Neil de Gray, a director in the Toronto office of Duff & Phelps, makes a strong argument for the use of business valuation professionals in any calculation of damages in his new guide The Financial Damages Model for Loss of Value, published late last month by Lexology. The lengthy summary offers ‘an overview of business valuation principles, concepts and methodologies, and … how they apply to the calculation of damages’ despite the lack of consistently applied valuation formulas.
Much of the background will be familiar to BVWire—UK readers, including his summaries of damages principles such as highest price available, willing buyer and willing seller, no compulsion to act, common knowledge of relevant facts, and an arm’s-length transaction in an unrestricted market. Still, de Gray’s summary of these factors, and the underlying business valuation principles, are clear, complete, and helpful to any expert involved in these contentious cases.
After reviewing asset-based and DCF methods, de Gray compares valuation benchmarks for the market-based valuation methodologies often used as secondary sources, and challenged by the courts in the UK (and elsewhere). His primary examples of valuation benchmarks include:
- Enterprise value-to-EBITDA multiple—calculated as enterprise value divided by EBITDA;
- Enterprise value-to-revenue multiple—calculated as enterprise value divided by revenue;
- Price-to-book-value ratio—calculated as the public-market capitalisation of the company divided by the reported net book value of the company; and
- Price-to-earnings ratio—calculated as the public-market share price divided by the earnings per share.
de Gray agrees that market approaches can introduce subjectivity into any business valuation and that ‘some ratios are more relevant to one industry than another,’ but, when used with sufficient professional judgement, they offer guidance to lost value calculations.