using ex-ante and ex-post benchmarks in estimating damages

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A P R O F E S S I O N A L D E V E L O P M E N T J O U R N A L f o r t h e C O N S U L T I N G D I S C I P L I N E S

the value examiner

•

May/June 2012

lost prot or lost enterprise value in

litigation; and the appropriate method

should be based on ex-post data, i.e.,

data available ater the event in which

damage occurred.

IMPACT ON ThE PLAINTIFF

In civil litigation, litigants, juries, and

courts struggle with the issue o how an alleged loss should be compensated.

What is a reasonable estimation o the

impact on the plainti o the event un-

der dispute?

In the corporate setting, that impact

generally involves some combination

o (a) lost prots and (b) lost enterprise

value through reduced business valua-

tion. o estimate these reasonably and

airly is an extremely complex matter.

Some o the elements, such as damage toreputation, are arguably subjective. Even

the more objective elements, such as lost

income, are not necessarily straightor-

ward. Tey require the development o

two alternate histories: one o them con-

cerning what happened in act, the other

representing what might have happened

“but or” the event in question, i.e., had

the event in question not occurred.

BENChMArkING

o arrive at claims or damages, liti-

gants turn to expert witnesses—in partic-

ular, nancial, economic, and accounting

experts—who, it is assumed, can apply

established models and methodologies.Tese experts set benchmarks that can

be used to measure perormance and

determine, in ways that are authoritative

and will be clear to the court, how much

was lost.

Benchmarking, in this context, is the

process o establishing the basis or the

hypothetical, “but or” gure. By deni-

tion, a benchmark is a standard. In gen-

eral, benchmarking involves comparing

a known gure—say, a perormancemetric—against an accepted standard.

In damages estimation, benchmarking

involves the use o an economic standard

to prove the validity o the hypothetical

but-or prots. Te challenge is to arrive

at a standard that the court will accept.

Benchmarks or damages can be es-

tablished in several ways. One is to use

management’s own orecast o uture

perormance—to say, in eect, “Tis ishow management believes the compa-

ny would have perormed i not or the

harm.” Another way is to use the orecast

o independent securities analysts: “Tis

is how independent experts projected

the uture perormance o the company.”

A third is to create a benchmark based on

the perormance o a peer group: “Tis is

how comparable companies perormed

that were not subject to harm.”

Creating and deending these bench-

marks is the work o expert witnesseswith backgrounds in valuation and/or

nancial economics.

CALCULATING LOST PrOFITS

o measure lost prots and thus es-

tablish the basis or damages, the expert

must calculate the ollowing:

Prots had the harm not occurred

- Actual prots

= Lost prots

Similarly we can think o lost enterprise

value as the present value o the stream o

lost prots. Eectively, lost prots and

lost enterprise value have their basis in

the same question: What was the harmul

impact on prots o the event in question?

Benchmarks are the basis for damages. But when the assumptions behind

the benchmarks fail to stand up to Daubert scrutiny, expert testimony may

be excluded.The purpose o this article is to demonstrate that “traditional” valuation

methods that incorporate ex-ante data can be inappropriate when used to estimate

By Donald M. May, PhD, CPA

•

Using Ex-Ante and Ex-PostBenchmarks in Estimating Damages

l i t i g a t i o n c o n s u l t i n g



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A P R O F E S S I O N A L D E V E L O P M E N T J O U R N A L f o r t h e C O N S U L T I N G D I S C I P L I N E

the value examinMay/June 2012

lebrity plainti experts and one o thr

deendant experts on Daubert groun

We will examine the Daubert aspects

this case in detail.

TOO MANy ASSUMPTIONS,

wrONG ASSUMPTIONS

Why is benchmarking so oten u

reasonable? he process o ben

marking involves making assumptio

about (a) uture business perorman

(b) economic conditions, and (c) t

competitive landscape o the litigan

industry. As we all know, making

sumptions is a dangerous business. T

particular problem here is that any

sumption will ramiy through years

projected business or nancial per

mance. Even a small error in the

Actual prots are easy to calculate,

as data is readily available. But “prots

had the harm not occurred” is a hypo-

thetical gure. It is based on an alter-

native history, a scenario in which the

harm did not occur.

