Income Statement – Sample Appraisal Report

Following is a summary of the revenues and expenses of the Company for the periods shown. Detailed financial statements are available in our workpapers.

Source: Internal Internal Internal Internal Internal
Basis: Accrual Accrual Accrual Accrual Accrual
12 months 12 months 12 months 12 months 10 months
*($000) Dec-05 Dec-06 Dec-07 Dec-08 Dec-09
REVENUE 4,218 3,403 5,851 7,303 8,239
Cost of Sales (excl depreciation) 2,484 2,165 3,519 4,578 4,378
Depreciation is COGS 184 144 103 112 94
Gross Profit 1,550 1,094 2,229 2,613 3,767
Gross Margin (% Sales) 36.70% 32.10% 38.10% 35.80% 45.70%
Operating Expenses 908 829 1,326 1,646 1,365
% Sales 21.50% 24.40% 22.70% 22.50% 16.60%
Officers’ Compensation 104 107 107 116 124
Operating Income 538 158 796 851 2,278
Depreciation                       (-) Interest Expense                 (-) Interest Income
Other Income(Expense)
NET INCOME BEFORE TAX 381 -95 730 632 2,258
1  Depreciation 222 288 126 136 111
2  Amortization 0 0 0 0 0
3  Interest expense 3 4 2 1 0
4  Non-recurring expense 0 0 0 250 0
5  Annualizing adjustment 0 0 0 0 162
Adjusted EBITDA* 606 197 858 1,019 2,531
Annualized Revenue 4,218 3,403 5,851 7,303 9,784
Adj Earn’gs as a percent of Revenue 14.40% 5.80% 14.70% 14.00% 25.90%
Adjusted EBITDA* 606 197 858 1,019 2,531
Annualized Revenue 4,218 3,403 5,851 7,303 9,784
Adj Earn’gs as a percent of Revenue 14.40% 5.80% 14.70% 14.00% 25.90%

*The earnings basis is control EBITDA, earnings before interest, taxes, depreciation and amortization. Control basis means that the interest under consideration can affect certain discretionary items,including owners and officers compensation.
Adjusted EBT Dec-05 Dec-06 Dec-07 Dec-08 Oct-09
Adjusted EBITDA 606 197 858 1,019 2,531
Depreciation -222 -288 -126 -136 -133
 Amortization 0 0 0 0 0
Interest expense -3 -4 -2 -1 0
Adjusted EBT 381 -95 730 882 2,398


1-3   Depreciation, amortization and interest expenses are added back to arrive at EBITDA.

4     In FY 2008, the Company incurred a one-time expenditure amounting to $250,000 in an anechoic chamber, a piece of equipment built by the Company.

5      An adjustment is applied in order to annualize the most recent interim financial statements.

            No other income statement adjustments were considered necessary. 

Rules of Thumb for Company Valuation

The following data is from 2010 and it was supplied from The Reference Business Guide, published yearly by Business Brokerage Press. This is a good resource for an individual involved in buying, valuing, or selling private businesses. This guide details reasoning as well as alternative methods, other references and tips for pricing and valuing businesses. It also documents the limitations of using rules of thumb. Included here is only a selection of the businesses valued and methods shown in the guide.


