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ARXIS - Litigation Consulting
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August 2017

Recent Case:

Reviewing and Critiquing a Valuation Report

Type of Matter:

A business valuation was prepared immediately before a complex stock transaction was finalized. That valuation report was later scrutinized in response to a claim that it was improper and erroneous.


A complex stock-for-stock transaction was contemplated between owners of a closely-held business involving over 20 subsidiaries. In contemplation of that transaction, the company retained a valuation expert to place a value on a portion of the business. The transaction was consummated at the value determined by that expert. Subsequently, the valuation conclusion was challenged and Arxis was retained to evaluate the report.

Arxis Work:

A copy of the complete report and all documentation that was originally supplied to the valuation expert was provided to Arxis. With that information we attempted to replicate the calculations, assumptions, and conclusions presented in the report. As a result, numerous substantial errors were identified. It was a collection of some of the most common valuation errors wrapped up in one report:

  • An invested capital risk rate (WACC) was used to value a cash flow to equity benefit stream. This, by definition, results in an incorrect conclusion.
  • The expert properly concluded that public companies were inappropriate to use as guideline companies. However, throughout the rest of the report public companies were used to project cash flow, capital expenditure levels, and working capital.
  • Public company data was used to determine the WACC rate for the subject company. This was inappropriate given the conclusion that public companies were not comparable to the subject company.
  • The expert did not consider, or adjust for, non-operating assets and non-operating income and expenses.
  • The sale of similar privately held companies (Market Approach) was not considered. This was problematic since there were hundreds of transactions in the same SIC code as the subject company available.
  • Prior transactions (several) of company stock were not considered.


The report was so flawed that all parties agreed it had to be set aside and a new valuation performed. A substantial amount of money had been spent on a valuation that was flawed on every level.

Service Profile:

Forensic Accounting Services for Employee Theft

The U.S. Department of Commerce estimates that employee theft of cash, property, and merchandise may cost American businesses as much as $50 billion per year. It occurs every day in all types of businesses and in a variety of ways, and it is estimated that up to 75 percent of all employee theft goes unnoticed. Theft crimes are committed by lower end to well-paid employees, new or trusted employees, and new to senior personnel. During difficult economic times, theft typically increases due to lack of salary increases, threats of downsizing and personal financial problems. Studies show that during bad economic cycles divorce rates and bankruptcy filings increase, so your employees may face these pressures as well. Add to those problems increased debt load from a child in college, drug or alcohol addictions and strained personal relationships, and it is easy to see why so many employees can be tempted to steal.

Employee theft can take many forms, from stealing items of relatively small face value to embezzlement, fraud and theft of information. When such costly crimes are detected, litigation may be necessary for recovery of losses. The trained fraud examination specialists in Arxis Financial's "Forensic Accounting" practice work with attorneys to evaluate evidence and provide expert testimony.

Our investigators assist in determining the extent of monetary loss or damages and to determine who committed the theft. Arxis Financial utilizes various investigative and analytical procedures to support criminal or civil actions against an individual(s), form a basis for termination of a dishonest employee, and provide evidence for insurance claims.

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Chris Hamilton, CPA, CFE, CVA
Chris Hamilton, CPA, CFE, CVA
(805) 306-7890
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