Common Sense Analysis Paramount in Business Valuation

The court date has finally arrived and it’s your business valuation expert’s opportunity to provide testimony. You’re expecting a stellar presentation. His credentials are impressive and he’s cool under pressure, but does he understand the importance of applying a common sense analysis to the valuation issue? Can he separate the “art” of business valuation from the “science”? Let’s take a look at the important areas your expert should have researched before his day in court and ways he can help when testing an opposing expert.

Support the underlying theory with a large dose of common sense. First of all, experts should rely on their “common sense.” Many experts have a tendency to check their work carefully, make sure that they have performed all of the objective calculations in a technically correct manner, and rely on whatever answer is produced by those efforts. Part of an expert’s job, however, is to ask the question, “Does the analysis make sense as a whole?” More cases are won or lost with common sense analysis than by any other means because judges and juries like the answer that “feels right.” Valuation theory should not depart from common sense, and when your expert applies a common sense analysis to every valuation issue, and supports the analysis with underlying theory, his credibility rises. Likewise, when your expert questions the common sense in relation to the underlying theory applied by the opposing expert, the opposing expert’s credibility is diminished.

For example, take the case of the opposing expert who valued a Jaguar automobile dealership for $156,000. Our analysis showed the dealership was worth quite a bit more. The judge ruled in favor of our client, not because we presented our testimony more artfully, or because our underlying theory was more technically correct, and not because we had checked our work better. Our client won on this issue because the average price of a Jaguar is $85,000, and one of the benefits of this particular dealership is that the owner received two demonstration vehicles from the manufacturer. We simply pointed out that the opposing expert apparently believed that this dealership was worth less than the price of two Jaguars; that answer simply did not make sense under the circumstances.

Know the external studies—in detail. Your expert should have an in-depth knowledge of the external studies utilized in the opposing expert’s analysis, and should provide questions for the opposing expert that challenge the same knowledge. Many practitioners are trained to rely on a variety of studies when determining relative discounts and premiums. In many cases material adjustments are made to the value indication based on external studies. These studies may be well known or relatively obscure, and the application of the study and the expert’s knowledge of the study itself are critical. Experts frequently refer to studies in their report, applying them to their analysis, without having ever read the studies in question. In trial or deposition, the expert should be asked if they have a thorough understanding of the studies utilized in their analysis, and should be posed specific questions regarding the studies’ methodology and results.

Never assume the math is correct. Your expert should always make sure the opposing expert’s numbers add up. Many experts have failed in their presentation because of simple math errors. The primary effect of this type of error is to distract the court, drawing its focus away from the underlying theory of the valuation. A challenge to basic math can fluster a vulnerable expert as he attempts to recalculate numbers from the stand. Miscalculations also create questions in the mind of the court as to the thoroughness of the expert.

Raise doubts about the opposition’s credibility. Because the credibility of an expert is paramount, it is important to remember that your expert’s job is about more than providing testimony. Your expert can and should point out instances where the opposing expert has failed in the analysis, whether that failure is related to mathematical errors, financial and valuation theory, or common sense consideration of the assignment. Expert testimony is 20% being correct (an important 20%), and 80% being believable.

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Robert Buchanan

Valuation | ESOP
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