Book Review: Shannon Pratt’s The Lawyer’s Business Valuation Handbook, 3rd edition

How many times have we been involved as an expert in a litigation case only to see the attorneys not understand business valuation, fumble with discovery, and waste their time and ours at great expense to the clients? This new 3rd edition of The Lawyer’s Business Valuation Handbook should help to correct those ills. 

As business appraisers (valuers), we typically look at Valuing a Business¹ and other technical references for our analytical work. To many lawyers and judges, this “expert” work is somewhat dull or at least mystifying. Shannon wrote the first two editions to address this “black hole” in legal minds. The 3rd edition is an update to the previous editions that contain not only basic tenants of business valuation (BV), but also relevant new information on cases and how BV is practiced. It is an excellent read, and we recommend that you tell your attorney contacts and judges about this new book for their reference shelves.

The four forewords, one by a retired judge and three by renowned attorneys in the fields of tax law, family law, and corporate law perspectives, summarize their views about the 3rd edition. Judge Steven I. Platt (ret.) makes the crucial point for attorney-readers: 

In my over 35 years serving as a judge on three different Maryland courts, cases where valuation was an important component were among the most challenging. Valuation is not an area where law schools provide much background for what’s ahead. The terminology and theories can be challenging even for experienced attorneys. The third edition of The Lawyer’s Business Valuation Handbook provides the attorney first confronted with valuation issues with a thorough understanding of the techniques for valuing used by “experts” for closely held businesses and interests in closely held businesses. 

Besides updating material in prior editions, the 3rd edition includes the following new and expanded material:

• Company information, site visits, and interviews: due diligence that should be taken in preparing a business valuation;
  
  
• Developing a discount rate: expanded discussion in a separate chapter on this integral component of any income approach valuation including new material on discount rates for small closely held businesses;
  
  
• Employment and noncompetition agreements: expanded discussion, moved to a separate chapter;
  
  
• Valuations for federal income tax matters: separate chapter covering federal tax valuation issues (other than gift, estate, and charitable contribution matters), including an introduction to transfer pricing;
  
  
• Shareholder and partner disputes: new Appendix B, "Fair Value in Dissent and Oppression," with state-by-state definitions of value in dissent and oppression matters, and new Appendix C, "Terms of the Market Exception," with state-by-state restrictions on appraisal rights for publicly held shares;
  
  
• Valuing interests in real property holding entities: covering partial interest discounts and the relationship between entities owning the real property and those owning a related operating business;
  
  
• Valuing intellectual property and intangible assets: covering legally protected intellectual property, rights of publicity, income tax and transfer pricing considerations, and differences in valuing such assets for financial reporting purposes;
  
  
• Valuation in fairness matters: introduction to principles of corporate law relevant to fairness opinions, role of corporate directors and their fiduciary duties, and directors’ responsibilities and decision-making in a transactional context;
  
  
• Valuation in solvency matters: introduction to claims of fraudulent conveyance/transfers, reasonably equivalent value, solvency opinions, director duties as a company approaches insolvency;
  
  
• Valuation in lost profits damages matters: estimation of lost profits or lost business value, prerequisites to damage recovery, and key concepts in damage calculations; and
  
  
• Valuation and appraiser penalties: relationship of standards and valuation penalties at the federal level, history and definitions, qualified appraiser and appraisal, and examples of penalty calculations.

The 3rd edition includes a Glossary of Business Valuation Terms cross-referenced to Valuing a Business, 6th ed.; PPC’s Guide to Business Valuations, 33rd edition; Internal Revenue Service, Valuation Training for Appeals Officers Coursebook, 1997 edition; and The Business Valuation Bench Book. An index of court decisions complements the subject index.

Probably the most useful item for attorneys is a Checklist for Reviewing a Business Valuation Report. Readers are free to make copies of the checklist to use as worksheets when reviewing reports of their own appraisers and/or opposing appraisers. Copies also may be distributed to others—attorneys, clients, judges, and so on. In fact, from our viewpoint as appraisers/valuers, knowing these checklists can help us prepare our reports that lawyers will review.

Adding to the 3rd edition’s usefulness are extensive case citations for the attorney’s research to their current cases and exhibits in each chapter that include diagrams, definitions, IRS Revenue Rulings, examples of methods, and differences between lost profits cases and lost business value cases, to name a few. These exhibits are invaluable to attorneys and will help the attorney-reader understand what we do and how to dig underneath the layer of the expert opinion.

Our recommendation: Tell your attorneys who hire you about the book, and strongly suggest that they buy it. This book is also a good reference source for our shelves as well, given that it helps us better understand legal reasoning and, as a result, improves our work product.