10.1 Business Valuation in Litigation Matters
(a) The Need for Valuation Experts
Parties involved in litigation often retain experts to assess the value of certain assets in the context of a damages claim. Numerous specialized valuation disciplines include gems and jewelry, equipment and machinery, personal property, real property, and business valuation. This chapter will focus on the valuation of businesses and ownership interests in businesses.
Analysts measure an asset's value as of a certain date based on the expected future benefits of owning the asset. Investors will pay a price to acquire an asset based on what they expect the investment will return in the future given their estimated cost of capital. Because the future lacks certainty, investments have risk. Facts often change or new information becomes available after the valuation date; these often affect earnings, expectations, and the asset's value. For example, the loss of a major customer or a new litigation claim could result in a significant decrease in the earnings and value of a company. Conversely, the business could obtain a major customer or file a significant damages suit, thereby increasing its earnings and value. The variability of future earnings—up or down—is the source of risk to an investor and of holding an investment. In spite of this risk, individuals and institutions make investment decisions every day based on their expectations of the future and ...