Book Review

Best Practices: Thought Leadership in Valuation, Damages, and Transfer Price Analysis

This fall, Robert F. Reilly and Robert P. Schweihs published Best Practices: Thought Leadership in Valuation, Damages, and Transfer Price Analysis. The book celebrates the 50^th anniversary of Willamette Management Associates and is intended to present thought leadership. The topics selected for inclusion are topics that the authors felt did not already enjoy thought leadership discussion in the current literature. As the authors note: “we were not satisfied with the breadth or depth of the available literature in [many of the topics covered]. We usually concluded: Someone should write a paper on that topic. In this book, we did just that.” In this article, we review the book and answer whether this book should be on your shelf.

This fall, Robert F. Reilly and Robert P. Schweihs published Best Practices: Thought Leadership in Valuation, Damages, and Transfer Price Analysis. The book celebrates the 50^th anniversary of Willamette Management Associates and is intended to present thought leadership. The topics selected for inclusion are topics that the authors thought did not already enjoy thought leadership discussion in the current literature. As the authors note “we were not satisfied with the breadth or depth of the available literature in [many of the topics covered]. We usually concluded: Someone should write a paper on that topic. In this book, we did just that.” Is this a book practitioners and attorneys should refer to? Yes! Robert F. Reilly and Robert P. Schweihs deliver a practitioner-oriented book that includes discussions and provides practical solutions to analysts’ practical problems and guidance to attorneys.

A central objective of the book is to reduce the diversity of analyst practices in the business valuation, economic damages, and intercompany transfer pricing. The book is not intended to be a principles textbook in any of the three above-mentioned professional disciplines. The genesis for many of the chapters in this book are discussions published in Willamette Management’s quarterly Insights journal. The authors pay tribute to “many of our current and former colleagues [who] contributed to those Insights discussions” and “current and former colleagues [that] suggested de novo topics for inclusion in this case. In either case, we are indebted to the foundational contributions of these colleagues.”

While the book is marketed to accredited professionals, they recognize that “lawyers will read this book [to] find some discussion that contradicts a current analysis or opinion. However, the words that these lawyers will miss are the words that we want to point out to fellow practitioners. Practitioners will note this book is replete with words like ‘typically,’ ‘usually,’ and ‘often.’” That is indeed the case.

This book is 1212 pages. The book is divided into three sections. The lengthiest is Section I, Valuation Analysis Best Practices; this section is 1011 pages. This section has 11 parts. Section II, Damages Analysis Best Practices, is 136 pages and divided into two sections; the first part presents Damages Measurement Methods Best Practices. The second part covers Forensic Analysis Best Practices. Section III, Transfer Price Analysis Best Practices, is 53 pages.

Section Breakdown

Section I. Valuation Best Practices

A. Business Valuation Best Practices

1. Asset-Based Business Valuation Approach
2. Application of the Asset-Based Approach
3. Professional Practices Valuation Approaches, Methods, and Procedures
4. Valuation of Health Care Entities, Properties, and Services
5. The Expected Long-Term Growth Rate in the Income Approach
6. Capital Expenditures and Depreciation Expense in the Direct Capitalization Method
7. Cost of Equity Capital Considerations in Statutory Fair Value Valuations
8. Considering a Material Negative Event in a Private Company Valuation
9. Valuing Stock Options for Section 409AA Purposes
10. Measuring Volatility in Stock Option Valuations

B. Business Valuation Discounts and Premiums Best Practices

11. Levels of Ownership Control
12. Measuring the Discount for Lack of Control
13. Discount for Lack of Marketability for Controlling Interests
14. Discount for Lack of Marketability for Noncontrolling Interests

C. Intangible Asset Valuation Methods Best Practices

15. Intangible Asset Valuation Approaches, Methods, and Procedures
16. The Cost Approach and Intangible Asset Valuation
17. The Market Approach Methods for Intangible Asset Valuations
18. License Royalty Rate Databases in Intellectual Property Valuations

D. Intangible Asset and Intellectual Property Best Practices

19. Intellectual Property Strategic Management
20. Valuation of Computer Software and Information Technology
21. Valuation of Trademark-Related Intangible Assets
22. Valuation of Licenses and Permits Intangible Assets
23. Valuation of Customer-Related Intangible Assets
24. Valuation of Technology-Related Intangible Assets
25. Valuation of Contract-Related Intangible Assets
26. Valuation of Goodwill-Related Intangible Assets

E. Property Valuation Best Practices

27. Real Estate Appraisal Reports
28. Personal Property Appraisal Reports
29. Tangible Personal Property Valuations
30. Special Purpose Property Due Diligence Procedures
31. Allocation of Value between Real Property and Intangible Personal Property

F. Property Tax Valuation Best Practices

32. Business Valuations, Unit Valuations, and Summation Valuations
33. Economic Obsolescence Measurements
34. Economic Obsolescence Measurement Methods
35. NOL Carryforwards and Other Tax Attributes in Property Tax Valuations
36. Applying Market-Based Evidence
37. Extracting Embedded Software for Property Tax Purposes

