Determination of Value

How to develop and support a credible opinion of value based on a foundational framework

This book provides knowledge and guidance to valuation practitioners on achieving a new level of professionalism and credibility, as well as to those stakeholders in the valuation process in need of assessing the credibility of an appraiser's work product for decision-making purposes. It introduces a well defined framework of key credibility concepts and procedures at each step of the appraisal process, including reasonableness tests, valuation methodologies, financial analysis, economic and industry analysis, engagement planning, and informed judgment.

• Provides needed guidance to valuation practitioners to enhance their valuation practice and improve the credibility of the appraiser's work product
• Offers guidance to stakeholders in the valuation process in need of assessing the credibility of an appraiser's work product for decision-making purposes

Get foundational framework appraisal advice with the proven guidance found in Determination of Value.

Preface xi

Acknowledgments xiii

Chapter 1: The Problem 1

In Search of a Truth 1

The Assurance Expert 4

Credibility Is Not Synonymous with Truth 7

Where Do We Go from Here? 8

Chapter 2: The Solution 9

Toward a Defi nition of Credibility 9

The Attributes That Make You Credible 10

Operational Credibility Attributes 11

Personal Credibility Attributes 19

General Observations about “Credibility” 21

Credibility Is Not Synonymous with Truth 23

Don’t Confuse Opining with Decision Making 25

Beware of Black Box Opinions 26

Conclusion 26

Chapter 3: The Credibility Pyramid and the Importance of a Well-Defined Analytical Process 29

The Importance of Process 29

The Valuation Process 31

The Credibility Pyramid 34

Three Problem-Solving Phases 36

Conclusion 41

Chapter 4: Pyramids, Not Castles 43

Why Is Credibility Important? 44

Reasonable Assurance 47

Generally Accepted Practices 50

Generally Accepted Practices Lead to Uniformity and Professional Consensus 54

Analytical Gaps 55

Informed Judgment 56

Conclusion 59

Chapter 5: Climbing the Credibility Pyramid 61

The Importance of Revenue Ruling 59–60 61

Identification of Key Pre-Engagement Parameters 63

Planning to Acquire Knowledge about the Subject 65

General Planning Considerations 69

The Importance of the Standard of Value as You Climb the Pyramid 79

Self-Assessment Tools 83

Stepped Reading 87

Conclusion 88

Chapter 6: How to Develop and Report Your Opinion 91

Practice Presenting Your Written Findings Orally 91

Valuation Adjustments 102

Description of a Benchmarking Methodology Used by Valuation Analysts 106

Benchmarking: Relative Weights and Qualitative Analysis 111

Make Sure There Are No Analytical Gaps in the Development and Derivation of Growth Rates 115

Incorporating Prospective Information That Is Presented into Your Opined Results 119

Reporting Your Opined Results 126

Conclusion 129

Chapter 7: Reasonableness Tests 131

Determining Reasonableness 132

Example 1: Derived Estimate of Value 136

Example 2: Guideline Company Method 139

Example 3: Use of Market Multiples 144

Example 4: Federal Tax Compliance 145

Conclusion 146

Chapter 8: Enhancing the Integrity of Your Opinion 149

Understanding the Credibility Threshold 150

Understanding the Scope Undertaken 152

Understanding Analytical Responsibilities and the Impact of Matter/Cause/Effect Analysis 154

Conduct Your Analysis within the Parameters of the Economic Reality Relevant to the Facts and Circumstances 156

