Salt Evaporation Plant

1
Salt Evaporation Plant
Reason for Damages Analysis
On January 17, 2001, there was a natural gas leak
from a natural gas storage facility. Gas was
found at the subjects facility within days of
the leak. The level of gas detected was
sufficient to cause the Hutchinson Fire Chief to
order evacuation of the facility.
Dennis Bingham 2007 IBA National Conference
2
Summary Description of Business

• Our client was a salt evaporation plant that
  produced food and feed grade, mechanically
  evaporated salt from injection mining. It also
  owned hundreds of acres of land under which the
  salt is found.
• Over many years of salt mining, huge caverns
  remain from which the natural gas would seep.

3
Problem

• As of the date of valuation, according to
  independent experts, there was no method to
  determine
• How much gas remained in the ground under the
  facility and
• There was no method to totally cure or remediate
  the presence of the natural gas in the
  foreseeable future.

4
How We Attempted to Solve the Valuation

• We set out to find resources that would help us
  to quantify a loss in value.
• Approach the loss of value from the perspective
  of what a willing buyer or seller would do.

5
When a Detrimental Condition Exists

• When there is evidence of environmental
  contamination, or structural damage, or issues of
  safety to public health, a detrimental condition
  is said to exist.
• The main driver of a loss of value when a
  detrimental condition exists, is an uncertainty
  for the buyer.

6
Valuation of Subject with Consideration of
Detrimental Condition
7
Valuation MethodsMethodology for Economic
Damages

• In arriving at an estimate of economic damages we
  prepared two analyses
• but-for or the unimpaired situation and
• after or the impaired situation
• The difference between these two estimates
  represents our estimate of economic damages.

8
Valuation Methods Selected

1. Multiple-period discounting.
2. Adjusted book value.
3. Merger and acquisition methods.

9
Multiple-Period Discounting Method

• The factors impacting the negative effect on
  value included the following
• Increased risk to the subjects economic income
  and,
• The potential that buyers may be unable to obtain
  financing and that buyers would require a reduced
  price for the enterprise due to the risk of
  future explosion.
• We prepared the but-for analysis using a
  standard valuation methodology (including the
  build-up method to determine the cost of
  capital).
• We prepared two after the environmental
  accident forecasts. The forecasts utilized CAPM
  methodology.

10
Forecast 1

• We assumed that as a result of the potential
  interruption in the subjects economic income
  stream a willing buyer would require a higher
  rate of return on the investment to compensate
  for the higher risk.

11
Forecast 2

• We assumed that as a result of the potential
  interruption in the subjects income stream that
  lenders would be unwilling to finance the
  business risk. Therefore, buyers would need more
  equity invested, which would increase the
  discount rate.
• We estimated the increased discount rate by
  calculating a WACC for the subject assuming 10
  equity financing.

12
Adjusted Book Value Method (Excess Earning)

• The factors impacting the negative effect on
  value included the following
• The value of the subjects real estate would be
  lower in the after scenario because the subject
  would have an additional risk characteristic that
  is greater than the companies analyzed in the
  but-for analysis and,
• Increased risk to the subjects economic income.
• Over the years Shenehon has been involved in
  numerous assignments regarding the impact of
  contamination on real estate values. We compiled
  a database of 25 such environmental-affected
  transactions (majority in the MSP area).
• We determined the diminution from unimpaired
  value by environmental issues (for example
  hydrocarbon contamination, natural gas/methane
  contamination, chemical contamination, and toxic
  metal contamination).
• We identified discounts from unimpaired value for
  natural gas/methane contamination ranging from
  12 to 61 with a median of 14. After further
  analysis, we estimated a 15 adjustment was
  appropriate in this case. This discount was
  applied to the subjects fixed assets (land,
  building, plant equipment and office equipment).