Since there are no actual gures to

apply to this alternative scenario, the

hypothetical prot must be calculated.

Te calculation must give but-or pro-

its a basis in reality. I the calculation is

realistic, the court can compare the two

scenarios and determine the extent o

the harm.

DauBErt ChALLENGES

For too many litigants and their at-

torneys, the participation o expert wit-

nesses provides no assurance o success,

as benchmarks used by expert witness-

es are increasingly the basis o success-

ul Daubert challenges.

Te use and eectiveness o Daubert

challenges are on the rise. According to

one study, in 2010 almost 50 percent

o expert witnesses were excluded on

the basis o Daubert challenges.1 Many

o these challenges ocused on the as-

sumptions behind benchmarks and

their reliability. In the case o Celebrity

Cruises v. Esse , in which I served as a

consulting expert on behal o Esse,

Judge Francis excluded ve o seven Ce-

1 “ Daubert Challenges to Financial Experts: An11-year Study o rends and Outcomes,” (2000–2010) PricewaterhouseCoopers. Available at www.pwc.com/us/en/orensic-services/publications/daubert-study-2010.jhtml.

Te author, Donald M. May, was a

consulting expert or the deense in the

Celebrity Cruises v. Esse case. He ana-

lyzed the plainti’s experts’ reports,

and sat in on depositions and the trial.

May’s article explains why the judge

in Celebrity Cruises v. Esse excluded the

testimony o six damages experts, as a re-

sult o Daubert challenges, on the basis

o their use o benchmarks to estimate

lost prots and lost enterprise value. InMay’s article, those experts are reerred

to as Experts A through F. Regarding the

“anonymization” o experts who are ex-

cluded, here is our editorial policy:

• Rather than explicitly naming busi-

ness valuation experts in litigation

whose testimony was excluded on

the basis o Daubert challenges, we

reer to them in anonymous terms,

such as “the damages expert” or

“Expert A.”

• We contact those “anonymized”

experts personally, show them the

manuscript (ater it is approved

by the peer-reviewers), and invite

them to comment on the article

prior to publication.

• I they choose to respond on the

record, their comments are sub-

mitted to our Editorial Board orpeer review beore being approved

or publication.

I was able locate and contact ve o

the six experts discussed in May’s article,

sent each o them the manuscript, and

invited them to comment. I received

responses rom all ve. In my e-mail

correspondence and phone conversa-

tions with those experts, some o them

said they disagreed with the way their

reports were characterized or explained

in the judge’s Daubert order; and their

perspectives on the issues in the Celebri-

ty Cruises case diered in some respects

rom May’s perspective, as you would

expect. However, none o them wished

to comment on the record.

By denition, litigation involves com

peting perspectives and opinions. Ti

article presents one party’s perspectiveon the case, and we believe that pos

mortems such as this one are useul to

readers who are or will be preparing

expert reports in litigation matters. We

think this article is quite useul or un

derstanding the thought process that one

judge used in his role as gatekeeper over

a large number o submitted experts.

—David M. Freedman, Senior Editor

EDITOr’S NOTE: rEGArDING ExPErTS A ThrOUGh F

•




the value examiner May/June 2012

sumption can lead to a wildly inaccu-

rate conclusion.

In addition to the general problem o

making assumptions, there are specic

problems as well. One is reliance on a one-

size-ts-all approach. Many experts rely

on a single benchmarking methodology

that they apply across a wide range o situ-

ations. Te methodology may or may not

t the situation. I it does not, a successul

Daubert challenge is likely to result.

Ex-ANTE AND Ex-POST

BENChMArkS

Tere is a closely related problem:

Many experts apply ex-ante benchmarks,the kind o orward-looking analysis ap-

propriate to litigation or shareholder

damages, to the calculation o lost prots

and lost enterprise value, where ex-post

benchmarks ought to apply.

