SOURCE: Marks Paneth & Shron LLP

Marks Paneth & Shron LLP

March 16, 2010 13:06 ET

Private Equity Managers and Investors Beware: Wall-Street-Style Valuation Assumptions Don't Always Work Says Marks Paneth & Shron Director

Wall Street Valuation Assumptions Are Quick, Efficient -- and Often Wrong; Private Equity Bankers Think in Terms of Transactions -- but Financial Economists With Accounting Expertise Understand What It Means to Run a Business, and That Makes Valuations Different, and Perhaps More Accurate Says Specialist; Why It's Good to Be Subjective -- and Why Making More Assumptions Means Valuations Will Be More Exact

NEW YORK, NY--(Marketwire - March 16, 2010) - Business owners and Private Equity managers who want businesses valued correctly should buck conventional wisdom and take a more comprehensive approach to valuation.

That's the advice of a specialist on valuations who believes that private equity firms and bankers who think mainly in terms of transactions can overlook elements that better determine the true value of an enterprise.

"The private equity world sometimes arrives at valuations by using standard Wall Street back-of-the-envelope assumptions," says Donald M. May, Ph.D., CPA, a director in the Litigation and Corporate Financial Advisory Services Group at New York accounting firm Marks Paneth & Shron LLP.

"But Wall Street assumptions are very quick and very general -- they're designed for a transaction environment and often don't take into account the realities of operating a business," Dr. May explains. "A business-savvy financial economist can look at a business in more detail -- and by making more assumptions, he or she can actually be more accurate in valuing a business as a going concern."

Dr. May is available for interviews, and can also author a bylined article that discusses:

  • Why Wall Street valuations are often wrong: "Wall Street assumptions are biased toward transaction value and that's often different from operational value: financial economists are often closer to what it means to run a business," Dr. May says. "Wall Street assumptions can be biased in order to derive the optimal value for either a buyer or seller in a given transaction. But operational assumptions can create a more objective valuation which ultimately will benefit both the buyer and the seller and not one at the expense of the other. For example, a Wall Street banker might make assumptions about how a business will grow, but doesn't factor in the capital or inventory it needs to make that target. They focus on the top line instead of on the business as a whole and how it will operate as its current environment changes."

  • Why it's better to make many small assumptions instead of a few big ones. "Wall Street often uses quick, rule-of-thumb calculations -- multiples of earnings and operating costs -- that often aren't applicable, particularly in the current environment," Dr. May explains. "It's rare to find a real-world company that's identical to the model. A banker might say, 'Use a revenue multiple of two.' I would prefer to say, 'Let's look at a more sophisticated model. Let's project out cash flows, understand if there are any potential imbedded options, work out the assumptions and see if they make sense. If sales growth is off, let's look at the industry forecast, and use third-party data to test the assumptions. Let's take the rule of thumb as a guideline and then do a deeper analysis -- breaking it down into smaller more tangible pieces instead of making one big assumption.'"

  • The argument for making many assumptions and being subjective: "Normally you'd say that making more assumptions is bad, because it's more subjective," Dr. May continues. "But the positive side is that you can see what the assumptions are and test them: One big assumption doesn't affect all your other calculations, and you can prevent big distortions from impacting your valuation. More research brings more objectivity to subjective assumptions -- and that's a good thing.

  • "We've noticed that private equity firms sometimes don't realize how imperfect their assumptions are. Big assumptions may not reflect the reality of the business. You may know that your valuation is way off the mark but you can't pinpoint what the specific problem is. Using many small ones, you can find measurements that are closer to reality and if they are not you will understand why and be able to adjust accordingly. The multiple approach unless it mimics a specific peer that is identical to the company you are valuing will not allow you to pinpoint areas of distortion and examine the potential range of values under alternative scenarios and assumptions."

For more information, to schedule an interview or arrange a bylined article, contact Itay Engelman of Sommerfield Communications at (212) 255-8386 or

About Marks Paneth & Shron

Marks Paneth & Shron LLP is an accounting firm with nearly 475 people, of whom 64 are partners and principals. The firm provides businesses with a full range of auditing, accounting, tax, bankruptcy and restructuring services as well as litigation and corporate financial advisory services to domestic and international clients. The firm also specializes in providing tax advisory and consulting for high-net-worth individuals and their families, as well as a wide range of services for international, real estate, media, entertainment, nonprofit, professional and financial services and energy clients. Visit for more information.

About Dr. Donald M. May

Donald M. May, Ph.D., CPA, is a valuation specialist with nearly twenty years of experience in industry, academia and public accounting and deep expertise in litigation and strategic consulting.

Previous to his role at MP&S, Dr. May was with leading global consulting and accounting firms including a Big Four firm and most recently Experts-on-Experts LLC, a New York-based litigation support firm where he served as Managing Partner and economic advisor to law firm clients across various industries on valuation, lost profits, opposing expert reports and deposition and trial preparation.

Earlier in his career, Dr. May was an Assistant Professor in the Sloan School of Management at the Massachusetts Institute of Technology where he published research and taught MBA and Ph.D. level classes in economics, accounting, financial statement analysis and statistics.

Contact Information