An attorney or CPA should carefully review a business valuation, as it plays a critical role in various legal matters, including mergers and acquisitions, divorce proceedings, shareholder disputes, estate planning, and tax reporting.
A thorough review ensures that the valuation methodology is appropriate, the financial data is accurate, and all assumptions are reasonable and defensible. Inaccurate or poorly supported valuations can lead to unfavorable settlements, regulatory scrutiny, or costly litigation.
By carefully examining the valuation, attorneys can identify weaknesses, uncover potential risks, and provide better guidance to their clients. This diligence helps protect client interests, strengthens negotiation positions, and ensures compliance with applicable laws and professional standards.
A strong valuation:
- Is written for the specific purpose using the correct Standard of Value
- Demonstrates independence and objectivity.
- Uses recognized methods and explains why others were not chosen.
- Documents assumptions with market evidence.
- Provides clear, reproducible analysis.
Red Flags to Watch For:
- Overly optimistic projections.
- Thin or missing documentation.
- Cherry-picked data.
- Discounts or premiums without explanation.
- Inconsistent use of methods.
- Lack of discussion of key risks.
A Cautionary Tale
An Attorney-CPA, serving as ESOP trustee, relied on a valuation from management’s accountant. The report showed a sharp increase in share value, which pleased all parties. But when company performance later fell and the Department of Labor reviewed the transaction, cracks appeared:
- Aggressive growth projections with no support.
- Cherry-picked comparables that inflated value.
- Unexplained discounts to align with expectations.
In court, the valuation fell apart. The judge found the trustee had breached its fiduciary duty, resulting in financial penalties and reputational damage.
Lesson: A valuation is not just a number—it’s a defensible story backed by evidence.
A Positive Example
In contrast, another trustee reviewing the sale of a family-owned manufacturer questioned a valuation that assumed high growth and an unusually low discount rate. Instead of accepting it, the trustee commissioned an independent valuation.
The second report tied projections to industry benchmarks, adjusted for customer risk, and clearly explained methodology. When regulators later reviewed the sale, the valuation held up and protected the trustee’s decision-making.
Lesson: Trustees don’t need to be valuation experts, but they do need to understand business valuation, ask thorough questions and demand clarity.
It’s easy to get caught up in a valuation that looks flawless on paper, until someone asks the simple, uncomfortable question—like the child in The Emperor’s New Clothes pointing out the obvious. I’ve seen meetings where everyone nodded along to impressive charts and growth projections, only for a single pointed question to reveal assumptions that didn’t hold water. That’s the power of scrutiny: it exposes what’s real, weeds out what’s wishful thinking, and ensures decisions are based on substance, not just style.