue considerations of closely held business operations. Indeed, a full 145 pages are given over to extracts from an IRS coursebook called "Valuation Training"; another 53 to a selection of cited Revenue Rulings.
As a result, the book's cursory progress through traditional valuation techniques leads readily to brisk working instruction in such tax-planning areas as transfer gifts, ownership continuity, liquidity provisions, and value freezing -- an important tactic that insures that revaluation need not occur at later stages of a business's growth. At each turn -- some absorbingly tortuous -- Burke describes precedent rulings and reflects on whether they'll stand up under subsequent tests. Much of his unswerving concern with courts and Revenue agents may seem unnecessarily convoluted, but then so do Tax Forms 1065 and 1120.
Each of these necessarily hefty volumes contains extensive bibliographies -- as if after all this hard work a reader still hungered for more.
Valuation and Valuation Planning, Prentice-Hall, Englewood Cliffs, NJ 07632; 420 pp; $39.50. Valuing a Business, Dow Jones-Irwin, 1818 Ridge Rd., Homewood, IL 60430; 410 pp., $42.50.)