This law firm is focused on Commercial litigation as well as Negotiation. While we pride ourselves on our ability to navigate the Courts using strategic intelligence, we also know that there are other factors that come in when negotiating during litigation and in the non-litigation context. Some of our clients seek our assistance in buying or selling or dividing an asset; obtaining financing; regulatory matters; and business strategy. So on top of legal intelligence, our team is able provide the financial knowledge and experience required to meet all of the needs of our clients.
There is an ever-evolving need for the valuation of assets in connection with legal services. As laws and regulations expand, the demand for the accurate and appropriate appraisal of assets is elevated. The reasoning for the valuations varies from regulatory requirements to disputes between different parties. Whatever the case, it is as important as ever to have an objective, accurate valuation of an asset in order to get any benefit from the litigation process.
Due to the nature of appraising an asset, the valuation or appraisal process can be a difficult undertaking. It is just as much art as it is science. The methodology utilized to determine an asset’s intrinsic value will depend on the type of asset as well as what is dictated by the type of legal proceeding.
In essence, an expert evaluates an asset, be it a piece of real estate, a business, a patent, or a website, and determines the future revenues and/or cash flow that the asset is likely to generate and determines a value based off of an intensive study of the asset and the market it operates within to generate those cash flows. Not all assets generate cash flows initially which can complicate the valuation process.
The major determining factors that drive the valuation process are as follows:
Before diving into the mechanics of an asset valuation, as it occurs in the legal process, it is more important to understand WHEN there is a need for a valuation. As stated before, there is a multitude of reasons for the need to establish the value of an asset before and during the litigation process. The following is not an exhaustive list, but will serve as a basic understanding of the more common reasons/causes for requiring a valuation:
As far as determining the valuation of an asset or private entity it can be a very complex process since there are usually areas of subjectivity that can be best quantified by a qualified expert. Additionally, there are different methodologies that can be undertaken to derive the valuation. In the simplest form, an analyst projects or forecasts the future cash flows, or earnings, that are likely to be generated from the asset and assigns the appropriate discount rate to derive the value of the asset.
The simplest case of this would be a classic perpetuity, or a constant, equal amount of cash flow/earnings generated by an asset that continues forever (an annuity). For example, if an asset creates earnings of $1 million per year and banks are paying an interest rate of 10% per year (assumed to not change) then that asset is worth $10 million. The reason being that no reasonable person should be willing to pay more than $10 million for this asset since one can get the exact same results ($1 million) by placing the $10 million in a bank account and earning the 10% interest.
In the real world, valuations are not this simple, however. There is no guarantee of precision in estimating the earnings generated from an asset as well as the obvious fact that interest rates, another primary driver of the valuation, change on nearly a continuous basis. Also, forecasting earnings can be a difficult undertaking as well. For example, one can look at Alex Rodriguez career baseball stats and tell you that he averages 31.6 home runs per season; however, if one were to forecast how many home runs Mr. Rodriguez will hit THIS year, that requires an in-depth look at the quality of pitching he is likely to face, his physical condition this season, how many games he is likely to play this season, and general trends in how well he is playing/hitting this year. Forecasting the future earnings of an asset is a somewhat similar endeavor that requires expertise and sound judgment of the asset and the markets in which it operates.
The end result is that the valuation process needs to take into account a variety of factors based on objective measures as well as projected, subjective items. It is also important that the individual performing a valuation is knowledgeable of the nuances in utilizing a financial model to determine the asset’s value. Some of the nuances and considerations in determining the value of an asset include:
Use of assumptions: growth rates, projecting cash flows based on historical analysis (see Alex Rodriguez HR example above), expectations of future interest rates, and expectations of overall macroeconomic (GDP) and microeconomic (Local market dynamics) performance.
Premiums and discounts: Also affecting the value of an asset are factors such as liquidity and control. If an asset cannot be easily bought or sold (that is sold/bought when needed within a reasonable time frame) since there is not a readily available market of buyers/sellers then this “illiquidity” makes the asset less attractive to a potential buyer/seller. The appraisal process will need to apply a discount to this asset in order to be properly valued. Additionally, there can be a premium or discount for an asset depending on the level of control over the asset that can be exercised. A buyer is not willing to pay as much for an asset that will make them a minor shareholder vs a majority shareholder. To be able to exercise control over an asset will command a premium, and thus a higher valuation. Conversely, the inability to exercise control over an asset will initiate the need for a discount, or lower valuation, in most cases.
The valuation process in connection with litigation does not need to be overly complicated, and there are a plethora of qualified professionals who can navigate through the complexities to advance the legal proceedings. It is important to find a qualified professional who understands the appropriate methodology to use, as well as all of the nuances of the inputs and assumptions that drive these different financial models. There are various credentials that signify expertise such as the Chartered Financial Analyst designation (CFA®), Certified Public Accountant (CPA), Certified Valuation Analyst (CVA), Certified Business Appraiser (CBA), and the Accredited Senior Appraiser (ASA). While it is subjective which certifications make a candidate more qualified, it is important that the professional performing the valuation has at least one qualifying credential to ensure an objective and accurate appraisal.
Serving the New York Supreme Courts in Manhattan, the Bronx, Brooklyn, Queens, Westchester, and Onondaga Counties, as well as the Appellate Division First, Second, Third, & Fourth Departments for Complex Litigation, Appeals, & Negotiation.
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