New Jersey Business Valuations - Contingent Claims Method

Video Transcript 

My name's Robert Bonavito, New Jersey Forensic Accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only. If this was a litigated matter, I would take a different approach, have different conclusions based on different facts and circumstances.

Hi, I'm Robert Bonavito, New Jersey Forensic Accountant. We testify a lot in court, and deposition, taken hundreds and hundreds of times. A lot of the issues revolve around valuations, and I was explaining, valuations is really a craft like cooking. The more you do it, the better you get at it. But it's important that we have a couple different methods we use, and one method that we like to use is a contingent claims method, especially for asset rich companies. And a contingent claims method for valuation is basically like an option method, where we look at resources like oil or diamonds, and we figure out what the cost is to extract those assets, and we take that and compare it to the selling price, and hopefully, there's a difference.

So, for example, I always like to use an oil company because it's something people can understand. If you have oil that's costing $10 and it's selling for $50, well, you have a $40 profit on each barrel of oil. So how are you going to value that company, because an oil company, their biggest asset is usually in the ground, right? Well, you're going to value that company based on the number of barrels you estimate they're going to pump, multiply that by $40, and you have a valuation. You can use this for pretty much any resource company there is. So we have done rock mines in Florida and stuff like that, and we've used this method, and it was successfully used.

So if you any questions on this method, please feel free to email me.