Determination of value: guidance on developing and supporting credible opinions

DETERMINATION

0F VALUE

Guidance on Developing and

Supporting Credible Opinions

FRANCISCO ROSILLO

Determination of Value

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Determination of Value

Guidance on Developing and

Supporting Credible Opinions

FRANCISCO ROSILLO

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L ib r a r y o f C ongress C a ta lo g in g -in -P u b lic a tio n D ata

Rosillo, Francisco, 1951-

Determination of value: appraisal guidance on developing f nd supporting a

credible opinion / Francisco Rosillo.

pages cm. — (Wiley corporate F&A series)

Includes index.

ISBN 978-1-118-28789-7 (cloth); ISBN 978-1-118-33149-1 (ePub):

ISBN 978-1-118-33374-7 (ePDF): ISBN 978-1-118-33486-7 (eMobi)

1. Valuation. 2. Corporations— Valuation. I. Title.

HG4028.V3R5825 2013

658.15—dc23

2013004414

Printed in the United States of America

10 987654321

This book is dedicated to my friend and colleague,

Contents

Preface xi

Acknowledgments xiii

Chapter 1: The Problem 1

In Search of a Truth 1

The Assurance Expert 4

Credibility Is Not Synonymous with Truth 7

Where Po We Go from Here? 8

Chapter 2: The Solution 9

Toward a Definition of Credibility 9

The Attributes That Make You Credible 10

Operational Credibility Attributes 11

Personal Credibility Attributes 19

General Observations about "Credibility" 21

Credibility Is Not Synonymous with Truth 23

Don't Confuse Opining with Decision Making 25

Beware of Black Box Opinions 26

Conclusion 26

Chapter 3: The Credibility Pyramid and the Importance of a

Well-Defined Analytical Process 29

The Importance of Process 29

The Valuation Process 31

The Credibility Pyramid 34

Three Problem-Solving Phases 36

Conclusion 41

viii ■ Contents

Chapter 4: Pyramids, Not Castles 43

Why Is Credibility Important? 44

Reasonable Assurance 47

Generally Accepted Practices 50

Generally Accepted Practices Lead to Uniformity and

Professional Consensus 54

Analytical Gaps 55

Informed Judgment 56

Conclusion 59

Chapter 5: Climbing the Credibility Pyramid 61

The Importance of Revenue Ruling 59-60 61

Identification of Key Pre-Engagement Parameters 63

Planning to Acquire Knowledge about the Subject 65

General Planning Considerations 69

The Importance of the Standard of Value as You

Climb the Pyramid 79

Self-Assessment Tools 83

Stepped Reading 87

Conclusion 88

Chapter 6: How to Develop and Report Your Opinion 91

Practice Presenting Your Written Findings Orally 91

Valuation Adjustments 102

Description of a Benchmarking Methodology Used by

Valuation Analysts 106

Benchmarking-. Relative Weights and Qualitative Analysis 111

Make Sure There Are No Analytical Gaps in the Development and

Derivation of Growth Rates 115

Incorporating Prospective Information That Is Presented into

Your Opined Results 119

Reporting Your Opined Results 126

Conclusion 129

Chapter 7: Reasonableness Tests 131

Determining Reasonableness 132

Example 1: Derived Estimate of Value 136

Example 2: Guideline Company Method 139

Example 3: Use of Market Multiples 144

Example 4: Federal Tax Compliance 145

Conclusion 146

Contents ■ ix

Chapter 8: Enhancing the Integrity of Your Opinion 149

Understanding the Credibility Threshold 150

Understanding the Scope Undertaken 152

Understanding Analytical Responsibilities and the Impact of

Matter/Cause/Effect Analysis 154

Conduct Your Analysis within the Parameters of the Economic

Reality Relevant to the Facts and Circumstances 156

Maintain a High Level of Professional Skepticism and

Engagement Awareness 157

Review Your Analytical Process for Relevance and Typical

Common Errors 160

Be Ready to Respond to Ethical Challenges 162

Enhancing the Integrity of Your Opinion When at

Trial or in Hearings 163

Enhancing the Integrity of Your Opinion When at Deposition 166

Conclusion 166

Chapter 9: Reviewing the Work of Others 169

Review Engagement Procedures to Consider 170

Preparing a Document Request for a Review Engagement 172

The Role to Be Assumed: Reviewing Expert or

Reviewing Consultant 173

Limiting Conditions and Assumptions 174

