Page 33 - Business Valuation for Estates & Gift Taxes

In addition to analyzing the entity’s historical financial results, a detailed report should also include a
comparison of the entity’s financial results against industry benchmarks and comparable companies.
These analyses are more effective when they include historical data looking back over a period of sever-
al years rather than the most recent year or two because this will give more weight to any statement that
refers to industry data and results to support conclusions about the entity’s financial results or forecasts.
For consistency purposes, it is important the valuation analyst uses comparable timelines for the entity’s
historical trends and the industry’s trends. This will help identify trend correlations and deviations be-
tween the entity and its related industry, as well as any other micro- or macro-economic influences. As
noted before, the valuation analyst should describe how these analyses support the conclusion of value.
Sensitivity or stress testing should be incorporated into this process when appropriate. Graphs and charts
may also be useful in presenting the results of the subject analyses; however, they should help explain
the data, analyses, and conclusions reached in the valuation report and not be relied on as a substitute for
supporting details.

To further establish comparability of a company’s historical financial statements to relevant bench-
marks, valuation analysts should assess whether the financial data presented in the detailed valuation re-
port should be adjusted when unusual or extraordinary events that significantly impact operations or fi-
nancial results (or both) exist. It will be up to the valuation analyst to support the normalizing adjust-
ment with historical operating results, discussions with management, and so on. If a conclusion is
reached that an adjustment is required, the valuation analyst must determine the magnitude of the ad-
justment in order to arrive at normalized operating results. For every such adjustment, the valuation ana-
lyst should explain the circumstances giving rise to each adjustment, the reasoning for making each ad-
justment, and the impact of the adjustment.

In the detailed valuation report, the valuation analyst should discuss the consideration of the three valua-
tion approaches (that is, income, market, and asset), which valuation methods were considered, and the
reasons why each is, or is not, applicable for the conclusion of value.

For example, if the income approach is appropriate, the valuation analyst should clearly define the bene-
fit stream being used and how the future levels of the benefit stream were derived. When developing a
discount rate or capitalization rate, the valuation analyst must make sure the detailed valuation report
identifies the sources for all inputs, such as the risk-free rate, the equity risk premium, and so on. Such
citations (usually in footnotes) should be complete and permit the reader to replicate the analyses. In in-
stances where the data cannot be supported by empirical data (for example, components of non-
diversified risk) the valuation analyst must apply professional judgment. In these cases, the valuation
analyst’s methodologies should be fully explained in enough detail to allow the reader to conclude on
the reasonableness of the valuation analyst’s results.

If indications of value are derived from multiple methods, the valuation analyst should reconcile the val-
ues from each method to the concluded value presented in the report with sufficient detail to permit the
reader to assess the reliability of the resulting conclusion of value. fn 3

fn 3
As noted in chapter 2, 26 (U.S.) Code of Federal Regulations 301.6501(c)-1(e)(2) requires appropriate level of detail in the report
to meet the "adequately shown" threshold. A reconciliation between multiple methods is recommended to help satisfy that require-
ment.

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