Direct Examination of the Business Valuation Expert

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Direct Examination of the Business Valuation Expert

By: Joy M. Feinberg



Skillful, seamless direct examinations are crafted by careful planning and attention to detail. Preparing the direct examination of a business valuation expert requires even more attention to details than most other examinations, as well as some knowledge, if possible, of the audience to whom you are presenting the evidence. How well does the judge comprehend accounting, finance and valuation principles? Where are the weaknesses in the positions being advanced? Upon what areas will your opponent focus the attack? All of these factors must be considered by the attorney when constructing the expert’s examination.


When preparing the direct, consider whether there is any risk associated with your expert’s credentials or ability to be accepted as an expert. Has the expert strayed from his or her field of expertise? Such examples may be the business appraiser who offers an opinion on compensation issues, the value of equipment or even the fair square footage rental rates in a certain community, any or all of which may be outside of that expert’s true field of expertise. If the expert is demonstrated to be lacking in the specialized knowledge required to formulate such opinions, you may find your expert’s testimony is limited, stricken or excluded.


Consider whether or not the theory of valuation upon which your expert is basing his or her opinion is generally recognized by the valuation community as a valid methodology of determining value. If not, your expert may not survive a Daubert or Frye challenge.


Again, if your expert does not use a generally recognized method, the testimony may never be allowed to occur in the trial. Such problems should be detected before the report is finalized so that you and your expert are not caught short at trial. The attorney should also check to see if the retention agreement comports to the work performed. Did the valuator exceed his or her authorized work arena by moving from valuator to litigation consultant? Review the expert’s time records and files to see if any notes in those files reveal damaging or potentially damaging information.


Building a business valuation expert’s direct examination should be accomplished in logical blocks of information, presented with demonstrative evidence and analogies to assist the judge in understanding the information being presented. A typical outline of such an examination begins with credentials of the expert. All experience in the industry of the business being valued should be emphasized. Move on to the work which the expert did in preparing for the valuation, such as documents reviewed; sources consulted; any site visit; other expert reports reviewed, such as equipment appraiser report, real estate expert report on fair rental rates for owner-leased premises, etc.; personnel interviewed and the information gleaned from each such resource; competitors examined; recasting of income and financial statements to include income not accurately reported or to exclude expenses of personal use, such as a boat or condominium owned for the personal use of the owner; or nonbusiness meals and entertainment charged and paid by a corporate credit card; extended family members receiving perquisites such as gasoline charge cards; home or cellular telephones paid by the business; repairs to the owner’s home being paid by the business; and the like. The purpose of each of these actions should also be explained.


When representing the business owner who also acts in the capacity of CEO, be certain to point out all actions the valuator took to check the veracity of the information being supplied by that individual. This will add to your expert’s credibility.


Have the expert detail the impact of the economic circumstances of the community, country and world at and around the time of the valuation, and how this information impacts the valuation. Move on to an explanation of the particular industry and then to the specific products or commodity for the entity being valued. Have him or her explain any peculiarities of that field or product, such as a limited life of the product, so that the judge formulates a perception of the depth and breadth of the expert’s knowledge of this specific enterprise.


Once this background of information has been completed, it is time to move on to the nitty-gritty of valuation. Explain what generally recognized valuation method is being used and why. Just like we did in law school, explain what methods were rejected or used as a secondary methodology, along with the reasoning for each such decision. Itemize all components of the valuation method and explain how the expert carried out the work required for each such component. Included within this portion of the testimony should be the financial calculations printed in large enough print to be read without strain. Provide the judge with a copy to write upon for each segment of the calculation, such as the capitalization rate calculation, revenue growth assumptions and projections, and the like.


At this point, all discounts must be explained and calculated, such as risks of size, management, high percentage of income from one source, minority discounts, lack of marketability discounts and the like. The expert must explain all sources relied upon in determining the percentages to be attributed to such discounts and the relative comparison between those sources and the particular entity being valued.


Finally, the ultimate conclusion of value or range of value should be presented with the report being accepted into evidence, subject to cross-examination. In order to prepare for any upcoming cross-examination, the opponent’s theories or conclusions should be debunked or discounted at each stage of direct examination. If your expert is also serving to rebut the other expert’s report, and that report has been presented, you will want to address any areas of disagreement not already covered in each previous block of information presented.


This article has not addressed the general rules and concerns of direct examination which should always serve as guideposts to the practitioner. It is the attorney’s job to assess the judge’s understanding of the information being presented and to direct the witness to clarify information that does not appear to have been understood as stated. Keeping this testimony simple, interesting and comprehensible is a challenge, but not impossible. Careful planning and preparation, as always, are the cornerstones of success at trial.