Financial
valuation
Applications and Models
JAMES R. HITCHNER
John Wiley & Sons, Inc.
Financial
valuation
Applications and Models
JAMES R. HITCHNER
John Wiley & Sons, Inc.
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Library of Congress Cataloging-in-Publication Data:
Hitchner, James R.
Financial valuation : applications and models / James R. Hitchner
p. cm.
Includes index.
ISBN 0-471-06138-7 (cloth : alk. paper)
1. Corporations—Valuation. I. Title.
HG4028.V3H583 2002
658.15—dc21
2002012146
Printed in the United States of America.
10987654321
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To my three children, the shining lights of my life. I love you more than I ever
dreamed possible. Jason Earle Hitchner, Michael James Hitchner, Deborah Marie
Hitchner
To the families of all the authors. Thank you for enduring our absences during
long nights and weekends. We appreciate your patience, tolerance and support in
preparing this book.
To the authors. Thank you for your strong opinions, that, when coupled with
your willingness to build a consensus, have helped to advance the profession of
business valuation.
To Shannon P. Pratt and Raymond C. Miles, two of the early pioneers in busi-

ness valuation books. Thanks for getting this all started.
James R. Hitchner, CPA/ABV, ASA
Editor
iv INTRODUCTION TO FINANCIAL VALUATION
About the Editor xiii
About the Authors xiv
Acknowledgments xxii
Preface xxiv
CHAPTER 1
Introduction to Financial Valuation 1
Who Values Businesses? 1
Purpose of a Valuation 2
Professional Valuation Organizations 3
Standards of Value 3
Fair Market Value 3
Investment Value 5
Intrinsic Value 5
Fair Value (State Rights) 5
Fair Value (Financial Reporting) 6
Premise of Value 6
Principles of Appraisal Practice 7
Dates 7
Approaches to Value 7
Valuation Procedures 8
Summary 8
Addendum 10
CHAPTER 2
Research and Its Presentation 18
Obtaining Internal Information 18
A Directive from the Internal Revenue Service 18

Research Techniques and Planning the Search 20
Information Sources: Business Financial Databases 24
Economic Research 25
Selected Sources of Economic Information 25
Industry Research 27
Selected Sources of Industry Information 27
Guideline Company and Transaction Research 28
Presenting Research in a Report 30
Other Sources of Information 31
Summary 31
Addendum 1— Valuation Information Request List 33
iv
contents
Contents v
Addendum 2— Management Questionnaire 37
Addendum 3— Industry Research Form 48
CHAPTER 3
Financial Statement and Company Risk Analysis 49
Historical Financial Statement Analysis 49
Length of Financial History to Be Used 50
Spreading Financial Statements in Columnar Format 50
Adjustments to Financial Statements 50
Normalization of Historical Financial Statements 53
Unusual, Nonrecurring, and Extraordinary Items 53
Nonoperating Items 54
Changes in Accounting Principle 54
Nonconformance with GAAP 55
Tax Effecting the Earnings of Subchapter S Corporations 55
Degree of Ownership Interest 57
Normalization Adjustments 58

Common Sizing Normalized Financial Statements 58
Ratio Analysis (Quantitative Analysis) 62
Comparative Analysis 69
Risk Analysis (Qualitative Analysis) 72
Macroenvironmental Analysis 76
Appendix—Commonly Used Financial Ratios Application to
Ale’s Distributing 78
CHAPTER 4
Income Approach 85
Fundamental Theory 85
Income Approach Involves a Numerator 86
Income Approach Involves a Denominator 86
Income Approach Methodologies 87
Normalization Process 87
Adjustments for Ownership Characteristics 88
Adjustments for GAAP Departures, Extraordinary, Nonrecurring,
and/or Unusual Items 90
Adjustments for Nonoperating Assets and Liabilities and
Related Income and Expenses 91
Adjustments for Taxes 92
Adjustments for Synergies from Mergers and Acquisitions 93
Determination of Future Benefit Stream (Cash Flows) 94
Defining the Benefit Stream 94
Defining Net Cash Flow 95
Use of Historical Information 96
Discounted Cash Flow Method 101
Terminal Value 109
Capitalized Cash Flow Method 114
Excess Cash Flow Method 116
Conclusion 125

CHAPTER 5
Cost of Capital/Rates of Return 126
Three Variables 126
Characteristics of Cost of Capital 127
Investor Expectations as Quantified by the Cost of Capital 127
Cost of Capital Equals Discount Rate 128
Cost-of-Capital Methods 128
More on the Basic Concepts 128
Discount Rate, Capitalization Rate, and Anticipated Growth 129
Growth 129
Relationship Between Risk and Cost of Capital 134
Types of Risk—Another View 137
Risks in a Small Business 138
Methods for Developing Cost of Capital 139
Size Premiums 141
Methods of Articulate Unsystematic Risk 145
Other Issues 150
Capital Asset Pricing Model Method 151
Development of the Weighted Average Cost of Capital 156
Price/Earnings Method 159
Adjustments to the Price/Earnings Ratio 161
Arbitrage Pricing Theory 163
Build-Up Summation Model 165
Cost-of-Capital Issues Related to Use of the Excess Cash Flow Method 166
Addendum 168
CHAPTER 6
Market Approach 184
Overview 184
Type of Value Obtained 185
Advantages and Disadvantages of the Market Approach 186

