Professional estimation of value

Business valuation experts are often asked to provide litigation consulting for cases involving disputes between two or more interested parties where claimed damages are determined based on a total firm value. The judgment or settlement amounts in these cases are largely determined by the standards of professional business valuation used in each report and the assumptions used to arrive at a valuation. In recent years, experts have raised questions surrounding the standard methods to estimate the discount rate for the income approach. Often, valuation experts must adjust their discount rate estimation for idiosyncratic risk using professional judgment alone. This flexibility enables experts to use their industry experience and better estimate the discount rate. Experts then adjust the final shareholder value for lack of control or marketability. However, one aspect to this approach is that it creates highly subjective estimations of firm value where biased parties may conclude any valuation based on their desirable outcome. Particularly, the party that benefits from a lower valuation will have incentive to estimate larger adjustments for idiosyncratic risk, lack of marketability and lack of control. However, professional standards create an incentive for valuation experts to provide reasonable estimates of value. This paper examines the use of professional estimation of value adjustments in business valuation reports within a legal setting to achieve valuations favorable to the client. Using publicly available court documents, I have analyzed these discount rates for which elements of the risk calculation are used to favor the client's goal. The evidence suggests that firm-specific risk adjustments to the discount rate and discounts for lack of control and marketability based on professional estimation are significant elements that distinguish valuation expert reports and lead to valuations that satisfy a client's desired result.