The valuation of privately held firms and litigation: a case study

Abstract

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -The purpose of this paper is to discuss the questions arising from the use of discounted cash flow (DCF) method in the context of the valuation of a Portuguese subsidiary of a German firm. The process ended up in courts. Expert valuation was called. Two points are of particular relevance. First, given the past performance of the company and the external environment it faced, what would be a reasonable growth rate for free cash flow in the residual value period. Second, what questions arise form the assumption of seeing the subsidiary as a going concern, given that the German parent company had been opening new factories in India, China, Romania and Slovakia, and its presence in Portugal was far from guaranteed. Design/methodology/approach -The paper is based on case study which rests on a real legal and financial business situation. The case is used to illustrate the conceptual questions related to the use of the DCF method in valuing closely held firms, particularly the very significant impact of terminal value in the process of equity valuation. Findings -It was found that very small variations in the growth rate assumed for the residual value period make a great difference in share valuation. Thus, the work of experts had to be very finely balanced, and the judge, when deciding on the fair value to be paid to the plaintiff based on expert opinion, should give careful consideration to scenarios. Practical implications -A relevant point of the paper is to highlight the effect on business valuation of potential growth rates forecasted for the perpetual growth phase. That rate is, in this case influenced by eventual location changes that can result from globalization of industrial activity. Portuguese shareholders in foreign controlled joint ventures, and all the other stakeholders are facing important challenges from a new world economic order, and this case clearly illustrates some characteristics of this trend. Originality/value -The paper is useful for managers that deal with business valuation cases that end in courts, by highlighting cash flow based methods and its central assumptions, and exploring critical areas that influence the final outcome of a lawsuit that...

Does the choice in valuation method matter in the judicial appraisal of private firms?

“…Herz et al., ). Its validity depends on two essential inputs: the expected economic income and the discount rate used (Dukes, Bowlin, & Ma, ) as even small variations in the inputs cause large fluctuations in the valuation estimate (Martins, ). However, both inputs incorporate a great deal of subjectivity (Chen et al., ).…”

Unsystematic Risk In South African Privately-Owned Company Valuations

“…The valuation of privately-owned companies is even more difficult and subjective with more variables and uncertainties that make it so much more complicated if compared to a public company valuation (Koeplin et al, 2000). As noted by Martins (2011), the practical application of performing privately-owned company valuations is fraught with difficulties. When privately-owned companies are valued, specific difficulties arise with the use of the three broad categories of valuations, namely the market approach, the asset-based approach and the income approach (Park & Lee, 2003;Helewitz, 2002).…”