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M any firms in the A/E industry are attracted to using a “valuation formula” to price their stock. They do this more than in any other industry I have studied in my valuation career. Over time, I have had many conversations with clients about their formulas. I thought I would share some of my insights with you. Proceed with caution Valuation formulas are subject to many influences, so it helps to periodically test them out to make sure they yield accurate results.
Tracey Eaves GUEST SPEAKER
fair market value to test the formula in place. The result indicated that the firm was overvaluing the shares at a minority interest level due to, in our pro- fessional opinion, the formula producing a control level value. This creates a difficult problem because minority shares have been transacted at the higher price and the firm is anticipating more transactions in the near future. formula’ to price their stock. They do this more than in any other industry I have studied in my valuation career.” “Many firms in the A/E industry are attracted to using a ‘valuation
To begin, I would like to emphasize that a formulaic approach to determine the value of a firm’s stock does not constitute fair market value as defined in Revenue Ruling 59-60. The ruling specifically addresses formulas, stating, “No formula can be devised that will be generally applicable to the multitude of different valuation issues ….” Having said that, I prefer to think of the use of formulas as a method to price stock, rather than to value it. I know it sounds like I’m being particular, and I am, with good reason. ❚ ❚ Case in point – A. Firm A has been using a stock formula to price shares for internal transactions for several years. Two people in the firm hold a majority of the shares, considered a block of stock, and ap- proximately 10 others own very minority positions. Firm A engaged Zweig Group to value the shares at
See TRACEY EAVES, page 9
THE ZWEIG LETTER May 22, 2017, ISSUE 1201
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