banner ad
Experts Logo


Introduction To Business Valuation Concepts For Attorneys

By: Thomas Kalajian, BS, CRTP, AVA, ABAR
Provident Valuation Professionals, Inc.

Tel: (949) 716-4875
Email Thomas Kalajian

Profile on

This article is intended to provide a conceptual introduction of business valuation for attorneys who seek a confirmation of the fundamentals, disabuse from common misleading notions, or practical tips to assess the quality of valuation reports encountered in their practices. Business valuation is a broad and technically challenging discipline. It would be impossible to introduce all the aspects of business valuation in this article. The author's approach has been to present several key concepts with the perspective of attorneys in mind to expedite their understanding while minimizing repetition of the ordinary material presented in the ordinary way.

How To Facilitate the Study of a New Field

In gaining understanding of any new field, it is very helpful to first identify its fundamental postulate. Once known, the postulate becomes the stable orientation point around which subsequent information and inevitable complexities can be aligned and understood. For example, Chinese general Sun Tzu wrote in 500 B.C., "All warfare is based on deception."1 This provided the student of warfare with a reference point to orient further study.

The Significance of Revenue Ruling 59-60

One of the earliest expositions on business valuation was published in 1959 by the Internal Revenue Service in Revenue Ruling 59-60.2 Today, 45 years later, it continues to offer refreshing clarity to business appraisers. Perhaps the most frequently quoted section lists the eight factors which must be considered in a full valuation report. These eight factors are central to the valuation process:
  1. The nature of the business and the history of the enterprise from its inception.
  2. The economic outlook in general and the condition and outlook of the specific industry in particular.
  3. The book value of the stock and financial condition of the business.
  4. The earning capacity of the company.
  5. The dividend-paying capacity.
  6. Whether or not the enterprise has goodwill or other intangible value.
  7. Sales of the stock and the size of the block of stock to be valued.
  8. 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, either on an exchange or over-the-counter.3
Attorneys should consider this the first reference on business valuation they read.

The Fundamental Postulate of Business Valuation

It is from Rev. Rul. 59-60 that a workable fundamental postulate emerges:
  1. Valuation is, in essence, a prophesy as to the future,4 thus
  2. For an operating going concern, value is based upon the risk-adjusted present value of the expected future benefit stream.5
Indeed, discounts, premiums and further calculations, assumptions and limiting conditions must be considered in arriving at the value conclusion. However, the basis of business valuation is conceptually grounded on the above postulate.

Principles of Valuation

The foundation of business valuation theory is governed by three fundamental principles:
  1. Principle of Alternatives - Each party to the transaction has alternatives to fulfilling the transaction, for what price and with whom.6
  2. Principle of Substitution - Substitution acknowledges how parties to a transaction will behave regarding alternative choices among comparable properties when prices vary.
  3. A prudent investor will not pay more for one investment than another equally desirable substitute. Derived from investment theory, an investor will choose the higher return between two choices of equivalent risk.7
  4. Principle of Future Benefits - Valuation is based on the future outlook of the business in the form of capital appreciation or dividends, or both, all distributed in the form of cash flow. Investors do not buy historical earnings, but history is relevant in assessing achievability of projections and assessing the risk associated with realizing future economic benefits.8

How the Body of Knowledge Is Organized

Valuation methodology is organized into a hierarchy of three basic levels:

. . .Read entire article and footnote.

Thomas Kalajian, BS, CRTP, AVA, ABAR, President of Provident Valuation Professionals, specializes in Business Valuations, Appraisals and Accredited Business Appraisal Review. He provides litigation support services as a consulting expert, including reviews of FRCP 26(a)(2)(B) business valuation reports of privately-held, small-to-medium-sized businesses.

See Thomas Kalajian's Profile on

©Copyright - All Rights Reserved


Related articles


4/22/2014· Appraisal & Valuation

Tree Risk Assessment: The More Things Change, The More They Stay The Same

By: Joe Samnik

The title is certainly an old play on words and, perhaps correctly, states the fact that no matter how radical a change the underlying components remain the same, as do the consequences. Such is true in many industries and ours is no different. Take the ANSI A300, (Part 9), and the companion publication, Best Management Practices (BMP) Series Tree Risk Assessment, regarding the assessment of tree risks.


5/3/2012· Appraisal & Valuation

What is an Aircraft Appraisal?

By: James Polk

To the Buyer: the appraisal is an impartial professional opinion as to the value of the particular aircraft they are planning to purchase. Further, the appraisal can assist in expediting the sale of the aircraft because the buyer and seller know the fair market value and relative condition of the aircraft through the independent appraisal.


9/29/2020· Appraisal & Valuation

Part 2: AIRA Issues New Standards for Distressed Business Valuation

By: Michael Pakter

In this second article on AIRA Standards, the author discusses unique issues valuing distressed companies. These include the standard of value used, the premise of value, the intended use of the valuation, and cost of capital.

; broker Movie Ad

Follow us

linkedin logo youtube logo rss feed logo