A litigation valuation begins with four decisions the governing framework shapes: the interest being valued, the valuation date, the standard of value, and the premise of value. The valuator then normalizes the financial statements, applies the income, market, and asset approaches as the company warrants, considers discounts and premiums appropriate to the standard and the interest, and reconciles the indications into a conclusion documented to professional standards. This guide walks through each decision and where valuations are attacked.
The standard of value defines whose perspective the valuation takes and therefore what the number means. Fair market value asks what a hypothetical willing buyer would pay a willing seller. Fair value, as defined by statute or case law for dissenting and oppressed shareholder matters, often excludes the discounts a hypothetical buyer would demand. Investment value asks what the interest is worth to a particular owner. The standard is a legal question the governing framework answers, and applying the wrong one is among the most common reasons a valuation is rejected. The fair market value versus fair value comparison explains the difference in detail.
Value is measured as of a specific date using what was known or reasonably knowable then. In a divorce the date may be the filing, the separation, or the trial, depending on the state; in a shareholder matter it is often the day before the transaction the shareholder dissented from; in a damages matter it is usually the date of the wrongful act. Events after the date are generally excluded unless the framework directs otherwise, so the choice of date can change the conclusion materially, and the report states the date and its basis.
Closely held company statements rarely show sustainable earning power without adjustment. The valuator removes non-recurring gains and losses, restates owner compensation to what an outside manager would be paid, separates personal expenses run through the business, adjusts related-party rents and loans to market terms, and identifies non-operating assets to be valued separately. Each adjustment is listed with its basis, because the normalized earnings drive the income approach and the adjustments are where opposing valuators most often differ. The income determination guide covers the owner compensation question from the support side.
The income approach converts expected cash flows into value, either by discounting a projection or by capitalizing a normalized level of earnings, with a rate built from the company's risk profile. The market approach draws on prices paid for comparable companies or interests, adjusted for size, growth, and risk. The asset approach values the assets net of liabilities and serves as a floor or as the primary approach for holding companies and businesses being liquidated. The valuator applies the approaches the company warrants, explains why any was not used, and reconciles the indications with stated weights. The business valuation approaches page describes each.
Professional valuation standards prescribe the engagement definition, the approaches, the analysis, and the report content, including the standard and premise of value, the valuation date, the sources of information, the approaches applied and the reasons, the discounts considered, and the assumptions and limiting conditions. A report that follows them is positioned to meet a methodology challenge; a report that does not gives the other side its cross-examination outline. The white paper on valuation standards sets out the elements, and the lost profits versus lost business value guide addresses when a valuation rather than a lost profits analysis is the right measure.
The governing framework does, and counsel identifies it. The valuator applies the standard counsel identifies, states it in the report, and where the standard is unsettled presents the result under each alternative.
Only with scrutiny. Projections prepared before the dispute for business purposes carry weight; projections prepared for the litigation are tested against the company's history and the market, and the report explains what was accepted, adjusted, or rejected.
Many states distinguish enterprise goodwill, which belongs to the business and is divisible, from personal goodwill, which attaches to the owner and in some states is not. The distinction is a legal one that varies by state, and the valuator allocates the goodwill according to the framework counsel identifies.
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