13
Merger and Acquisition Methods

• The value of the subjects business would be
  lower in the after scenario because the subject
  would have an additional risk characteristic that
  is greater than the companies analyzed in the
  but-for analysis.
• We calculated the but-for value using
  transaction data that was publicly reported on
  four salt producers. In addition, we used eight
  private transactions that were reported in Done
  Deal States (SIC 2899).
• In arriving at an after value we relied on the
  data base of 25 such environmental-affected
  transactions (majority in the MSP area) discussed
  earlier.
• We determined the diminution from unimpaired
  value by environmental issued (for example
  hydrocarbon contamination, natural gas/methane
  contamination, chemical contamination, and toxic
  metal contamination).
• We identified discounts from unimpaired value for
  natural gas/methane contamination ranged from 12
  t0 61 with a median of 14. After further
  analysis, we estimated a 15 adjustment was
  appropriate in this case. This discount was
  applied to the subjects fixed assets.
• We separately adjusted the salt reserves and
  goodwill multiples by 22 and 10 respectively.

14
Summary                                           
                                                 
                                      
15
UN-Fairness Opinion

• Consulting firm (David) v. Big (Bad?) Investment
  Bank (Goliath)
• Peter Butler

2007 IBA National Conference
16
Fujitsus acquisition of Amdahl

• Valuation problem
• 12.00/share fair price?
• Yes Big (Bad?) Investment bank
• No Small consulting firm
• Amdahl
• Conversion from hardware/equipment (40 of
  revenue) distributor to provider of computer
  information services and software (60)
• IT faster growth larger multiples

17
Why unfair? Financial analysis

• Relative valuation (Historical)
• Blended 60/40 mix 19.97 - 22.41
• Price/sales price/book
• Relative valuation (forward-looking)
• Blended 60/40 mix 16.95
• Price/earning (future)
• Acquisition premium
• 18.5 (5-days out) v. 45.61 (60/40 mix)
• 1.6 (day before) v. 45.61
• Amdahl recently traded as high as 13.375

18
Undue influence - Googlewack facts

• Fujitsu already 42 shareholder in Amdahl
• Fujitsu major supplier to Amdahl
• Two companies shared research development
• Fujitsu controlled at least 3 seats on Amdahls
  board of directors
• Fujitsu had access to non-public information
• None of the other large Amdahl shareholders was
  even consulted regarding the transaction before
  the announcement
• Prior to offer, Fujitsu acknowledged that it
  would not sell its shares in the event of a
  competing bid
• Assurances from Fujitsu that current Amdahl
  management would keep jobs
• Amdahl agreed to inform Fujitsu if there were
  other interested parties

19
Analysts responses

• The 12 offer did not take into account the
  future value of Amdahls growing software and
  services business.
• When it looked like the company was on the brink
  of doing a lot better, its going to be Fujitsu
  that ends up making the real money.
• Being in a position of major supplier and 42
  shareholder allows Fujitsu to buy the company for
  850 million, of which nearly half could be paid
  from Amdahls balance sheet.

20
Big (Bad?) Investment Bank Un-Fairness Opinion

• Choice of comparable companies suspect
• Low future growth expectations relative to
  transformation of company and industry
• Used adjusted and worst case scenarios that were
  between 20 - 80 below earning projections of
  Amdahl management
• Amdahl managements projections conservative
  based on streets consensus
• Only spoke with Fujitsus investment bankers
• Fujitsu is also a client

21
Conclusions

• UNFAIR fairness opinion
• If you come up against big (Bad?) investment bank
  do not be intimidated
• Chances are the shareholders best interests have
  not been accounted for

22
The Case of the Disappearing Debt Valuation or
Lost Profits with Changing Assumptions

• Engagement Type Business Valuation
• Client 100 Shareholder of Company
• Valuation Method Discounted Cash Flow Model
  (DCF)
• Numerator Cash Flows to Total Invested Capital
  (TIC)
• Denominator Weighted Average Cost of Capital
  (WACC)
• Capital Structure Actual (calculated by
  iteration)
• Value of Equity TIC minus actual debt

Keith Pinkerton 2007 IBA National Conference
23
The Case of the Disappearing Debt

• Engagement Type Business Valuation
• Client 100 Shareholder of Company
• Valuation Method DCF
• Numerator Cash Flows to TIC
• Denominator WACC
• Capital Structure Hypothetical
• Value of Equity TIC minus hypothesized debt

24
The Case of the Disappearing Debt

• Engagement Type Calculation of Lost Profits
  (Into Perpetuity)
• Client 100 Shareholder of Company
• Valuation Method DCF
• Numerator Cash Flows to TIC
• Denominator WACC
• Capital Structure Actual (calculated by
  iteration)
• Value of Equity TIC minus actual debt

