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ARTICLES & NEWSLETTERS |
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Published Articles and
News You Can Use -- |
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Back Issues
of our Business Appraisal Newsletter |
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504 Grove Avenue - P. O. Box 9 - Parma, Idaho
83660
(208) 722-7272
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PUBLISHED ARTICLES:
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| Editor's Column -- "Does
a Historical Average, Weighted or Otherwise, Constitute an Income
Forecast?" by Paul R. Hyde, EA, MCBA, ASA, MAI. Published
in Business Appraisal Practice: Journal of The Institute of
Business Appraisers, Inc., Winter 2007/2008, p. 2 - 7. |
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| Editor’s Column – “Business
vs. Real Estate Cap Rates” by Paul R. Hyde, EA, MCBA, ASA, MAI.
Published in Business Appraisal Practice: Journal
of The
Institute
of
Business
Appraisers, Inc., Fall 2007, p. 2 – 3.
|
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| Editor’s Column - “Using
Relevant Economic Data” by Paul R. Hyde, EA, MCBA, ASA, MAI.
Published in Business Appraisal Practice:
Journal of The
Institute
of
Business
Appraisers, Inc., Spring 2007, p. 2 – 3.
|
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| Editor’s Column – “Valuations
for Divorce”
by
Paul R. Hyde, EA, MCBA, BVAL, ASA, MAI.
Published in Business Appraisal Practice:
Journal of The
Institute
of
Business
Appraisers, Inc., Winter 2006/2007, p. 2 – 3. |
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“An
Average of Historical Earnings is Not a Forecast” by Paul R. Hyde,
EA, MCBA, ASA, MAI. Published
in IBA News, Fall 2006, p. 3.
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Editor’s Column – “Litigation
and the Limited Report” by
Paul R. Hyde, EA, MCBA, BVAL, ASA, MAI.
Published in Business Appraisal Practice:
Journal of The
Institute
of
Business
Appraisers, Inc., Fall 2006, p. 2 – 3.
|
Editor’s
Column – “Machinery & Equipment Appraisals:
How Can the Value be Different” by Paul R. Hyde, EA, MCBA, BVAL,
ASA, MAI. Published in Business
Appraisal Practice: Journal of
The
Institute
of
Business
Appraisers, Inc., Summer 2006, p. 2 – 4.
|
Editor’s Column – “Quantifying
Discounts for 50% Interests”
by Paul R. Hyde, EA, MCBA, BVAL, ASA.
Published in Business Appraisal Practice:
Journal of The
Institute
of
Business
Appraisers, Inc., Spring 2006, p. 2 – 9.
|
Editor’s Column – “Updated Levels of Value Chart”
by Paul R. Hyde, EA, MCBA, BVAL, ASA.
Published in Business Appraisal Practice:
Journal of The
Institute
of
Business
Appraisers, Inc., Summer/Fall 2005, p. 2 – 4.
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Editor’s Column – “Valuing Businesses With Real
Estate Components” by Paul R. Hyde, EA, MCBA, BVAL, ASA.
Published in Business Appraisal Practice:
Journal of The
Institute
of
Business
Appraisers, Inc., Spring 2005, p. 2 – 7.
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“Book
Reviews for Business Appraisers: The Handbook of Business Valuation
and Intellectual Property Analysis” by Shawn M. Hyde, CBA.
Published in Business Appraisal Practice:
Journal of The
Institute
of
Business
Appraisers, Inc., Spring 2005, p. 48.
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Editor’s Column – “Suggestions for the Selection of a
Baseline Marketability Discount for Holding Companies”
by Paul R. Hyde, EA, MCBA, BVAL, ASA.
Published in Business Appraisal Practice:
Journal of The Institute of Business Appraisers, Inc., Winter
2004-2005, p. 2 – 5.
