Expert Witness or Hired Gun?
Business Valuation in Divorce
Your client is in a contested divorce. Included in the marital property is a very
profitable consulting firm. Your client
is the primary operator of the business, and wishes to own it exclusively after
the divorce. The spouse has no interest
in owning the business after the divorce.
Is it in your client’s best interest to obtain the lowest valuation of
that business you can get?
One of the senior partners at your firm
suggests a business valuation expert from a large local CPA firm, saying with a
wink “Harry will get the number you need.”
He also tells you that Harry has served as an expert witness for your
firm more than one hundred times over two decades.
You decide to check with your CPA also. He refers you to Cathy, a CPA with valuation
credentials and ten years of experience.
Cathy works for a small firm that specializes in business valuation. She rarely serves as an expert witness; the
majority of her work is related to the buying and selling of businesses. After you call Cathy and explain your
circumstances, she tells you that she can accept the engagement, provided you
understand that she will not steer the outcome of her analysis in one direction
or another. “My number is my number,”
she declares.
Which expert will better serve the interests of
your client? Many attorneys will
recommend hiring the expert who will give you the answer you want. They will argue that most of the time the
judge will split the difference between the two values, because the judge will
assume that both reports are equally skewed.
Therefore, if your report is not equally skewed, you will be ceding
ground to the opposition.
Believing this logic requires that you must
also believe one or more of the following statements is also true:
- Business valuation reports are so inherently technical that an accurate report with sound logic is indistinguishable from one that is not.
- Judges are incapable of recognizing the differences between a sound valuation report and one that contains inaccuracies. Further they are equally ill equipped to discern the significance of the expert witnesses’ criticisms of each others’ reports.
- The credibility and experience of the expert witness is far more important than the quality and accuracy of their work. Judges, not being able to discern a good analysis from bad, will evaluate the experts based on their credentials and experience, and will weight their testimony based on their relative credibility.
Based on my experience and my readings of
judicial opinions in valuation cases, all three of these assumptions are false
in the majority of cases.
Valuation reports are inherently technical,
however the logic applied in a well-written report should be understandable to
anyone with a solid grasp of standard financial investment principles (return
on investment, present value, etc.)
Given that judges have the opportunity to read two reports regarding the
same company, hear the authors’ explanations of their logic, and hear the
experts’ criticisms of each others’ reports, most judges are very capable of
evaluating the merits of an expert’s opinion.
Most judges will also be able to identify and quantify those little
inaccuracies that tend to skew a conclusion of value in one direction or
another. Judges will also base their
opinion of the expert witnesses’ credibility – in part – on the quality of
their report, their testimony, and their responses to cross-examination.
The very foundations of valuation practice are
the product of judicial opinions in cases arising from a tax break offered to
companies hurt by the enactment of prohibition.
Several of the IRS most prominent Revenue Rulings are the product of
judicial opinions. Judicial opinions
have continuously served as a guide to professionals’ best valuation practices,
with particular emphasis on the most contentious theoretical topics.
Choosing the ‘hired gun’ will cost your client
more, in most cases. If you present a
valuation report with well-substantiated logical conclusions, the opposing side
may accept your expert’s opinion of value.
In most cases this would dramatically improve the chances for a
negotiated settlement, saving your client significant time and expense. Even if the opposition does not accept your
expert’s opinion out of hand, after hiring their own expert they may conclude that your value estimate was reasonable, which again increases the probability of a negotiated
settlement. If your report is highly
skewed, you have almost certainly assured your client an expensive court battle
involving multiple expert witnesses, depositions, and court appearances. Finally, a skewed report may cause your
client to have unrealistic expectations, which frequently result in
disappointment.
It is very probable that the estimate of value in a skewed report (which inherently contains some inaccuracies or
omissions in order to reach its skewed conclusions) will be completely
disregarded if a knowledgeable judge is comparing it to a well-written
reasonably valued opinion. You may argue
that your client hasn't lost anything in such a case. I disagree.
Because the judge has completely accepted the opposing side’s value, you
have lost the smaller more realistic negotiating opportunity that reasonably
exists in every company. Your client has
also spent tens of thousands of dollars more to achieve a result that they may
have obtained months earlier.
Brian Murray CPA/ABV, CVA specializes in business valuations and merger and acquisition consulting, and has served as an expert witness in court. Please call Murray & Roberts CPA Firm SC at (920) 225-6436 to find out more or visit our website www.murrayrobertscpa.com, and click on the BUSINESS VALUATION link. Go to www.mycompanyvalue.com now for a fast and affordable business valuation report prepared by Brian Murray.