25
The Case of the Disappearing Debt

• Engagement Type Calculation of Lost Profits
  (Into Perpetuity)
• Client 100 Shareholder of Company
• Valuation Method DCF
• Numerator Cash Flows TIC
• Denominator WACC
• Capital Structure Hypothetical
• Value of Equity TIC minus hypothesized debt

26
Key Points
The Case of the Disappearing Debt

• Start-up company. VC Funding 8/1/03, Val Date
  1/1/04
• Technology-based (Internet) company
• Gross revenues from inception less than 500K
• Litigated matter, opposing expert uses DCF to TIC
• 10-year DCF with imbedded Gordon Growth model
• Employs a hypothetical 60/40 (d/e) capital
  structure
• CoE 22, CoD 4.2, WACC 14.9
• Initially subtracts no debt b/c there is no
  debt _at_ t0
• Later claims no debt subtract b/c its a lost
  profits calculation, not a valuation

27
The Case of the Disappearing Debt
28
Application to Finite Cash Flow Stream
The Case of the Disappearing Debt

• Should some amount of debt be subtracted even in
  finite period of lost profits. . .
• when cash flow to total invested capital is the
  measure of damages
• and when the plaintiff group does not include
  creditors?

29
Appraising theGooglewacks

• 2007 IBA National Symposium
• Masterminds Track II
• June 22, 2007

KC Conrad 2007 IBA National Conference
30
Unique Business Valuations Reining in that
Final Value
2007 IBA National Conference
31
Valuation Problem
Customer Base Substantially U.S. Government
Intelligence Community 39 Department of Defense
61
Subject produced things which are deployed or
sent into the field.
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32
Description of Business
The Companys Three Main Products

• Software Engineering
• Electro-Mechanical Integration
• - Prototyping Services

(Commonly known as bending metal writing code)
2007 IBA National Conference
33
Description of Business
The Company provided critical system engineering
and software engineering expertise for the
development of advanced systems for the
Intelligence Community Department of
Defense Homeland Security
2007 IBA National Conference
34
Description of Business
These services where used for

• Space Systems
• C4ISR
• Intelligence Defense Community

Command, Control, Communications, Computer,
Intelligence, Surveillance and Reconnaissance
(C4ISR)
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35
Obstacle
Conrad Business Appraisers did not hold the
required U.S. Government Security Clearance
2007 IBA National Conference
36
Problems to Solve

• What information would Subject provide (security
  issues) ?
• What economic factors affect the company?
• Who are their competitors?
• Availability of industry data?
• Potential pool of buyers?

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37
Approach to Value 1
I formed negative questions during managements
interview

• You probably do not provide services on a
  sub-contracting basis?
• The economy doesnt affect the business you do
  for the government?
• All of your competitors a larger than you?
• They dont do exactly what you do?
• You never had a problem getting employees
  through security clearance?
• Hypothetically speaking?

2007 IBA National Conference
38
Approach to Value 2
Searched Lockheed Martin Boeing
Raytheon Honeywell Northrop Grumman Reviewed
10ks For similar type of services offered
and outlook Examined likely pool of potential
buyers
2007 IBA National Conference
39
Value Conclusion
Income Approach MPDM Market Approach
Guideline Company
23,600,000.00
23,600,000.00
2007 IBA National Conference
40
Appraising the Googlewacks

• Brent McDade
• 2007 IBA National Symposium
• Masterminds Track II
• June 22, 2007

41
Beefy Brisket Chop Shop
Appraising the Googlewacks

• Valuation Date 10/31/2004
• Controlling Interest Basis
• Divorce

42
Historical Industry Conditions
Appraising the Googlewacks

• Recent history very attractive
• Low carb diets and realization that fat not all
  bad increasing domestic demand
• Lots of production along the Canadian border
• Canada a net exporter of cattle to be processed
  in the United States

43
Looming Concern BSE
Appraising the Googlewacks

• Bovine Spongiform Encephalopathy
• Outbreak in UK in 1986
• Related to
• Scrapie in sheep and goats
• Chronic Wasting Disease in deer and elk
• FSE in cats
• Variant Creutzfeldt-Jakob Disease (vCJD) in humans