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“Dealing
with a 50% Interest: Should an Adjustment for Control Apply?”
by Shawn M. Hyde, CBA. Published in Business Appraisal Practice:
Journal of The Institute of Business Appraisers, Inc., Winter
2004-2005, p. 47 – 53.
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Editor’s Column – “WACCy
Problems: When is the Use of
a Weighted Average Cost of Capital (WACC) Appropriate?” by Paul R.
Hyde, EA, MCBA, BVAL, ASA. Published
in Business Appraisal Practice: Journal
of The Institute of Business Appraisers, Inc., Fall 2004, p. 2 – 3.
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Editor’s
Column – "Why Do We Include an Economic and Industry Section in Our
Appraisal Reports?"
by Paul R. Hyde, EA, MCBA, BVAL, ASA.
Published in Business Appraisal Practice:
Journal of The Institute of Business Appraisers, Inc., Summer
2004, p. 2 – 3.
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Editor's Column: "When
to Use the Public Guideline
Company Method" by Paul R. Hyde, EA, MCBA, BVAL, ASA.
Published in Business Appraisal Practice: Journal of The Institute of
Business Appraisers, Spring/Summer 2004, p. 2 - 6.
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Editor's Column: "Operating
Companies with Real Estate" by Paul R. Hyde, EA, MCBA, BVAL,
ASA. Published in Business Appraisal Practice: Journal of The
Institute of Business Appraisers, Winter 2003-2004, p. 2 - 5.
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"In Support of Unsupportable Rates" by Paul R. Hyde,
EA, MCBA, BVAL, ASA and Shawn M. Hyde, CBA. Published in Business
Appraisal Practice: Journal of The Institute of Business Appraisers,
Fall 2003, p. 32 - 35.
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Editor's Column: "Forecasting Net Cash Flow" by
Paul R. Hyde, EA, MCBA, BVAL, ASA. Published in Business Appraisal
Practice: Journal of The Institute of Business Appraisers, Fall 2003,
p. 2 - 3.
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Editor's Column: "A
Newsletter or Discussion Idea" by Paul R. Hyde, EA, CBA,
BVAL, ASA. Published in Business Appraisal Practice: Journal of
The Institute of Business Appraisers, Summer 2003, p. 2 - 3.
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Editor’s
Column: “An
Invitation to You to Submit an Article”
by Paul R. Hyde, EA, CBA, BVAL, ASA, Editor.
Published in Business Appraisal Practice:
Journal of The Institute of Business Appraisers, Spring 2003 p. 2.
The Institute of Business Appraisers, Inc.
Post Office Box 17410, Plantation, FL 33318.
|
“One
Point Does NOT Define a Line – One Method Does NOT (Usually)
Constitute an Appraisal”
by Paul R. Hyde, EA, CBA, BVAL, ASA, Editor.
Published in Business Appraisal Practice:
Journal of The Institute of Business Appraisers, Spring 2003 p.
24-26.
The Institute of Business Appraisers, Inc.
Post Office Box 17410, Plantation, FL 33318.
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"Explaining
the Alphabet Soup: Business Appraisal Designations -- What They Mean and
How Difficult They are to Obtain" by Paul R. Hyde, EA, CBA, BVAL, ASA.
Published in Business Appraisal Practice: Journal of The Institute of
Business Appraisers, Spring 2002, p. 23 - 39.
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"Pricing Tips for Mini-Self Storage Units"
by Paul
R. Hyde, EA, CBA, BVAL. Published in The 2001 Business Reference Guide,
Business Brokerage Press, 2001, p. 574.
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"Discounts and Premiums: A Chart to Illustrate
Them More Clearly" by Paul R. Hyde, EA, CBA, BVAL. Published in
Business Appraisal Practice: Journal of The Institute of Business
Appraisers, Fall 2000, p. 22 - 24.
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"Dealing with 'Skimming
Sellers'" by Paul R. Hyde, EA, CBA, BVAL. Published Spring 2000 Issue of IBBA News, p. 5 - 6.
