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The Importance of Considering the Potential Future of a Business in Business Valuations for Litigation

Written by Joshua Chan | Apr 17, 2023 1:54:50 AM

In litigation, business valuations can play a critical role in determining the financial damages or compensation that may be awarded to a plaintiff. However, it is important to note that not all business valuations are created equal. In this article, we will discuss the importance of considering the potential future of a business when conducting a business valuation for litigation.

Why the Future can Matter

In litigation, the future potential of a business can be just as important as its past performance, as, past performance of a business is not always indicative of its future performance. Litigation scenarios such as shareholder disputes, breach of contract, or intellectual property disputes often involve claims for future lost profits or damages. In such cases, a business valuation that solely relies on historical financial data may not accurately reflect the potential future and therefore value of the business.

For example, suppose a business has experienced a decline in revenue due to adverse external factors such as an economic downturn or one-off, abnormal circumstances such as the COVID-19 pandemic. In such a scenario, a business valuation that only considers past financial data may undervalue or overvalue the business. However, a thorough analysis of the potential future of the business may reveal that it is positioned differently in the coming years.

Moreover, future potential can also impact the value of intangible assets, such as patents, trademarks, or customer relationships. In some cases, the value of these assets may be heavily dependent on the potential for future revenue growth or market demand. A business valuation that takes into account the potential future of the business can provide a more accurate assessment of the value of such intangible assets.

Considering the potential future of a business involves analysing various factors such as industry trends, market demand, competition, and the overall economic outlook. A thorough analysis of these factors can help determine the potential for future growth and success, which in turn can impact the value of the business.

Understanding and Assessing the Future

Valuing the potential future of a business requires a combination of financial analysis and industry knowledge. Financial analysis involves projecting future cash flows based on historical data and market trends. Industry knowledge involves understanding the competitive landscape, market demand, and other factors that can impact the future performance of the business.

Find Out More

At Groves & Partners, our team of professionals has extensive experience in business valuations for litigation. We have worked with clients in a variety of industries and can provide a comprehensive analysis that takes into account the potential future of a business. Our team includes experts in financial analysis and litigation support. We can provide a professional and unbiased opinion that is backed by years of experience. 

To find out more contact us on 1300 892 717 (+61 2 7208 7970) or email info@groves.com.au.