Kroll valuation work, produced by the firm formerly known as Duff & Phelps, puts defensible numbers on assets that end up in front of auditors, the IRS, and judges. Corporations, private equity funds, and legal teams hire Kroll to value entire companies, individual intangible assets like patents or customer relationships, and complex securities that have no observable market price. The engagements fall into four broad buckets: financial reporting, tax compliance, M&A advisory, and litigation support. Each is governed by different professional standards, and each carries different consequences when the number is wrong.
What Kroll Actually Values
The practice breaks into three asset categories, and the category dictates the methodology, the applicable standards, and the level of scrutiny.
Business enterprise valuation determines the total market value of a company or a specific ownership interest. It is the starting point for most M&A transactions, restructurings, and fairness opinions, producing a single number or range that drives deal pricing, tax treatment, and financial reporting downstream.
Intangible asset valuation covers non-physical assets like proprietary technology, customer relationships, trade names, and developed software. These often represent the majority of value in a modern acquisition. After closing, accounting rules require the buyer to assign specific fair values to each identifiable intangible, which demands specialized knowledge of how those assets generate returns.
Complex securities valuation handles instruments without a readily observable market price: stock options, warrants, convertible debt, contingent earnout payments, and private equity interests. This work typically requires option pricing models like Black-Scholes or binomial lattices, and in some cases Monte Carlo simulations, to capture embedded risk features that simpler methods miss.
Valuing a fleet of trucks for insurance and valuing a software platform for a billion-dollar acquisition are fundamentally different exercises, even though both sit under the umbrella of “valuation.” The Uniform Standards of Professional Appraisal Practice (USPAP) govern personal property and real estate appraisals, while business valuations follow standards published by organizations like the American Society of Appraisers.1The Appraisal Foundation. USPAP
The Three Core Valuation Approaches
Professional standards require analysts to consider three fundamental approaches when determining fair value: income, market, and cost.2Appraisers.org. ASA Business Valuation Standards Not every approach fits every engagement, but the analyst must at least explain why one was included or excluded.
Income Approach
The income approach values an asset based on the present value of the cash flows it is expected to generate. The workhorse is the discounted cash flow (DCF) model, which projects free cash flows over a defined forecast period, then discounts them back using a rate that reflects the risk of actually receiving them.
That discount rate is usually the weighted average cost of capital (WACC), which blends the after-tax cost of debt and the cost of equity in proportion to the company’s capital structure. The cost of equity itself is commonly estimated using the Capital Asset Pricing Model: risk-free rate, plus an equity risk premium, adjusted for the company’s beta. A single percentage point off on the discount rate can swing the final valuation by tens of millions of dollars on a large company, which is why this input attracts heavy scrutiny.
The last piece is the terminal value, which captures cash flows beyond the forecast period. Because terminal value often accounts for a large share of total enterprise value, the growth assumptions baked into it deserve as much attention as the near-term projections.
Market Approach
The market approach estimates value by comparing the subject to similar businesses that have recently been sold or are publicly traded. If buyers are paying six times EBITDA for comparable companies, that multiple provides a reference point.
Two methods dominate. The guideline public company method draws valuation multiples from publicly traded companies that resemble the subject in industry, size, and financial profile. Analysts look at metrics like enterprise value relative to EBITDA or price relative to earnings, then apply those multiples to the subject’s own financials. Finding truly comparable public companies is the hard part, especially in niche markets.
The guideline transaction method pulls multiples from completed acquisitions of entire companies. Transaction multiples tend to run higher than public-company multiples because they capture a control premium. Analysts must adjust for differences in size, growth, and operating efficiency between the guideline transactions and the subject. Which comparables are genuinely comparable is one of the first things opposing experts attack in a dispute.
Cost Approach
The cost approach asks what it would cost to replace the asset from scratch. No rational buyer would pay more for an existing asset than the cost of building a substitute with equivalent utility. This works best for tangible assets like machinery, specialized equipment, and real estate, where replacement cost can be estimated with reasonable precision.
For operating businesses, the cost approach rarely serves as the primary method because it cannot capture an established customer base, brand recognition, or workforce expertise. It does find a useful role in valuing internally developed software (based on accumulated labor and development costs) and in setting a floor for asset-heavy businesses. It also appears in purchase price allocations, where some intangibles are best estimated by what it would cost to recreate them, adjusted for functional or economic obsolescence.
Financial Reporting Valuations
Financial reporting valuations are driven by specific accounting standards under U.S. GAAP and IFRS, and they run through multiple layers of review by external auditors and, for public companies, the SEC.3Financial Accounting Foundation. About the Codification Three accounting standards generate the bulk of the work: ASC 805 for business combinations, ASC 350 for goodwill and intangible impairment, and ASC 820 for fair value measurement.
Purchase Price Allocation Under ASC 805
When one company acquires another, ASC 805 requires the buyer to allocate the purchase price across every identifiable tangible and intangible asset acquired, and every liability assumed, at fair value as of the closing date. Whatever consideration exceeds the net fair value of those identified items gets recorded as goodwill. This purchase price allocation is not optional, and it often takes months to complete.