Professional Journal of the International Business Brokers Association, Inc.
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INDEX TO
ISSUES OF NEWS YOU CAN USE:
(Click on the Item You
Want to See)
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| Lease
Issues and Business Value
-
April 2008 |
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| S
Corp Valuations & Gross v. Commissioner
-
March 2008 |
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| Valuing
Professional Practices
-
February 2008 |
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| Conservation
Easements
-
January 2008 |
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| How
to Select a Professional
- December 2007 |
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| Why
Are Appraisal Reports So Thick?
- November 2007 |
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| Is
a Site Visit Really Necessary?
- October 2007 |
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| Common
Appraisal Errors
- September 2007 |
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| Fair
Value Update
- August 2007 |
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| Canned
Computer Valuation Programs
- June 2007 |
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| Precision
vs. Accuracy
- May 2007 |
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| Risk
vs. Reward
-
April 2007 |
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| Business
vs. Real Estate Cap Rates
- March 2007 |
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| Goodwill:
What is it?
- February 2007 |
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| Real
Estate in Business Valuations
- January 2007 |
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| Fair
Market Value & Synergy
- December 2006 |
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| Estate
& Gift Tax – When is an Appraisal
Really
Necessary?
- November 2006 |
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Valuations
for Divorce
-
October
2006
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Highest
and Best Use
- September 2006
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Public
Comparables for Private Companies?
- August 2006
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How
to Handle Large, Unusual Risks
- July 2006
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Does
One Point Define a Line?
- June 2006
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Let’s
Talk About Dates
- May 2006
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An
Average of Historical Earnings is
Not a Forecast
-
April 2006
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Machinery
& Equipment Appraisals:
How
Can the Value be Different?
- March 2006
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What
Does This Mean?
- February 2006
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What
is a Business Really Worth?
- January
2006
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Hold
‘em or Fold ‘em?
- December 2005
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Developing a
Realistic Forecast vs. Dream Sheets
- November 2005
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Using a Third
Appraiser to Solve Differences
- October 2005
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Buy-Sell
Agreement Problems
- September 2005
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Subsequent
Events:
The Appraisal Date Matters!
- August 2005
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(Out
of) Control Premiums and Discounts - July 2005
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See the Big Picture
- June 2005
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Defining
the Appraisal Assignment
- May 2005
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Business
vs. Real Estate:
Cap Rate Problems
- April 2005
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Appraisal
Diagnosis - March 2005
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Undivided
Interest Appraisal Problems - February 2005
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Appraisals:
Is the Cheapest Really the Best - January 2005
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Appraising
the Appraisal - December 2004
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Business
and Commercial Damages - November 2004
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Coordinating
Business & Asset Appraisals - October 2004
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Fourth
and Long for Minority Stock? - September 2004
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Public
Comparables for Private Companies? - August 2004
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Economic
and Industry Analysis - July 2004
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Market
Data - June 2004
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The
Method Behind the Madness: Why Discounts Exist - May 2004
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When
Should the Public Guideline Company Method Be Used? - April 2004
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Ball
Park Estimates Strike Out - March 2004
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Return
on Investment: Risk vs. Reward -
February 2004
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Company
Owns Real Estate? Be Careful! - January 2004
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Is
There a "Fair Market?" - December 2003
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Commodity
vs. Professional Services - November 2003
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Family
Business Values - October 2003
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Economic
Outlook - September 2003
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Valuation
Quotes - August 2003
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Business
and Commercial Damages -- July 2003
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Fair
(Market) Value? -- June 2003
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Computer
Valuation Programs -- May 2003
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Valuation
"Experts" Testimony Excluded -- April 2003
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Personal
and Professional Goodwill -- March 2003
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The
Role of the Third Appraiser -- February 10, 2003
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Compensation