Maintain a High Level of Professional Skepticism and Engagement Awareness 157

Review Your Analytical Process for Relevance and Typical Common Errors 160

Be Ready to Respond to Ethical Challenges 162

Enhancing the Integrity of Your Opinion When at Trial or in Hearings 163

Enhancing the Integrity of Your Opinion When at Deposition 166

Conclusion 166

Chapter 9: Reviewing the Work of Others 169

Review Engagement Procedures to Consider 170

Preparing a Document Request for a Review Engagement 172

The Role to Be Assumed: Reviewing Expert or Reviewing Consultant 173

Limiting Conditions and Assumptions 174

Determining an Appropriate Scope for Your Review 175

Minimum Scope Considerations in a Review Engagement 177

Conclusion of a Business Appraisal Review Engagement 177

Business Appraisal Review Opinion 178

Reviewer’s Independence 182

Common Errors and Analytical Gaps Found in Valuation Reports 183

Conclusion 188

Chapter 10: The Journey Continues 189

Definition of Credibility 189

Attributes Attached to a Credible Opinion 190

Separating Decision Making from Opining 192

A Note on Generally Accepted Principles and Practices 193

A Definition of the Concept of Informed Judgment 193

Suggestions for Assessing Your Own Methodology—the Importance of Reasonableness Tests 194

Suggestions for Enhancing the Integrity of Your Opinion 194

Conclusion 195

Appendix 197

About the Author 209

Index 211

Francisco "Frank" ROSILLO, CPA, ABV, ABAR, CBA, CVA, CFE, CFF, CFFA, is the managing director of the Valuations and Forensics Advisory, LLC. Serving an international clientele, the firm provides business valuations, mergers and acquisitions transactions, and forensic accounting advisory services. Rosillo is a frequent national lecturer and trainer in valuation and forensic accounting topics. He has authored Institute of Business Appraisers (IBA) and National Association of Certified Valuators and Analysts (NACVA) courses and the practice aid, Business Appraisal Review. Frank also teaches a five-day NACVA Appraisal Review Workshop and is a member of the Board of Governors of the Institute of Business Appraisers. He has been the recipient of several CPA accounting professional awards in business valuations and litigation support. His financial expert witness experience includes cases in federal and state courts.

When it comes to matters involving the proffering of opinions, such as situations involving the determination of value, disputes often center on whether or not an opinion of value is credible. Decision makers and stakeholders need to be able to effectively assess the credibility of an appraiser's work for decision-making purposes.

In one comprehensive volume, Determination of Value provides knowledge and guidance to valuation practitioners on achieving a new level of professionalism and credibility. Written by Francisco "Frank" Rosillo—recognized expert in the field of valuation—this important resource introduces a well-defined framework of key credibility concepts and procedures at each step of the appraisal process, including reasonableness tests, valuation methodologies, financial analysis, economic and industry analysis, engagement planning, and informed judgment.

The author emphasizes the "Credibility Pyramid" framework, a new perspective on the determination of value applying well-defined key credibility concepts at each and every step of the appraisal process, so that users can not only replicate the results reported in an appraiser's work product, but also see how the appraiser achieved credible results.

Offering appraisal guidance on how to develop and support a credible opinion of value based on this foundational framework, Rosillo considers:

• The importance of a well-defined analytical process
• Climbing the credibility pyramid
• How to develop and report your opinion
• Enhancing the integrity of your opinion
• Reviewing the work of others

Business valuation analysts, appraisers, litigation experts, estate and corporate attorneys, corporate development officers, intermediaries, and venture capitalists will find this book to be a timely guide for ensuring credible results.

Develop and support a credible opinion of value based on a foundational framework

Written by Francisco "Frank" Rosillo, a veteran in the valuation field, Determination of Value is an essential guide for valuation practitioners eager to enhance their valuation practice and improve the credibility of the appraiser's work product.

The process outlined in the book spotlights a new perspective to the determination of value—a credibility pyramid framework that allows you to see step by step how your appraiser achieved credible results.

Reflecting the view that to be credible, analytical work and any related developmental assumptions, conclusions, and summations must provide a path for others to follow, as well as the means to replicate your work and obtain similar results, Determination of Value looks at:

• The attributes of a credible opinion
• Decision making and the roles of stakeholders apart from opining individuals
• How to enhance the integrity of your opinion
• Constructing a review methodology designed to assess whether the methods and procedures undertaken accomplished the proposed purpose

Laying out a proven way of approaching the process of determining value, this comprehensive book reveals much-needed guidance to valuation practitioners for achieving a new level of professionalism and credibility.