Business valuation experts often rely on prospective financial statements when applying the discounted cash flow (DCF) method to value a private business interest. However, when management prepares financial projections for another purpose — such as a loan application — repurposing them to estimate fair market value for litigation purposes may raise a red flag. A recent New York statutory appraisal case provides a cautionary tale worth considering. Unrealistic projections sink expert’s analysis In Magarik v. Kraus USA, Inc., both parties in a buyout dispute hired business valuation professionals to estimate the fair value of the petitioning shareholder’s 24% interest in an S corporation that sold upscale plumbing fixtures. Although both experts applied the income and market approaches, their value conclusions were widely disparate. The shareholder’s expert estimated the value...