The process requires separate valuations for each significant intangible asset. Customer relationships are commonly valued using the multi-period excess earnings method, which isolates the cash flows attributable to the customer base after charges on all other contributing assets. Trade names might be valued using a relief-from-royalty method. The amortization periods assigned to each finite-lived intangible directly affect the acquirer’s reported earnings for years to come, which makes the allocation one of the highest-stakes accounting exercises in any deal.
Goodwill Impairment Testing Under ASC 350
After the initial allocation, companies must test goodwill for impairment at least annually and more often if specific triggering events occur.4SEC EDGAR Filing. Note 10 – Fair Value Measurements Under the current standard (updated by ASU 2017-04), the quantitative test is a single step: compare the fair value of the reporting unit to its carrying amount. If the carrying amount exceeds fair value, the company records an impairment charge for the difference, capped at the total goodwill allocated to that unit.
Companies have the option of first performing a qualitative assessment. This preliminary check evaluates whether it is more likely than not (greater than 50 percent probability) that the reporting unit’s fair value has fallen below carrying amount. Factors include deterioration in macroeconomic conditions, declining industry metrics, negative changes in financial performance, and a sustained drop in share price. If the qualitative assessment concludes impairment is unlikely, the quantitative test can be skipped that year.
When the quantitative test is required, it typically involves a full business enterprise valuation using both the income and market approaches. Failing to record an impairment when the numbers warrant it creates a material misstatement, which is where independent valuation firms earn their keep.
Fair Value Measurement Under ASC 820
ASC 820 provides the overarching framework for fair value measurements in financial reporting. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.5SEC EDGAR Filing. Fair Value Measurements The standard also establishes a three-level hierarchy that ranks the reliability of inputs.
- Level 1 covers quoted prices in active markets for identical assets or liabilities. A share of publicly traded stock with a closing price on the NYSE is the classic example.
- Level 2 covers observable inputs other than Level 1 prices, such as quoted prices for similar assets, interest rates, or yield curves corroborated by market data.
- Level 3 covers unobservable inputs that reflect the company’s own assumptions about how market participants would price the asset. A DCF model for a private company sits squarely here.
Level 3 valuations attract the most scrutiny because the inputs are inherently subjective. Auditors push back on discount rates, growth projections, and comparable-company selections, and the SEC has flagged fair value disclosures as a recurring comment area.
How Auditors Review the Work
Valuation specialists and the auditors who review them follow separate standards. PCAOB Auditing Standard 2501 requires auditors to obtain sufficient evidence that accounting estimates in the financial statements, including fair value measurements, are reasonable and properly disclosed.6PCAOB. AS 2501 – Auditing Accounting Estimates, Including Fair Value Measurements In practice, the auditor either tests the company’s internal valuation process (methods, data, assumptions), develops an independent estimate for comparison, or evaluates subsequent events that shed light on whether the estimate was reasonable.
When a company uses a third-party specialist, the auditor still has an obligation to evaluate the specialist’s work: whether the methods comply with the reporting framework, whether the data is accurate and complete, and whether any changes in methodology from prior periods are justified. The valuation report needs to hold up not just at the board level, but through the full audit cycle.
Tax Valuations and IRS Standards
Tax valuations often operate under different definitions than financial reporting valuations. The IRS defines fair market value differently than FASB defines fair value, and the penalty regime for getting it wrong is severe.
Estate and Gift Tax
When someone transfers ownership of a closely held business or other non-publicly traded asset by gift or at death, the IRS requires a valuation to determine the fair market value of what was transferred. Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither under any compulsion to act and both having reasonable knowledge of the relevant facts. This standard is rooted in Revenue Ruling 59-60, which remains the foundational guidance for valuing closely held business interests.7Internal Revenue Service. Valuation of Assets
Two discounts are central to this work. A discount for lack of control reflects the reduced value of a minority interest where the holder cannot dictate business decisions like dividend payments or asset sales. A discount for lack of marketability reflects the difficulty of converting a private company interest into cash compared with selling publicly traded stock. Together, these discounts can reduce the taxable value of a transferred interest by a meaningful percentage.
Restricted stock studies, which measure the price difference between freely tradable and restricted shares of the same company, have produced average marketability discounts in the range of 20 to 35 percent, with some observations running much higher. Pre-IPO studies show larger discounts, averaging roughly 40 to 60 percent.8Internal Revenue Service. Discount for Lack of Marketability Job Aid for IRS Valuation Professionals The right figure for any engagement depends on company-specific factors like financial health, distribution history, and contractual transfer restrictions. Successfully defending these discounts is often the single biggest driver of tax savings.
Transfer Pricing
When affiliated companies in different countries transact with each other, tax authorities require intercompany prices to reflect what unrelated parties would charge at arm’s length. IRC Section 482 gives the IRS broad authority to reallocate income between related parties when their pricing does not clearly reflect income.9Office of the Law Revision Counsel. 26 USC 482 – Allocation of Income and Deductions Among Taxpayers For transfers involving intangible property like patents or software licenses, the statute specifically requires that income attributed to the transfer be commensurate with the income the intangible actually generates.