in Divorce -- January 13, 2003
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Occasionally
You Can Have Your Cake and Eat it Too! ESOPs --
December 11, 2002
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Confusion
Regarding Goodwill -- November 18, 2002
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Bills
Get Paid With Cash, NOT ‘Earnings’
-- October 14,
2002
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Sure,
we lose $5 on the sale of each item, but we’ll make it up on the volume! --
September 16, 2002
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One
Point Does NOT Define a Line – One Method Does NOT Constitute an
Appraisal -- August 12, 2002
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Rebutting
Unreasonable Appraisals -- July 15, 2002
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Have
You Valued a Dallas Diamond Dealer for Divorce? -- June 17, 2002
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The
Geeks Shall Inherit the Earth -- May 13, 2002
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Runs,
Hits and Enrons -- March 18, 2002
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Master
Limited Partnerships -- February 11, 2002
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Irrelevant
Appraisal Issues -- January 21, 2002
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Excedrin
Headaches #141 and #142: Valuing Goodwill and Intangible Assets
-- December 17, 2001
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Back
to Basics: Standards of Value
-- November 15, 2001
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How
Long Should a Business Appraisal Take? -- October 15, 2001
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What
is "Cash Flow?" -- September 17, 2001
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Stock
vs. Asset Sales -- August 13, 2001
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Buy-Sell
Agreements: the Good, the Bad and the Ugly --
July 16, 2001
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Selecting
a Business Appraiser -- June 2001
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Stock
Options for Private Companies? Whoa! -- May 2001
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Understanding
Discounts for Lack of Control
-- April 2001
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Valuation as
of When? -- March 2001
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An ESOP Fable --
February 2001
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How
Much Does Debt Really Cost? -- January 2001
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Discounts
and Premiums -- December 2000
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Discounts
and Premiums: A Chart to Illustrate Them More Clearly
-- Referenced in December 2000 Letter
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Review
of Business Appraisal Reports -- November 2000
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FLP/LLC
Valuation Discounts Redux: Know When to Hold 'Em, and When to Fold 'Em
-- October 2000
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Buy-Sell
Agreement Problems -- September 2000
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Appraising
Appraisal Designations -- August 2000
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Court
Cases Court Trouble for Appraisers -- July 2000
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How
to Value Very Small Businesses -- June 2000
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Dealing
with "Skimming" Sellers - May 2000 ( Article written for &
published by IBBA News)
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Who
Wants To Be an IPO Millionaire? -- April 2000
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The
Toughest Part of Business Appraising: The Multiple -- March
2000
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Price
Negotiations: Ready, Fire, Aim! -- February 2000
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Who Values Businesses?
-- January 2000
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Industry
Experts or Business Appraisers -- December 1999
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How
Much Appraising is Enough? -- November 1999
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Information Known or
Reasonably Knowable -- October 1999
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Justification
of Purchase: A Key Appraisal Tool -- September 1999
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Rates and
Multiples: Define Them! -- August 1999
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Double Counting! --July 1999
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How
Long is a Business Appraisal Good For? -- June 1999
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Valuing Stock Options
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April 2008
Lease
Issues and Business Value
Many businesses do not own the real estate
they occupy. Instead, the premises
are typically leased. A lease is a
written agreement that transfers the right to use and occupy real property for a
specified period of time in return for rent.
Leases often include many other provisions, some of which can be quite
complicated, that may affect the value of the business occupying the site.
Business appraisers must carefully consider
the implications that the lease has on business value.
There are many. I have chosen
to discuss of few of them in this article.
First, an outrageous, but real example.
A few years ago a retail store located in a regional mall was put
up for sale. It had been in the mall
for quite a few years and had been very successful.
Due to large amounts spent for advertising and good business practices,
the retail store’s revenue and profits had grown each year and it appeared to
be highly desirable as a business purchase.
A buyer was found that made an acceptable offer on the business and both
the buyer and seller were happy. Only
one problem existed. The real estate
lease was expiring in less than a year and it turned out that the regional mall
had a new jewelry store in mind for the space that was willing to pay a much
larger rent. When the buyer applied
to assume the lease and requested a renewal of the lease, the mall told them
that the lease would not be renewed. The
pleadings of the seller and references to long-term loyalty including spending
lots of dollars to bring customers to the mall were to no avail.
