December 07 , 2016

Detecting Bias in a Business Valuation Report

Opposing experts are sometimes hired to value an asset/business in a legal proceeding to facilitate mediation and/or litigation efforts. These business valuation experts can all too often offer differing opinions as to the value of the subject company.

This can be the result of legitimate differences in the analysis. For example, expectations of future revenues, profits, capital expenditures, or other financial statement items can sometimes be easily identified and understood and reconciled. Different gross profit margins, for example, and their impact on value are usually easy to quantify, compare to historical results, and discuss. The underlying cause may be an honest difference in interpreting the company's prospects, or it may be due to an attempt by one of the business valuation experts to “engineer” or bias the result.


A biased analysis can also be difficult to spot. Here is an example:

  • Development of the discount rate in the (Income Approach) or the comparable transactions selected (Market Approach) are two areas where bias can be more elusive to the user of the report. In addition, the choice of "normalizing adjustments" for excess salaries, self-dealing transactions, owners' perks paid by the business, etc., and the magnitude of these adjustments also impact value. Manipulations in these areas could have a significant impact on value individually.  Small manipulations can cumulatively result in a large change in value and are harder to discover.


A clear and concise business valuation report should include detail explanations all such adjustments describing why the adjustment is necessary, as well as the amount of the adjustment.  The goal of the report is to be forthcoming with all assumptions and the explanation for each major driver of value. A propensity to engineer an outcome is a somewhat common problem in financial modeling in general and I have found it throughout my corporate and consulting career. However, it is the report writer’s job to illustrate reasonable choices made in the analysis and try to eliminate as many upfront questions as possible. Give Brad a call direct at 770-380-2406 to discuss your situation further and how we eliminate issues with our business valuation reports. Please see more on how to critique a valuation report as well.