Valuation Opinions and Their Assumptions
A valuation looks like a measurement and is a judgment expressed as a number. Change the date, the purpose or the assumed buyer, and the same asset produces a materially different figure without anybody having made a mistake.
The rule in short
Valuation opinions depend on a defined basis, a defined date and a set of assumptions, and each of those choices moves the number. Two valuations of the same asset that differ substantially are usually both defensible, because they answered slightly different questions. Comparing the assumptions is more productive than comparing the results.
Parties treat a valuation figure as a fact to be established and then discover that both sides have produced one, from qualified people, several hundred thousand apart. Neither is wrong. They answered questions that were not quite the same.
The basis of value
Market value assumes a willing buyer and seller. Both properly informed, neither under compulsion, and with a reasonable period of exposure to the market, which is a specific and generous set of conditions.
Forced sale value assumes the opposite. A compressed timescale and a seller who must transact, which produces a materially lower figure for the identical asset.
Replacement or reinstatement cost. What it would cost to obtain an equivalent, which is a different question again and frequently produces the highest of the available figures.
Book value is an accounting figure. It records historical cost adjusted by a depreciation convention and has no necessary relationship to what anything is worth today.
Value to a particular buyer. Some assets are worth more to one purchaser than to the market generally, and whether that is the relevant figure depends on the question being asked.
The basis must be stated. A valuation that does not say which basis it used is not usable, because the reader cannot tell what question the number answers.
Date and purpose
Value is a snapshot. Assets move, markets move, and a figure is meaningful only in relation to a specified date, which the proceeding usually fixes.
The date is frequently contested. Where parties want different dates, the argument about which one applies matters more than any argument about the valuation itself.
Hindsight is not permitted. A valuation at a past date should use what was knowable then, and information that emerged later is excluded however relevant it now appears.
Purpose shapes basis. A valuation for a division of assets, for a loan, for insurance or for tax may properly use different bases and produce different figures.
A valuation for one purpose is not portable. Reusing a figure produced for a different purpose is the commonest source of an indefensible number in a proceeding, and the report usually says on its face that it was not prepared for this one.
Instructions fix the date and the basis. Both choices are made by the party commissioning the work rather than by the valuer, which is why the letter of instruction is worth reading before the valuation is.
| Basis | Assumes | Relative figure |
|---|---|---|
| Market value | Willing parties, reasonable exposure | Baseline |
| Forced sale | Compressed timescale | Lower |
| Replacement cost | Obtaining an equivalent | Often higher |
| Book value | Historical cost less depreciation | Unrelated to worth |
| Value to one buyer | A specific purchaser's position | Variable |
Method and comparables
Comparison to similar transactions. The most common approach for property, and it depends entirely on which transactions the valuer selected as comparable.
Adjustments are judgment. No two assets are identical, so comparables are adjusted for differences, and the adjustments are where the argument lives.
Income approaches for producing assets. Capitalizing an income stream, which imports assumptions about the durability of that income and the rate applied to it.
Cost approaches. What it would cost to reproduce the asset less depreciation, which is used where comparables are absent and depends on the depreciation assumption.
Selection of comparables is arguable. Which transactions were chosen, which were excluded and why is the first question to any valuation resting on comparison.
More than one method is stronger. A figure supported by two approaches that broadly agree is far more robust than one supported by a single route.
Asking each valuer to re-run their analysis on the other's assumptions is the fastest way to find out what the dispute is actually about. If the figures move close together, nobody is disagreeing about valuation at all, and the decision-maker is being asked to choose between assumptions.
Access and information
An inspection changes what can be claimed. A valuer who has seen the asset can address condition; one working from documents is making an assumption about it.
Desktop valuations should say so. Their limits are real and stating them protects the valuation, while omitting them invites the discovery under examination.
Information supplied by a party. Figures about income, condition or occupancy that came from an interested party are assumptions, and the point is general to the basis of an opinion.
Undisclosed encumbrances. Charges, disputes and restrictions materially affect value and are frequently not visible to a valuer who was not told about them.
Documents behind the figures. A valuation resting on financial records is only as good as those records, which is dealt with in business income and its records.
What the valuer was not shown. The list of documents relied on is worth reading closely, because material that existed and was not provided limits the valuation in ways the figure itself does not disclose.