The lease was not renewed, the business relocated outside the mall but it
never regained profits anything like what they were while in the mall and it
eventually went out of business. As
shown in this example, the failure to be able to renew and transfer the lease
eliminated what had appeared to be a significant business value.
Lease issues that must be considered when
valuing a business include, but are not limited to, the following:
 | Remaining term of the lease |
 | Renewal options |
 | Transferability |
 | Below or above market rent |
 | Percentage rent or other participation
clauses |
 | Default provisions |
 | Ownership of leasehold improvements |
 | Requirements to restore premises to
original condition |
The remaining term of the lease is usually the
easiest potential problem to spot. Usually,
the expiration date of the lease is clearly defined.
Some businesses are easier to move to a new location than others.
The easier it is to relocate a business, the less impact on the value due
to the lease. Conversely, the more
difficult to move the business, the greater the impact on the value related to
the lease.
Renewal options can be tricky.
Many leases spell out specific formulas or fixed amounts for the rent for
each renewal option, however, quite a few leases call for vague and ambiguous
rent provisions for the renewal periods. A
clause that calls for an agreement to agree on the future rent is not very
worthwhile and cannot typically be relied on to assure renewal of the lease.
A reference to market rent at the time of renewal can also be a problem.
If the business is highly dependent on the location and market rents soar
for any number of reasons, the future market rent may be so much higher than
current rent as to eliminate all or much of the business profits.
Estimating future market rents five or more years down the road is
difficult as well. Such a renewal
option increases the risk of achieving the forecasted business income stream
effectively reducing the value of the business.
Transferability issues are relatively obvious.
They can cause huge problems as shown in the example.
Often, the lease calls for landlord approval of transfer of the lease
with approval “not to be unreasonably withheld.”
Other times the lease gives the landlord a great deal of discretion
regarding transferability of the lease again effectively reducing the value of
the business.
Below or above market rent may affect the
value of the business substantially. A
long-term lease with below market rent that is clearly transferrable may
increase the value of the business, however, should the property be foreclosed
upon, the lease may be extinguished eliminating this increased value.
If a business is paying above market rent, the business is often
motivated to relocate and thus reduce this expense or may be able to renegotiate
the lease if relocation is a strong possibility.
These factors are challenging to deal with in business valuations.
Percentage rent or other participation clauses
must be taken into consideration especially when forecasting future revenues.
Some leases, particularly long-term leases for businesses like
restaurants, have a clause that requires the tenant to pay a certain percentage
of gross revenue if that amount exceeds the basic rent.
Default provisions can create uncertainty
especially if a business has difficulty avoiding some provision that could be
used by the landlord to get out of the lease.
Ownership of leasehold improvements is
generally specified in the lease. Many
businesses include leasehold improvements on their balance sheet, however often
at the termination of a real estate lease they become the property of the
landlord. Even if they really do
belong to the tenant, are they worth anything if the tenant leaves the location
– can they be removed and used elsewhere?
Usually, the leasehold improvements have no value as they cannot be
removed and used elsewhere; they are simply on the company’s books and the
cost is being recovered by depreciating them.
Requirements to restore premises to original
condition can be particularly onerous depending on the nature of the business
and the amount invested. If some
environmental issues are involved and total clean-up is required, the cost of
the remediation is sometimes larger than the value of the business enterprise.
Valuations play a part in all strategic
transactions, tax, and many litigation matters. For additional information or
advice on a current situation, please do not hesitate to call.
We value both real estate and businesses,
including machinery & equipment.