Basic Implementation 187
Sources and Characteristics of Guideline Company Data 188
Information Sources 188
Advantages and Disadvantages of the Guideline Company
Transaction Method 189
Publicly Traded Companies 190
Information Sources for Industry “COMPS” 192
Stock Prices and Number of Shares Outstanding 192
Advantages/Disadvantages of Public Company Data 193
Characteristics of Publicly Traded Companies 193
Choosing Guideline Companies 197
Financial and Other Indicators 200
Sample Size Matters 203
Comparable Companies Information Dates 203
Basic Financial Indicators 203
Displaying the Information 204
Adjustments to the Guideline and Subject Companies 209
Income Adjustments 209
Balance Sheet Adjustments 211
vi CONTENTS
Effects of Adjustments on Value 213
Concluding Remarks on Choosing Comparables 213
Calculating Standard Pricing Multiples 214
Equity versus Invested Capital 214
Financial Statement Measures 216
Computation of Multiples 218
Matching Price to Parameter 219
Dispersion of Pricing Multiples 219
Applying the Valuation Multiples 221
Concluding Thoughts on Value 223

Using the Pricing Multiples for Growth 223
Adjusting the Guideline Multiples for Size 227
Summary 230
CHAPTER 7
Asset Approach 232
Fundamental Theory 232
Applicability 233
Premise of Value 235
Control versus Minority 235
Built-In Gains 236
General Steps in the Asset Approach 236
Valuation of Individual Assets and Liabilities Example 237
Liabilities 243
Unrecorded Assets and Liabilities 244
Built-In Gain 244
Conclusion 247
Addendum 1— Understanding Real Estate Appraisals 248
Addendum 2— Understanding Machinery and Equipment Appraisals 259
Addendum 3— Revenue Procedure 77-12 270
CHAPTER 8
Valuation Discounts and Premiums 272
Levels of Value 272
Classifying Discounts 275
Discounts for Lack of Control and Control Premiums 277
Discounts for Lack of Marketability 285
Empirical Evidence of Marketability Discounts 287
Quantitative Tools 311
Other Discounts 316
Discounts and Premiums Summary 323
Addendum— Tax Court Cases (The Oldies but Goodies) 324

CHAPTER 9
Report Writing 342
USPAP Engagements 342
Types of Valuation Engagements and Related Reports 344
Complete Valuation Report 344
Other Business Valuation Reports 352
Contents vii
Sample Report 353
Addendum— Sample Valuation Report, Valuation of the Common
Stock of Acme Measurement Devices Inc. as of May 31, 2000 354
CHAPTER 10
Business Valuation Standards 423
History of Valuation Standards 423
Government Action 424
Organization of the USPAP Standards 425
Business Valuation Standards 425
Other Business Valuation Standards and Credentials 431
Summary 434
Addendum— Internal Revenue Service Business Valuation Guidelines 435
CHAPTER 11
Estate, Gift, and Income Tax Valuations 446
Valuations in Estate and Gift Taxes 446
Selected Treasury Regulations 448
Selected Revenue Rulings 451
Revenue Ruling 77-287 466
Revenue Ruling 83-120 475
Revenue Ruling 93-12 480
Valuations for Income Taxes 483
Charitable Contributions of Property 484
Conversion of Property 485

Addendum— Valuation Checklists/Ready Reference
(Revenue Rulings 59-60, 77-287, and 93-12) 487
CHAPTER 12
Valuation of Family Limited Partnerships 502
Family Limited Partnership Uses 502
Tax Advantages 503
How Family Limited Partnerships Are Formed 504
Other Characteristics of Family Limited Partnerships 505
State Law, Property Rights, and Their Importance to the
Valuation Process 505
Improper Formation Can Create Problems for Partners 507
Valuation of Family Limited Partnership Interests 508
Illustrative Case Study 532
CHAPTER 13
Summary of Court Cases Issues 540
Tax Cases 540
Civil Cases 573
CHAPTER 14
Shareholder Disputes 577
History of Shareholder Disputes 577
Causes of Action 578
Standard of Value 579
viii CONTENTS
Valuation Date 582
Entire Fairness 583
Valuation Methodology 584
Valuation Adjustments 586
Court Case Caveats 589
Conclusion 590
Appendix 591

CHAPTER 15
Valuation Issues in Employee Stock Ownership Plans 593
Need for Valuation Services 594
Securities Laws and ESOPs 595
How ESOPs Are Used 596
Differences in Entity Structure 596
Adequate Consideration: How and Why It Works 598
Put Rights of Terminating Plan Participants 598
ESOPs and Plan Contributions 600
ESOPs that Include Debt 601
General Considerations for ESOP Loans 602
Accounting Standards and ESOPs with Debt 604
Value for ESOP Shares 607
Writing a Valuation Conclusion 612
Information Sources 613
CHAPTER 16
Valuation in the Divorce Setting 615
Standards of Value in Divorce 615
Premise of Value—Going Concern 617
Premise of Value—Liquidation 617
Goodwill— The Battleground for Divorce Valuations 618
Defining Goodwill 618
State Interpretations on Including Goodwill in the Marital Estate 618
Personal versus Entity Goodwill 619
Dividing Goodwill into Personal and Entity Components 620
Applying the Factors to Separate Goodwill 622
Role of Noncompete Agreements in Determining Personal
versus Entity Goodwill 625
Personal Goodwill in Commercial Businesses 626
Restrictions on Data 627

Ranges versus Specificity 627
Professional Standards in a Divorce Settlement 627
Role of the USPAP 627
AICPA Standards 628
Other Standards 628
Daubert Challenges in Divorce 628
Valuation Methodology and the Application of Discounts in
Divorce Valuations 629
Avoid Double Counting 629
When an Interest Is Considered Control in a Divorce Setting 629
Contents ix
Family Aggregations in Divorce Settings 630
Partnerships, LLCs, LLPs, and Family Entities in a Divorce Setting 630
Liquidity Myth in Pass-Through Entity 631
Divorce Valuation and Bankruptcy 631
Summary 632
CHAPTER 17
Valuation Issues in Small Businesses 633
What Is a Small Business? 633
Financial Statement Adjustments 635
Qualitative Factors Affecting Value 638
Valuation Methods 639
Reasonableness Tests 644
Summary 645
CHAPTER 18
Valuation Issues in Professional Practices 646
Types of Practices 647
Purpose of Valuation 649
Professional Goodwill and Practice Goodwill 649
Select Case Law for Marital Dissolution 651

