Book Review

The Business Valuation Bench Book by William J. Morrison and Jay E. Fishman

In this article, Ed Mendlowitz provides readers a review of William J. Morrison and Jay E. Fishman’s The Business Valuation Bench Book; a book geared to judges.

 

The last thing we need is another basic book on business valuation and this is one that, on first hearing about it, I would put on that list.  However, one of the co-authors, Bill Morrison, is a partner of mine, so as a courtesy, I read it just to be able to tell him I did.  Well, if there is one book that most people performing business valuations, or who want to perform them, should have, it is this one.  Let me explain.

The book was written for judges that rule on cases where business valuations are an essential element of the case.  Considering that the intended reader is not a valuation professional, but someone who is involved with reading, reviewing, and passing judgement on valuation reports, this book is an excellent abridgement of the valuation concepts, approaches, premises, standards, and conclusions.  It is a veritable “CliffsNotes” on valuations.  I cannot imagine a shorter or briefer summary of all the essential valuation concepts in one place than this book.  Yet, while it is short, it is to the point and I cannot detect any missing information or shortcomings based on its purpose.

The focus is for judges including a series of questions at the end of each chapter of what a judge should ask, or for that matter, an opposing attorney questioning a valuation expert.  Further, each of these questions could serve as a reality check or self-review for the valuator when finishing their report.  Combined, the questions would serve as a valuable pre-completion checklist.  Each chapter begins with a listing of points covered in the chapter which can be used as a concise summary that I believe would be of value to people that do not specialize in valuations.  For those people, every facet of a business valuation is covered clearly with good and interesting relatable illustrations.

Following are brief summaries of items I want to call attention to from each chapter.

Chapter 1. Business Valuation Concepts: There is a good discussion of the comparison of fair market value and fair value; and the authors clear up some of the confusion about defining and using fair value.  With regard to the fair market value issues of shareholder level minority and marketability discounts, they are covered briefly enough to present some of the issues the non-specialist would appreciate; however, Appendix 9 provides a very thorough explanation and listing which is, actually, a brief catalogue.  By the way, the two co-authors, along with Shannon Pratt, wrote the definitive book on standards of value[1] (covered here in barely two pages) which they refer readers to, as do I.

Chapter 2. Approaches to Value: Market, Income, and Asset-based approaches are covered with clear uses.  The end of chapter questions have great points a valuator should make sure they responded to in their report.

Chapter 3. Income Approach: There is good treatment and illustrations of normalized earnings, valuing and tax affecting pass through entities, the capitalization process, and use of the discounted cash flow method.  A comment directed to the judge (and something we need to clearly do in our reports) is to ask the expert to explain why their cap rate is correct and whether they have chosen the appropriate long-term growth rate in light of past performance, expected future performance, and the economic and industry conditions.  We also sometimes forget or overlook some of the details needed with normalization adjustments which are well covered here.  This is the longest and meatiest chapter, and by itself is worth the price of the book.

Chapter 4. Asset-Based Approach: Good explanation of the method, but this approach is usually not as important in valuing a going concern, but the possibilities of excessively valued assets and value in liquidation needs to be considered in the arriving at the conclusion or calculation of value.

Chapter 5. Hybrid-Excess Earnings Method: This chapter considers benefits derived from both income and assets, but it is not used too much.  The discussion mentions that and when it might be applicable, and how to proceed in that situation.

Chapter 6. Market Approach: This is a comparison to actual transactions method and is explained well.

Summary: The two goals of the book are that it serves as a reference guide of fundamental business valuation concepts for judges, i.e., non-valuation professionals, and that a methodology is presented whereby a complex valuation can be separated into component parts with the expert’s support for their factual and theoretical bases in support for their conclusion to be analyzed.  They also showed how small differences in some of the assumptions can result in significant changes to the conclusion of value.

Appendix 1 has a chart of various state’s goodwill cases which can be very helpful.

Appendixes 2 through 8 have templates of worksheets for various methods and schedules.

Appendix 9 has a very good basis of discounts discussion and a chart I always like to see—levels of value.  In the book’s case, the range is from $12.00 for synergistic value to $4.40 for nonmarketable minority value.  I always enjoy explaining this to a client that wants a valuation so he “knows what his business is worth.”  Somehow showing if from the pages of a book carries more weight and certainly gets more of the client’s attention.  This appendix also provides explanations that support the reasoning for many of the discounts, with listings of esoteric, but real, discounts.

Appendix 10 provides a glossary of business valuation terms.  This can be very helpful to a non-specialist and sometimes a quick reminder for the experienced.

Appendix 11, bench book questions, is a good self-checking list.  Also great for an assistant that develops a “first draft” for you.

Appendix 12, reference guide, is a soft summary of the more commonly used methods, approaches, and tools.

Conclusion

I know we know all these things but seeing it in this book’s pithy format is a good way to check yourself before signing off, and if you are not a specialist, a checklist to use when starting.  While the book is directed toward judges, it should be in the arsenal of every attorney practicing in areas where valuations are necessary or sometimes appear, and is a useful book for anyone performing valuations.  I give this book to staff who will assist me and highly recommend it to colleagues that are not “full time” valuation experts.  The book is written in a calm, easy, conversational style meant to “teach” a judge how to assess conflicting valuation reports set before him or her.  It will “teach” any user.  Get this book!

[1] Standards of Value, Theory and Applications, Second Edition by Jay E. Fishman, Shannon P. Pratt, and William J. Morrison (Wiley).

Edward Mendlowitz, CPA, PFS, ABV, CFF is partner at WithumSmith+Brown, PC and on the QuickRead Buzz editorial board. He is also the author of a twice-weekly blog posted at http://www.partners-network.com.

Mr. Mendlowitz can be contacted at (732) 964-9329 or by e-mail to emendlowitz@withum.com.