An expert witness in business valuation and litigation can, at times, present reports and analyses that embody embedded assumptions and subjective determinations that warrant further examination. But cross-examining experts is always a challenge for a litigator, so it can be difficult to draw out these areas before the court.
Jeff Pellarin, himself an expert witness in business valuation, damages quantification and forensic accounting, is pleased to have contributed to the Canadian Lawyer’s April 2017 issue, in an article entitled “Cross-examining the business valuator”. The article discusses a number of the more common problems that are present in many business valuation reports, and that should be considered in cross-examining an expert witness, including:
Valuation using comparable companies
Valuation by reference to public-company trading multiples, or completed buy/sells of competitors, has an undeniable appeal—it feels objective, and easy for the lay person to relate to. In the article, Jeff sets out a number of shortcomings to this approach that make it far from ideal.
Confusing “Fair market value” and “Fair value”
These two terms are benchmarks or reference points for much litigation. While they seem to be synonyms, they are not the same thing. There are key differences between the two that warrant consideration.
Growth rate and earnings
The forecasted growth of a business has a heavy influence on the present value of the company. Frequently, valuators are overcome by the optimism present in a company, particularly when there has been recent spectacular growth, and assumes such super-growth will continue. However, in truth, it is rare for a business to sustain long-term growth at a rate faster than that that of the economy overall.
Reconciling the reports
The article ends with some advice to practitioners in preparing their own expert witness. When there are two opposing expert reports, a key is to reconcile the differences—how much of the difference between the two experts is on account of each variable on which they concluded differently? While, on the surface, there may be a large number of areas where the two experts disagreed, often most of the difference between the experts is on attributable to only a small subset of those many variables.