Industry “Rule of Thumb” Valuation
Accounting Firms 100–125% of yearly revenues
Book Stores 15% of yearly sales & inventory
Bars/Taverns 40% of yearly sales & inventory
Auto Dealers (for New Cars) 0–10% of yearly sales & inventory
Coffee Shops (Gourmet) 40% of yearly sales & inventory
Dental Practices 60–65% of yearly revenues incl. inventory
Day Care Centers 45–50% of yearly sales incl. inventory
Engineering Services 40–45% of yearly revenues
Food Shops (Premiumt) 30% of yearly sales & inventory
Dry Cleaners 70–80% of yearly sales & Inventory
Flower Shops 30–35% of yearly sales & inventory
Gas Stations (w/o C-Store) 15–20% of yearly sales & inventory
Gift/Card Shops 35% of yearly sales incl. inventory
Hardware Stores 45% of yearly sales incl. inventory
Landscape Businesses 45% of yearly sales
Grocery Store (Supermarket) 15% of yearly sales & inventory
Insurance Agencies 125–150% of yearly revenues
Liquor Stores 40–45% of yearlys sales & inventory
Law Firms 90–100% of yearly revenues
Restaurants (Full Services) 30–35% of yearly sales & inventory
Restaurants (Limited)  30–40% of yearly sales & inventory
Sports Goods Stores 25% of yearly sales & inventory
Veterinary Practices 70% of yearly revenues & inventory
Travel Agencies 35–40% of yearly commissions

Valuation – Sample Appraisal Report

In arriving at a value determination for ABC, this appraiser has considered the relevant factors set forth in Revenue Ruling 59-60 with respect to the valuation of closely held companies.  The following comments represent the findings with regard to those specific factors outlined in Revenue Ruling 59-60 as they pertain to the valuation of a closely held company such as ABC.

Book Value

Revenue Ruling 59-60 states that one should consider book value when valuing a closely held company. ABC had a stated book value or net worth of $2,004,792 as of December 31, 2007 and

$2,149,281 a year later. It was $3,374,907 as of July 31, 2009.

Book value, per se, is typically not given much weight in the valuation of company such as ABC unless, on a liquidation basis, it exceeds the value as calculated using methods related to the earning power of the Company.

Recent Sales of Common Stock

Revenue Ruling 59-60 suggests that one consider recent purchases or transactions in the stock of the

Company or recent offers to purchase or merge the Company.

There have been no recent transactions in the Company’s stock.  Therefore, no consideration has been given to this approach in considering the minority interest value.

Dividend History Capacity and Probability

Revenue Ruling 59-60 suggests that the appraiser consider the dividend paying capacity of the corporation when valuing a closely held company such as ABC.

ABC has paid cash dividends during the period under examination.  Data on dividend yields and dividend payments by similar companies exists and valuing the Company based upon its dividend paying capacity was deemed to be appropriate at this time.

Market Comparable Valuation Analysis

Revenue Ruling 59-60 suggests that the Appraiser compare the business being appraised and other, similar companies.  The choice of comparable companies is a critical factor in the application of these methods.

Publicly traded companies are frequently used due to the ready availability of data but closely-held concerns are often used when data can be obtained.  To the extent possible, they should be in the same industry as the Company and should represent similar investment opportunities.  Furthermore, some consideration should be given to the strategic position of the companies in their industries; similarity in company size, product quality, labor and capital intensiveness, value added, and other factors may be important in establishing comparability.

It should be noted that it is often difficult or impossible to find market transactions or public companies that are strictly comparable to the business under consideration. When this is true, we generally find market data that provides the best available evidence, and use that as a starting point for our analysis of market pricing patterns.

RR 59-60 advocates use of public companies that are the same as or similar to the subject company; where “similar” has been interpreted to allow wide latitude in guideline company selection. For example, in Estate of Gallo v Commissioner, there were no good public winemaker comparables, so

experts on both sides used brewers, distillers, soft drink bottlers, and brand-name recognition consumer food packages. The object is to find companies that have similar risk characteristics, similar modes of operation, similar financial structure, and similar size and profitability, to the greatest extent possible.

The following companies possess operating and financial characteristics similar to ABC:


Description – Sample Appraisal Report

 The following is the equity ownership of ABC:  Number of Percentage
               Shareholders                        Shares   Ownership 
Shareholder 1


Shareholder 2





General Business Description

[Intentionally Deleted]


[Intentionally Deleted]

Sales& Marketing

[Intentionally Deleted]


[Intentionally Deleted]


[Intentionally Deleted]


[Intentionally Deleted]


As of October 31, 2009, ABC had 87 employees including senior executives.