Ex-ante benchmarks use inormation

that was available only beore the event

(in this case an outbreak o Legionnaires

disease on a 1994 cruise). Ex-post bench-

marks use data available ater the event.

Valuation experts and investment

bankers use metrics that are designed to

orecast uture perormance. Tey exam-

ine past perormance, then look ahead in

order to create a prediction, using data

that might include the company’s own

orecasts. In estimating damages associ-

ated with events that lead to lost prots

or injured business reputation (lost en-

terprise value), the task is dierent—the

starting point is a given date in the past,

the date when the alleged harmul event

took place; and the requirement is totry to calculate two dierent scenarios.

One scenario refects what actually hap-

pened, and the other refects what might

have happened i the event had not oc-

curred. Tere is more and dierent data

available, including inormation about

how the company, the industry, and the

economy actually perormed. None o

that would apply in projecting a valua-

tion or shareholder damages, but it is

essential or calculating lost prots or

lost enterprise value.

Many experts have had their testi-

mony excluded specically because they

used valuation-type metrics in cases

involving damages rom harmul acts.

Benchmarking or damages to share-

holders resulting rom accounting or

nancial raud does, however, need to

be based on orward-looking valuation

methods. It is critical that experts and

litigators know the dierent require-

ments and apply the right benchmarkingmethods or the particular type o case.

QUESTIONABLE

BENChMArkING IN

CElEBritY CruiSES

What is the impact o questionable

benchmarking practices on a case?

For a dramatic example, one need

look no urther than Celebrity Cruises,

Inc. v. Esse Corp., 434 F. Supp. 2d 169

- Dist. Court, SD New York 2006 No.

96 CIV. 3135(JCF).

Celebrity Cruises is an upscale cruise

line. It was an independent company un-

til Royal Caribbean acquired it in 1997.

In summer 1994, there was an

outbreak o Legionnaires’ disease, an

acute respiratory inection, aboard

one o Celebrity’s ships, Horizon, dur-

ing a New York-to-Bermuda cruise. A

number o passengers sued Celebrity

and also Esse, the manuacturer o the

ship’s whirlpool spa and lters, which,according to the U.S. Centers or Dis-

ease Control and Prevention, were the

source o the outbreak.

In a bellwether procedure, where a

verdict or one plainti determines li-

ability or all parties, Celebrity was ound

to be 30 percent liable or the outbreak,

and Esse 70 percent liable. Damages

were awarded to the bellwether plainti,

a married couple. Celebrity then led its

claims against Esse, seeking compensa-

tion or direct costs (such as the dam-

ages it paid to the plaintis and the cost

o decontaminating the ship) as well as

lost prots during the period rom the

outbreak to its acquisition by Royal Ca-

ribbean, and lost business value. Celeb-

rity claimed it lost prots because pro-

spective passengers did not book, or the

line had to discount to get passengers to

book, because o the stigma caused by

the reported Legionnaires’ disease. In

addition, Celebrity claimed that becauseo the outbreak, its purchase price was

lower than it would otherwise have been.

why ThE ExPErTS

wErE ExCLUDED

Celebrity Cruises identied experts to

testiy concerning all categories o dam-

ages. Esse chose not to challenge the

Celebrity experts who addressed direct

costs and damages already paid. Esse

did challenge the experts who addressed

the more hypothetical claims about Ce-

lebrity’s lost prots and lost business

value. Esse also challenged a Celebrity

expert who opposed Esse’s motion or

summary judgment. Celebrity, in turn,

challenged each o Esse’s three experts.