G. ESOP and ERISA Best Practices

38. ESOP Formation Feasibility Analysis
39. ESOP Financial Adviser Due Diligence Procedure Checklist
40. ESOP Fairness Opinion Analyses
41. Sponsor Company Solvency Analyses and Solvency Opinions
42. Sale of Sponsor Company Stock to an ESOP and to Other Parties

H. Family Law Best Practices

43. Guidance to the Family Law Counsel Working with a Valuation Specialist
44. Reasonableness of Compensation Analyses for Family Law Purposes
45. Family Law Valuations of Large and Small Professional Practices
46. Business Valuations for Family Law Purposes
47. Valuing Derivative Securities and Share-Based Compensation

I. Transfer Taxation Best Practices

48. The Identification and Quantification of Valuation Adjustments
49. Measuring the Discount for Lack of Marketability with Put Option Pricing Models
50. Valuation of Holding Company Ownership Interests

J. Fair Value Measurement Best Practices

51. Acquisition Accounting of Business Acquisitions
52. Market Participant Acquisition Premium
53. Business Combinations and Goodwill Impairment
54. Business Combinations and Bargain Purchase Transactions
55. Contingent Considerations in Business Combinations

K. Independent Financial Adviser Best Practices

56. Procedures to Avoid Overpaying for Acquisitions
57. Technology Company Fairness Opinions
58. Transferring Private Company Equity to Key Employees
59. Financial Adviser Expert Report and Expert Testimony Guidelines

Section II.        Damages Analysis Best Practices

L. Damages Measurement Methods Best Practices

60. Forensic Analysis of Intangible Asset Damages
61. Deprivation-Related Property Valuations
62. Event Studies to Measure Economic Damages
63. Measuring Trade Secrets Damages
64. Legal Standards Related to Damages Measurements

M. Forensic Analysis Best Practices

65. Intellectual Property Forensics Analysis Considerations
66. Due Diligence Procedures in Damages Analysis
67. Due Diligence Interviews in Forensic Analysis Engagements
68. Trade Secrets Damages Awards

Section III.       Transfer Price Analysis Best Practices

N. Transfer Price Methods Best Practices

69. Arm’s-Length Price for Intellectual Property Transfers
70. Marketing-Related Intangible Property Transfer Price Analyses
71. Intangible Property Transfer Price Guidelines
72. Intangible Property Transfer Price Analysis

These chapters are detailed. The chapters are also replete with guidance. What stands out to this writer is that the book contains numerous illustrative examples, consistently sound guidance, and ease of access. This is an excellent resource for practitioners and attorneys. For example, when discussing the Asset-Based Business Valuation Approach, the authors provide the following guidance:

However, these Cost Approach methods may not be applicable to all tangible and intangible asset categories. Many tangible and intangible assets are more efficiently valued by reference to the Market Approach. Similarly, many intangible assets are more efficiently valued by reference to the Income Approach.

For example, in a business valuation, it is possible to value a company’s goodwill by reference to the Cost Approach (e.g., the capitalization of the lost income opportunity cost during a total asset recreation period). However, in the business valuation, it is more typical for analysts to value a company’s goodwill by applying the Income Approach CEEM.

In summary, the Cost Approach can be applied to value various categories of company tangible assets (e.g., machinery and equipment) or intangible assets (e.g., a trained and assembled workforce). However, it may not be possible to value all the assets of a going-concern operating company by applying the Cost Approach exclusively. Such an analysis may ignore the income generation capacity of the company, and it may not appropriately encompass either:

1. 1. The company’s goodwill (positive capitalized earnings), or
   2. The company’s economic obsolescence (negative capitalized excess earnings).

The above guidance is representative of that contained in other parts of this book.

Lawyers that practice family law will benefit from reading the guidance found in Family Law Best Practices. Here, the authors write “this discussion summarizes what the counsel needs to know to retain and work with an analyst in the valuation of the marital estate’s business ownership interests.” Of course, those parts of the book that discuss the valuation of holding company ownership interests, intellectual property, business combinations, trade secrets damages, forensic analysis engagements, and due diligence are just as invaluable to valuation practitioners and attorneys; the latter group, especially small and medium-sized firms, in this writer’s experience, could benefit greatly reading this book and understanding the multiple issues and considerations. A valuation is not as simple as using an EBITDA multiplier; there is far more and properly representing a party in litigation requires appreciation of what is shared here.

Conclusion

This is a timely, sensible, and detailed book. The guidance and illustrations serve to drive the points made in the respective parts. This is a reference source that I will refer to in my attorney and appraiser roles. In short, Messrs. Reilly and Schweihs and past and current Willamette Management Associates have delivered a gem—a book replete with thoughtful insight—that serves to make us better professionals. Thank you!

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Roberto H Castro, JD, MST, MBA, CVA, CPVA is an appraiser of closely held businesses, machinery and equipment, and Managing Member of Central Washington Appraisal, Economics & Forensics, LLC. He is also a Senior Attorney with the Gravis Law, PLLC group North Central Washington Offices where he focuses on real estate, tax, wills and trust law, business litigation, and succession planning. Mr. Castro is also Technical Editor of QuickRead and previously wrote the federal case law columns for The Value Examiner.

Mr. Castro can be contacted at (509) 679-3668 or by e-mail to rcastro@gravislaw.com.