Preface

• Jurisdiction: United States

Preface

This publication provides a discussion about the language employed in, and the application of, prospective financial information as used in corporate bankruptcy and other litigation for business valuation, damages and other applications. Our goal is not to restate and explain well-known and frequently covered principles of valuing a business, such as how to perform a discounted cash flow analysis. Instead, we focus on how valuation experts and counsel can ensure that the most appropriate financial information is being used, and that the source documents are being interpreted consistently, when such an analysis is being prepared and used.

As such, this text presents a summary of important valuation concepts (Chapter 1) and a basic explanation of prospective financial information (Chapter 2), together with descriptions of some important professional standards (Chapter 3) that all offer guidance about the interpretation and application of prospective financial information. We further discuss the implications of using prospective financial information in corporate bankruptcy matters (Chapter 4) and a variety of other litigation settings (Chapter 5). We outline key factors to consider when determining relevance and reliability, focusing on due diligence themes (Chapter 6). We conclude with a discussion of issues pertinent to the preparation and review of financial information as used in projections more generally in order to highlight some of the inquiries that may be important to fully understanding the context and interpretation of prospective financial information (Chapter 7). We list other important additional sources of information on these subjects (Appendix A) and highlight IRS Ruling 59-60 (Appendix B) as an important statement of the overall philosophy that can guide an inquiry into a business's condition and its future prospects. Finally, we include sample lists for performing due diligence (Appendix C) and employing normalization adjustments (Appendix D).

Attorneys, financial advisors, valuation analysts and court-admitted experts should be prepared to address questions relating to prospective financial information in a range of settings. In particular, a variety of questions may arise when litigants face issues that turn on management's views and management's credibility, or on creditors' outlooks regarding the future of a business, and underlying documentation that involves prospective financial information.

In our view, corporate...