Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle

April 2015 Hardcover, PDF (154 pages)

Keith Sellers, Nancy Fannon

Business Valuation Resources, LLC

Seven years in the making, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle guide provides a substantive contribution to the controversial issue of how to value pass-through entities. Authors Nancy Fannon and Keith Sellers present the findings of decades of academic research on the impact of taxes on firm value and demonstrate that historical market returns impound the effects of shareholder taxes.  This research is used to demonstrate how these returns can be adjusted to estimate a cost of capital appropriate for the valuation of a pass-through entity.

There are no easy answers to valuing pass-through entities and the research is both dense and ongoing. However, the breadth and depth of information presented in this guide is deep and provides appraisers the ability to make informed inferences to arrive at reasonable valuation conclusions. This guide brings the academic research together in one place and assists the profession in moving forward on its long-struggling quest to solve the pass-through entity valuation puzzle.
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Categories: S corps

Table of Contents:

  • About the Authors
  • Acknowledgments
  • Introduction
  • Chapter 1. The Importance of Matching the Cost of Capital With the Income Stream
  • Chapter 2. Introduction to the Concept of Implicit Taxes
  • Chapter 3. An Explanation of the Implications of Shareholder Taxes on the Corporate Cost of Capital
  • Chapter 4. Literature Review: Research on the Effect of Taxes Embedded in the Cost of Capital
  • Chapter 5. Impact of Prior Research on Private-Company Valuation
  • Chapter 6. Foundation for Cash Flow-Based Models
  • Chapter 7. Research Related to the Magnitude of Taxes Embedded in the Cost of Capital
  • Chapter 8. An Alternative Approach to the Valuation of Pass-Through Entities
  • Appendix A. Suggested Areas for Further Research
  • Appendix B. Evolution of Pass-Through Entity Valuation
  • Appendix C. Understanding the Basics of the Cost of Capital
  • Appendix D. C Corporation Versus S Corporation Transaction Pricing
  • Appendix E. Digests of Cases Addressing Pass-Through Entity Issues
  • Appendix F. Bibliography
  • Appendix G. Links to Selected Academic Research Papers

Here is what the technical review panel has to say about this highly-anticipated guide:

"Great job marshalling the arguments and presenting them in a logical way."
--Aswath Damodaran, Professor of Finance, Stern School of Business, New York University

"I am impressed at the research (...the authors) put into this document."
--Michael Gregory, Consultant, Michael Gregory Consulting

"This book has a nice flow with logical conclusions and very practical suggestions and reasonable alternatives which BV practitioners can relate to and judges can follow."
--Ken Pi, Partner in Charge of Business Valuations, Meyers, Harrison & Pia, LLC

"Bravo!  I believe this will be the seminal work on the subject and serve to change a lot of minds."
--Theodore Israel, Partner, Israel Frey Group, LLC