There is no union and turnover has remained under control (average of 14.5 percent).

Although there is a hierarchical structure at the top, the organization underneath is flat creating a cooperative culture. It is a Company policy to cross-train employees to perform multiple functions in order to avoid delays caused by illness or other conditions.

Prospective new hires go through a two hour battery of tests before they are considered for full time employment. Once hired, employees find benefits to be more than competitive as skilled workers are difficult to find; even in the current economic environment.

According to management, the Company is in a hiring mode and is also seeking a qualified Human

Relations manager and VP of Operations.

Below is a breakdown of employees by job description:

ABC, Inc. October 31, 2009


 Job Description                                    Number        



Repair Floor


Cusotmer Support


New Product Floor


New Product


Production Office


Quality Control









[Intentionally Deleted]

Brief Marketing Discussion

[Intentionally Deleted]

Valuation Considerations And Other Factors – Sample Appraisal Report

In general, a company whose securities are traded in volume by informed persons in a free and active market has its fair market value determined continuously. The prices at which the securities of such a company trade are a reflection of the collective opinion of the investing public as to what the future prospects of the company are at that point of time.

However, when a stock is traded infrequently, or is traded in an erratic market, or is closely held, such as in the case of ABC, some other measure of value must be found in the prices at which the stock of companies engaged in the same or a similar line of business are selling in a free and active market. Several publicly traded companies were found to be comparable to ABC. Industry composite data was considered relevant and was utilized where appropriate.

This valuation was conducted under the guidelines established by the Treasury Department and the Internal Revenue Service in its determination of fair market values of closely held business enterprises for income tax, estate tax, gift tax, and other related purposes. Fair market value has been defined by the Internal Revenue Service as:

“… the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state, in addition, that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and be well informed about the property and concerning the market for such property.”

The Internal Revenue Code, Section 223(b), specifies that the value of stocks and securities of corporations not listed on an exchange or freely traded “…shall be determined by taking into consideration, in addition to all other factors, the value of stock or securities of corporations engaged in the same or a similar line of business which are listed on an exchange.” By Revenue Ruling 65-193 the Treasury Department extended the use of Revenue Ruling 59-60 to include the determination of fair market value of closely held businesses for income and other tax purposes. The primary authority for determination of fair market value of a business enterprise, therefore, has been established as Revenue Ruling 59-60. This Revenue Ruling lists eight factors which are fundamental to any appraisal “…in addition to all other factors…” as follows:

History of the Company and Nature of Its Business

Determination of degree of risk of a company in relation to other companies in its industry requires a review of past trends and the subject company’s stability or instability in the marketplABC. Depth and longevity of management, secondary management strength, and turnover of the labor force are important. The condition of the company’s facility, trends in its industry, etc. also help to determine the degree of risk. More weight is given to recent events, and past nonrecurring financial effects should be reviewed for diminution and elimination if appropriate.

Economic Outlook in General and Condition and Outlook of the Industry in Particular

Economic conditions in the trading arena in which the company operates are of primary importance, but nationwide economic trends, and in some instances international economics, may have favorable or adverse effects on an industry or a company. The intermediate and long term future of the industry and the company’s competitive position in the industry has an important effect on the value of the company. A valuation would be incomplete without a careful analysis of the economic climate in which the company must perform.

Book Value of the Stock and Financial Condition of the Business

Any company must be financially structured to respond to the opportunities available to it or meet with failure. Inadequate capitalization, overpowering debt, inefficient operations, inadequate expense
control, and many other negative factors can defeat the effectiveness of the company in its industry. A study of capital and operating ratios and their relationship to comparable companies is a necessary part of the valuation process. Although “Book Net Worth” or “Book Value” in current inflationary times has little effect upon the determination of fair market value, since many assets are often worth more than stated book value, book value does establish a base from which adjusted values can be calculated.

