The importance of proper valuation methods and theory is critical for litigation purposes. In addition, being able to communicate your findings to a jury or trier of fact.
Two brothers owned a small successful construction company. One brother supervised and was hands on in most of the work, while the other brother ran the office and generated most of the sales. The “office brother” began to get involved in other interests and slowly began to be less involved in the business, which caused sales and profit to decline. The brother who remained in the business got jobs by word of mouth and slowly began to downsize the business and continued to do most of the work by himself.
The brother who left the business was then going through a divorce. David Consigli, partner at FAZ CPAs, was hired to value the business. An opposing expert was also hired. The two valuations were far enough apart in dollar amount that the case went to trial. David used a weighted average of cash flow for a five year period, to forecast future cash flow. This took into account a complete business cycle and the latest down trend in sales and profits due to the change in the make-up of the Company. The opposing expert used a twelve year historical period to forecast cash flow.
Even though the final valuation conclusion was much less than in the past, David was able to testify to the judge on why future cash flow forecasting is critical to determining the current value of a business and how the past performance is not always the best indication of future.