Determining an Appropriate Scope for Your Review 175

Minimum Scope Considerations in a Review Engagement 177

Conclusion of a Business Appraisal Review Engagement 177

Business Appraisal Review Opinion 178

Reviewer's Independence 182

Common Errors and Analytical Gaps Found in Valuation Reports 183

Conclusion 188

Chapter 10: The Journey Continues 189

Definition of Credibility 189

Attributes Attached to a Credible Opinion 190

Separating Decision Making from Opining 192

A Note on Generally Accepted Principles and Practices 193

A Definition of the Concept of Informed Judgment 193

Suggestions for Assessing Your Own Methodology—

the Importance of Reasonableness Tests 194

Suggestions for Enhancing the Integrity of Your Opinion

Conclusion

Appendix 197

About the Author 209

Index 211

■ Contents

Preface

J

U S T TH E F A C T S , M A 'AM ."

I am still reminded of Sergeant Joe Friday from the TV show Dragnet, whc

would regularly proclaim so. Alas, for much simpler times now gone when

just the facts were enough to make a decision. Have you ever wondered why

stakeholders and decision makers turn to “experts” in a given field for opined

conclusions to incorporate into a given decision-making process? Or why so￾called expert opinions are needed at all?

Every single day the landscape of commercial transactions and social

interactions becomes ever more complex. Against this background, when￾ever issues arise, decision makers are presented with difficult, if not nearly

impossible, facts and circumstances to navigate in search for a truth on those

matters before them. Decision makers turn to those who hold themselves as

experts to help them navigate the vast amounts of information and facts to

be considered.

No matter the subject matter or field of endeavor, from law enforcement,

health care, law, engineering, or the appraisal disciplines, the continuing reli￾ance on expert opinions is likely to increase; achieving an understanding of

these dynamics is an important endeavor for anyone who must come before

others to present a conclusion or opinion on those issues at hand.

This book attempts to dissect the dynamics I have experienced in the dis￾cipline of opining before others. Over the past two decades, I have come to

the realization that the discipline of opining is best understood and practiced

when a practitioner comes to the sober conclusion that opining is a search for a

truth among an unresolved, and many times poorly defined, set of facts and cir￾cumstances. However, opining itself does not represent a truth over any given

matter. And so, as one uncovers the transcendental elements underpinning

the processes affecting the search for a given truth, the ability to effectively,

precisely, and concisely state one’s opinion can be materially expanded. In the

xii ■ Preface

chapters that follow, we will travel on a journey, a familiar journey in many

aspects, yet traveled from different perspectives.

• Chapter 1 discusses the nature of the problems facing opining individuals.

■ Chapter 2 presents and analyzes a practical definition of credibility.

■ Chapter 3 lays out the criteria for a well-defined analytical process.

• Chapter 4 presents a different opining attitude: pyramids, not castles.

■ Chapter 5 examines the necessary elements of the Credibility Pyramid.

• Chapter 6 discusses how to develop, report, and present opined results.

• Chapter 7 discusses how reasonableness tests are an important part of the

opining process.

■ Chapter 8 suggests steps to enhance the integrity of opinions.

■ Chapter 9 introduces a simple approach when reviewing the work of

others.

■ Chapter 10 offers suggestions on continuing your personal journey with

newfound enhanced awareness.

Acknowledgments

I

W ISH TO A C K N O W L E D G E MY F R IEN D and colleague, Mr. Howard

A. Lewis, former executive director of the Institute of Business Appraisers,

retired program manager for the Internal Revenue Service, National Engi￾neering Program, and author of Business Valuation Standards o f the Internal

Revenue Service. Howard’s advice and guidance were always welcomed and

most productive.