Factors Affecting Value 654
Financial Statement Adjustments 658
Valuation Methods 661
Summary 665
Appendix 1— Management Interview Medical Practice 667
Appendix 2— Management Interview Law Practice 671
Appendix 3— Management Interview Accounting Practice 674
CHAPTER 19
Valuation of Healthcare Service Businesses 677
Industry Background and Transition 679
Healthcare Industry’s Unique Attributes 680
Overview of Considerations for Valuing Healthcare Entities 691
Valuation Process 692
Income Approach Discounted Cash Flow Method:
Developing a Discount Rate 696
Minority Discounts 699
Discounts for Lack of Marketability 700
Key Person Discount 700
Valuation Issues for Specific Healthcare Industry Niches 702
Publicly Traded Healthcare Services Companies by Niche 711
Addendum 1— Tara Surgery Center, L.P. 714
Addendum 2— Valuation of Ashley Hospital 734
CHAPTER 20
Valuation of Intangible Assets 749
What Are Intangible Assets? 751
Why Are Intangible Assets So Difficult to Measure? 752
x CONTENTS
Nature of Intangible Assets 753
Identification and Classification of Intangible Assets 753
Measurement of Intangible Assets 754

Fair Value 755
SFAS No. 141, Business Combinations 756
SFAS No. 142, Goodwill and Other Intangible Assets 757
Nature of Goodwill 759
Goodwill, Indefinite-Lived Intangible Assets, and the Impairment Test 760
Transition: Previously Recognized Goodwill 763
Financial Reporting Disclosures under SFAS Nos. 141 and 142 764
In-Process Research and Development 765
Tax Effects 770
Transfer Pricing 770
Returns on and of Contributory Assets 772
Discount Rate Considerations for Intangible Assets 773
Case Study: Determining Goodwill and Other Intangible Assets in a
Business Combination 774
Valuation of Intangible Assets 788
Assembled Workforce 794
Trade Name 799
Noncompete Agreement 800
In-Process Research and Development 810
Valuation of Goodwill 813
Allocation of Purchase Price 814
Appendix— Intellectual Property 817
CHAPTER 21
Marketing, Managing, and Making Money in a Valuation Services Group 821
Purpose and Overview 821
What Good Economics Looks Like 821
Operational Keys for Good Economics 824
Key Engagement Principles 826
Engagement Acceptance Process 827
Fees, Retainers, Billing, and Collection 828

Engagement Control 830
Litigation Services Engagements 831
Conclusion 833
CHAPTER 22
Business (Commercial) Damages 834
Role of the Law and Financial Experts 834
Legal Principles Governing Damages 835
Daubert and Admissibility of Expert Opinions 836
Measure of Damages: Diminution of Value or Lost Profits 837
Differences Between Damage Computations and Business Valuations 839
Can Business Damages Exceed the Fair Market Value of the Business? 848
Conclusion 849
Contents xi
CHAPTER 23
Other Valuation Services Areas 850
A: Valuation Issues in Mergers and Acquisitions 850
B: Valuations for Public Companies and/or Financial Reporting 861
C: Valuation Issues in Buy-Sell Agreements 867
D: Valuation Issues in Pass-Through Entities 875
E: Valuing Debt 885
F: Valuation Issues in Preferred Stock 890
G: Restricted Stock Valuation 897
H: Valuation of Early-Stage Technology Companies 909
I: Valuation Issues Related to Stock Options 917
J: Real Option Valuations 936
K: Maximizing Shareholder Value 941
CHAPTER 24
Valuation Views and Controversial Issues: An Illustration 955
The Report 955
Introduction 957

National Economic Outlook 963
Regional Economic Data (as of December 8, 1999) 965
Local Economy 967
Industry Outlook 967
Financial Analysis of the Company 968
Appraisal of Fair Market Value 977
Lack of Marketability Discount 996
Correlation of Values 997
Total Conclusion of Value on a Nonmarketable, Control Basis 998
Index 999
xii CONTENTS
H-1 Head xiii
James R. Hitchner, CPA/ABV, ASA is the managing director of the Financial
Valuation Group (FVG) in Atlanta, GA. FVG is a national financial advisory serv-
ices firm specializing in valuation and litigation services. Mr. Hitchner is a founding
member of the Financial Consulting Group, L.C. (FCG). FCG is a national associa-
tion of professional services firms dedicated to excellence in valuation, financial and
litigation consulting.
Mr. Hitchner has more than 24 years of professional experience, including 22
years in valuation services and two years in real estate development. He was with
Phillips Hitchner Group, Inc. for seven years and was also partner-in-charge of
valuation services for the southern region of Coopers & Lybrand (currently
PricewaterhouseCoopers), where he spent more than nine years. He was also
employed as a senior appraiser with the national appraisal firm American Appraisal
Associates, in both the financial and industrial valuation groups.
He has been recognized as a qualified expert witness, and has provided testi-
mony on valuations in numerous state and federal courts. In the valuation area he
has coauthored ten courses, taught over 35 courses, published over thirty articles,
and has made over eighty conference presentations including the American Institute
of Certified Public Accountants, the American Society of Appraisers, the National

