When a business’s value is in dispute, owners often turn to experts to present an opinion of value. While these experts are typically applying the same valuation approaches (and often citing many of the same studies), it’s not unusual for them to arrive at materially different conclusions. How does that happen? In short: assumptions matter—a lot.
Below are some of the most common areas where reasonable professionals can disagree, sometimes by more than clients expect.
Adjustments to earnings.
Certain historical income or expense items may be non‑recurring, discretionary, or simply not at market levels (think owner salaries, related‑party rent, or one‑time legal fees). Depending on the level of value being determined, adjustments may be appropriate. Deciding which adjustments are justified—and which ones cross the line from normalization into optimism—is often where the first real debate begins.
Application of discounts for lack of control and marketability.
Buy‑sell agreements that do not specifically address discounts tend to leave plenty of room for disagreement—usually at exactly the wrong time. A minority interest may suffer from impairments due to a lack of control and/or marketability, but absent clear guidance, the party having their interest redeemed often views discounts very differently than the party writing the check. Unsurprisingly, both sides are convinced their position is the “reasonable” one.
Capital structure assumptions.
Many privately held companies operate with little or no debt. However, when determining a control value, the analysis often assumes an optimal capital structure that includes some level of leverage. Failing to account for a change in capital structure can materially undervalue the company. This is one of those adjustments that rarely feels intuitive—but can have a meaningful impact on value.
Expected long‑term growth.
This assumption sometimes feels like an afterthought, but it can quietly do a lot of heavy lifting. A seemingly modest difference in expected long‑term growth—say 2% versus 3%—can easily translate into a 10% swing in concluded value. Small inputs, big consequences.
In valuation disputes, the disagreement is rarely about the math. More often, it’s about judgment calls embedded in the assumptions—and understanding those differences is usually the key to narrowing the gap.
Have questions about how valuation assumptions may affect your company’s value? Drop me a line and let me know. Write me at lbell@meadenmoore.com or try the old fashioned way by calling 216-928-5360.