Litigation and Valuation

Litigation and Valuation

The Practice of Business Valuation

Much more than “rules of thumb.”

T he theory surrounding the value of an interest in a business depends entirely on the future benefits that will accrue to the owner of it.

A business valuation then depends upon an estimate of the future benefits and the required rate of return at which those benefits are discounted back to the date of the valuation.

To put this in the most simplest of forms, a business valuator projects some category or categories; (such as cash flow, earnings or dividends) and then estimates the present value of those future earnings by discounting them based upon the time value of money and the risks associated with ownership. The direct implementation of this will be discussed in future issues of our newsletter.

While there is a generally accepted framework for business valuation; translating it into practice in an uncertain world poses one of the most complex challenges of financial theory and practice.

The reasonableness of the conclusion is contingent upon the valuators projections and variables used to estimate future economic benefits. Because of the complexities associated with this, business valuation experts have developed various approaches that use historical as well as projected data to arrive at a valuation that is supportable and defendable in the business and legal world.

Points to consider when using an Expert Witness

    1. Don’t expect your expert to work in a vacuum and then appear in court with a perfect presentation. Preparation is the key.
    2. Don’t expect to be able to ambush a well-prepared expert witness.
    3. Don’t tie your expert up with tightly worded yes or no questions. Ask questions that allow the expert to explain a position.
    4. Don’t expect to win your case on the cross-examination of the opposing expert. Win it with your expert.
    5. Don’t just learn the basic principles or theory. Having just a little knowledge is dangerous.
    6. With your expert, prepare an outline of direct testimony and include only those technical terms necessary to ask questions.
    7. Retain the expert early; that usually results in a more efficient case, with less overall cost.
    8. Maintain constant communication with your expert. He or she needs to know about any financial aspect of your case.
    9. Use the deposition process to make the opposing expert tell everything he or she knows about the case.
    10. Use a written report if the matter is complex. The written report is a valuable tool for you, not your opponent.