Association of Certified Valuation Analysts, and numerous state CPA societies. He
has also been a faculty member teaching valuation courses for judges for the
National Judicial College and the Flaschner Judicial Institute.
Mr. Hitchner is co-author of the book Valuation for Financial Reporting:
Intangible Assets, Goodwill, and Impairment Analysis—SFAS 141 and 142, editor/
co-author of the book Financial Valuation: Applications and Models; and co-author
of the book Financial Valuation Workbook, all published by Wiley. He is co-author
of the American Institute of Certified Public Accountants (AICPA) three-part self-
study videocourse series on SFAS 141 and 142 on business combinations, intangi-
ble assets and goodwill impairment.
He is an inductee in the American Institute of Certified Public Accountants
(AICPA) Business Valuation Hall of Fame and current member of the AICPA task
force on Business Valuation Standards. Mr. Hitchner is past chairman of the
Business Valuation Committee of the Georgia Society of CPAs, past member of the
AICPA Business Valuation Subcommittee, past member of the AICPA ABV exam
committee, past chairman of the ABV exam review course committee, contributing
editor of AICPA CPA Expert newsletter, and a former member of The Appraisal
Foundation Industry Advisory Council. He has a Bachelor of Science degree in
Engineering from the University of Pittsburgh and a Masters of Business
Administration degree from Rider University. He holds the AICPA Accreditation in
Business Valuation (ABV) specialty designation, and also is an Accredited Senior
Appraiser (ASA) with the American Society of Appraisers.
xiii
about the editor
xiv
Mel H. Abraham, CPA/ABV, ASA, CVA is the Co-Founder and Director of Kaplan,
Abraham, Burkert & Company, a national valuation and litigation consulting firm
located in Wood Ranch, California. He holds the AICPA specialty designation of
Accredited in Business Valuation (ABV), is an Accredited Senior Appraiser (ASA)
with the American Society of Appraisers, and is a Certified Valuation Analyst (CVA)

with the National Association of Certified Valuation Analysts. Mr. Abraham has
over 15 years of professional experience. He has authored numerous articles as well
as his book entitled, Valuation Issues and Case Law Update—A Reference Guide,
and two new books. He is a nationally recognized and award-winning lecturer on
valuation matters, and has addressed numerous conferences on a local, state, and
national level. Mr. Abraham is a member of the AICPA Consulting Division, and a
faculty member of The National Judicial College. He has a Bachelor of Science from
California State University, Northridge.
R. James Alerding, CPA/ABV, ASA, CVA is the Partner-in-charge of the Valuation and
Forensic Services Group for Clifton Gunderson, LLP’s Indianapolis Client Service
Center. He holds the AICPA specialty designation of Accredited in Business Valuation
(ABV), is an Accredited Senior Appraiser (ASA) with the American Society of
Appraisers, and is a Certified Valuation Analyst (CVA) with the National Association
of Certified Valuation Analysts. Mr. Alerding has over 34 years of financial/account-
ing/investment experience, including over 20 years of business valuation experience.
He has taught over 40 valuation courses, published over 45 articles, and made over
100 business valuation presentations. He has been recognized as an expert witness in
several states across the United States, and testified 500 times in depositions and trials.
Mr. Alerding is a charter Panelist on the Technical Advisory Panel for the AICPA
“ABV E-Valuation Alert,” a member of the Indiana CPA society, a member of the
Maryland Institute of CPAs, past member of the AICPA Business Valuation Subcom-
mittee, and an AICPA Business Valuation Hall of Fame Member. Mr. Alerding has a
Bachelor of Science in Business Administration from Xavier University.
Terry Jacoby Allen, CPA/ABV, ASA is the Midwest Managing Director for The
Financial Valuation Group, a valuation and litigation services firm located in Kansas
City, Missouri. She holds the AICPA specialty designation of Accredited in Business
Valuation (ABV), and is an Accredited Senior Appraiser (ASA) with the American
Society of Appraisers. Ms. Allen has over 20 years of professional experience,
including 14 years of business valuation experience. She is the editor of ASA’s BV E-
Letter and has been a speaker on valuation matters at seminars and conferences

sponsored by various national and state professional organizations. She has taught
accounting and finance at the college level and presently is a faculty member for
ASA and AICPA professional accreditation programs. Ms. Allen is a member of the
AICPA Business Valuation Technical Issues Advisory Board, and the Iowa Society of
about the authors
About the Authors xv
CPAs. Ms. Allen has a Bachelor of Arts from the University of Missouri at Kansas
City, and a Master of Business Administration in accounting from the University of
Colorado.
Larry R. Cook, CPA/ABV, CBA is the owner of Larry R. Cook & Associates, PC,
a financial services firm located in Houston, Texas, that focuses on business valua-
tion and succession planning, as well as a founding member of The Financial
Consulting Group, L.C. He holds the AICPA specialty designation of Accredited in
Business Valuation (ABV), and the designation of Certified Business Appraiser
(CBA) from the Institute of Business Appraisers. Mr. Cook has over 26 years of
business valuation experience. He has testified as an expert witness numerous times
in courts and depositions and participated as an instructor for courses on a wide
range of subjects for a number of audiences such as the AICPA, TSPA, IBA and
FCG. Mr. Cook was past President of the Financial Consulting Group, chair of the
ABV Credential Committee for the AICPA, a Board of Director member of the
Texas Society of CPAs, and on the Business Valuation Standards for Professional
Practice Committee of the Institute of Business Appraisers. Mr. Cook graduated
from Sam Houston State University, and was a member of the first graduating class
of Accounting majors from the university.
Michael A. Crain, CPA/ABV, ASA, CFE is a shareholder with Peed, Koross,
Finkelstein & Crain, P.A., a CPA and consulting firm in Ft. Lauderdale, Florida. He
holds the AICPA specialty designation of Accredited in Business Valuation (ABV), is
an Accredited Senior Appraiser (ASA) with the American Society of Appraisers, and
is a Certified Fraud Examiner (CFE) with the Association of Certified Fraud
Examiners. Mr. Crain has over 22 years of professional experience. He has been rec-

