Business Valuation Litigation
Friday, February 19, 2010
Business Valuation Litigation - Contextual Considerations and the Assessment of Economic Damages
When financial markets turn downward, litigation tends to escalate. In this climate, it is increasingly important for businesses to retain experts to perform analysis that quantifies economic damages or lost profits related to a damaging event in a litigation context. Damaging events occur when the actions of a third-party cause a negative effect on the business operations or earning capacity of another "innocent" party.
In business valuation litigation, the context and details of the damaging event must be considered. Specifically, it is necessary to provide a reasonable correlation of how the damaging event resulted in the alleged damages and then be able to quantify the amount. Generally, the identification of the damaging event is a simple step. Providing a reasonable basis that a connection exists to monetary damages may be relatively simple as well. Unfortunately, the determination of appropriate related monetary economic damages is subject to considerable speculation, interpretation and debate. Add potential differences in financial modeling to the mix and it is easy to see how two parties, beginning at the same starting point with similar facts, can quickly distance themselves as they walk down diverging paths of collective assumptions.
The selection of a quality business valuation expert in an economic damages case is critical. At the end of the day, regardless of whether you are a plaintiff or a defendant in a lawsuit, it is an advantage to have an expert that is credible.
It is understood that the valuation process does not produce an absolute, but rather an estimate of, value. After all, no one can predict the future with certainty. If it was certain, there would be no debate. Two appraisers can consider the same facts, but based on selected assumptions, they can find different conclusions that may each be reasonable. It is the appraiser who utilizes assumptions that deviate further from common sense and the original facts which can be deemed unreliable.
It may be helpful to think of the successful resolution of business valuation in litigation as a matter of making expert judgments on matters that inherently involve some gray areas. To put it another way - we all recognize that individuals can look at a black ink blot and see different images. Problems arise when someone looks at the black ink blot and tries to convince others that it is a stack of red bricks. To be credible, in addition to using sound financial and valuation theory, an analysis needs to be well grounded in common sense. Selecting an expert with the ability to clearly connect the dots will help others see the valuation picture plainly.
