Last week’s BVWire covered a recent blog post by Professor Aswath Damodaran (New York University Stern School of Business) in which he questions the size premium. One point he makes is that some analysts add a size premium by rote because the legal system looks to precedence as opposed to what may be a better practice.
What to do: One reader makes this suggestion: “When any ‘rote’ methodology, not just the small cap premium, is not the way to produce credible results, provide both the rote answer and the credible, out-of-the-legal-precedent-box answer,” advises Paul French, director of litigation and valuation services at Lain Faulkner & Co. PC. (Dallas). “Include well supported bases including empirical support--rather than simply intuition--supporting why the out-of-the-box answer is more correct than the rote answer. Then offer the judge both alternatives to select from based upon the entirety of the evidence during the trial.”
He continues: “This approached has worked well with numerous judges including a nationally recognized federal judge who is extremely knowledgeable in business valuation. He responded that it was nice to hear from an expert who actually thought that the court did have a brain. Do a thorough job, obtain and quote/reference as much peer reviewed literature concerning the out-of-the-box approach as you can and prepare for the likely Daubert battle.”
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