A defensible transfer pricing study requires careful valuation of the assets or services being exchanged, along with contemporaneous documentation. Companies without adequate documentation face steep penalties if an audit finds the pricing off. The economic analysis has to be prepared before a dispute arises, not after.
Penalties for Valuation Misstatements
The IRS imposes graduated penalties when a claimed valuation on a return turns out significantly wrong. A substantial valuation misstatement (claimed value 150 percent or more of the correct amount) triggers a penalty of 20 percent of the resulting tax underpayment. A gross valuation misstatement (200 percent or more of the correct amount) doubles the penalty to 40 percent.10Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments These apply to both overstatements (inflating the value of donated property) and understatements (deflating the value of transferred assets for estate tax). A well-documented independent valuation is the primary defense.
Section 409A and Private Company Stock Options
Section 409A of the Internal Revenue Code governs nonqualified deferred compensation, which includes stock options granted by private companies. If an option is granted with an exercise price below the fair market value of the underlying stock on the grant date, the option is treated as noncompliant deferred compensation. The consequences fall on the option holder: the entire deferred amount becomes immediately taxable, plus a 20 percent additional penalty tax, plus interest at the federal underpayment rate plus one percentage point, running back to the year the compensation was first deferred.11Office of the Law Revision Counsel. 26 USC 409A – Inclusion in Gross Income of Deferred Compensation Under Nonqualified Deferred Compensation Plans
Private companies avoid this by establishing a defensible fair market value for their common stock at the time of each grant. IRS regulations provide three safe harbor methods that create a presumption of reasonableness if challenged. The most common is an independent appraisal by a qualified third party. Two other safe harbors apply in narrower circumstances: a formula-based approach for stock subject to permanent transfer restrictions, and a simplified method for illiquid stock of early-stage startups operating for fewer than ten years. Any safe harbor valuation must be performed no more than 12 months before the relevant grant date.
Companies that rely on informal board estimates or outdated valuations are taking on real risk. The cost of an independent 409A valuation is trivial compared with the combined income acceleration, penalty tax, and interest exposure that lands on affected employees if the exercise price is successfully challenged.
Independence, Fairness Opinions, and Litigation
A valuation is only as credible as the independence of the firm behind it. That independence shows up most visibly in fairness opinions and solvency opinions, and it becomes the central issue when a valuation lands in court.
Fairness and Solvency Opinions
A fairness opinion is an analysis provided to a board of directors stating whether the financial terms of a proposed transaction, like a merger or acquisition, are fair from a financial point of view. The opinion does not address whether the deal is a good strategic move. It addresses whether the price sits within a reasonable range of fair value. Boards rely on fairness opinions to demonstrate that they met their fiduciary duty to shareholders by obtaining an independent financial assessment before approving a transaction.
A solvency opinion serves a different protective function. Boards obtain solvency opinions in connection with leveraged buyouts, dividend recapitalizations, and other transactions that significantly increase the company’s debt load. The opinion addresses whether the company will remain solvent after the transaction by evaluating three elements: whether assets exceed liabilities at fair value, whether the company can pay its debts as they come due, and whether it has adequate capital to keep operating. Both opinions require rigorous financial modeling and are issued with the explicit understanding that the board and its advisors will rely on them.
Expert Testimony
Valuation professionals frequently serve as expert witnesses in shareholder oppression claims, intellectual property damages cases, breach-of-contract litigation, and contested business valuations. The expert’s job is to translate complex valuation concepts into terms a judge or jury can follow, while defending the methodology against cross-examination.
In federal courts and most state courts, expert testimony must satisfy the standard set by the Supreme Court in Daubert v. Merrell Dow Pharmaceuticals, which assigns the trial judge a gatekeeping role over admissibility.12Legal Information Institute (LII) at Cornell Law School. Daubert Standard Under Federal Rule of Evidence 702, an expert’s testimony is admissible only if the proponent shows it is based on sufficient facts, employs reliable principles and methods, and reflects a reliable application of those methods to the facts of the case.13Legal Information Institute (LII) at Cornell Law School. Testimony by Expert Witnesses
Courts evaluating a valuation expert’s methodology consider whether the technique has been tested and subjected to peer review, its known error rate, whether controlling standards exist, and whether the approach has gained general acceptance in the relevant professional community. Opposing counsel will look for any methodological shortcut or unsupported assumption to file a Daubert motion seeking to exclude the testimony outright. If the expert gets excluded, the entire damages theory or valuation position collapses with them.
The report in a litigation context has to be meticulously documented, because it is the foundation for everything the expert says on the stand. Every assumption, data source, and calculation needs to be traceable. Experts who develop opinions specifically for litigation, rather than applying the same methods they use in their regular professional practice, face heightened skepticism from judges applying the Daubert factors.