How do you apply a litigation discount to a valuation?

Answer

Mechanics

a litigation discount is a valuation reduction for open legal disputes with potential damages exposure.

Methodology

Probability-weighted outcomes: `expected damages = Σ (probability × damage)`.
Discount to present value: the cash outflow is often 2–4 years out.
Tax effect: damages are often tax-deductible — use the after-tax liability.
Pitch model: `adjusted EV = standard EV − probability-weighted litigation liability`.
For highly uncertain litigation: a "pro-forma range" valuation with/without the litigation outcome.

Deep diveShow more details

Example — probability-weighted expected value

Inputs:

30% probability of $100m in damages
50% probability of $50m in damages
20% probability of $0 damages

Calculation:
```
Expected value = 30% × $100 + 50% × $50 + 20% × $0
= $30 + $25 + $0 = $55m
```

Examples

the Volkswagen diesel emissions case (2015–present, cumulative liabilities >$35bn); the Bayer-Monsanto Roundup litigation (2018–present).

Pitch tip

'For pharma or auto targets, litigation due diligence is as important as financial DD — several deals fell through over litigation between 2018 and 2024.'

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