Delaware Appraisal Rulings Spotlight Growth Assumptions in Expert Valuation Models
Business Law Today, April 2024
An essential component of discounted cash flow models used for company valuations is the terminal value – the lump-sum discounted value of all cash flows expected to occur after the explicit forecast period. However, valuation experts’ assumptions about the linkage between growth, investment, and return on investment in calculating the terminal value are often not made explicit. Recent appraisal actions in the Delaware Court of Chancery have highlighted the need for clarity about these linkages.
Analysis Group Managing Principal Michael Cliff and Vice President Joseph Maloney explore these linkages in an article on two commonly used methods to calculate terminal value – the extrapolation approach and the convergence approach. The authors describe the assumptions underlying each method, explain the importance of maintaining internal consistency regarding those assumptions, and illustrate the differences between the methods in the context of recent Chancery Court appraisal actions. They conclude by cautioning that experts may face heightened scrutiny about their assumptions, even when they are implicit.
The article, “Delaware Appraisal Rulings Spotlight Growth Assumptions in Expert Valuation Models,” was published in the American Bar Association’s (ABA’s) Business Law Today.