44
Mad Cow Disease
Appraising the Googlewacks

• Cause not known
• Believed to be transmitted by eating infected
  protein (prion)
• Resistant to heat, UV light, radiation, normal
  sterilization processes
• Not destroyed by cooking
• Transmitted by eating material infected with
  prions
• Back of mind concern until

45
May 20, 2003
Appraising the Googlewacks

• BSE discovered in Alberta, Canada
• United States almost immediately bans importation
  of Canadian cattle and beef products
• Supply of cattle moves sharply to the left,
  increasing costs
• Company suffers from short supply of Canadian
  beef, but not nearly as much as plants further
  north
• Company in fixed price contracts, so
  profitability suffers a little
• Company begins selling some spot market cuts
  domestically
• U.S. beef product prices increase somewhat, as
  supply from Canadian processors eliminated

46
Fiscal Year Ending October 31, 2003
Appraising the Googlewacks

• Industry rocked by BSE
• Cattle prices in the US skyrocket, particularly
  near the Canadian border
• Tyson, Smithfield, and other big players close
  plants
• The Company benefits from all this and has its
  most profitable year ever, driven by a large
  upswing in inventory valuation
• Location near Omaha allows the Company to access
  US cattle at prices lower than more distant
  plants
• Company successful in maximizing revenue per
  carcass with sales to Japan and Mexico
• By this time, oversupply of cattle in Canada has
  resulted in incentives to build processing
  capacity there moves quickly, since age of
  cattle is a significant factor in quality (value)
  of cuts
• US begins importing Canadian boxed beef but not
  Canadian cattle in 8/03

47
If anything can go wrong, it will
Appraising the Googlewacks

• In December of 2003, BSE is found in the U.S.
  herd
• Almost immediately, 40 countries close their
  borders to US beef products
• Ouch
• Company begins hurriedly refocusing its marketing
  efforts on domestic sales
• Requires operational changes, as cuts are
  somewhat different
• Inventory of cuts preferred by Europeans not very
  valuable
• Inventory of parts valuable in Mexico and Asia
  less than worthless, as brains go from product to
  hazardous waste
• New Canadian competitors ramping up production
  Canadian cattle prices about 70 of cattle prices
  in US

48
Fiscal Year Ending October 31, 2004
Appraising the Googlewacks

• Company has its worst year in recent history,
  reflecting about 10 months of closed-border
  activity
• Margins down dramatically
• Despite record production and revenue, pretax
  income down well over 50 from 2003
• Pretax income about 60 of historical norm
• Company struggling to reinvent itself as a
  supplier to the US market

49
Valuation Date October 31, 2004
Appraising the Googlewacks

• October 21-23, 2004 Meetings between US and
  Japanese officials result in tremendous
  uncertainty about when, if ever, the Japanese
  border will reopen to US beef
• Australia has become the worlds largest exporter
  of beef products and the leading supplier to
  Japan
• Plants are continuing to close in the United
  States as the public companies shift their
  operations to other countries

50
Capitalization of Earnings
Appraising the Googlewacks

• Based ongoing earning power estimate on
• Average 2004 adjusted pretax with historical
  normal pretax (2000 2002)
• Pre-BSE level of production x 2004 level of gross
  profit per head assumes production rebounds but
  profitability based on current
• Used relatively low multiple due to high risk and
  little room for volume growth

51
Key Points Summary
Appraising the Googlewacks

• Admittedly simple valuation method despite
  complex business
• It was important to focus on the fundamentals of
  valuation throughout the process
• What cash flows would the business generate going
  forward?
• How risky are those cash flows?
• By how much would a reasonable investor expect
  them to grow?

