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Video Transcript

I am going to discuss valuation. As a forensic accountant we generally perform valuations for three main reasons:

• Shareholder Disputes
• Matrimonial
• For Estates

I regularly consult these three books for business valuations:

• Valuations, Measuring and Managing Value Of Companies, by McKinsey and Company
• Investment Valuation, Tools and Techniques for Determining the Value of Any Asset, by Aswath Damodaran
• Understanding Business Valuation. Practical Guide To Valuing Small To Medium-Size Businesses, by Gary R Trugman

As a forensic accountant, I always expect valuations to be reviewed and challenged. That’s why we prioritize mastering effective techniques and report writing to prevent potential issues.

My priority is facilitating settlement.

In this series, I’ll discuss each book in detail, but here’s a quick summary of what makes them useful and why we appreciate them.

I always recommend that each of these books be read multiple times so that you have a deep and thorough understanding of the concept.

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Valuations, Measuring and Managing Value Of Companies
by McKinsey and Company

Value Creation is Cash Flow-Based

• True value is created by generating sustainable free cash flow, not by accounting tricks or short-term earnings boosts.
• Growth only adds value if it delivers returns above the cost of capital.

Foundations of Valuation

• The most reliable method is Discounted Cash Flow (DCF), focusing on operating performance, growth, and risk.
• Multiples can be useful, but they must be anchored in underlying fundamentals.

Performance Drivers

• Value is driven by Return on Invested Capital (ROIC) versus the Weighted Average Cost of Capital (WACC).
• Companies that earn more than their cost of capital create value; those that earn less destroy value.

Managing for Value

• Managers should focus on long-term value drivers: growth, margins, capital efficiency.
• Avoid focusing only on quarterly earnings — they may mislead investors about true performance.

Special Situations

• Valuations for emerging markets, high-growth companies, cyclical industries, mergers & acquisitions, and IPOs.
• Accounting for intangibles, brand value, and restructuring scenarios.

Key Takeaways

• DCF remains the gold standard for valuation.
• Value is about cash flow, growth, and risk, not accounting numbers.
• The role of executives and investors is to measure, manage, and communicate value consistently.

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Investment Valuation, Tools and Techniques for Determining the Value of Any Asset
by Aswath Damodaran

Foundations of Valuation

• Every asset has a value, and that value is based on expected future cash flows, adjusted for risk.
• Price and value are not always the same — markets can misprice assets, creating opportunities.
• Valuation is not about precision, but about making the best possible estimate with available information.

Approaches to Valuation

• Discounted Cash Flow (DCF) Valuation: Estimate cash flows and discount them back using an appropriate discount rate.
• Relative Valuation: Compare an asset to similar assets (multiples like P/E, EV/EBITDA, Price-to-Book).
• Contingent Claim Valuation (Options): Useful when assets have flexibility or optionality, such as patents, undeveloped land, or start-ups.

Key Takeaways

• No single “right” valuation — it’s a range of values, not a point estimate.
• Best practice is to triangulate using multiple methods (DCF, multiples, real options).
• Valuation is more about disciplined thinking than predicting the future with certainty.

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Understanding Business Valuation. Practical Guide To Valuing Small To Medium-Size Businesses
by Gary R Trugman

Purpose of Valuation

• Valuations are needed for divorce, shareholder disputes, estate & gift taxes, sales/mergers, and financial reporting.
• Each purpose may require different standards of value (fair market value, investment value, intrinsic value).

Standards & Approaches

• Standards of value: fair market, fair value, investment, intrinsic.
• Three major approaches:
  • Income Approach – DCF or capitalization of earnings.
  • Market Approach – guideline public companies or transactions.
  • Asset Approach – net asset value, adjusted for fair market.

Income Approach in Practice

• Focus on cash flows, normalization of earnings, adjustments for owner’s compensation, and risk assessment.
• Selection of discount and capitalization rates is critical — build-up method and CAPM are explained.

Discounts & Premiums

• Control premiums, minority discounts, and lack of marketability discounts are major issues in closely held businesses.
• Application must align with the standard of value and case law.

Practical Challenges

• Private companies have limited data — reliance on professional judgment is critical.
• Adjustments are often needed for non-operating assets, excess compensation, and related-party transactions.

Litigation & Real-World Use

• Valuations are tested in court (Daubert challenges, cross-examination).
• Documentation, transparency, and defensibility of assumptions are essential.

Key Takeaways

• Valuation is both art and science — numbers matter, but so do judgment and context.
• Understanding the purpose, standard of value, and methodology is essential.
• Trugman provides a practical, CPA-focused guide blending theory with litigation and tax cases.