EXPOSURE DRAFT – REQUEST FOR COMMENT
Introduction by Eric W. Nath, ASA
Business Valuation Standards Subcommittee
eric@ericnath.com

After five years in the making the Business Valuation Standards Subcommittee is pleased to submit for public comment a proposed Procedural Guideline on valuing minority and fractional ownership interests. By following this link: PG-2 Valuation of Partial Ownership Interests you will have an opportunity to review and comment on what the Subcommittee considers to be important and groundbreaking guidance the business valuation profession has long needed.

Guidance of this nature has never been written. Standards issued by the various appraisal and accounting organizations, including ASA, have primarily dealt with issues related to valuation of companies as a whole, with passing reference or a piecemeal approach to partial interest valuation. Even some of the most well known business valuation textbooks fail to deal comprehensively with the complexity found in the universe of fractional and minority ownership interests. Yet these types of valuations are some of the most common we encounter, and by far some of the most difficult and contentious.

Procedural Guidelines are not standards and they are not binding. Like PG-1 Litigation Support, this PG-2 suggests certain procedures that may be used in the conduct of an assignment, but it does not establish requirements nor does it create any liability for appraisers if it is not followed. At the same time, it does contain many suggestions which, if considered, will hopefully result in more thoughtful and supportable business appraisals.

The purposes of PG-2 are several:

1. This Procedural Guideline provides an overarching framework within which to think about valuing partial ownership interests. This framework has some distinct differences and unique characteristics in comparison to the valuation of a company or asset as a whole.
2. PG-2 provides some linkage between the various ASA Standards and Statements on Standards when valuing fractional and minority interests. For example, BVS-IV and BVS-V, dealing with the income and market approaches, respectively, apply both when valuing minority interests as well as whole companies. PG-2 highlights the difference between the two types of valuations and suggests more directly how these approaches may be applied in the partial ownership context. Similarly, PG-2 provides "connective tissue" between BVS-VII (Discounts and Premiums) and SBVS-1 and SBVS-2 dealing with the Guideline Public Company Method and the Guideline Transactions Method, respectively.
3. PG-2 provides additional detail on relevant procedures to use in conforming to the provisions of USPAP. As an example, USPAP Standards Rule 9-4 (d) states that:

“An appraiser must, when necessary for credible assignment results, analyze the effect on value, if any, of the extent to which the interest appraised contains elements of ownership control and is marketable and/or liquid.” The Comment to Rule 9-4 (d) states that: “An appraiser must analyze factors such as holding period, interim benefits, and the difficulty and cost of marketing the subject interest.”
PG-2 provides appraisers with a series of concepts to consider that will assist in analyzing and incorporating factors which affect holding period considerations, interim benefits and the risks associated with these factors.

As you review this document bear in mind that, as a procedural guideline, there is room to address issues in a more substantive and comprehensive manner. Yet this is not a "cookbook". It is a framework of ideas that are neither prescriptive nor required. Furthermore, the Standards Subcommittee has attempted to make it flexible enough to be applicable in virtually any situation, from financial reporting to estate and gift tax, to litigation support, as well as to structuring buy sell agreements.

PG-2 is agnostic as to specific methodologies, procedures or approaches. Whether you rely primarily on discounted net asset value or a discounted cash flow methodology in valuing a family limited partnership interest there is no intended bias in this guidance. On the other hand, it contains much to think about if you always use only one method for developing a minority interest value.

How to respond

After you have reviewed the document please click the link below to send an e-mail to the BVC Standards Subcommittee with your comments. Please have your comments to us by July 31, 2009 so that we will have time to incorporate them into a final document to be submitted for approval to the Business Valuation Committee at its October session in Boston. We also ask that you provide contact information in your response (e.g. name, phone and e-mail address).

Click here to provide feedback on PG-2

The ASA Business Valuation Standards Subcommittee would like to thank you in advance for your careful consideration of this document, your constructive criticisms and suggestions for improvement.

Z. Christopher Mercer, ASA, CFA (Chair)
Susan L. Heisey, ASA, CPA/ABV
Curtis R. Kimball, ASA, CFA
Eric W. Nath, ASA
J. Timothy Cromley
Lorne Siebert, CA, CBV
Richard M. Wise, FASA, FCBV, MCBA, CVA, FCA, CA/IFA