Determination of Value: Guidance on Developing and Supporting a Credible Opinions

CHAPTER FIVE

Climbing the Credibility Pyramid

CREDIBILITY IS AN INFERENCE DRAWN by decision makers, resulting from the application of an analytical process to a set of facts and circumstances under analysis.

THE IMPORTANCE OF REVENUE RULING 59–60

Revenue Ruling 59–60 is generally accepted as a treatise of the factors to be considered in order to reach a credible opinion of value. As you might recall from Chapter 3, Exhibit 3.1 listed the eight factors generally regarded by valuation analysts as key elements to be considered.

As a valuation analyst, you must be conversant with these factors, and your valuation analysis must consider all of these eight factors as part of the process of climbing your own Credibility Pyramid.

For reporting and report-reviewing purposes, it is useful to list where in your report each of these factors was considered.

One of these factors requires consideration of the nature of the business, and the history of the enterprise from its inception is one of the requirements necessary to achieve a credible valuation.

Specifically, Revenue Ruling 59–60 further defines this requirement as follows:

The history of a corporate enterprise will show its past stability or instability, its growth or lack of growth, the diversity or lack of diversity of its operations, and other facts needed to form an opinion of the degree of risk involved in the business. For an enterprise, ...