March 2008
S
Corp Valuations & Gross v. Commissioner
In
the now famous court case entitled Gross
v. Commissioner,
a very profitable Pepsi Cola distributorship that paid out large amounts as
distributions to its shareholders was valued by the taxpayer’s expert using
the then standard valuation technique of tax-affecting the income stream “as
if” the entity were a ‘C’ corporation.
This technique was disallowed by the court causing an upheaval in the
valuation profession. Since this
time, this valuation concept has been studied, reported on, and analyzed by many
valuation experts. Several valuation
models have been developed which are now commonly used to value minority
interests in ‘S’ corporations especially when the report is prepared for tax
purposes. Tax-affecting the income
stream “as if” the entity were a ‘C’ corporation is generally considered
perfectly appropriate when valuing a 100% control interest in the entity, but it
certainly is not appropriate when valuing a minority interest in an ‘S’
corporation.
Whether
or not a minority interest in an ‘S’ corporation or a ‘C’ corporation is
worth a different amount has been the subject of many arguments and articles in
the business valuation profession since the Gross
v. Commission case was first published.
Since then, several more cases have strengthened the IRS’s resolve to
disallow tax-affecting the income stream when valuing minority interests in
‘S’ corporations.
The
basic concept underlying the valuation of a minority interest in an ‘S’
corporation is fairly simple: “if
you have to pay income taxes on the income you receive from an investment, you
end up with less in your pocket than if you didn’t have to pay taxes.
Therefore, all things being equal, if one investment has taxes levied on
it, and the other does not, an investor would choose the one that does not.”
‘S’
corporations were originally authorized by congress so that small business
corporations that elected this status could be taxed in the same manner as
partnerships effectively doing away with the double taxation problem that
‘C’ corporations have, i.e. income is taxed at the corporate level and then
dividends paid out to shareholders from after-tax income is taxed again to the
shareholders. The creation of
‘S’ corporations eliminated the dividend tax that the individual shareholder
must pay. In fact, the shareholders
of ‘S’ corporations pay the income tax that a ‘C’ corporation would have
paid personally on their share of the income, whether or not cash is actually
distributed, at personal income tax rates. Currently,
personal and corporate income tax rates are substantially equal so the real
benefit to the investor is that the investor does not have to pay dividend tax
on any amount distributed to them from an ‘S’ corporation.
An
additional benefit of an ‘S’ corporation when less than 100% of profits are
paid out to shareholders is that the earnings not paid out will increase the
shareholders basis in their investment and lessen the eventual capital gains tax
that will have to be paid when the investment is actually sold.
Some ‘S’ corporation models attempt to quantify this benefit by
making a number of subjective assumptions regarding the likely holding period of
the investment and generally use a different risk rate to discount this future
benefit as the risk of receiving it is much higher than the benefit of not
paying dividend taxes. Unless a
transaction is expected in the near future, the present value of this benefit is
generally immaterial. Investors in
closely held companies typically have a long investment horizon, often estimated
at approximately fifteen to twenty years. Under
the fair market value standard of value, a typical investment holding period is
assumed, therefore, this possible benefit is often not given any weight in many
valuations.
Depending
on the amount of cash distributions relative to the amount of income tax that
must be paid by the shareholder personally, the value of ownership interests in
‘S’ corporations may be worth less than an otherwise similar ‘C’
corporation, may be worth the same, or may be worth more.
For example, some ‘S’ corporations pay out less cash to shareholders
than the shareholder will have to pay personally in income taxes for the
investment, some pay out just enough to cover the personal income tax liability,
and others pay out more than is necessary to pay the personal income tax
liability.
Since
the Gross v. Commission case was
decided, a number of valuation models have been developed to value minority
interests in ‘S’ corporations. Among
these models, the one that we believe best presents the value in an
understandable manner is the model developed by Chris Treharne, ASA, MCBA, BVAL
in his article entitled “S Corps: Follow
the Cash” presented at the 2006 Institute of Business Appraisers conference
and based on the article entitled “Valuation of Minority Interests in
Pass-Through-Tax Entities” published in Business
Valu |