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only four performance measures; the multiples he used seemed to
vary greatly from company to company, and his choice of multiples
was not very well explained.
Problems With the Income-Based Approaches
Ms. Walker testified that in theory, income-based approaches
should produce more accurate determinations of value, because
they attempt to value directly the future income streams flowing
from an investment. She also testified, however, that many
assumptions must be made to employ such approaches and the
results are highly sensitive to the assumptions used. Most
importantly, if the subject company’s future income is
unpredictable, then income-based methods will produce inaccurate
appraisals of the company’s value. See Pratt et al., supra at
257.
We conclude that as of the date of the gifts, it was very
difficult to predict Demco’s future income. It appears that as
of that date Demco’s management had predicted only 1 year of
future results. Due to the lack of a long-range forecast, Ms.
Walker did not even attempt to predict Demco’s future revenues.
Instead, she used an average of Demco’s historical and forecasted
results to create a measure she described as Demco’s “normalized”
free cash-flow, and assumed this would grow at a constant rate.
In this connection, we note that one of the leading treatises on
business valuations cautions that historical averages or pure
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