Te challenges produced a sort o ex-

pert-witness bloodbath. Here are some

o the most critical challenges and how

they turned out:

Challenge 1: Tracking lost prots—using a price-increase spike. Expert A

testied or Celebrity and developed an

estimate o lost prots. He linked pro-

its to pricing, then compared Celebrity’s

pricing to a market proxy, using a com-

parison period rom March 1993 to June

1994, the period beore the outbreak. He



6



Indeed, to take 1993 as an examp

Celebrity budgeted earnings beo

interest, taxes, depreciation, a

amortization (EBIDA) o $61.9 m

lion or the Horizon and its sister shi

the Zenith and the Meridian, but t

actual EBIDA or those three vess

in that year was $55.4 million. Usi

[Expert B’s] methodology, this wou

indicate damages o over $83 milli

or that year, even though the Legio

naires’ outbreak had not yet occurr

Challenge 4: Taking the company

word or growth rates. Expert C d

without industry proxies. Instead, he timated projected prots based on C

lebrity’s own ve-year plan as ormu

ed by management in January 1994. H

compared anticipated prots with actu

prots and concluded that Celebrity h

lost approximately $101 million. He th

adjusted his projections in various wa

calculating higher or lower lost-pro

gures, but always using the compan

own projections as the basis. Te cou

rejected this approach, stating:

[Expert C’s] lost prots analysis

fawed in at least one major respe

the projection o prots based on C

lebrity’s ve-year plan is wholly un

liable. []he entrepreneur’s “cheer

prognostications” are not enou

Schoneld v. Hilliard , 218 F.3d 1

173 (2d Cir.2000) (quoting Dobbs La

o Remedies, by Dan B. Dobbs, §3.4

Indeed, Expert F (see Challengebelow), another o Celebrity’s expe

explicitly rejected use o the ve-ye

plan to project anticipated prots a

December 31, 1994. o calculate t

value o the company ater the outbre

Expert C began with the $1.312 billi

purchase price paid by Royal Caribbe

then projected the pricing orward to

show what prots would have been had

there been no outbreak.

On examination, it turned out that

Celebrity’s prices were signicantly

lower than the proxy’s in March 1993.

Over the next 15 months, Celebrity’s

prices rose dramatically, closing the

gap. But there was nothing to indicate

that Celebrity’s upward trend would

have continued. I anything, prices

might have allen as Celebrity rolled out

three massive new ships, adding capac-

ity that might have more than absorbed

existing demand. In act, Celebrity’s

own management pointed to a weak-ening o demand in 1995. Tere was no

evidence that Celebrity’s pricing could

have continued to outpace the market.

Expert A’s testimony was ound to lack

the reliability required under Daubert ,

and it was excluded.

Challenge 2: Transaction bench-

marks that compared apples to orang-

es. Expert A also analyzed Celebrity’s lost

enterprise value, comparing the Celebri-

ty acquisition to two other large industry

transactions: the acquisition o Norwe-

gian Cruise Line by Star Cruises and the

merger o P&O Princess with Carnival.

But the selected guideline transactions

were not really comparable. Te scales

were radically dierent—Celebrity had

8,000 berths, Norwegian Cruise Line

12,000, and P&O Princess 30,000. Te

other two transactions were subject to

competitive bidding, whereas the only

other oer or Celebrity was a last-min-ute aair. Finally, the other transactions

took place roughly two-and-a-hal years

ater Celebrity’s, and Expert A did not

account or market changes over the in-

tervening years that might have aected

the relative value o the sales. His lost-en-

terprise-value analysis was also excluded.

Challenge 3: Projecting lost enter-

prise value using orecasts instead o

peer or industry perormance as the

basis. Expert B projected an expected

growth rate or Celebrity’s revenue

which in turn was based on a proxy con-

sisting o Royal Caribbean and Carnival.

She took projected growth rates or each

o the two companies as established by

analysts in 1994, and applied them to

Celebrity. Te problem is that the mar-

ket proxy did not in act display anything

close to the projected growth rates.

According to analysts, Royal Carib-

bean’s revenue was expected to grow

at rates ranging rom 2.5 to 4.9 percentbetween 1994 and 2000; Carnival was

expected to grow at rates ranging rom

0.6 to 2.1 percent. As it happened, Royal

Caribbean’s growth in 1995, 1996, and

1997 was 0.21 percent, -1.08 percent,

and -1.25 percent, respectively. Carni-

val’s growth rate during the same three

years was -2.6 percent, -3.7 percent, and

-1.7 percent. Expert B admitted in her

deposition that she did not know these

actual gures were available, and later

acknowledged she would have consid-

ered them had she known.

