Bankruptcy Court Rejects Valuation For Lack of "Real World Information"
Another court has struck down a valuation that lacks “real world information”….otherwise known as market data. The U.S. Bankruptcy Court N.D. Illinois held little back in criticizing the use of the Discounted Cash Flow Method in the valuation of a small clothing business. The Discounted Cash Flow Method (a.k.a. DCF) is a valuation method generally classified under the Income Approach umbrella of valuation methods (as opposed to the Market Approach). Both valuation “experts” used the same cash flow forecasts, and the same Ibbotson data to derive discount rates in their analyses, and yet arrived at widely disparate final conclusions of value. The court concluded that, by using the DCF method, “a skilled practitioner can come up with just about any value he wants.”
And here lies the fundamental problem with DCF…it relies on numerous subjective assumptions, with layers upon layers of calculations that rest upon these assumptions. In the end, one ends up with a value that rest on a very weak foundation….like a home built on sand…it falls under its own weight.
Bankruptcy and other non-tax courts across the country are slowly coming around to the “value” of using market data in arriving at fair conclusions of value for privately-held businesses. Malt & Company has been, and will continue to be, a leader in business appraisals using market data.