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C. Market Approach
Mr. Kramer also used a market approach to value Renier,
while Mr. Sliwoski considered but ultimately rejected this
approach. Typically, a market approach valuing the stock of a
closely held company involves three considerations: Past
transactions in the company’s stock, past offers to purchase the
company, or, if neither of these is available, the market values
of stocks of comparable companies. See sec. 20.2031-2(a)-(f),
Estate Tax Regs.; Rev. Rul. 59-60, 1959-1 C.B. 237.
Mr. Kramer concluded that a market approach comparing Renier
to publicly traded companies was inappropriate because there were
no publicly traded companies sufficiently similar to Renier to
provide an adequate basis for comparison. Instead, Mr. Kramer
utilized a market approach which he termed the “business broker
method”. In Mr. Kramer’s analysis, the business broker method
postulates that the purchase price of a business equals the
market value of the inventory and fixed assets plus a multiple of
the seller’s discretionary cash-flow, defined as the total cash-
flow available to the owner of the business. Seller’s
discretionary cash-flow is computed by adding owner’s
compensation, depreciation, and interest expense to pretax
income. The multiple applied to seller’s discretionary cash-flow
is determined based on the strengths and risks associated with a
particular business; such multiples commonly range between 1 and
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