Valuing Closely Held Businesses

1
Chapter 16

• Valuing Closely Held Businesses

2
Revenue Ruling 59-60

• Original guidelines for estate and gift tax
  valuation the classic definition of fair market
  value
• Price at which a property would change hands
  between a willing buyer and a willing seller when
  neither is under any compulsion to buy or sell
  and both have reasonable knowledge of the facts
  

3
Rev Rule 59-60 Valuation Factors

• Nature and history of business
• Company and industry economic outlook
• Financial condition of the business including
  book value of stock
• Earning capacity
• Dividend payment capacity

4
Rev Ruling 59-60 Valuation Factors

• Value of goodwill or other intangible assets
• Prior sales of stock in the company and size of
  the block to be offered
• Market prices of stocks of corporations engaged
  in the same or similar businesses that have
  stocks actively traded in free and open markets

5
Capitalization of Income Valuation

• Value of company determined as present value of
  expected future income stream
• Discount rate adjusted according to riskiness of
  company higher risk higher discount rate

6
Discount Rate Guidelines

• Low Risk Treasury Bill rate plus 5 to 10
  percent
• Medium Risk Treasury Bill rate plus 11 to 20
  percent
• High Risk treasury Bill rate plus 21 to 30
  percent

7
Case Study

• Chapter 16 case study, Home Medical Care,Inc.,
  illustrates application of valuation principles