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Contents
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Valuation in the Current Environment The current economic environment has challenged the valuation community in determining the value of most businesses. Valuators not only have to deal with the subjectivity of valuation overall, but are now struggling to support some of the most basic valuation issues such as cost of capital and marketability discounts in quickly changing economic times. The need for increased self-review, research and support for valuation methods utilized has never been greater. Methods to develop the costs of capital and marketability discounts should look familiar but also include an element to account for the current economic environment. Additional thought and support should be given to the following areas:
These are just some of the factors that should be noted when reviewing valuations in the later part of 2008 and early 2009. Our valuation experts are available to discuss these issues with you and are capable to address the current economic conditions in a supportable manner. For more information about our Business Valuation practice, email BVLS@SCandH.com or call (410) 403-1500 | (800) 832-3008.
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Valuations Insights, Second Quarter, 2009 Case Shows the Importance of Distinguishing Lost Profits Versus Lost Business Claims JRG, Inc. v. Thomasville Furniture Industries, 2008 WL 5170541 (C.A. 6 Ohio) December 11, 2008 In 2002, a jury awarded plaintiff (JRG, Inc.) zero lost profits—but gave it $1.5 million in lost business value damages against the defendant (Thomasville Furniture) for breach of contract. The defendant appealed the decision on liability and damages.The plaintiff cross-appealed, requesting pre-judgment interest, but neither party designated the zero lost profits award for review. The Sixth Circuit Court of Appeals affirmed the judgment as to liability, but vacated the lost business value award and remanded the case for redetermination of damages, due primarily to the impermissible admission of lay opinion testimony. Expert testimony leads to a much larger award. Before the 2006 retrial on damages, the federal court of appeals (6th Circuit) denied the defendant's motion to preclude the plaintiff from recovering lost profits based on its failure to appeal the jury's 2002 award of zero lost profits damages. At the retrial, plaintiff presented expert testimony on damages—specifically lost profits, and the jury received instructions related to lost profits damages but none related to lost business value. This time the jury awarded the plaintiff $3.3 million in lost profits and $3.53 million in lost opportunity costs, or more than four and half times the 2002 award for lost business value. The defendant appealed once again, arguing that the plaintiff was barred from seeking lost profits at the second trial because it failed to appeal the jury’s prior verdict of zero lost profits damages. Valuing settled versus unsettled cases. At trial, the husband again argued that the partnership agreement should control the valuation of his interest in the law firm. He had no immediate plans to leave the firm, however. And since none of the other triggering events had occurred, the trial court found that the valuation could include methods beyond simple withdrawal and reimbursement of partnership accounts. In his application of the income approach, the wife’s expert specifically included the firm’s commercial goodwill but none of the husband’s personal goodwill. He also considered the firm’s historical operations and, per the court’s instructions, two years of projected earnings, adjusted for nonrecurring events, including the settlement of a large patent infringement case. He valued the husband’s interest in the general law practice at $1.5 million. His interest in the settled cases was worth an additional $400,000, based on the payment history of the opposing parties and projected payments over the next two years, bringing his total interest to $1.9 million. The expert also valued pending but unsettled cases, using a royalty rate calculation. If the four largest clients settled in the next two years, the husband’s interest would be worth $4.1 million, he said. If all defendants settled within this period, the husband’s interest would increase by another $2.2 million. The Sixth Circuit agreed. "When we vacated the award for loss of business value, we lacked jurisdiction to vacate the lost profits award of zero because neither party designated it in their notice of appeal or even briefed the issue." The plaintiff’s failure to appeal the lost profits award from the first trial barred it from arguing for lost profits damages at the second trial, and the court vacated the entire 2006 award of $6.83 million. Not all was lost: "Because of the confusion stemming from our last remand," the court said, "the 2006 jury was not charged regarding damages for loss of business value, and the verdict form for damages did not include loss of business value as an option for the jury to consider." Thus, the court specifically remanded the case for a new trial on damages for loss of business value, only.
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