When applying the income approach, the theory of business valuation determines the value of a business by assessing the present value of its future net cash flows. Since the requirement of full compensation is generally interpreted to put the damaged party into the same economic (i.e., financial) situation it would have been in but for the wrongful act, the methodology and approaches widely accepted for business valuation are also applied in the determination of damages.
In a recent article*, Alvarez & Marsal (A&M) Managing Director Alexander Demuth introduces the discounted cash flow (DCF) methodology and its approaches, and then discusses, in the context of international arbitration, its application to the assessment of damages, the assumptions required to adequately and reliably use this methodology and the documentation required to support its results.
*First published in Global Arbitration Review’s Guide to Damages in International Arbitration, ed. John Trenor, December 2017