Forward-looking methodology such

as this can be appropriate or valuing an

enterprise at a single point in time. But

it does not adequately measure dam-

ages that occur ater the point when

the projection is made. In this case, all

three companies lost ground. But Ex-

pert B attributes Celebrity’s shortall

to the eects o Legionnaires’ disease,

while making no attempt to determinewhy the other two companies declined.

Even worse: Expert B’s lost enterprise

value calculation began with Celebri-

ty’s 1993 budget projections, which she

then compared to 1997 actuals. As the

court pointed out when he excluded

her evidence:




the value examiner May/June 2012

then adjusted it or anticipated synergies.

But he did not take into account that the

purchase price, including the synergies,

was negotiated between Celebrity and

Royal Caribbean. Celebrity might have

lost bargaining power because o the

Legionnaires’ outbreak, or there might

have been balanced negotiations. In ei-

ther case, the synergy gure is the result

o a negotiation—it is too subjective to

be the basis or an enterprise value calcu-

lation. For Expert C’s excessive reliance

on the company’s own projections, the

court noted, “A methodology so sensitive

to one highly subjective variable lacks

the necessary reliability.” Tus Expert C’stestimony was excluded.

Challenge 5: Using more sophisti-

cated methodologies…that still rely

on the company’s growth projections.

Te lost-prots analysis by Expert D also

relied on Celebrity’s ve-year plan. He

took a more conservative approach than

Expert C—or example, excluding out-

o-pocket and “brand repair” costs—but

still used Celebrity’s projections as the

basis or his calculations, projections not

borne out in reality. Te court noted:

[Expert D’s] analysis suers rom the

same atal faw as [Expert C’s] meth-

odology: reliance on projections that

were not borne out in reality. Tis de-

ect drives the entire calculation and

is not repaired by identiying a lower

bound using a methodology, which,

standing alone, might be more reli-

able. [Expert D’s] lost prots analysisis thereore excluded.

Tis atal faw is the basis or the en-

tire calculation, and using lower bound-

aries or the estimate does not oset the

undamental problem. His lost enter-

prise value analysis used six dierent

sets o calculations to arrive at an aver-

age gure, but still relied either on Celeb-

rity’s ve-year plan or a 1995 projection

prepared or the company by Te Black-

stone Group, which was nearly identical.

Expert D developed a reasonable rate o

return analysis, but did not justiy it by

comparing it to other companies.

Challenge 6: Using benchmarks

o company sufering alleged stigma

does not control or stigma to other

ships. Expert E testied or Esse, pro-

viding an expert opinion that criticized

the reports o Celebrity’s witnesses and

also included an independent evalua-tion o Celebrity’s damages. Te cen-

terpiece o Expert E’s report was his

evaluation o Celebrity’s lost revenues.

He began by identiying a relationship

in revenue per passenger cruise day

produced by Horizon and her sister

ships, Zenith and Meridian, beore the

Legionnaires’ outbreak. Expert E then

observed that revenue declined sharply

or Horizon and Meridian in the quar-

ter immediately ater the outbreak, but

not or Zenith. By the ourth quarter

o 1994, Meridian’s revenues had re-

turned to their pre-incident pattern,

and by the third quarter o 1995, Ho-

rizon had as well. Expert E then com-

pared the actual revenues or these

three vessels to that which he projected

based on their prior perormance, and

concluded that Celebrity experienced

a revenue shortall o approximately

$5.7 million during the third quarter o

1994, $1.6 million in the ourth quartero 1994, and $325,000 in the second

quarter o 1995. Te court rejected this

benchmarking approach, stating: “Te

allacy o this analysis is that it assumes

that the Zenith was unaected by the

Legionnaires’ incident.” Expert E’s tes-

timony was thus excluded.

Challenge 7: Bad yardsticks. Te

only Celebrity expert to testiy at trial

was Expert F. He presented a lost-prots

analysis showing the impact o the out-

break on Celebrity’s EBIDA, compar-

ing it to a yardstick made up o three

other cruise lines. He also developed a

lost enterprise value analysis based on

discounted cash fows, using a ormula

to determine the weighted average cost

o capital (WACC). Based heavily on his

testimony, the jury awarded Celebrity

damages o $190 million or lost prots

and lost enterprise value.

