Bankruptcy decision rejects standard three-year income projections

Have you ever used a business’s three-year historical annual average to project sales and revenue growth, EBITDA or capital expenditures? Have you ever used the term “zone of insolvency” to describe a business on the brink of bankruptcy? Does your valuation report sometimes omit the precise formula used in your DCF?

If you answered “yes” to any of these questions, then the Onex bankruptcy opinions—a duo focused on a Daubert challenge to the BV expert—are a must-read. In the first phase, the federal district court considered the trustee’s claims that three LBOs were fraudulent conveyances. The trustee’s expert rejected management projections in favor of using industry data and flat, three-year historical averages in his DCF. However, the expert provided no “reasoned explanation” or reliable authority in support, the court found. “Rather, [the expert] appears to have selected the three-year rate because it produced a revenue growth outcome closest to the…industry numbers.”  Similarly, the expert used “zone of insolvency” without citation to any authority, legal or financial, and the court dismissed his entire opinion under Daubert.

The trustee moved for a reconsideration—attaching a “supplemental” expert report that cited four treatises supporting the use of three-year historical averages, but the court rejected the effort as barred by discovery rules and Daubert. Read the complete digest of Kipperman v. Onex Corp., 411 B.R. 805 (Aug. 2009) and Kipperman v. Onex Corp., 2010 WL 761227 (N.D. Ga.)(March 2010) in the June Business Valuation Update™; the full-text of the court’s opinions will also be available at BVLaw™.