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20.5%. Assuming the closing price of ENCO stock on that date of $2.375
per share is the fair market value of the freely trading shares, the discount
of 20.5% is $0.486 per share, leaving a fair market value of the 500,000
shares of restricted stock of $1.889 per share, or $945,000 (E14) for Robert

In accordance with recognized professional ethics, the fee for this service
is not contingent upon our conclusion of value, and neither Abrams Val-
uation Group nor any of its employees has a present or intended interest
in the Company.
Per your instructions, we have relied upon Robert Smith™s informa-
tion as to shares outstanding and other relevant information. We have
been accepted this information without veri¬cation as being correct. The
same is true as to the dates of marketability, though our information came
from Len Storm, Vice President and Legal Secretary of ENCO, Inc.

12. Source: America Online, Prophet Line.

PART 3 Adjusting for Control and Marketability
The conclusions are based on our analysis and discussions with Rob-
ert Smith. We did not make any site visit, as we deemed that unnecessary.
We further assume that present ENCO Management would continue to
maintain the character and integrity of the enterprise through any sale,
reorganization, or diminution of the owners™ participation or equity in-
terest. We know of no signi¬cant pending legal action against the Com-
pany of which the market is unaware;13 nor do we know of any other
˜˜skeleton in the closet,™™ and we assume none is or will be occurring. If
this did happen, then might change the value of the Company and Robert
Smith™s underlying stock.
Our opinion of the discount for lack of marketability in this report
is valid only for the stated purpose and only at the date of the appraisal.
It is our understanding that this opinion will be used for income tax
purposes. The fair market value, as determined within our report, shall
not be used for other purposes or dates.
Though some similarities exist between value as set forth for this
purpose and others, it would be incorrect to use the price per share as
determined within our report for any other purposes due to speci¬c tim-
ing, performance, and marketability issues that arise in evaluating the
fair market value of a company. Accordingly, any such use of the value
as determined within this report for other purposes would be inaccurate
and possibly misleading and no such use shall be made without written
permission from Abrams Valuation Group.
Our determination of fair market value as reported herein does not
represent investment advice of any kind to any person and does not con-
stitute a recommendation as to the purchase or sale of shares of the Com-
pany or as to any our course of action.
Future services regarding the subject matter of this report, including,
but not limited to, testimony or attendance in court shall not be required
of Abrams Valuation Group unless previous arrangements have been
made in writing.
This report may only be presented to persons whose use is relevant
to its purpose, and only the entire report can be so conveyed. Giving part
of this report for someone to read can lead to dangerous misunderstand-
ing and is prohibited.
Neither all nor any part of the contents of this report shall be con-
veyed to the public through advertising, public relations, news, sales,
mail, direct transmittal, or other media without the prior written consent
and approval of Abrams Valuation Group.

Jay B. Abrams, ASA, CPA, MBA, author and inventor, is a nationally
recognized consultant within the valuation ¬eld.
Mr. Abrams lectured at the June 1996 Toronto International Confer-
ence of the American Society of Appraisers, the organization from which

13. By the ef¬cient markets hypothesis, if the market knows about a lawsuit or even a potential
lawsuit, the stock price will re¬‚ect that. Here we are saying we know of no insider relevant
information that would change the market price if the public knew about that.

