In litigation, accountants and valuation experts often use business-valuation principles to quantify potential damages. Attorneys are required to evaluate the reasonableness of damage claims prepared by their expert or find deficiencies in those presented by an opposing party. A firm understanding of the key assumptions in business valuation will allow for a better assessment of the strengths and weaknesses of the damages testimony and any potential vulnerabilities to a Daubert challenge under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).
Legal claims that may rely on business valuation to quantify economic damages include breaches of contract, business ownership disputes, intellectual property, and post-acquisition disputes. In ownership disputes, the value of the business determines the potential damages. When a business is harmed by an alleged wrongful act, a comparison of the business valuation as a result of alleged wrongful action with a hypothetical valuation assuming that the wrong did not occur is generally required. The difference in values is the damage related to the alleged action.
When valuing a business in the context of damages, certain general considerations need to be addressed. A damages expert must demonstrate that the change in the value of the business was directly attributable to the alleged action of the opposing party. The damage claim must control for other macro- and microeconomic factors that may have influenced the value of the business that are not related to the alleged action.