Expert Witness Journal Issue 63 October 2025 - Flipbook - Page 61
Hypothetical Valuations, Real
Insights: A Forensic Approach To
Business Worth
by Neil Rudd: Associate Director in the Forensic Services Team at Crowe U.K. LLP
The estimated maintainable earnings are then
multiplied by a factor, referred to as ‘the multiple’
representing the number of future years’ earnings for
which a purchaser might be prepared to pay to give an
enterprise value for a business. Comparable real-world
transactions,
listed
or real-world
published
enterprise value
for acompany
business.multiples
Comparable
valuation indices are some of the common resources
used in deciding what is an appropriate multiple.
Introduction
Haven’t you ever wanted to play a game of matching
hypothetical businesses to the most appropriate
valuation methods? No, me neither, but who knows, it
might catch on.
Forensic accountants are regularly instructed to opine
on the hypothetical market value of a business, when an
actual sale of the business may not be practical or needed.
This can occur both in a contentious legal setting,
for example, in divorce proceedings, shareholder /
partnership disputes or unfair prejudice matters, or in a
non-contentious setting, say, when a valuation is needed
at a particular point in time for tax purposes.
This enterprise value is the value of a business’
underlying trading operations, which must then be
adjusted to re昀氀ect its working capital and debt structure,
to
arrive to
at re昀氀ect
the market
value of
the business.
adjusted
its working
capital
and debt structure,
With the pro昀椀tability of the business being fundamental
to
this
approach,
it lends
to being
to value
With
the
pro昀椀tability
of theitself
business
beingused
fundamental
pro昀椀table trading (rather than investment) businesses,
that
havetrading
reasonably
futurebusinesses,
昀椀nancial
pro昀椀table
(ratherpredictable
than investment)
performance.
that have reasonably predictable future 昀椀nancial
A common question that arises in these situations
is, “Which valuation method is the most accurate?”
Unfortunately, the answer is often “it depends.”
Thankfully, forensic accountants have a variety of tools
at their disposal to address di昀昀erent scenarios.
at their disposal to address di昀昀erent scenarios.
Below I explore various scenarios, all framed in the
hypothetical shareholder dispute between hypothetical
business partners, Ellen, Esme and Deanna and their
hypothetical pharmaceutical conglomerate, Ell Ess Dee
Limited.
Ell Ess Deelivery Limited, the pharmaceutical wholesale
arm, could potentially be valued using an earnings
based approach, given it is a well-established pro昀椀table
business
that has given
tradeditconsistently
for manypro昀椀table
years.
based approach,
is a well-established
Turnover multiple approach
A turnover multiple approach is a speci昀椀c type of
earnings-based
approach,
but asis the
name suggests,
A
turnover multiple
approach
a speci昀椀c
type of
it uses turnover rather than pro昀椀t as the measure of
earnings.
it uses turnover rather than pro昀椀t as the measure of
See if you can work out which subsidiary might lend itself
to each valuation approach, before the likely candidate
is revealed at the end of each section, with your options
being.
Again, this applies to trading businesses and can
be appropriate in situations where stable recurring
turnover is a key metric of the success of a business.
Examples where this might be appropriate are.
(a) Ell Ess Deesign Limited, the R&D division, responsible
for deigning new drugs.
(b) Ell Ess Deelivey Limited, its wholesale arm,
manufacturing and supplying drugs to pharmacies.
(c) Ell Ess DeeLandLord Limited, a remnant from when
they used to operate a chain of pharmacies, but now just
hold the premises as investment properties to rent out.
(d) Ell Ess Deeveloper Limited, a recently acquired
mobile phone app developer, known for its addictive
pharmaceutical sim game, Side E昀昀ect City.
pharmaceutical sim game, Side E昀昀ect City.
•
•
An independent 昀椀nancial advisory business, whose
turnover
is derived
from aadvisory
percentage
of the whose
assets
An
independent
昀椀nancial
business,
it manages on behalf of its clients.
A mobile phone game developer, whose turnover
is reliant on advertising revenues earned through
users playing the game, rather than the initial
purchase of the game.
Earnings based approach
This method 昀椀rst seeks to establish the level of
maintainable
that to
a business
This method earnings
昀椀rst seeks
establishcan
thesustain
level for
of
the foreseeable future. Often the measure of earnings
used is EBITDA pro昀椀t, being earnings before interest,
taxation,
depreciation
as this
can
used is EBITDA
pro昀椀t, and
beingamortisation,
earnings before
interest,
be a fairly comparable pro昀椀t measure when evaluating
di昀昀erent
businesses.
A combination
of historical,
current
be a fairly
comparable
pro昀椀t measure
when evaluating
and
forecasted
昀椀nancial
performance
may be used
in
di昀昀erent
businesses.
A combination
of historical,
current
arriving
at this estimate
maintainablemay
earnings.
and forecasted
昀椀nancialofperformance
be used in
EXPERT WITNESS JOURNAL
Probably slightly too well signposted, Ell Ess Deeveloper
Limited, the mobile phone app company, is a potential
candidate for this valuation method, particularly given
the amount of recurring advertising revenue Side E昀昀ect
City
generates.
the amount
of recurring advertising revenue Side E昀昀ect
City generates.
Asset based approach
An approach that does exactly what is says on the tin,
in that it values a business based upon the market value
of its assets (and liabilities). This is usually achieved by
of its assets (and liabilities). This is usually achieved by
59
OCTOBER/NOVEMBER 2025