CHAPTER 8 Sample Restricted Stock Discount Study 311
he holds the professional designation of Accredited Senior Appraiser
(ASA) in Business Valuation. He has lectured for the National Association
of Certi¬ed Valuation Analysis and the Anthony Robbins™ Financial Mas-
tery Seminar.
Mr. Abrams has provided services to clients representing a variety
of organizations from small entrepreneurs to Columbia Pictures, Dr. Pep-
per, Purex Corporation, and other Fortune 1000 ¬rms in the area of in-
tangibles, including goodwill, customer lists, licensing agreements, con-
tracts, and business enterprise and capital stock appraisals for numerous
purposes, including the following:
— Employee stock ownership plans (ESOPs).
— Estate planning, estate and gift taxes.
— Income taxes and charitable contributions.
— Mergers and acquisitions and sales.
— Divestitures.
— Warrants and stock options.
— Shareholder buy/sell agreements.
— Blocks of publicly traded securities.
— Private placements and public offerings.
— Restricted securities.
— Recapitalization and reorganizations.
— Debt and equity ¬nancing.
— Company dissolutions.
— Litigation settlement.
Additionally, Mr. Abrams has prepared and given expert testimony
in the capital stock and business enterprise valuation areas in various
courts of law.
Mr. Abrams™ valuation experience encompasses a wide array of in-
dustries and assignments, for mergers/acquisitions, sales and leaseback,
litigation support, leveraged buyouts, and stockholder agreements. Mr.
Abrams was Vice-President of Paci¬c Corporate Valuation, Inc. in charge
of the valuation practice, and he was a Project Manager at Arthur D. Little
Valuation, Inc. He was a cofounder and president of Raycom, a radio
communications ¬rm, and prior to this was an auditor with Arthur An-
dersen & Company. Mr. Abrams received his MBA from the University
of Chicago in ¬nance and marketing, where he also pursued graduate
studies in economics.
Mr. Abrams invented and published the Abrams Table of Equity Pre-
mia and has published an article quantifying the discount for lack of
marketability. He invented several formulas for valuing leveraged ESOPs,
as well as the Abrams Table of Accounting Transposition Errors, used for
troubleshooting such errors. He also wrote software to automatically gen-
erate a table of potential sources of error.
Mr. Abrams™ writings include:
— Quantitative Business Valuation, McGraw-Hill, November 2000.
— ˜˜ESOPs: Measuring and Apportioning the Dilution,™™ Valuation,
June 1997.

PART 3 Adjusting for Control and Marketability
— ˜˜Discount Rates as a Function of Log Size and Valuation Error
Measurement,™™ The Valuation Examiner, February/March, 1997.
— ˜˜An Iterative Valuation Approach,™™ Business Valuation Review,
March 1995.
— ˜˜A Breakthrough in Calculating Reliable Discount Rates,™™
Valuation, August, 1994.
— ˜˜Discount for Lack of Marketability: A Theoretical Model,™™
Business Valuation Review, September 1994.
— ˜˜Cash Flow: A Mathematical Derivation,™™ Valuation, March 1994.
— ˜˜An Iterative Procedure to Value Leveraged ESOPs,™™ Valuation,
January 1993.
— ˜˜How to Quickly Find and Fix Accounting Transposition Errors,™™
The Practical Accountant, June 1992.
— Coauthor of ˜˜Valuation of Companies for ESOP Purposes,™™
Chapter 8 in Employee Stock Ownership Plans by Robert W. Smiley,
Jr. and Ronald J. Gilbert, Prentice Hall/Rosenfeld Launer
Publications, New York, 1989.
— ˜˜The Annuity Discount Factor: Generalization, Analysis of
Special Cases, and Relationship to the Gordon Model and Fixed-
Rate Loan Amortization,™™ unpublished.