ognized as a qualified expert witness, and testified on valuations on numerous occa-
sions. He has published over 15 articles, and is a contributing author of the book
The Portable MBA in Finance and Accounting, 3
rd
Edition. Mr. Crain is a member
of the AICPA ABV Examination Committee, the AICPA ABV E-Letter Technical
Advisory Committee, and a past member of the AICPA Litigation and Dispute
Resolution Services Committee. Additionally, he is the Founding Chair of the FICPA
Valuation and Litigation Services Committee, and Vice President of the National
Litigation Support Services Association. Mr. Crain has a Bachelor of Arts in
Accounting and a Master of Business Administration from Bellarmine University.
Robert E. Duffy, CPA/ABV, ASA, CFA was a principal with Brueggeman and
Johnson, P.C., a Seattle, Washington–based firm specializing in the valuation of closely
held business interests and related issues, and a founding member of The Financial
Consulting Group, L.C. He is currently a partner with Grant Thornton. He holds the
AICPA specialty designation of Accredited in Business Valuation (ABV), is an
Accredited Senior Appraiser (ASA) with the American Society of Appraisers, and is a
Chartered Financial Analyst (CFA). Mr. Duffy has over 18 years experience in valua-
tion services, and has been involved in over 1,200 matters. He has appeared as an
expert witness over 50 times, and is a long-term instructor of the AICPA’s business
valuation courses. Mr. Duffy is a Charter Panelist on the Technical Advisory Panel for
the AICPA’s ABV E-Valuation Alert and a contributing editor of the AICPA’s CPA
Expert publication. Mr. Duffy has a Bachelor of Arts from Western Washington
University and a Master of Business Administration from Pacific Lutheran University.
xvi ABOUT THE AUTHORS
Edward J. Dupke, CPA/ABV is a Principal in the Rehmann Consulting Division of
The Rehmann Group, a 10 office Michigan firm of CPAs and consultants. He is
Practice Director for the firm’s Business Valuation, Litigation Services and Merger
and Acquisition practice. He holds the AICPA specialty designation of Accredited in
Business Valuation (ABV). Mr. Dupke is a former chairman of the AICPA Business

Valuation Subcommittee and a past chairman of the Michigan Association of CPAs.
He has over 30 years of professional experience in Public Accounting and Business
Valuation practice, has been qualified as an expert witness and is a regular instruc-
tor in Business Valuation at both the state and national level. Mr. Dupke has
recently completed a three-year term as a member of the AICPA Board of Directors
and Chair of its Strategic Planning Committee. He chairs the AICPA Task Force
writing Business Valuation Standards for CPAs. In 1998, Mr. Dupke was awarded
the Distinguished Service Award from the Michigan Association of CPAs and in
1999 was inducted into the AICPA Business Valuation Hall of Fame. He holds a
Bachelor of Science in Business Administration degree from Wayne State University.
Nancy J. Fannon, CPA/ABV, BVAL, MCBA is a Principal in the Valuation
Consulting Division of Baker Newman & Noyes, an accounting and consulting firm
located in Portland, Maine. She holds the AICPA specialty designation of Accredited
in Business Valuation (ABV), is a Business Valuator Accredited in Litigation (BVAL),
and a Master Certified Business Appraiser (MCBA) with the Institute of Business
Appraisers. Ms. Fannon has over 10 years of professional experience. She has been
qualified as an expert witness, instructed and presented over 15 courses and pre-
sentations on business valuation, was a contributing author for The Business
Appraiser and Litigation Support textbook, and has authored over 15 articles. Ms.
Fannon was a member of the AICPA Business Valuation Subcommittee, former
AICPA Business Valuation Conference Chairperson, and a member of the “CPA
Expert” Editorial Advisory Board. She has a Bachelor of Business Administration in
Accounting from the University of Massachusetts.
John R. Gilbert, CPA/ABV, ASA, CVA is a managing director of the Rocky
Mountain region with The Financial Valuation Group, a business valuation con-
sulting and litigation service firm in Great Falls, Montana. He holds the AICPA spe-
cialty designation of Accredited in Business Valuation (ABV), is an Accredited
Senior Appraiser (ASA) with the American Society of Appraisers, and is a Certified
Valuation Analyst (CVA) with the National Association of Certified Valuation
Analysts. Mr. Gilbert has over 29 years of professional experience, including 15

years of valuation experience. He has been recognized as a qualified expert witness
in Montana, and testified on valuations numerous times. He has published over 75
articles, including the Financial Consulting Group Estate & Gift Valuation E-Flash.
Mr. Gilbert is a member of the Montana Society of CPAs, and the National
Association of Forensic Economists. Mr. Gilbert has a Bachelor of Arts in Business
Finance from the University of Montana.
Thomas E. Hilton, CPA/ABV, CVA is a Partner with Anders, Minkler & Diehl LLP,
a CPA and financial consulting firm in St. Louis, Missouri. He holds the AICPA spe-
cialty designation of Accredited in Business Valuation (ABV), and is a Certified
Valuation Analyst (CVA) with the National Association of Certified Valuation
Analysts. Mr. Hilton has over 26 years of professional experience, including over 10
About the Authors xvii
years of business valuation experience. He has been recognized as a qualified expert
witness, and testified over 90 times in Missouri, Florida, Arkansas, and Illinois. He
has instructed and presented on various valuation and litigation topics at AICPA
sponsored courses and conferences, and served as a reviewer of Shannon Pratt’s
Business Valuation Body of Knowledge. Mr. Hilton is the current Chair of the
AICPA Business Valuation Subcommittee, past Chair of the NACVA Executive
Advisory Board, and past Chair of the Valuation Committee for CPA Associates. He
is a member of the MSCPA, FICPA, and the IBA. Mr. Hilton has a Bachelor of
Science in Accounting from the University of Missouri, and a Master of Science in
Finance from St. Louis University.
James R. Hitchner, CPA/ABV, ASA is the managing director of the Financial
Valuation Group (FVG) in Atlanta, GA. FVG is a national valuation and litigation
services firm. Mr. Hitchner is also a founding member of the Financial Consulting
Group, L.C. He holds the AICPA specialty designation of Accredited in Business
Valuation (ABV), and is an Accredited Senior Appraiser (ASA) with the American
Society of Appraisers. Mr. Hitchner has over 22 years experience in valuation serv-
ices. He has often testified as a qualified expert witness, and has testified on valua-
tions in eight states. He has coauthored ten courses, taught over 35 courses,

