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Dangers of Relying on a Single-Period Capitalization Mode
Frequently, matrimonial attorneys are presented with an “opinion” of marital asset value of a business equity from a CPA, appraiser or other financial professional, that seems rather basic. Following depositions, arguments often ensue as to the “reliability” of the value, how much effort was expended in the analysis, and whether the “conclusion of value” meets appropriate professional standards. The easiest model in valuation is a single-period capitalization methodology because there are few moving parts. In reality, however, the single period model encapsulates a whole variety of assumptions and estimates that are easy to manipulate but difficult to sustain. The biggest danger to matrimonial attorneys is that the valuation professional will only give this single-period model as the sole support for the opinion, seemingly ignoring other market evidence and asset/liability components. If this is the situation, the matrimonial attorney should understand how to attack the opposing expert, or seek support of his/her expert in a hearing to rehabilitate the expert following a cross-examination scrutiny.
Background
There are three approaches to valuing businesses: the income approach, market approach and asset approach. There are various methods within each of the approaches that the business appraiser can consider in performing a valuation. With perfect information, all methods will yield the “correct” value. Unfortunately, the expert's opinion of business value is necessary because of imperfect information.
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