Esse moved or a new trial, claiming

there were several serious faws in ExpertF’s presentation. Esse contended that

the companies that made up the yard-

stick were too dissimilar to be useul—

one was industry giant Carnival, with bil-

lions in revenue and multiple brands; the

other was a company that mainly oper-

ated riverboat cruises. Finally, and most

signicantly, Esse argued that in devel-

oping the lost enterprise value calcula-

tion, Expert F had ignored a basic tenet

o WAAC calculation: he ailed to take

into account the impact o debt on the

capitalization o the business. He used a

generalized cost-o-capital gure or the

cruise industry, but did not “relever” it to

apply a debt gure to the yardstick com-

panies or to Celebrity. In so doing, he

ignored the advice he had laid out in his

own textbook. As he later acknowledged,

he misspoke and said that he had applied

a “levered Beta,” when he clearly had not.

CONSEQUENCES: DrASTICALLyrEDUCED AwArD

As a result o the faws in Expert F’s

testimony, the court reversed the ver-

dicts or lost prots and lost enterprise

value. At a new trial, this time seeking

damages o roughly $60 million rather

than the $190 million originally awarded,



8



same amount in the same period. I,

the sake o argument, Celebrity’s reven

had actually declined by 25 percent a

the outbreak, we would have conclud

that 10 percent was due to actors not

lated to the outbreak, and 15 percent w

due to the outbreak.

In the matter o ex-ante vs. ex-po

benchmarks: In general, when you c

culate a valuation, your benchmark (th

is, what you expect perormance to be

ter the valuation date) is typically bas

on actors that you are orecasting pr

to the valuation date, e.g., econom

growth. Tese are ex-ante benchmar

because they relate to inormation avable prior to the valuation date.

However, the Celebrity case sho

that this type o approach may ail

court. It is better in this instance to u

ex-post benchmarks—actors that y

know occurred ater the event, such

how the economy or industry actua

perormed ater the event (in this ca

the outbreak o disease). Judge Fran

specically excluded experts who us

benchmarks based on traditional va

ation methods in avor o ex-post

proaches. While ex-post approach

are typically either not available or a

deemed inappropriate or typical val

tions, they should be used in estimati

damages because they control or oth

unrelated actors that are important

estimating lost prots that result rom

single, specic event.

A BETTEr APPrOACh TO

BENChMArkINGAs the Celebrity case shows, to be

ensible, benchmarks need to conorm

closely as possible to business and e

nomic reality. In practice, that mea

applying ex-post benchmarks: measu

ments applied at the end o the peri

under scrutiny, which actor in such

Celebrity and Expert F again presented

the yardstick analysis with the two

comparable companies that had been

criticized by the court. Expert F added

a third comparable company that was

considered more reliable. Yet his analy-

sis reached a similar valuation. Tis time

the jury returned $15 million in dam-

ages to Celebrity. On appeal, the court

ound the evidence sucient to support

the award, but applied a 30 percent re-

duction or comparative ault. Celebrity

Cruises, Inc. v. Esse Corp., 530 F. Supp.

2d 532 (S.D.N.Y. 2008).

In February 2008, the district court

entered a $30.4 million judgment againstPentair, the company that had acquired

Esse, or out-o-pocket costs, expenses,

and lost prots, including interest. Ce-

lebrity and Pentair both appealed.

According to a 10-Q ling by Pentair

on July 22, 2008, the parties agreed to

a $35 million settlement—a reduction

rom the $190 million jury verdict, and

one attributable in large measure to the

unreliable benchmarking produced by

Celebrity’s experts. Esse also had some

o its experts excluded on Daubert ; and

o the Esse experts who did testiy, some

o their testimony was excluded as well.

But the impact o the challenges ell most

directly on Celebrity and had the greatest

eect, a negative one, on Celebrity’s case.

