Valuation expert’s credibility takes several hits

BVWireIssue #252-1
September 13, 2023

judicial dissolution
fair value, controlling shareholder, shareholders

In a New York fair value case, one of the 50% owners filed for dissolution and the other owner elected to buy him out. The valuation expert for the owner who would remain with the business relied solely on tax returns to base his valuation—even though his client controlled the books and records. The expert testified that he did not independently verify the financial information his client gave him. The court wrote: “It is troubling that an expert would purport to render a serious opinion on the Company’s value based only on its tax returns, knowing his client could easily have given him a more complete set of records.”

Plus, the expert concluded that the business had zero value, even though it was a going concern and his client would continue to operate it. “Indeed, that [the owner’s] expert could conclude based on the record evidence that the Company was worth $0 significantly undermines his credibility,” the court wrote. “The notion that the Company is worthless is belied by the significant value [the owner] continues to derive from it.”

In the end, the court relied mostly on the opinion of value from the departing owner’s expert but did make some adjustments, including to the growth rate, the multiple derived from the guideline transaction method, and the potential retirement of the remaining owner (for goodwill). There was no discussion of a discount for lack of marketability (New York does not take a consistent position with respect to this discount in fair value proceedings).

The case is Rosenthal v. Erber, 2023 N.Y. Misc. LEXIS 4035; 2023 NY Slip Op 32750(U), and a case analysis and full court opinion are on the BVLaw platform.

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