Chapter 8 Conclusion

• Jurisdiction: United States

Chapter 8 Conclusion

"Value is a word of many meanings," wrote Justice Brandeis in 1923.²⁸⁴ Fundamentally, business valuation is based on growth prospects, risk profile and cash flows.²⁸⁵ And yet, valuation analyses and valuation conclusions result from both objective and subjective processes, with many areas calling for the judgment of the valuation analyst or expert involving a range of quantitative and qualitative factors, inputs and adjustments.²⁸⁶

This text has raised concerns and asked questions that may need to be addressed when relying upon prospective financial information. In our experience, counsel, valuation analysts and valuation experts, and even the courts, are not always aware of the possible range of issues and problems associated with unreliable prospective financial information. Our goal has been to collect and discuss a sample of these questions and concerns and to introduce representative themes.

Management-created prospective financial information is generally the starting point for any analysis of business value (or of damages to the business). But these documents should not be taken at face value and simply utilized without due diligence. Although the terms "budget," "forecast," "projection" and "pro forma financial statement" are often used interchangeably, there are important differences that the professional, and the court, should consider. Ignoring these important distinctions can lead to erroneous conclusions, unintended consequences or negative results.

The valuation expert and counsel should understand the nature of and intended meanings of management's prospective financial information and other documents, their underlying assumptions, and the intended uses of those documents. The circumstances surrounding the preparation of the documents should be reviewed and understood, and their assumptions should be tested for reasonableness, because "[a]ny valuation reflects an assessment of value at a particular point in time, and the value of an asset of business may change as different facts and circumstances arise."²⁸⁷

Due diligence plays a critical role. This publication does not instruct, and is not intended to provide, an explanation of the mathematical and other types of analyses that may be undertaken. Some analytical techniques include performing sampling, developing internal and/or external benchmarking or comparisons, performing trend analysis, and/or applying statistical methods. Many of these are addressed in books and...