52
Damages From an Alleged Wrongful Lease
Termination
Renaissance Investment, Inc. V. U.S. Army Corps
of Engineers, Little Rock District
Bill Herber 2007 IBA National Conference
53
The Ugly Nature of Litigation

• Were it not for judicial privilege and sovereign
  immunity, the government would be held liable for
  defamation for its closing argument. Its use of
  falsehoods, distortions, and exaggerations mixed
  with precious little truth are designed for one
  purpose To generate unwarranted hatred and
  animosity towards Mr. Lehman and Mr. Ginther. In
  effect, the government has artfully weaved
  unreliable, inadmissable evidence with
  unwarranted inferences to recast two honorable
  and successful men into criminals. The challenge
  to the Board is to resist being seduced by the
  sophistic, but grossly unsupportable government
  arguments and examine the objective,
  uncontroverted facts of this case on the merits.
• Renaissance v. United States
• Appellants Opening Argument
• Reply Brief, February 25, 1997

54
Case Summary

• Renaissance alleges the Corp of Engineers twice
  wrongfully terminated a long term lease.
• The commercial concession lease was for operation
  of an excursion boat and attendant facilities
  located on 11 acres of land at Table Rock Lake
  near Branson, Missouri.
• The questions before the court was did the Corp
  of Engineers unjustly terminate a long term
  lease.
• If the lease was wrongfully terminated, what were
  the damages or lost profits.

55

Lease Revocation

• November 2, 1997 for non-payment of rent.
• September 19, 1989 failure to provide minimum
  facilities.
• Renaissance Investment, Inc. sought damages of
  43,782,828 plus interest of 5,980 per day from
  the date of breach.

56
Lease Summary

• Signed September 1, 1987
• Landlord Department of Army
• Lessee Originally Steve Lehman transferred to
  Renaissance Investment, Inc.
• September 1, 1986 to September 31, 2011 25 Year
  term no options.
• Rental Fixed 3,500 annually, paid quarterly.
• Graduated/ 1.8 on all revenues.
• Minimal Facilities Due
• (1) 450 passenger Paddle Wheeler,450,000
• (1) 15 x 70 Dock, 45,000
• (1) 200 x 110 Parking Area, 60,000
• (1) 80 x 30 Building, 65,000
• Landscaping 20,000
• Lighting 4 lot, 40 walkway, 10,000 Road Sign
  22,000 Info Signs (6) 1,000
• - Utility Connections, 18,000
• After the second lease year, unless waived by the
  District Eng.
• 5 of yearly gross income to be reinvested in
  park.
• No exclusive right for excursion boat operations.

57
Purpose of the Analysis

• Determine the lost profits for the riverboat
  project as envisioned by Renaissance Investments,
  Inc.
• Shenehon conducted a lost profit analysis
  subtracting the initial construction costs.
• Explaining to the court the difference between
  Evolutionary vs. Revolutionary Business Types.
• Why do Evolutionary Businesses have no goodwill
  value at the onset, but must develop it over time
  and therefore requires an operating history.

58
Assumptions by Renaissance Which Were Challenged
in Court

• Had ability to complete project in a timely
  manner.
• Had capital in place to proceed.
• Had competent management.
• Based on plans for a dinner riverboat of 340
  seats (which was much greater than originally
  planned.)
• All of the above items were disputed at trial.

59
Outline of Project

• Determine proper methodology.
• Study industry competition.
• Completed supply and demand study.
• Completed very detailed study of anticipated
  revenue and expenses based on what was to be
  constructed.
• Completed detailed costs to build the anticipated
  project.
• Arrived at value damages by using DCF and
  subtracting costs to develop.
• Compared our Pro-forma to Renaissance Pro-forma,
  outline differences.

60
Renaissance Vision
61
Present Value Shenehon Analysis
62
Case Results

• The appeal was denied in all aspects.
• Off the record, 600,000 was offered to
  Renaissance in settlement of all claims.

63
Unique Aspects of Case

• Studied ability to perform financially. Looked
  at individuals and corporation and whether they
  could get money to build.
• Studied feasibility of project.
• Cost to build.
• Review Plans and documents.
• Additional Research
• Became an expert in tourism projections
• How to secure funding.
• Building a vessel.
• Getting all approvals.
• Assemble a management team.
• Provide a factual foundation for the court.
• Learned how to build a case.

