Valuation lessons from the High Court
Working capital management - can you ever have too much cash?


Two experts can arrive at valuations of a business.  Experts aren’t in the business of advocacy, and shouldn’t two trained and experienced professionals come up with the same answer?  Here’s some good reasons they might differ.



Legal guidance                                     

Experts can be reacting to different legal guidance.

Differences in availability of information

Access to data may be unequal.  Valuers can only conclude based on the available evidence.

Access to Management

Sometimes the valuer for one “side” in the case is denied the level of access to management granted to the other expert. 

Using different valuation methods

Valuers make judgements as to which of the three main valuation methods to use.  The asset approach focuses on assets values, the income approach deals with income capitalisation or discounted cash flow and the market approach uses comparisons with public companies and with analogue transactions.   Valuers need to be aware of their merits and disadvantages. 

The asset approach is usually of limited use for profitable operating companies. 

The market approach is powerful but comparable companies and transaction need to be selected carefully, and for some businesses it can be difficult to find suitably close comparators.

In the income approach there is much subjectivity around future cash flows (especially the terminal value) and appropriate levels of discount.   

Judgements around these choices hugely influence the valuation opinion.

Different judgements, different assumptions

Experts providing business valuations must make assumptions and judgements on a wide range of issues:-

  • Asset methods – what basis to value the assets
  • Earnings methods – how to adjust and analyse the cash flows. Some element of judging the future from the past is required.  Adjustments need to be made to normalise profits and to reflect working capital changes.
  • Forecast assumptions for DCF – each difference of judgement shifts result. The terminal value in a DCF calculation can account for more than 50% of the value – so is it reasonably arrived at, what multiple is used?  What sensitivity analysis has been applied?
  • Public company comparables – is this method appropriate? Are the selected companies sufficiently comparable to reach a meaningful conclusion? Have differing growth rates and risk between the comparable companies and the company being valued been accounted for?
  • Analogue transactions –are the selected comparable transactions actually comparable to the subject company.
  • Premia and discounts – for example for control - or minority holdings - are they defensible?
  • Weightings assigned to the different methods – are they reasonable?


One would hope they’ll be discovered and corrected before anyone ends up before a Judge.


The court may also be swayed by the relative credibility of the reports and the testimonies of the experts.   Also, how compelling the conclusion is in comparison with other evidence?  Does it make sense?  

PEM Valuations also providing M&A advice to business owners, so we have the advantage of being able to apply the “gut test” to any valuation opinion.  In short do we believe that someone would pay that amount for the business being valued?


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