Earnings Capacity of the Company

Simplified, “the value of a company to any acquirer is the future stream of earnings which he may expect to receive from the company.” A review of the past is a foundation for future expectations. Further, the Appraiser must review the past to search for extraordinary events which give rise to over and understatement of past earnings. Primary emphasis should be given to the most recently experienced earnings.

Dividend Paying Capacity

The ability to pay dividends must be examined; whether dividends are paid by closely held companies
is not important. Tax laws discourage dividend payments by private companies, but dividend capacity is evidenced by excess liquidity, relatively high levels of executive salaries, bonuses to
shareholder-employees and other generous employee benefits.

Whether or Not the Enterprise Has Goodwill or Other Intangible Assets

Reference is not made to the accounting definition of goodwill. A record of profitable operations in a trading arena, the reputation of the enterprise, the ownership of patents or trademarks, and the prestige of the firm better define goodwill. In the selection of Capitalization Rates, Discount Rates and Price/Earnings Ratios, the Appraiser should assign fractional points for the existence of good-will and should subtract points for “negative goodwill” or other intangibles.

Sales of Stock and Size of the Block of Stock to be Valued

The relationship of the parties to a transaction may be more important than the price at which the shares are traded. Arm’s length sales to knowledgeable, unrelated third parties in the recent past would be a basis for valuation. The Appraiser should discount private transactions, and transactions controlled by restrictions such as those contained in buy-sell agreements, unless there is evidence of independent third party negotiations. Discounts for minority blocks and premiums for control blocks of stock should be applied depending on the size of the block involved.

The Market Price of Stocks of Corporations Engaged in the Same or a Similar Line of Business Having Their Stocks Actively Traded in a Free and Open Market or Over the Counter

Revenue Ruling 59-60 emphasizes “…volume in a free and active market by informed persons.” Therefore, the Appraiser should look for comparable companies first on the New York Stock Exchange, second on the American Exchange, and, finally, on the Over-the-Counter Market. Basis for comparability would be provided by product mix, similarity of market, sales trends, and operating and financial ratios. Industry statistics, where applicable, are also helpful to the Appraiser.

In addition to the eight factors above, there are other factors which the Appraiser must consider in performing his valuation. Specifically, an Appraiser must consider comparability of accounting methods and discounts to fair market value determinants. Our views on these subjects are summarized below:

Comparability in Accounting Methods

The accounting profession allows a number of alternative accounting treatments in areas such as inventory and depreciation accounting. Depending upon the particular accounting method utilized, reported earnings may differ materially within a given year. These accounting treatments, which are permitted under Generally Accepted Accounting Principles (GAAP), are usually one-time decisions. Once a company has opted for a particular accounting treatment it cannot change without good cause. That is to say, a company cannot flip-flop between various accounting alternatives year after year just to suit its desire to affect reported earnings. Because of these rules, accounting statements for a particular company are generally comparable from year to year. This comparability, however, may not exist from company to company even if they are in the same industry. This is especially true if one is comparing a “public” company with a “closely held” company.

In general, it is the goal of public companies to maximize reported earnings. This is because the value of a public company’s stock tends to reflect the trend in reported earnings. Obviously, the degree of sensitivity of stock values to reported earnings is tempered by economic conditions, market conditions, and other variables. Public companies tend to utilize straight line depreciation for reporting purposes and accelerated depreciation for tax purposes. This accounting treatment gives rise to higher reported earnings and “deferred income taxes payable” on the balance sheets of these companies. In addition, many public companies still use FIFO inventory accounting, which generally leads to higher reported profits.

On the other hand, “closely held” companies do not often concern themselves with reported earnings. Their major concern is maximizing cash flows and minimizing taxes. It is not unusual to find private companies utilizing accelerated depreciation, LIFO inventory methods, and aggressive reserve accounting, which tend to minimize earnings and taxes while maximizing cash flows.

Maximization of cash flows is very important to lending institutions, which are more concerned with a company’s ability to service debt than they are in a company’s ability to report earnings, since reported earnings, in and of themselves, do not necessarily reflect the ability of a company to repay its obligations. As a consequence, a company that is able to maximize its cash flows is normally in a better position to plan for its working capital needs, its capital expenditure requirements, and its future long term capital.