64
Appraising the Googlewacks

• Institute of Business Appraisers
• 2007 National Symposium
• Masterminds Track II
• June 22, 2007

Daniel R. Van Vleet, ASA, CBA Managing
Director Duff Phelps, LLC (312)
697-4670 dan.vanvleet_at_duffandphelps.com
65
Valuation Problem

• Executive Options Issued in 1998
• Executive Terminated in 1998 Attempted Exercise
  in 1999 3 Months Prior to IPO
• Company Refused and Executive Sued
• Right to Exercise Upheld in Proceedings
• Relatively Small Equity Position
• Issue FMV of Stock as of 1999
• Determination of Damages
• FMV Minus Strike Price Equals Damages

66
Description of Subject Company

• Dot-Com in Financial Services Sector
• Started in 1997 with Minimal Capital
• S-1 Registration Statement Filed as of VD
• Several Rounds of Venture Capital Funding
• Convertible Preferred Voting Securities
• Significant Cash Burn Rate
• Valuation Date 3 Months Prior to IPO
• Several Hurdles Remained
• IPO or Die Trying

67
Financial Characteristics

• From Inception to Valuation Date
• 5 Million in Revenues
• 20 Million in Operational Losses
• As of Valuation Date
• 50 Million in Cash and 45 Million in Equity
• 75 Million in Convertible Preferred Equity
• Multiple Pre S-1 Transactions with VC Firms
• Complex Capital Structure - Options Warrants
• Three Years of Projections
• Cash Flow Positive in the Third Year

68
Guideline Public Company Method

• Identified 10 Guideline Public Companies
• Industry not an Important Characteristic
• Sales less than 50 million
• In Business as a Result of the Internet
• Developed Revenue Multiples
• All Guideline Companies Reported Losses
• Revenue Multiples Ranged from 20 to 120
• Used Average and Median Multiples
• Assumed Conversion of Preferred Stock
• Applied a DLOM

69
Guideline Transaction Method

• Identified 700 S-1 Filings During 1998
• Narrowed the List
• Industry not a Prominent Concern
• Less than 50 Million in Revenues
• In Business as a Result of the Internet
• Not Public as of the Valuation Date
• Eliminated Pass-throughs and Banks
• Focused on Service Companies
• Availability of Pre-IPO Arms Length Transactions
• Transactions Occurred Within 5 Months of IPO

70
Guideline Transaction Method

• Identified Transactions
• Disclosed in Recent Sales of Unregistered
  Securities Item No. 15 in S-1
• Developed Revenue Multiples
• All Companies Reported Operating Losses
• Multiples Ranged from 6 to 60
• No Statistical Relationships
• Used the Average and Median Multiples
• No DLOM Applied
• Transactions Involved Private Securities

71
Discounted Cash Flow Method

• Private Placement Memorandum Projections
• 2 Years of Losses and 1 Year of Profits
• Extended Projections by 5 Years
• Started at Terminal Year and Worked Backwards
• Scaled Back PPM Revenue Growth Projections
• Used Standard Equity Rate Analysis
• DP and Ibbotson
• CF Adjustments for WC, Dep. and Cap. Ex.
• Applied a DLOM

72
Discount for Lack of Marketability

• Willamette Pre-IPO Studies
• John D. Emory Studies
• Dot-Com Studies for 1997 Through 2000
• 53 Transactions Averaged 54
• Dated Transactions Prior to IPO
• 0-30 Days 30 91-120 Days 49
• IPO/VC Academic Studies 1987-2000
• 50 Remain Private
• 20 are Acquired
• 9 Fail
• 21 go IPO

73
Key Points Summary

• The Dot-Com Era
• Historical Losses and Cash Burn Rates
• Projected Financials
• Shares Outstanding Used in the Analysis
• FMV and Pre-IPO Transactions
• Failed IPOs and Post IPO Performance
• Pre-IPO DLOM Studies
• The SEC and Cheap Stock Issues
• Rule 144 and 6 Month Lock-up Period

74
No Financial StatementsPRESENTED BY ERNEST E.
DUTCHER, MCBANATIONAL BUSINESS APPRAISERS, LLC

• 2007 IBA National Symposium
• Masterminds Track II
• June 22, 2007

2007 IBA National Conference
75
Unique Business Valuations Reining in that Final
Value
No Financial Statements

• This Medical Practice case study is presented as
  follows
• Valuation Problem
• Description of the Subject Business
• Approaches Used in the Valuation
• Value Conclusion

76
Subject Business29 DOCTOR MEDICAL GROUP
WITHOUT WALLS
No Financial Statements

• Valuation problem Individual practice financial
  data not available for all practices or IPA due
  to 10-year time lapse.
• Description of the business A 29 doctor
  multi-specialty group without walls whos
  practice area covered about 22 separate business
  locations in Davis (East Sacramento), California.
  Doctors had formed an Independent Practice
  Association (IPA) to handle billing, HMO contract
  negoti-ations, etc. The IPA negotiated a sale of
  the Group to a 503 (c) (3) not-for-profit medical
  foundation.

