At last week’s IBA-NACVA Superconference, I attended noteworthy presentations on sophisticated and complex valuation models, including Butler-Pinkerton (for the company-specific equity risk premium), Finison-Dailey (same) and an overview of lack of marketability discount methodologies. [These presentations and more are available elsewhere on this website.]
After these presentations, several people asked me whether I use these models. I do!
I use every model that I can to check and double-check my conclusions about these two items, which are often the toughest parts of valuation analysis and reporting.
Upon reflection, I wish I had thought to say more (which is what follows).
I do very little litigation work. I am deposed perhaps once a year and testify maybe once every other year. My practice is heavy on tax work, with a good deal of ESOP, financial reporting, and transactional engagements. As such, my reports are audited or reviewed by the IRS, the Department of Labor, CPA auditors, and other valuation professionals. These folks are almost always more knowledgeable about valuation than judges and juries. In my experience (which may not be typical), they understand that value is a reasonable range and that valuations are accordingly uncertain. They appreciate my application of multiple methods to narrow the reasonable range and buttress my conclusions. If they do not understand a method, I am happy to explain it to them. (This has nothing whatsoever to do with the fact that I am paid by the hour during audits…) What they usually question are my assumptions: reasonable, competent, honest men and women should always do this. I have no problem with that. In fact, if someone disagrees with my value conclusion, I urge them to show me where their assumptions are different from mine, and why! I try as hard as I can to explicitly state and justify every assumption with facts. When I must be subjective, I try to be objective (seeking the middle ground). If there are weak or arguable assumptions, I so state in my reports (and provide sensitivity analyses showing the impact of alternate reasonable suppositions). I am an imperfect human being: when I goof or can be persuaded that an assumption of mine is unreasonable, I correct and / or revise my opinion. Although this is embarrassing, I have found that accepting responsibility defuses tension and leads to agreement without the threat of sanctions on me.
If I did more litigation work, I probably would NOT use all of these models because they are difficult to explain to unsophisticated individuals and also because they require many subjective inputs that could be cross-examined. In litigation, I try to keep things as simple and concise as I can to avoid these risks.