Accounts to Fair Market Value

The marketability of the company’s stock and the control position of majority shareholders, and the relationship of these factors to the block of stock being valued, can also affect the concluded value. Closely held stock, which lacks marketability, is far less attractive than a similar stock with ready access to the public marketplABC. A minority stock interest in a closed corporation is usually worth much less than a proportionate share of the assets to which it is attached. Correspondingly, a control position is usually worth much more than a proportionate share of the assets to which it is attached. In valuing a block of stock, Revenue Rulings and court decisions provide a basis for concluding that a discount is
valid for an absence of marketability and for a minority interest if the value base does not already
reflect the lack of marketability on a minority interest. Similarly, control premiums are often applied to controlling blocks of stock because of the ability of those control blocks to control the management and operations of the Company.

Accordingly, discounts, if applied, can range from 5% to 50% of determined value for lack of marketability. Premiums for control have normally ranged from 10% to 40% or more above minority interest values in recent years with 25% usually the norm.

Introduction And Summary – Sample Appraisal Report

Click on image to download a sample appraisal report in pdf format

The Plan Committee of the ABC Engineering, Inc. Employee Stock Ownership Plan has requested that Sansome Street Appraisers, Inc., evaluate the common stock of ABC Engineering, Inc. (“ABC” or, sometimes, the “Company”) as of October 31, 2009 in order to determine the fair market value of the common stock on a minority interest basis in connection with the proposed purchase of common stock by the Company’s Employee Stock Ownership Plan (“ESOP”). This report discusses the information, principles, criteria and conclusions used to reach this valuation.

The common stock of ABC has been valued based upon: (1) the pertinent regulations and principles promulgated by the Internal Revenue Service; (2) a thorough analysis of the Company’s financial statements, forecasts and other information; (3) thorough discussions with management; (4) analysis of the relevant industry conditions; and other factors.

The basic rules for valuation are laid down in Revenue Ruling 59-60 issued by the Internal Revenue Service in April, 1959 (as modified by Revenue Ruling 65-193). The rulings define “fair market value” as follows:

“…the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state, in addition, that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and be well informed about the property and information concerning the market for such property.”

This definition is widely accepted and used in courts of law and in tax literature and is the most widely used approach in valuing closely held securities. It is the basic definition upon which we have relied in determining the fair market value of the Company’s stock. Revenue Ruling 59-60 was issued for estate valuation purposes, but is not limited to that use. It serves as a guide in virtually all valuation situations requiring the determination of fair market value.

Consequently, this report has considered the following factors:

  • General economic outlook and the outlook of the particular industry.
  • The history of the Company and the nature of the business.
  • Earnings capacity of the Company.
  • Book value of the stock and the financial condition of the business.
  • Whether the enterprise has goodwill or other intangible value.
  • Dividend paying capacity.
  • Market prices of stock of other comparable companies traded on exchanges.
  • Sales of stock and the size of the block to be valued.

These eight factors are fundamental to any appraisal of closely held securities. They are not, however, all-inclusive. All other factors relevant to the subject valuation must also be considered.

Based upon the analysis of ABC, the experience of this appraiser in the valuation of closely held securities, and the consideration of the factors set forth in this valuation report, the appraiser is of the opinion that the fair market value of ABC (on a minority interest basis) is $10,894,000 or $108,940.00 per share based upon 100 shares of common stock outstanding.

FAIR MARKET VALUE of 100.00% of the Equity $10,894,000 $108,940.00
non-marketable, minority interest basis

This valuation was based upon valuation methods utilizing market comparable data and the capitalization of the Company’s earnings capacity, as defined. A complete description of our valuation methodology, is set forth in the “COMPUTATION OF VALUE” section of this report.

