Appendix B, Principle of Substitution. The principle of substitution underlies nearly all appraisals. According to the principle of substitution, value is determined by the cost of acquiring an equally desirable substitute. This appendix explains that from an investment viewpoint, transaction prices are relevant to the value of private businesses when they are similar with respect to the degree of risk, the liquidity of the investment, and the involvement of management.

Appendix C, IBA Standards. The Institute of Business Appraisers (IBA) is the oldest professional society devoted solely to the appraisal of private businesses. To support business appraisers, IBA and other professional appraisal organizations have developed and published appraisal standards. These standards provide much of the structure for the practice of valuation. Every person in need of a private business appraisal should review this appendix before engaging an appraiser.

Appendix D, Private Equity Securities. There are many types of private equity securities. Each type of security may have numerous permutations and features. This appendix explains different securities, including common and preferred stock, phantom stock, and stock appreciation rights.

Appendix E, Sample Preferred Stock Offering Term Sheet. Term sheets outline the key tenets of a deal. These documents can be very complex, and generally employ unfamiliar language. This appendix provides an example preferred stock offering term sheet, which indoctrinates the uninitiated to the confines of private equity.

Appendix F, Private Placements. A private placement is a nonpublic offering of securities exempt from full Securities and Exchange Commission registration requirements. Prior to formally offering private securities to the market, managers should understand and follow the appropriate securities laws. This appendix gives an overview of the laws and various types of private placements and discusses marketing strategies for a successful offering.

Appendix G, Sample Management Buyout Letter of Intent. A letter of intent is the primary preclosing document between the management team and the seller. This letter is generally a legally nonbinding agreement that describes all of the important terms of the deal. Similar to the term sheet contained in Appendix E, the sample letter in this appendix will help those unfamiliar with the management buyout process.