When asked to deal with numbers and valuations, most lawyers will say they went to law school for a reason—to avoid math at work. Nevertheless, valuations are an important part of any attorney’s practice. Whether arguing the value of a company’s common stock in a shareholder dispute, evaluating a potential acquisition target for a client, assigning value to assets held in trust, or attempting to determine the ability of a business to reorganize under the Bankruptcy Code, so many different variables must be reviewed and determined, and an attorney may quickly find themselves underwater. For instance, at what point in time should an asset be valued? What valuation methodology should be used? What weight should recent financial data be given compared to projections going forward? These and many other factors must be decided before any reputable valuation can be made, all while running complex calculations that attorneys typically hope to avoid.
With the rise and continued encumbrance of the COVID-19 pandemic, the questions facing those attempting to prove or argue a valuation have become even harder to resolve. For existing, pre-2020 valuations, practitioners must consider the new reality of the pandemic in assessing or disputing now-unrealistic valuations. For valuations completed during the pandemic, questions arise about whether a valuation can project a value of an asset that assumes a general emergence from pandemic depression or whether it instead should give greater weight to recent, concrete financial data (based on the idea that current economic trends are slowly becoming the new “normal” for the economy and markets).
These compounding questions, whether they arise in the middle of an acquisition, in preparation for trial, or in a bankruptcy case, can prove daunting. When faced today with a difficult valuation, there are a few key resources and considerations that attorneys can use to help them wrap their heads around the valuation questions they face. By keeping these resources and considerations in mind, attorneys can go forward more confident in their development or rebuttal of a valuation even in the heart of this seemingly endless pandemic.
If Possible, Hire a Financial Advisor or Valuation Expert
Valuations, particularly of complex assets in high-stakes litigation or acquisitions, are difficult, likely requiring the creation of discount rates, the identification of countless inputs, and in-depth knowledge of relevant industries. Such valuations can therefore quickly outstrip the training or expertise of most attorneys. Additionally, if involved in a valuation dispute preparing for summary judgment or trial, a definitive report, testimony, or additional evidence will likely be needed to prove the party’s proposed value of the asset or claim at issue. Therefore, to the extent possible, a party in need of a valuation (or a party preparing a rebutting valuation) should consider hiring an expert depending on the type of valuation needed—for instance, hiring a financial advisor to prepare projections and a business valuation, or hiring an appraiser for a real estate transaction.
Initially, this expert can lead the valuation process on behalf of the client to ensure the valuation’s efficacy and accuracy. Later, this individual can serve as a party’s expert witness if needed, providing expert testimony and creating a valuation report to submit to the factfinder to support the client’s valuation or refute an opposing party’s valuation.
Without expert assistance, an attorney runs the risk of relying on a questionable or inadequate valuation, lacking sufficient persuasive evidence, or, if the attorney prepares the valuation, being placed in the untenable situation of becoming a fact witness. While valuation experts certainly will cost clients additional funds, the benefit provided will normally outweigh such cost significantly.