How to Spot a Biased Valuation Report
Bias in a valuation report rarely looks like bias. It looks like a series of reasonable choices that all lean the same direction. The way to find it is to look at where the expert had discretion and ask whether each choice was explained.
The insight: bias is a pattern, so one favorable choice proves nothing
A business valuation involves dozens of judgments. Any single one can be defended. What reveals an advocate is direction. If the normalization adjustments, the discount rate, the choice of comparable companies, and the weighting of methods all push the number the same way, the pattern is the evidence.
Six places to look
The assignment box. Who retained the expert, what standard of value applies, what date, and what premise (going concern or liquidation)? A report that does not state these clearly has left itself room to change them.
The benefit stream. Which earnings or cash flow was valued, and how was it adjusted? Look for symmetry. If personal expenses were added back, was the cost of a replacement manager deducted? If one-time gains were removed, were one-time losses?
The discount rate. Is it built up from stated components, each with a source? A rate that arrives without a build-up cannot be tested. Small changes in this one input move value substantially, so it deserves the most scrutiny.
The weighting rationale. If the report uses more than one method, how were they weighted, and why? Heavy weight on the method that produced the lowest or highest figure, with no explanation, is a flag.
The asset floor. Does the conclusion fall below what the company's assets, net of debt, could realize? If so, the report should explain why a going concern is valued below its own balance sheet.
The double-dip disclosure. Does the report state whether the earnings valued are also being treated as income for support? Silence on this question is not neutral.
Three red flags that matter
Conclusions that appear before the analysis. A report that opens with the number and then builds toward it may have been written backward.
Sources that cannot be checked. Comparable companies, industry data, and market multiples should be identifiable. "Industry experience" is not a source.
Changes of position. Compare the expert's prior reports, testimony, and publications on the same questions. A discount applied for one client and rejected for another is worth asking about.
A fair test before you rely on any report, including your own expert's
Ask what the number would be if the assumptions favoring your side were replaced with neutral ones. A credible expert can answer, and can tell you how much each key assumption moves the result. An expert who cannot has not tested the opinion.
Questions to ask your expert
If I replaced your three most important assumptions with neutral ones, what would the number be?
How was the discount rate built, and what is each component's source?
Why were the methods weighted this way?
Are the normalizing adjustments applied symmetrically?
Does the report address whether the same earnings are used for support?
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