Finance and Accounting for Nonfinancial Managers: All the Basics You Need to Know

By William G. Droms | Go to book overview

16
Valuing Closely Held Businesses

VALUATION PRINCIPLES

As seen in the previous chapter, one of the most common applications of the time value of money concept is the valuation of financial assets such as stocks and bonds. Virtually all economic models that value financial assets are based on the concept of value as the discounted present value of future cash flows. Valuing real assets, such as real estate or a closely held business, is ultimately based on the same general principles as valuing financial assets. (In this context, "closely held" refers to a business that is privately owned and does not issue publicly traded stocks or bonds.)


REVENUE RULING 59-60

One commonly used source of conceptual guidance for valuing closely held companies is the Internal Revenue Service's Revenue Ruling 59-60, which was originally made to provide guidelines for estate and gift tax valuation. This ruling is the source of the classic definition of fair market value as the price at which a property would change hands between a willing buyer and a willing seller when the former is under no compulsion to buy and the latter is under no compulsion to sell, with both parties having reasonable knowledge of the facts.

Revenue Ruling 59-60 specifies that in the valuation of closely held corporations or valuation of the stock of corporations for which market quotations are lacking or unreliable, all available financial data as well as all relevant factors affecting fair market value should

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