Business Valuation Calculation Reports: Analyzing Assumptions in Cash Flow Forecast

During my over two decades of working in the valuation profession, I have valued several hundred entities and reviewed hundreds of valuation reports, including business valuation calculation reports, summary reports, and comprehensive valuation reports prepared by other experts.

While I have only infrequently seen valuation theory applied incorrectly, I routinely have seen business appraisers make assumptions in a valuation that could be considered illogical disconnects within the valuation at best—and outright errors at worst. 

Several of these assumptions may be found within the forecast of future cash flows used in the income approach.  Business appraisers must often deal with financial forecasts in their valuation of private companies.  In many cases, management of the company being valued will provide financial forecasts or projections to an appraiser to be used in a discounted or capitalized cash flow model. 

Appraisers preparing a calculation report, summary report, or comprehensive valuation report might:

  • accept these forecasts at face value because management prepared them
  • tweak the forecasts based on the appraiser’s judgement
  • come up with their own forecasts of the company’s cash flow

Regardless of which forecast an appraiser relies upon, there will be several assumptions within that forecast that must be adequately analyzed and supported, or the effect could be overvaluation or undervaluation of a company.  

While there are many assumptions used by an appraiser in a valuation, the assumptions I will focus on for this blog series are forecasts of:

  • capital expenditures, depreciation, and amortization
  • working capital to sales
  • short and long term growth rates
  • use of future debt

These ratios and assumptions are embedded in the forecasted cash flows an appraiser uses in capitalized cash flow or discounted cash flow model  A model of capitalized cash flow or discounted cash flow may be theoretically and mathematically correct, yet not provide a reasonable value due to unreasonable or unsustainable assumptions. 

This is the first in a series of blog posts on assumptions made in cash flow forecasts. In coming posts, I will point out several issues I have observed in my review of cash flow forecasts in business valuation calculation reports, summary reports, and comprehensive valuation reports and valuation models. 

In the meantime, if you are interested in learning more about how you can strengthen your case with a business valuation expert or want to learn more about our services and our team, please contact us.

How Attorneys Can Effectively Utilize a CPA in a Breach of Contract Claim

Selecting the right expert to calculate economic damages in a breach of contract claim can be critical in the success of an attorney’s case. The expert must be able to calculate damages resulting from a breach of contract and convey the story to a trier of fact in a manner that will make the attorney’s job easier. As CPAs, we can provide independent, objective expert opinions and consult on various issues in a case on an undisclosed basis.

What CPAs do in litigation

CPAs analyze financial information and other relevant data to help clients determine the existence and extent of damages associated with a particular set of facts and circumstances. These analyses are used to develop conclusions about the issues and form the basis of independently calculated economic damage opinions that are defensible in a court of law or another forum.

We are hired to assist in a variety of breach of contract claims:

  • Employment disputes / Covenants not to compete
  • Sales contracts
  • Insurance losses
  • Business interruption
  • Franchise agreements
  • Leases
  • Construction contracts
  • Distributor agreements
  • Lending agreements

We provide additional services beyond the financial analyses expected of CPAs to assist with the breach of contract claim:

  • Assistance with document requests
  • Development of deposition questions
  • Support with responses to interrogatories
  • Review correspondence/non-financial information

FSS assists attorneys in anticipated litigation

Forensic Strategic Solutions provides the analyses that attorneys can use to settle a breach of contract claim prior to filing a lawsuit. Bringing FSS in early to assist, we can assess the facts of the case from a financial perspective to improve the efficiency of the damages calculation.  We determine if quantifiable damages are available for recovery and provide preliminary estimates of a reasonable range.  We also identify critical information required to form a more focused damage calculation.  Setting expectations early can benefit a breach of contract claim by improving chances for a reasonable settlement or determining that trial is the likely remedy.

FSS serves attorneys in litigation

We can be retained as a consulting expert or a testifying expert. As consulting experts, our role is usually never disclosed, so our work is generally not discoverable.  Attorneys can view us as trusted advisors to provide strategic advantages throughout all phases of litigation.

As testifying experts, we will be put forth as your expert witness in the ongoing litigation, and all of our work is usually discoverable.  In this role, we will advocate for our independent opinion and not for the attorney’s client.  Litigation work can be complex, involving high stakes, and the FSS team understands what it takes to provide attorneys with the highest level of professional service in that environment.

Reasons to hire FSS

  • Economic damages analyses and forensic investigations involve complex financial issues. FSS has professionals with the skill to explain these subjects in a clear and concise manner so a trier of fact can understand clearly as we present our opinions.
  • FSS has credentialed professionals with the knowledge, experience, education, and training to provide credible opinions and defend them under intense scrutiny.
  • Our professionals use some of the most advanced technology to develop our work product. This not only enables us to be highly efficient, but we are then able to use that technology to aid in telling the story to the trier of fact.

When should an attorney hire FSS?

The earlier we are brought into a case, the greater the likelihood that we will be able to proceed with the highest level of efficiency.  While cost is usually a consideration, early involvement reduces wasted time and the pursuit of fruitless theories, and generally results in lower fees to the client.  We are able to assist managing the process from the outset, as opposed to dashing to the finish line with a reduced ability to leverage.

FSS manages fees for the client by:

  • Implementing budgets and workplans
  • Performing work in phases, allowing the client to control spending
  • Billing on a regular basis to avoid any surprises

Learn more about how FSS can add value to a breach of contract claim or other litigation involving economic damages here.