Scope and Limitations of This Valuation

This valuation is based upon discussions with Company management, and upon data and information provided to us. The Appraiser has no reason to believe that any of the representations of management are other than true and accurate. The Appraiser is not aware of material omissions or understatements which would affect values contained in this report. The fair market value arrived at herein represents the Appraiser’s considered opinion based on the facts and information presented to him. No legal opinion is expressed by this report and its accompanying documents.

In performing this valuation study a variety of data and assumptions were used. The financial information on past performance were gathered from financial statements of ABC for the years ended December 31,
2005 through December 31, 2008 as well as the 10 months ended October 31, 2009. Management also provided projections for the next five years.

Interviews were held with the senior officers of the Company and with certain outside sources with regard to the particular industry and ABC’s relative position within the industry.

All financial statements, Company background and other pertinent information have been provided by the Company. This material has been reviewed thoroughly and has been accepted as being factual and representative. In ascertaining the value of the Company, published data from multiple data sources were utilized.

This report specifically addresses the valuation of the Company on a minority interest basis, not on a controlling interest basis which includes the attendant rights to control the direction and growth of the Company, to influence or control compensation and dividends, to change management, to acquire other companies or business operations or establish new product lines, or to sell or merge the Company.

Approach and Scope of Work

Our objective is to determine a value which would provide a fair and reasonable return on investment to an investor/owner, the “willing buyer” as well as the “willing seller”, in view of the facts available to us as of the effective date of the valuation.

Value has been defined as “the present worth of future benefits”. Accordingly, we are concerned with the earnings and cash flow that are expected to be realized in the future, as those appear from the vantage point of the “as of” date of the valuation. We are also concerned with the risks facing the business, and their possible effect on those future benefits.

A site visit and management interview was conducted by John Doe of John Doe, Inc. on September 24, 2009.

Historical earnings and financial condition are considered because they generally are indicative of the expected future income, although that is not always true. Adjustments are usually necessary to recast the historical financials so that they more fairly represent the likely pattern of future income and financial condition. We gave special attention to the current and anticipated cash flow of the Company.

The earnings basis is control EBITDA, earnings before interest, taxes, depreciation and amortization. EBITDA was chosen because it eliminates distortions caused by varying borrowing policies, interest rates, and depreciation rates between the Company and the guideline companies.

Both internal and external factors which influence the value of the Company were reviewed, analyzed and interpreted. Internal factors include the Company’s financial condition, results of operations and the size and marketability of the interest being valued. External factors include, among other things, the status of the industry and the position of the Company relative to others in the industry.

Having reviewed the Company’s condition and situation, we next sought to determine the pricing parameters to be applied. We generally rely on market pricing from business sales transactions, or public stock prices, or both. It should be noted that it is often difficult or impossible to find market transactions or public companies that are strictly comparable to the business under consideration. When this is true, we generally find market data that provides the best available evidence, and use that as a starting point for
our analysis of market pricing patterns.

We found 6 public companies that were sufficiently similar to the Company to be useful in the analysis. Our search for private business sales transactions produced 11 useful market transactions involving sales of businesses similar to the Company. Private market transactions reflect sales of marketable, controlling interests, although not “freely-marketable” in the same sense as many public stocks. As a consequence, the values determined later will be marketable, controlling interest values. The resulting value will then
be adjusted to a non-marketable, minority basis.

The public stock price information which was relevant was converted to a marketable, controlling interest basis, so it could be combined with the private transaction data.

We generally use as many methods as are meaningful, and then average the results, or take a weighted average based on our opinion as to which methods are the most appropriate. The reason for this is that no single valuation method utilizing a few mathematical variables can possibly capture the value of a complex, operating business. Historical methods assume that the future will be much like the past, although with allowances for anticipated changes. Future earnings and cash flow methods rely on projections that are often speculative and sometimes self-serving. Each method provides a different perspective on value, and it is our opinion that the “true” value of the business is better revealed when it has been considered from as many perspectives as can reasonably be developed.