How does Monte Carlo simulation analysis aid in valuing trade secrets?


Jacquelyn Dal Santo in a Willamette Management Associates Insight article outlined a hypothetical case study which assumes an analyst will value a trade secret using the discounted cash flow method. She poses the question about how to best handle the following data gaps.

1. Management income projections are not available;

2. Historical financial information exists regarding the use of the trade secret, but the historical information does not;

3. Both historical revenues and expenses related to the trade secret seem to fluctuate within a range.

4. Expected long-term growth rates are better estimated by a range than by a single point estimate.

Dal Santo’s solution?  Monte Carlo analysis.  Unfortunately, many valuation analysts find the Monte Carlo methodology confusing, and therefore this excellent tool is not being used in instances that clearly call for it.  David Dufendach and Jason Andrews of Grant Thornton are combining with BVR to present a roll-up-your-shirt sleeves workshop on March 8 to take the mystery out of Monte Carlo statistical analysis. Mark your calendar and tell your colleagues.


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