ClarityBV Blog

I just found a neat tool (wordle.net) for making word clouds out of any batch of text. (Hat tip to Carolyn Elefant)

Sadly, my brain leapt right to making word clouds out of business valuation standards…

AICPA SSVS No. 1 Wordle

ASA Business Valuation Standards Wordle

IRS Revenue Ruling 59-60 Wordle

Observations: It seems Revenue Ruling 59-60 has the most balanced word cloud. The AICPA standards appear to be narrower and emphasize reporting. Finally, the ASA standards seem to stress the appraisal expert and general methodology.

Anyway, Wordle is fun and could be handy for presentations too!

Additional Resources: Just in case you stumbled on this post looking for the actual standards mentioned above, following are relevant links.

• AICPA Valuation Standard and Implementation Toolkit
• ASA Business Valuation Standards
• IRS Revenue Ruling 59-60 (pdf)

It’s amazing how many valuation questions can be answered by IRS Revenue Ruling 59-60, which is available as a free download in PDF format from BVResources.com. At only six pages long, it is required reading for preparers of valuations and users of valuations for gift and estate tax reporting.

Recently, I’ve had several people ask questions along the lines of…

1. When valuing a business, do you apply as many methods as possible and average the results?
2. Is there a standard multiple of average earnings to value my business?

Revenue Ruling 59-60 succinctly addresses these questions.

1. Because valuations cannot be made on the basis of a prescribed formula, there is no means whereby the various applicable factors in a particular case can be assigned mathematical weights in deriving the fair market value. For this reason, no useful purpose is served by taking an average of several factors (for example, book value, capitalized earnings and capitalized dividends) and basing the valuation on the result. Such a process excludes active consideration of other pertinent factors, and the end result cannot be supported by a realistic application of the significant facts in the case except by mere chance. [Section 7] [Emphasis Added]
2. Prior earnings records usually are the most reliable guide as to the future expectancy, but resort to arbitrary five-or-ten-year averages without regard to current trends or future prospects will not produce a realistic valuation. [Section 4.02(d)] [Emphasis Added]

To paraphrase — appraisers should not substitute arithmetic for professional judgment!