Page 39 - Business Valuation for Estates & Gift Taxes

Exhibit 2

1 - (1/1.3) = 1 - .77 = 23 percent discount for lack of control

To adjust the $1.30 control value to a non-controlling-marketable value see the following:

Control Value $1.30

Discount for Lack of (.30)
Control: 23%
Non-Controlling Value $1.00

Income Approach

There are several valuations methods available within the income approach. Regardless of the specific
method chosen by the valuation analyst, applying the income approach requires the valuation analyst to
consider the economic benefits of ownership and the cost of capital that will be applied to those benefits.

The most significant component in determining the "control versus non-control" decision is whether the
anticipated or future benefit stream associated with the rights acquired includes the rights that permit the
changes that a controlling owner could make to enhance value of the benefit stream. If the benefit stream
includes no such rights, the conclusion would likely be that the acquired interest is a minority, or non-
controlling interest. For example, a minority benefit stream may be negatively impacted by excess com-
pensation paid to the controlling owner or payments made to parties or entities related to the controlling
owner. These payments would drive down the ultimate economic benefits available to the minority
owner and therefore the value of the minority interest.

Asset Approach

When applying the asset approach to value a business interest, the initial value indication will be at a
control level of value because it assumes that the owner of the subject interest has the ability to sell or
liquidate the company. When using the asset approach to value a non-controlling interest, a DLOC is
usually required because the non-controlling interest does not have the liquidation rights inherent in a
controlling interest.

The challenge facing a valuation analyst when using the asset approach to value a non-controlling inter-
est is determining the magnitude of the discount for lack of control.

Market Approach

The market approach consists of two methods known as (1) the merger and acquisition method, and (2)
the guideline public company method. Both methods require significant professional judgment and, as a
result, well thought-out and documented analyses.

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