published over 30 articles, and has made over 80 conference presentations. Mr.
Hitchner is co-author of the book Valuation for Financial Reporting: Intangible
Assets, Goodwill, and Impairment Analysis—SFAS 141 and 142, and
co-author of Financial Valuation Workbook, both published by Wiley. He is an
inductee in the AICPA Business Valuation Hall of Fame and current member of the
AICPA task force on Business Valuation Standards. Mr. Hitchner is past chairman
of the Business Valuation Committee of the Georgia Society of CPAs, past member
of the AICPA Business Valuation Subcommittee, past member of the AICPA ABV
exam committee, and past chairman of the ABV exam review course committee.
Steven D. Hyden, CPA, ASA is a managing director of The Financial Valuation
Group, LC, a valuation and litigation services firm located in Tampa, Florida. He is
an Accredited Senior Appraiser (ASA) with the American Society of Appraisers. Mr.
Hyden has over 17 years of professional business valuation experience. He has co-
authored and taught 10 valuation courses, and was a guest expert for the AICPA
Continuing Professional Education video course series, “Valuation of Intellectual
Property.” Additionally he was co-author of the book Valuation for Financial
Reporting: Intangible Assets, Goodwill, and Impairment Analysis—SFAS 141 and
142. Mr. Hyden is a past member of the ASA Exam Development Subcommittee.
He received a Bachelor of Science in Marketing from Syracuse University, and a
Master of Business Administration from Pace University.
Gregory S. Koonsman, CFA is a founder and principal of Value Management
Group, LLC in Dallas, Texas. Value Management Group is a firm that specializes in
providing business valuation, transactions advisory services, and strategic consult-
ing to healthcare services providers throughout the United States. Mr. Koonsman is
a Chartered Financial Analyst (CFA), and has over 14 years of business valuation
experience. He has been recognized as a qualified expert witness in Texas and
Kansas, and testified on valuations many times. He has published over 5 articles,
and presented to numerous groups on the subject of equity valuation, merger and
xviii ABOUT THE AUTHORS
acquisitions, and joint venture strategy. Mr. Koonsman is a member of the American

Society of Appraisers, the Association for Investment Management and Research,
and the Healthcare Financial Management Association. Mr. Koonsman has a
Bachelor of Science in Aerospace Engineering, and a Master of Business
Administration from the University of Dallas.
Eva M. Lang, CPA, ASA is the Chief Operating Officer of the Financial Valuation
Group, L.C., a nationwide alliance of business valuation and consulting firms. She
is an Accredited Senior Appraiser (ASA) with the American Society of Appraisers.
Ms. Lang has over 14 years of business valuation experience. She is a nationally rec-
ognized expert on electronic research for business valuation and litigation services.
She has published over 10 articles, is a frequent speaker to national groups on tech-
nology issues, a contributing editor for The CPA Expert, published by the AICPA,
and was a co-author or contributing author to six books, including The Best
Websites for Financial Professionals, Business Appraisers, and Accountants. Ms.
Lang has served as a member of the Business Valuations Subcommittee of the
AICPA and on CPA committees at the state level in the areas of estate planning, lit-
igation services, and management consulting. Ms. Lang has a Bachelor of Science in
Business Administration from Northwestern State University.
Michael J. Mard, CPA/ABV, ASA is a Managing Director of The Financial
Valuation Group, a valuation and litigation services firm located in Tampa, Florida,
and a founding member and founding President of the Financial Consulting Group,
L.C. He holds the AICPA specialty designation of Accredited in Business Valuation
(ABV), and is an Accredited Senior Appraiser (ASA) with the American Society of
Appraisers. Mr. Mard has over 18 years of professional business valuation experi-
ence. He has been recognized as a qualified expert witness, and has testified on val-
uations approximately 100 times. He has published over 50 articles, and was
co-author of the book, Valuation for Financial Reporting: Intangible Assets,
Goodwill, and Impairment Analysis—SFAS 141 and 142, and co-author of
Financial Valuation Workbook, both published by Wiley. Mr. Mard has served on
numerous committees of the AICPA, FICPA, ASA; has been inducted into the
AICPA Business Valuation Hall of Fame; and is very active at state and national lev-