CHAPTER 8 Sample Restricted Stock Discount Study 313
This page intentionally left blank.
January 4, 2000
Mr. Bradley J. Jones
ABC Company, LLC
PO Box 99214
San Diego, CA 92169
Dear Mr. Jones:
On January 6, 1999, ABC Company, LLC (˜˜ABC,™™ or ˜˜the LLC™™), a Cal-
ifornia Limited Liability Company, was established for purposes of in-
vesting in real estate and other assets. On December 25, 1999, Tina M.
Smith made four gifts of member interests of 2.80% in the LLC to the
other existing members, who are her children. On January 3, 2000, Mrs.
Smith made four gifts of 2.25% member interests.
In accordance with your instructions, we have performed a Complete
Appraisal, documented in a Self-Contained Report, to calculate the dis-
counts for lack of control and lack of marketability (collectively, ˜˜the Frac-
tional Interest Discount™™) for the four 2.80% and 2.25% member interest
gifts for gift tax purposes.
Our opinion of the Fractional Interest Discount will be effective from
December 25, 1999, through January 3, 2000, for gift tax purposes. The
fractional interest discounts, as determined within our report, shall not
be used for other purposes or dates without our written consent, as they
may be misleading and dangerous.
The term fair market value is de¬ned as follows: ˜˜the amount at which
property [in this case, the member interests in the LLC] would change
hands between a willing buyer and a willing seller, when the former is
not under any compulsion to buy and the latter is not under any com-
pulsion to sell, and when both parties have reasonable knowledge of
relevant facts.™™1
The scope of our engagement did not include a physical visit to the prop-
erties or your of¬ces, nor a separate valuation of the former.
For the fair market value of the properties, we relied on the appraisals
by ABC Real Estate Appraisals as of December 1998 and the estimate of
fair market value for the Dutch Flat property by Bradley Jones. All in-
formation regarding the LLC was provided by Bradley Jones and the
LLC™s attorney, David Hollander, Esq., and its accountant, David Sofer,

1. American Society of Appraisers Business Valuation Standards. Also, the wording is virtually
identical in Reg. § 1.170A-1(c)(2) (income tax, charitable contributions of property); see Reg.
§§ 20.2031-1(b) (second sentence) (estate tax), 25.2512-1 (second sentence) (gift tax).

PART 3 Adjusting for Control and Marketability
CPA. This information has been accepted, without additional veri¬cation,
as correctly re¬‚ecting the ¬nancial statements and value and nature of
the underlying assets, and is your responsibility.
In our opinion, based upon our investigation and analysis and subject to
the attached report and Statement of Limiting Conditions, the appropriate
fractional interest discount for the subject 2.80% and 2.25% member in-
terests is 48%. The fair market value of each 2.80% interest is $20,000,
and the fair market value of each 2.25% interest is $16,250.
We retain a copy of this letter in our ¬les, together with the ¬eld data
from which it was prepared. We consider these records con¬dential, and
we do not permit access to them by anyone without your authorization.
USPAP (Uniform Standards and Principals of Appraisal Practice) Certi-
I certify that to the best of my knowledge and belief that
— The statements of fact contained in this report are true and
correct, the reported analyses, opinions and conclusions are
limited only by the reported conditions, and they are our
personal, unbiased, professional analyses, opinions, and
— We have no present or prospective interest in the property that is
the subject of this report, and we have no personal interest or
bias with respect to the parties involved.
— Our compensation is not contingent on an action or event
resulting from the analyses, opinions, conclusions in this report
or the use thereof.
— Our analyses, opinions, and conclusions were developed, and
this report has been prepared, in conformity with the Uniform
Standards of Professional Appraisal Practice and the Business
Valuation Standards of the American Society of Appraisers.
— No one has provided signi¬cant professional assistance to me.
— I have passed the USPAP examination and am certi¬ed through
2001. Additionally, I am an Accredited Senior Appraiser (ASA)
with the American Society of Appraisers. My certi¬cation is
current through the year 2000.
Sincerely yours,

Jay B. Abrams, ASA, CPA, MBA

Chaffe, B. H., III. 1993. ˜˜Option Pricing as a Discount for Lack of Marketability in Private
Company Valuations,™™ Business Valuation Review (December).
Mercer, Z. Christopher. 1997. Quantifying Marketability Discounts. Memphis, Tenn.: Pea-

CHAPTER 9 Sample Appraisal Report 317
Purpose of the Report
Valuation of Considerations
Sources of Data
Signi¬cant Terms and Legal Issues
Economic Growth
Interest Rates
State and Local Economics
Commentary to Table 9-2: FMV Balance Sheets
Commentary to Table 9-3: Income Statements
Commentary to Table 9-4: Cash Distributions


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( 100 .)