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compute the purchase price of a closely held, family business64
that derived all its value from its ability to discover and
exploit oil and gas reserves. See Zukin, Financial Valuation:
Businesses and Business Interests, par. 19.2[6] at 19-9, par.
19.2[8] at 19-13 (1990). If a company is primarily in the
business of selling its assets, then hypothetical buyers most
likely would be interested in the company’s net asset value. See
Ward v. Commissioner, 87 T.C. at 102 (citing Harwood v.
Commissioner, 82 T.C. 239, 265 (1984), affd. without published
opinion 786 F.2d 1174 (9th Cir. 1986)(concerning company engaged
in selling timber)); see also Estate of Jameson v. Commissioner,
T.C. Memo. 1999-43. True Oil’s proved oil and gas reserves are
its most significant asset and its sole source of revenue, so it
64Dr. Shannon Pratt (founder of WMA) and his colleagues
articulated some of the fundamental differences between large and
small companies that would diminish the value of the guideline
company approach as follows:
Public companies are run by boards of directors
and professional managers. These executives make
operating decisions based on a different set of
corporate objectives than private companies typically
have. Private companies are more likely to have
relationships with family members, employees,
suppliers, customers, and the local community that have
developed over a long period of time. These
relationships can present the board and the management
of the private company with corporate objectives that
are different than a strict duty to maximize
shareholder value. As an additional example, in
private companies, the analyst is more likely to
observe a strategy that is designed to minimize income
taxes, compared with strategies of public companies.
[Pratt et al., Valuing Small Businesses and
Professional Practices 289 (3d ed. 1998).]
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