Dispelling the ‘hired gun’ perception of testifying experts

BVWireIssue #234-1
March 2, 2022

marital dissolution/divorce
business valuation, capitalization rate, cash flow, discount for lack of marketability (DLOM), earnings, officer compensation, management fees

A question often comes up: “How can two qualified and experienced business valuation experts analyze the same company and come up with widely disparate values?” Some people may think the answer is “hired gun” or a faulty analysis, but legitimate reasons can cause two experts to be far apart, as a new case illustrates.

New case: The case is a marital dissolution matter in Nebraska. The expert for the husband valued his interest in his roofing business at $494,000, while the wife’s expert came up with a value that was almost four times higher ($1,830,500). Both experts were highly experienced and credentialed valuation experts who did everything by the book. But certain assumptions they used for the income approach differed. For example, when averaging five years of historical earnings, one expert disregarded two years because he felt they were anomalies, while the other expert disagreed and included those two years in his analysis. They also disagreed on normalization adjustments for certain expenses—one expert treated them as nonrecurring, while the other expert did not. They also used cap rates that were significantly different. In the end, the district court found the wife’s expert’s valuation to be more credible and accepted his value of $1,830,500.

On appeal, the appellate court said the lower court did not “abuse its discretion” by siding 100% with one expert over the other. The appellate court noted that the differences in the two valuations were not due to any “foundational flaw” in the analyses—they were due to differences in “professional judgment.” It was not the appellate court’s role to second-guess the district court’s determinations of weight and credibility. The decision of the lower court was upheld.

The case is Cain v. Cain, 2022 Neb. App. LEXIS 18; 2022 WL 287918. A case digest and the full opinion are available on the BVLaw platform.

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