The Science of Business Valuation
Gone are the days when an expert valuation witness or specialist could just say, “based on my experience,” and expect the audience to accept it. Even with a Daubert motion in place, valuation specialists face increasing demand for scientific support of their assumptions—and this isn’t limited to the courtroom.
As the market ebbs and flows, we see greater scrutiny in almost every aspect of business. That’s not a bad thing. In fact, it’s led many advisors to better serve their clients, which in turn results in improved business performance and faster dispute resolution. This translates into growth—for individuals, companies and the overall economy. To thrive in these higher market expectations, however, specialists and business owners need more education.
I was quickly reminded of this fact when I recently spoke with an attorney. Those of us who provide expert witness and specialist services understand the need for strong quantitative (scientific) support for our litigation opinions. Historically, this standard wasn’t common for nonlitigation-related valuations, but its adoption by the market has proven an unpleasant education for the unprepared. That would explain why the IRS now outlines specific specialist qualifications for performing tax valuations. We may soon see similar guidance from the Public Company Accounting Oversight Board and other agencies in relation to public companies and complex securities valuations. These areas represent high risk and, thus, require greater scrutiny.
The burden, however, doesn’t just fall on the specialist. The business owner needs to provide complete, accurate information in a usable format. Ultimately, the specialist, business owner and other consultants must come to a mutual understanding of the valuation’s underlying purpose so all relevant data can be properly identified and analyzed. More so, it requires group collaboration and transparency so the specialist can arrive at a reasonable and supportable valuation. This allows the owner to move forward with his or her business plans or dispute resolution. When valuation data and assumptions are backed up with ample support, it translates into increased confidence in the overall economy. It may seem like more work, but in the end it’s a win for everyone.