77
Subject BusinessTables Referenced Below From
Actual Report
No Financial Statements

• Approach to Value 1 - Appraiser had appraised a
  multi-specialty 29-doctor medical group in a
  nearby city in the San Francisco to Sacramento
  corridor. These historical income statements
  (Table B) were used to establish a foundation for
  the average expense percentages as related to net
  revenues and expenses (Table B-1) to apply to
  certain known factors in the Subject Group (Table
  B), resulting in an estimate of the various
  income and expense items for a pro-forma income
  statement. (Table C).

78
Subject Business Tables Referenced Below From
Actual Report
No Financial Statements

• Approach to Value 2 A series of tables were
  prepared to evaluate the real and estimated
  production expectation of each of the 29
  physician partners plus 6 additional hired
  physicians in the IPA. Production estimates were
  prepared from the data found in Medical Group
  Management Study (Physician Compensation and
  Production Survey 1994 Report Based on 1993
  Data.
• Tables D, D-1, D-2 and D-3 reflect the adjusted
  estimates the 9 specialties represented in the
  IPA, used in Table C.

79
Subject Business Tables Referenced Below From
Actual Report
No Financial Statements

• Approach to Value 3 The following methods were
  used in this valuation Income Approach (Table
  E), Excess Earnings Approach ( Table G), Market
  Approach (Table I) and Cost Approach (Table O).
  The results of these approaches were weighted and
  the Conclusion of Market Values are presented in
  Table J. The value of the donated assets shown
  in Partners 1994 Tax Returns was 1,632,377.
  These assets were valued at 2,515,255 by NBA, or
  about 54 higher that claimed on Partners returns.

80
Subject Business
No Financial Statements

• Value Conclusion Value of contributed
  good-will of about 1.632 million claimed on
  tax returns but reduced to 100,000 by the IRS.
  Interest and penalties on the over 1.5 million
  disclaimed amount, reflected a growing tax
  liability of over 3 million.
• Value of contributed goodwill estimated at 2.5
  million by the NBA appraisal upheld in U.S. Tax
  Court with the concession by the IRS on Value
  issues. Amendments utilizing the higher values
  are contemplated by Partners, as well as
  litigation expenses.

81
Key Points Summary
No Financial Statements

• a. Lack of actual financial data will not
• necessarily invalidate a report.
• b. Identify all possible sources of data used.
  It will be asked on cross-exam.
• c. Keep final analysis as simple as possible.
  It will be appreciated by the Court. (Table A)
• d. Do not be intimidated by the IRS. They are
  as human as we are.
• e. The pay is good.

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ASSIGNMENT Partial Fee Simple Interest in a
Rail Corridor
Bob Strachota 2007 IBA National Conference
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NorthStar Corridor in Minneapolis, Minnesota
Value of 12 Train Trips per Day of 43 minutes
each through this primary Burlington Northern
Two Rail Corridor
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• Corridor appraisers, mainly working for major
  railroads, articulated four possible methods for
  Valuation of Corridors
• Across-the-Fence value (ATF)
• Liquidation Value (discounted ATF)
• Subjective Percentage Replacement Methods
  Replacement Cost)
• Value as a Linear Corridor (Income Approach)

Problem 1 No Established Method for Income
Approach Appraisal of a fee simple partial
interest Answer Use Applicable Business
Valuation AND Real Estate Valuation Principles
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Problem 2 Neither Burlington Northern nor the
Northstar Committee could provide us with
Information Answer Use Available Data -
Burlington Northern is a Public Company and
Department of Transportation Provides Detailed
Data pertaining to Cargo Hauled on Rail
Corridors.
Example Weight of Carloads from the DOT
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How We Did It
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How We Did It
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How We Did It
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How We Did It