els with emphasis on business valuation standards and intellectual property valua-
tions. Mr. Mard has a Bachelor of Science in Accounting and a M.Acc. in
Accounting from the University of South Florida.
Harold G. Martin, Jr., CPA/ABV, ASA, CFE is the Principal-in-Charge of the
Business Valuation and Litigation Services Group for Keiter, Stephens, Hurst, Gary
& Shreaves, P.C., a full-service CPA firm based in Richmond, Virginia. He holds the
AICPA specialty designation of Accredited in Business Valuation (ABV), is an
Accredited Senior Appraiser (ASA) with the American Society of Appraisers, and is
a Certified Fraud Examiner (CFE) with the Association of Fraud Examiners. Mr.
Martin has over 20 years experience in financial consulting, public accounting, and
financial services. He is a frequent speaker and author on valuation topics, and is a
contributing author to Cost of Capital: Estimation and Applications, 2nd ed., pub-
lished by John Wiley & Sons, Inc. Mr. Martin is the editor of the AICPA ABV
E-Valuation Alert, a national instructor for the AICPA’s business valuation educa-
tion program, a former member of the AICPA Business Valuation Subcommittee,
About the Authors xix
and member of the Board of Directors of the Virginia Society of Certified Public
Accountants. Mr. Martin has an A.B. degree from The College of William and
Mary, and has a Master of Business Administration from Virginia Commonwealth
University.
Michael Mattson is the Managing Director of The Financial Valuation Group in
Chicago, Illinois, specializing in business and intellectual property valuations, liti-
gation, and consulting. Mr. Mattson has over 18 years of professional business val-
uation experience. He has authored over 10 articles, taught numerous business
valuation courses, and written, edited, and taught courses for the American Institute
of Certified Public Accountants. Mr. Mattson is a member of the American Society
of Appraisers. He has a Bachelor of Arts from Kenyon College, and a Master of
Business Administration in Finance and Accounting from the University of Chicago.
Raymond E. Moran, ASA serves as Senior Vice President of American Appraisal
Hongkong Limited. Mr. Moran has over 22 years of valuation experience. He is an

Accredited Senior Appraiser (ASA) with the American Society of Appraisers. He has
testified as an expert witness numerous times in courts and depositions, such as U.S.
Bankruptcy Court in Los Angeles, U.S. Bankruptcy Court in Houston, and before
the American Arbitration Association in New York. Mr. Moran is a member of the
American Association of Cost Engineers, and the American Chamber of Commerce
Hong Kong where he serves on the Real Estate and Energy Committees. Mr. Moran
has a Bachelor of Arts in Valuation Sciences from Hofstra University.
Charles M. Phillips CPA/ABV, CFE is a Shareholder with a valuation and litigation
consulting firm in Atlanta, Georgia. He holds the AICPA specialty designation of
Accredited in Business Valuation (ABV), and is a Certified Fraud Examiner (CFE).
Mr. Phillips has over 30 years experience including 25 years of business valuation
experience. He has been recognized as a qualified expert witness numerous times,
and has testified on valuations in eight states. He has written articles for newsletters,
various local business publications, and The Licensing Journal. Mr. Phillips is the
current Chair of the Georgia Society of CPAs Business Valuation and Litigation
Services Section; and a member of the AICPA, National Association of Certified
Fraud Examiners, and the American Bar Association. He has a Bachelor of Science
in Business Administration from Auburn University, a Bachelor of Science in
Commerce, Business Administration from the University of Alabama, and a Master
of Arts in Accounting from the University of Alabama.
James S. Rigby, Jr., CPA/ABV, ASA is a Managing Director of The Financial
Valuation Group, and president of the Financial Valuation Group of California, Inc.
specializing in business and intellectual property valuations, litigation, and consult-
ing, and a founding member of the Financial Consulting Group, L.C. He holds the
AICPA specialty designation of Accredited in Business Valuation (ABV), and is an
Accredited Senior Appraiser (ASA) with the American Society of Appraisers. Mr.
Rigby has over 25 years of professional experience, including valuation related serv-
ices and financial consulting. He is co-author of multiple continuing education
courses and articles published in varied professional journals. Mr. Rigby is a mem-
ber of the AICPA, the American Society of Appraisers, and other state and local

business valuation societies and committees. He has a Bachelor of Science in
xx ABOUT THE AUTHORS
Business Administration from Bryan College, and a Master of Business
Administration from Woodbury University.
Ronald L. Seigneur, CPA/ABV, CVA is owner of Seigneur & Company, P.C., a CPA
firm located in Lakewood, Colorado, specializing in valuation and litigation serv-
ices. He holds the AICPA specialty designation of Accredited in Business Valuation
(ABV), and is a Certified Valuation Analyst (CVA) with the National Association of
Certified Valuation Analysts. Mr. Seigneur has over 19 years experience working
with complex valuation and litigation support matters, has published over 65 arti-
cles on business valuation, and taught advanced business valuation courses for the
AICPA and NACVA. He presently assists the AICPA Business Valuations
Subcommittee where his primary focus is the technical review of the new
Foundations of Business Valuations curriculum; additionally he develops technology
resources for ABV constituents. Mr. Seigneur is an adjunct professor at the
University of Denver College of Law where he teaches financial, management and
leadership courses. He has a Bachelor of Arts in Hotel, Restaurant and Institutional
Management from Michigan State University, and a Master of Business
Administration in Corporate Policy and Finance from the University of Michigan.
Robin E. Taylor, CPA/ABV, CBA, CFE, CVA is a shareholder in the Birmingham,
Alabama, office of Dixon Odom PLLC, a regional accounting firm, and a founding
member and current President of The Financial Consulting Group, L.C. He holds
the AICPA specialty designation of Accredited in Business Valuation (ABV), is a
Certified Business Appraiser (CBA) from the Institute of Business Appraisers, a
Certified Fraud Examiner (CFE) with the Association of Fraud Examiners, and a
Certified Valuation Analyst (CVA) with the National Association of Certified
Valuation Analysts. He has provided expert witness testimony in the area of busi-
ness valuations, and testified in other areas including government contracts, and
damages quantification. He has written and spoken to conferences on a number of
valuation issues. He is also an AICPA instructor for its valuation curriculum and the

