Difference in Expert Opinion on Valuation of a closely held firm

Valuation of Closely Held Firm:  Difference in Expert Opinion


http://www.nafe.net/JFE/j02_1_03.pdf

The paper reviews four basic approaches to the valuation of the equity of a closely-helf firm:  net asset value, discounted cash flow, earnings multiples, and captialized earnings.  Financial and narrative information on an anonymous closely-held firm were evaluated by 18 valutaion experts.

Findings:

1.  All respondents reported valuation methods; 15 recommended values ranging from $6.0 million to $17.5 million. 

2.  The dispersion of values was not consistent with our expectation of convergence of value estimates.

3.  The professional training and background of the experts proved significant in the valuation methodology and estimate.  The 8 experts who are investors fvoured, by 7 to 1, a non-DCF approach, such as an earnings multiple or capitalized earnings.  The 10 consultants/appraisers expressed a slight preference, 6 to 4, for the DCF approach.

4.  The greatest disparity between investor experts and consultants was in the recommended value of the firm.  The average value recommende by the consultants was $14.7 million, almost 50 percent higher than the investors' average estimate of $9.87 million.


Conclusions:

Three implications of the study.

1.  The substantial variation in valuation opinions suggests that courts cannot expect convergence of expert valuation of a firm even from a large number of experts.

2.  The variation in opinion may be related to the professional training and background of the experts.  Consultants, those who are not investors or risk bearers, offered significantly higher valutaion opinions than investor experts. 

3.  The valuation expert who are interested in economically sound valuation opinons would be well-advised to use more than one valuation approach, if circumstances permit, cross verify valuation estimates.  The dispersion of values provided by the sample of experts suggests that the expert who can demonstrate the soundness of an opinion by the independent application of two or more methods is likely to have more credibility.