SUMMAry: BENChMArkS

rEjECTED AND ACCEPTED

Te experts in Celebrity were ex-

cluded because they used inappropriate

benchmarks, and so the court ruled theirestimates o damages to be unreliable.

Some o the experts used Celebrity’s

own orecast prior to the damages event

to benchmark or but-or prots. Tat is,

they said that had the lters not gone bad,

Celebrity would have met its orecast per-

ormance, based on its own management

orecasts. Te court called this unreliable,

quoting Dobbs Law o Remedies to the

eect that the entrepreneur’s “cheerul

prognostications are not enough.”

Other experts used securities ana-

lysts’ orecasts or Celebrity’s peer group

as the benchmark. Celebrity was not a

public company at the time. Te court

determined that this approach was also

unreliable because those orecasts did

not account or actual economic condi-

tions that occurred subsequent to date

o damages—conditions that would have

also aected Celebrity’s perormance. In

act, we showed, and the court quoted the

act, that i that benchmarking methodwere used, it would result in something

approaching $60 million in damages in

the year prior to the actual date when the

Legionnaires’ outbreak occurred!

I should note that the court also

ruled that one o Esse’s own experts be

excluded. Tis was because the expert

used the perormance o other Celebrity

ships as a benchmark or how the aect-

ed ship would have perormed. Te court

deemed this benchmark unreliable and

biased downward because i there was

stigma caused by the Legionnaires’ dis-

ease outbreak, it would have aected all

o Celebrity’s ships and not just the ship

that had the outbreak.

In the end, the court admitted testi-

mony only by those experts who used

the yardstick approach to benchmarking

or but-or perormance. Te yardstick

approach involved benchmarking the

perormance o peer cruise lines ater

the outbreak o the disease, and then ap-plying that benchmark to how Celebrity

should have perormed. In other words,

i Royal Caribbean or Carnival or a com-

bination o the two saw their revenues

decrease by 10 percent in the period ol-

lowing the outbreak, we would expect

Celebrity’s revenue to decrease by the



the value examiner

VE

tails as operating costs, fuctuations in business demand, and

changes in the economy. Ex-ante benchmarks, the kind o

orward-looking assumptions used by investment bankers,

are error-prone and are best avoided. Worse is using an ex-

ante projection that is based solely on the plainti ’s own ore-

cast, like the management orecasts used to predict but-or

perormance in the Celebrity case.

An expert who understands the operating realities o

a business is an essential partner in arriving at a reason-

able benchmark.

Donald M. May, PhD, CPA, is principal o

litigation support and valuation services

at Grassi & Co., with ofces New York and

North Carolina (www.grassicpas.com). He

has prepared expert reports and expert wit-ness testimony related to business valuation,

hedge und valuation, lost prots, lost enter-

prise value, Daubert challenges, time-series

orecast models, asset and investment portolio valuation, and

statistical orecasting models and methodologies. May oten

works as an expert witness consultant.

CRITICAL THINKING:How Do You Value Equipment?

Your client has equipment. The equipment has valueHow you proceed makes a HUGE difference in the

ultimate value of the business and its equipment.

How do you determine the value of your client’s

equipment?

A. Do you guess at the value?

B. Do you bury the value and lump it into the

overall value?

C. Do you take the owner’s word for it?

D. Do you rely on the depreciation schedule?

E. Do you rely on the word of an auctioneer or

dealer who may have a hidden agenda?

Options A through E above are not only

inaccurate, but filled with the risk of liability!

Only a Certified Equipment Appraisal by a Certified

Equipment Appraiser will withstand scrutiny.

That’s why you need to seriously consider

adding the perfect complement of CMEA

(Certified Machinery & Equipment Appraiser)!

NOW is the time to find out what you’ve been

missing. Request our FREE CMEA Preview

Pak to discover the opportunities that await you!

866-632-2467

www.nebbi.org

Let’s Face It...

You Only Have 1 Option

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The best guides to INVESTING.From the biggest name in VALUATION.

using ex-ante and ex-post benchmarks in estimating damages

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