This article is the second of a three-part series that provides practical guidance for understanding, measuring, and critiquing valuation issues that commonly occur in litigation. The first article, "Business Valuation 101 for Litigators," described the conceptual tenets of the valuation process and highlighted two concepts: (1) the market and income approaches both rely on some form of multiple when estimating the value of an operating business; and (2) the “right” multiple becomes evident only after the expert analyzes those items that have the greatest impact on a company’s ability to generate earnings (or cash flow) in the future, as well as the degree of risk in achieving those future amounts.
This article undertakes a deeper examination into the analysis required to support critical valuation assumptions. We will consider an expert’s analysis of these factors in the hypothetical valuation of Shoe Company (Shoe Co. or the Company), a designer, marketer, and distributor of branded shoes for men, women, and children. The Company employs an “asset-lite” business model by relying on third parties to manufacture and distribute its products.