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For What It’s Worth: Precisely Wrong! – June 2015

I cringe when I see appraisals that state overly precise value conclusions; i.e. a per-share value of $1,400.17 or an enterprise value of $1,050,612.  I also cringe when intermediate results, such as the discount rate for cash flow, are overly precise, e.g. 20.42%.

The reason I cringe is that this apparent precision is misleading.  Every valuation assumption is subject to uncertainty, and the uncertainty associated with all of the assumptions is cumulative to the value conclusion.

Here is a simple example. When we “build up” a discount rate, we add up components such as the Treasury bond rate (which is accurate to several decimal points).  The last one is the “specific company equity risk premium,” an amount that reflects the risks unique to a particular company.  This is subjective.  The discount rate is rounded to a reasonable degree of significance.

Be very leery of an appraisal report that does not round off these items.  That could be a sign of omniscience for valuation precision, which is non-existent in high-quality appraisals.

Valuations play a part in all tax, transaction, and litigation matters. For additional information or advice on a current one, please do not hesitate to call.

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About Western Reserve Valuation Services LLC
Western Reserve Valuation Services LLC, based in Columbus, Ohio, is a leading provider of valuation services and financial opinions relating to corporate finance transactions, corporate tax planning and compliance, succession planning and wealth preservation, employee stock ownership plans (“ESOPs”), financial reporting and portfolio / fund valuations.  For more information, visit www.wesresvaluation.com or call (614) 448-3700.

Western Reserve Valuation Services is an affiliate of Western Reserve Partners LLC, a FINRA-member investment banking firm offering financial advisory services relating to mergers and acquisitions, capital raising and financial restructuring. For more information on Western Reserve Partners, please www.wesrespartners.com or call (216) 589-0900.

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