It’s always very informative and helpful to listen to judges talk about the valuation cases they hear. At its annual conferences, NACVA regularly presents sessions with judges. At its Business Valuation and Financial Litigation Super Conference in June, a session included a panel of four judges and one moderator. As seen in the recent article, “From the Bench: 10 Warning Signals of Trouble With a Valuation Expert,” from Business Valuation Update (BVU), the panelists shared their views of when they detect potential problems with appraisers when they are on the witness stand.
1. Suggestion of a level of precision that is not realistic.
An opinion of value down to the very last penny? A DLOM taken out to three decimal places? Judges know that no appraiser can guarantee accuracy, but valuation experts who focus too much on math can fall into the “illusion of precision” trap that moves experts away from using judgment in the process.
2. Foundation based on judgment rather than available facts.
Gone are the days when an expert can merely rely on “my professional opinion.” Often, millions of dollars are at stake when an input or assumption shifts, so the data must be current and the analysis in-depth.
3. Refusal to acknowledge an obvious error.
Everybody makes mistakes. In the judge’s eyes, your credibility will suffer by attempting to support an error, so admit it quickly. Failure to acknowledge a minor error could affect the validity of your entire valuation, the panel points out. Once you’ve admitted the error, you can expect the following question: “How many other errors do you have in your report?” Don’t say “No” because another mistake may be found, so you should answer: “None that I know of.”
4. Refusal to acknowledge alternative interpretation of the data or methods.
Judges are constantly puzzled whenever two highly qualified credentialed experts come up with such divergent values. Of course, different legitimate assumptions about the many variables and inputs in a business valuation can affect the opinion of value. The problem is when experts refuse to acknowledge that there are alternate ways to interpret data—then they give the perception of being a hired gun.
5. All ‘judgment calls’ go in the same direction.
Appraisers need to be cautious about their dealings with attorneys who can become overzealous and want to steer the valuation. Attorneys will hire experts they feel they can “shape,” but judges can spot that type of advocacy, according to one of the panelists. Experts who are most persuasive are those who “weave” advocacy into what he describes as “objective analysis.” This lends itself to the judge adopting that expert’s position “lock, stock, and barrel,” he says. An expert who sounds like just a mouthpiece for the attorney often winds up having his or her testimony totally discounted.
6. Approach and methodology dependent upon expert’s ‘side of the case.’
If the approaches experts use change depending on which way the wind is blowing, it’s a sure sign of advocacy. Also, judges also take a dim view of experts who appear over and over again taking the same side and having the same opinion. What do judges do when they spot an expert advocating for the client instead advocating for his or her opinion? It depends on whether it’s a jury trial or a bench trial, according to one of the panelists. If it’s a jury trial, the judge has to be very careful. Typically, there will be an objection by opposing counsel and then a conference at the bench to get the expert back on track. If it’s a bench trial (no jury), the judge will admonish the expert to just stick to the facts and give his or her opinion.
7. Cannot clearly and simply ‘tell the story.’
All too often, written valuation reports put too much emphasis on calculations and not enough on the narrative. Complicated facts need to be distilled into a simple story using bite-size morsels. A clear and convincing narrative must also be presented that ties to the numbers. Pretend you are telling a story to a child and focus on crafting a good beginning and ending—the middle will pretty much take care of itself.
8. Boilerplate, not case-specific, approach.
Attorneys will often say that, if a valuation report is too short, it’s “lightweight,” so the expert may be tempted to add a lot of boilerplate and padding. Judges know that certain sections of the report are prone to boilerplate, such as the industry and economic sections—a lot of pages of text and data that don’t have much to do with the subject company. And, in today’s pandemic environment, it’s more important than ever to relate what’s happening in the industry and economy to your subject firm.
9. Inability or unwillingness to connect the theory and case facts.
If you don’t connect the dots between valuation theory and the facts of the case, the judge will interrupt you and say: “Please tell me what your analysis has to do with the facts!” The report may be a solid analytical work, but you must make sure that the facts connect with the analytical methodology and market data, and, foremost, tell the story in a clear and persuasive way.
10. Inability to admit or explain source of assumptions.
At the end of the day, it all comes down to the assumptions you make, which are based on personal experience and professional judgment. But you need to clearly explain the assumptions you are using in your various models. One good idea is to use an “assumption box” that can help guide users of the model to the key inputs driving it. At the end of the day, if your key assumptions are reasonable—sales projections, competitive situation, and the like—you’ll have a good valuation. If they’re not, you won’t have a good valuation.
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