ABV Examination Review Course and serves on several AICPA valuation task
forces. He is an honors graduate from The University of Alabama and holds a
Master of Arts Degree in Accounting.
Linda B. Trugman, CPA/ABV, ASA, CBA is the Vice President of Trugman
Valuation Associates, a division of Rachlin Cohen & Holtz, and specializes in busi-
ness valuation and litigation services. She holds the AICPA specialty designation of
Accredited in Business Valuation (ABV), is a Certified Business Appraiser (CBA)
from the Institute of Business Appraisers, and is an Accredited Senior Appraiser
(ASA) with the American Society of Appraisers. Ms. Trugman has over 15 years of
professional experience. She has been qualified as an expert witness in State Courts
in New Jersey, instructed over 12 courses on business valuation, authored and co-
authored two courses on valuation, and was awarded the Instructor of the Year
Award from the Institute of Business Appraisers. Ms. Trugman was Chair of the
2002 AICPA Business Valuation conference, serves as editor of the professional
journal, Business Appraisal Practice, published by IBA and serves on the AICPA
Business Valuation Subcommittee. She has a Bachelor of Science from the
University of North Carolina, and a Master of Business Administration from
Fairleigh Dickinson University.
Don Wisehart CPA/ABV, CVA is the owner of Wisehart & Associates, LTD., a
financial consulting firm located in Wakefield, Rhode Island, and a founding mem-
ber of The Financial Consulting Group. L.C. He holds the AICPA specialty desig-
nation of Accredited in Business Valuation (ABV), and is a Certified Valuation
Analyst (CVA) with the National Association of Certified Valuation Analysts
(NACVA). Mr. Wisehart has over 30 years of professional experience, including 10
years of business valuation experience. He has given numerous business valuation
presentations, developed and taught many business valuation courses, two of which
are required courses for the NACVA certification program, and has testified as an
expert witness for valuations. Mr. Wisehart has served as the Chairman of the
Education Board for NACVA and served as the first president of the Rhode Island
Business Appraisal Group. He received a Bachelor’s degree from Kent State

University, and a Master of Taxation degree from Bryant College.
Mark L. Zyla CPA/ABV, ASA, CFA is a shareholder with a business valuation and
litigation services firm located in Atlanta, Georgia. He holds the AICPA specialty
designation of Accredited in Business Valuation (ABV), is an Accredited Senior
Appraiser (ASA) with the American Society of Appraisers, and is a Chartered
Financial Analyst (CFA). Mr. Zyla has over 16 years of professional business valu-
ation experience. He has taught 8 courses on business valuation practices, authored
numerous articles for various business publications, and presented to various com-
panies and organizations. Mr. Zyla is also co-author of the book Valuation for
Financial Reporting: Intangible Assets, Goodwill, and Impairment Analysis—SFAS
141 and 142. Mr. Zyla is a member of the AICPA, the Association for Investment
Management and Research, and the Atlanta Society of Financial Analysts. Mr. Zyla
is a former member of the Business Valuations Subcommittee of the AICPA. He
received a Bachelor of Business Administration in Finance from the University of
Texas at Austin and Master of Business Administration with a concentration in
Finance from Georgia State University.
Contributing Authors: The following people provided valuable insight and knowl-
edge to the above authors, and assisted in the preparation of the text: Deborah Patry
and Laura Kelley from Baker, Newman, & Noyes; Robert Kleeman from Clifton
Gunderson, LLP; Neil Beaton, Darren Cordier, and David Dufendach, previously
with Brueggeman & Johnson and currently with Grant Thornton; Adrian Ciocoi
from Dixon Odom PLLC; Carl-Henry Geschwind, Derick O. Champagne, and
Jeremy T. Hess of Keiter, Stephens, Hurst, Gary & Shreaves, P.C.; Scott M. LeMay
from LeMay-Lang Consulting; Brenda M. Clarke, CVA, CPA/ABV from Seigneur &
Company, P.C.; Robert Grossman CVA, CPA/ABV, CBA, ASA from Grossman
Yanak & Ford LLP.
About the Authors xxi
xxii
I
would like to thank Terri Houston. I appreciate all of her hard work and help in

shaping this project with me from start to finish. She was instrumental in keeping
things organized and on track over countless revisions. Special thanks to Barbara
Brown, Sheri Krajewski-Bibins, Keith White, Maggie Van Ness, and Brian Skinner
for helping with various parts of the manuscript. In addition, I would like to thank
all of my staff who were involved in preparing this book.
I would also like to thank Sarah Nelson of Intellectual Capital Uplink Inc. and
Eva Lang of the Financial Consulting Group for their assistance in the editing
process.
At Wiley I would like to thank John DeRemigis, Judy Howarth, and Sujin
Hong for their encouragement, direction and tough love to keep me on track.
I thank all of the following prominent valuation practitioners for reviewing the
book and for their insightful comments:
Parnell Black
National Association of Certified Valuation Analysts
Salt Lake City, UT
Mark Dietrich (Healthcare chapter)
Dietrich & Wilson, P.C.
Framingham, MA
Christopher Mercer (ESOP chapter)
Mercer Capital
Memphis, TN
Shannon Pratt
Business Valuation Resources
Willamette Management Associates
Portland, OR
Gary Trugman
Trugman Valuation Associates
Rachlin Cohen & Holtz
Miami, FL
I would also like to thank the following organizations for the use of certain

information:
John Wiley & Sons, Inc.
Mercer Capital
acknowledgments
Morningstar
The Financial Valuation Group
The Appraisal Foundation
Risk Management Association
Beckmill Research
The Brookings Institution
The Financial Consulting Group
Financial Accounting Standards Board
American Institute of Certified Public Accountants
Internal Revenue Service
Partnership Profiles, Inc.
Ibbotson Associates
Trugman Valuation Associates
The National Center for Employee Ownership
acknowledgments xxiii