Reading a Valuation Report Like an Attorney: Red Flags That Signal a Weak Opinion
Most attorneys read a valuation report from the first page to the conclusion. A better order starts with the pages that show what the expert took for granted.
The insight: the calculator test
A strong report lets a reader reproduce the conclusion. Every number in the conclusion traces to an exhibit, and every exhibit traces to a source. If you cannot follow a figure from the conclusion page back to a document, the opinion rests on something the report is not showing you.
A reading order
Assignment, standard, premise, and date. Does it match your case? A report built on the wrong valuation date or standard is the wrong report, however well it is done.
Assumptions, limiting conditions, and reliance. What did the expert accept from management without checking? Valuation experts generally do not audit, but the report should say what was verified and what was taken as given.
The conclusion and reconciliation page. Which methods were used, what value each produced, and how they were weighted.
The normalization schedule. The adjustments to earnings are usually where the largest swings sit. Each should have a stated reason and a source document.
The discount or capitalization rate build-up. Each component should be identified and sourced.
The market approach. How were comparable companies or transactions selected, and what was excluded?
Discounts and premiums. What was applied, why, and what supports the size?
The appendices. Documents relied on, the expert's qualifications, and prior testimony.
Signs of a weak opinion
Conclusory language. Statements such as "in my experience" or "it is reasonable to assume" with no support behind them.
Methods named but not performed. A report that says the asset approach was considered, with no calculation, has given you nothing to test.
Numbers without sources. Industry data, multiples, or risk premiums that cannot be identified.
No sensitivity analysis. A single point estimate with no range shows no testing of the key assumptions.
Arithmetic and consistency errors. Totals that do not add, dates that disagree between sections, or an earnings figure that differs between the narrative and the exhibit. Checking the math is inexpensive and effective.
Silence on contrary facts. An adverse document the expert had and did not address.
Unexplained change from a prior draft or prior report. If a method or an assumption changed, the reason should be stated.
A note on standards
Professional valuation standards govern how an analysis is developed, and they apply to litigation work. They allow some flexibility in how a litigation report is formatted. Flexible format does not mean flexible rigor, and a report that skips steps the standards require is worth noting.
Questions to ask your expert
Which assumptions, if changed, would move the conclusion most?
What did you verify, and what did you take from management?
Which documents did you request but not receive?
What range of values is reasonable, and why did you select the point you did?
Can I follow each number in the conclusion back to a source document?
Comments