Comparing two valuations
Start with the basis and the date. Most large differences resolve at this stage, because the two reports were valuing on different assumptions or as at different moments.
Then compare the comparables. Where both used comparison, the selected transactions and the adjustments made to them account for most of the remaining gap.
Look for the single moving assumption. One assumption frequently drives the whole difference, and identifying it converts an unresolvable dispute into a narrow question.
Ask each valuer to apply the other's assumptions. If the figures converge, the disagreement is about assumptions rather than about valuation, and that is a question for the decision-maker.
Consider a joint instruction. Where the asset is not central, one valuer instructed by both sides removes an expensive dispute, per two experts who disagree.
A valuation is a judgment with a number attached, and the number is the last thing produced rather than the first. Everything upstream of it, the basis, the date, the assumptions and the comparables, determines what it turns out to be.
Large gaps between competent valuations are normal and usually explicable. They come from different bases, different dates or a single assumption that moves the figure a long way, not from one valuer being wrong.
The basis of value is the element most often left unstated and most often decisive. A figure that does not say what question it answers cannot be relied on, whatever qualifications the person who produced it holds.
Access matters more than parties expect. A valuation produced without an inspection is making assumptions about condition, and those assumptions should be visible in the report rather than discovered afterwards.
For anybody facing competing figures, the productive step is to line up the assumptions side by side rather than the results. The dispute nearly always turns out to be about one or two of them.
Points to carry away
- Basis of value determines the figure before any analysis begins.
- The valuation date is a choice with large consequences.
- Comparables are selected, and the selection is arguable.
- Access to the asset changes what a valuation can claim.
- Two valuations usually differ in assumptions, not competence.
Questions readers ask
Why do two qualified valuers produce very different figures?
Usually because they were answering slightly different questions. A valuation depends on a basis of value, a date and a set of assumptions, and each of those choices moves the result. One valuer may have used market value at an earlier date while the other used a forced sale basis at a later one, and both figures can be entirely defensible. The productive approach is to compare the assumptions rather than the conclusions, because the gap almost always resolves into one or two identifiable choices.
Does it matter whether the valuer inspected the asset?
Considerably. A valuer who has inspected can speak to condition, and one who has not is assuming it, generally on the basis of information supplied by somebody with an interest in the answer. Desktop valuations are legitimate and are frequently the only option, and the report should state clearly that no inspection took place and what has been assumed as a result. The problem arises when that limitation is not stated and emerges under examination instead.
Should both sides instruct their own valuer?
Not always. Where the asset is central to the dispute and substantial, separate valuations are usual. Where it is one item among many, a single valuer instructed jointly by both parties removes an expensive argument and produces a figure neither side can easily attack. The cost of two competing valuations, plus the hearing time spent reconciling them, frequently exceeds the amount actually in dispute about the asset.
Sources
- Federal Rules of Evidence — Rule 702, Testimony by Expert Witnesseslaw.cornell.edu
- Federal Rules of Evidence — Rule 703, Bases of an Expert's Opinion Testimonylaw.cornell.edu
- Federal Rules of Evidence — Rule 701, Opinion Testimony by Lay Witnesseslaw.cornell.edu
- IRS — Valuation of Assetsirs.gov
- Federal Rules of Civil Procedure — Rule 26, Duty to Discloselaw.cornell.edu
- Legal Information Institute — Fair Market Valuelaw.cornell.edu
True Justice Record is a publication, not a law firm. This article states general rules and cites its sources; it is not advice about any particular case, and the law differs by state and changes over time.
More in Opinion That Counts as Evidence
Who Qualifies as an Expert
A witness may be qualified by knowledge, skill, experience, training or education, and any one of them suffices. The enquiry is whether this person knows something useful about this question, not whether they hold a particular qualification. A separate and prior question is whether the claimed field is one in which expertise genuinely exists.
Paying for an Opinion, and What It Buys
An expert is paid for time and analysis, and that arrangement is normal and disclosed. Fee structures tied to the outcome are treated differently and are prohibited in some fields. The questions that carry weight concern contingency, the proportion of a witness's work from one source, and the extent of instructing-party involvement in drafting.
What an Expert Report Must Contain
A usable expert report identifies the question it answers, lists the material examined, separates assumptions from findings, describes the method, shows the reasoning, states the qualifications relied on and carries the declarations the forum requires. Omissions are treated as weaknesses rather than as tidiness problems.