3.23: Professional judgment and contrasting conclusions provided by multiple CBVs
It is well recognized that valuation conclusions on the same business can vary. Having separate valuations on the same business done by two or more CBV’s most often occurs in the context of a dispute. While there may be reasons for the differing conclusions outside of the CBVs’ control, most of the reasons will lie in the judgment formed by the CBVs. The judgment of the CBV may be reflected in varying views on issues such as:
- Choice of valuation method
- Choice of capitalization rates (which may indicate differing interpretations of the risks faced by the business)
- Development of pro forma cashflow statements
- Level of the CBV’s corroboration of information supplied by management
- Analysis and treatment of redundant assets
- Conclusions regarding the transferability of goodwill
- Discounts applied for lack of control or marketability
- Suitability of tax rates used
The choice of CBV for an engagement often rests on whose professional judgment is the most reliable.
Differences between conclusions may also derive from issues not directly controlled by the business valuator:
- Assumptions provided TO the CBV – because valuations are usually forward looking, assumptions about future circumstances may vary. One CBV may be required to base his/her work on one set of assumptions and the other a different set. Based on the assumptions given, each CBV may provide a credible report. The court will need to decide which assumptions are valid and this may determine which valuation conclusion is accepted.
- The valuation mandate from one user (e.g. a defendant) may be more limited than from another user (e.g. a plaintiff). This could affect the scope of the CBVs’ engagements, affecting the amount of information that is provided to each CBV and the treatment of the information.
Contact MVI if you need help understanding why another valuator’s report may provide a different conclusion.