Navigating Complex Business Valuation in Litigation | Part 2: Strategies for Multiple Valuation Dates & Opposing Expert Reports

This is the second of a two-part series where we focus on navigating business valuation complexities in litigation. Part 1 discussed strategies for multi-entity and multi-location businesses and can be found here.

Case Scenario 3: Multiple Valuation Dates

In litigation, it is not uncommon for multiple valuation dates to be involved due to various events that cause the need for valuations. These different valuation dates present unique considerations. The need for multiple valuation dates can be triggered by a number of different reasons. Some states require date of valuation at separation or filing, while others require a current valuation as close to trial as possible. Multiple valuation dates may also be necessary in matters where the business began prior to marriage to assist in pre-marital or separate divisible value, as well as appreciation in value of the business during the course of the marriage and/or after separation through the current date. Some strategies when dealing with multiple valuation dates include:

1. Understanding Changes in Circumstances: Valuing a business at multiple points in time necessitates a thorough understanding of how changes in the business between valuation dates can impact its value. These changes can shift the business’s financial performance, as can changes in the economic environment or industry that the company operates in. Example considerations include the following: Does the Company still pay rent expense to a third party, or do they now own the facilities of the business? Has the dividend policy changed over time? Has the industry the business operates in grown over time or has it hit a non-recurring peak in between valuation dates? Has the market share of the business changed and are the products & services offered from the Company still the same?
2. Consistency in Methodology: Clearly document the valuation methodologies used at each valuation date and explain why you chose specific valuation approaches. If applicable, provide the rationale for any changes in methodology between the valuation dates. Ensure that the chosen methods are appropriate for the specific circumstances at each date. One factor that can impact a change in methodology is the life stage of a business. A younger company might be valued more appropriately by applying a discounted cash flow (DCF) method with increased growth and risk factors. On the other hand, a mature company at a later valuation date might be best valued using a capitalization of earnings method, a historical income approach with more moderate ongoing growth.
3. Documentation of Changes: It is important to document and explain any changes in the business’s circumstances or assumptions that occurred between valuation dates. Maintaining a detailed change log that records significant changes in the business’s operations, financials, and market conditions can be helpful. For expert testimony, prepare your valuation expert to provide clear and credible testimony regarding the reasons for changes in circumstances and assumptions between valuation dates.

Case Scenario 4: Opposing Expert Report

When faced with an opposing expert report, it is necessary to assess the methodology, assumptions, and conclusions presented.

1. Review and Analyze: Reviewing and analyzing the opposing expert’s report is the first step. Understand the valuation methods employed by the opposing expert and whether they have used the appropriate approach for the specific business and context. For instance, assess whether he or she has chosen an income-based, market-based, or asset-based approach and evaluate the appropriateness, provided facts and circumstances. Did the opposing expert give reasons for methods used and reasons for methods excluded or not relied upon? Did the opposing expert provide rationale for assumptions chosen through the report?
2. Identify Weaknesses: Evaluate the reliability and relevance of the data sources utilized by the opposing expert. Assess whether the opposing expert has used outdated or inaccurate data. Delve into the key assumptions made by the opposing expert and identify if any of the assumptions used are unsupported or unrealistic. This could involve assumptions related to revenue growth, cost projections, discount rates, or market trends. Scrutinize the calculations and mathematical procedures applied in the report. Errors in calculations can undermine the reliability and accuracy of the valuation.
3. Prepare for Trial: Once you have identified the weaknesses and inconsistencies in the opposing expert’s report, it is time to prepare for trial. Refute unsupported assumptions with evidence-backed data or industry benchmarks. Collaboration between the valuation expert and legal counsel helps both professionals prepare for trial.

Conclusion

Navigating business valuation complexities in litigation involving multiple valuation dates and opposing expert reports can be challenging. However, these challenges can be overcome through the strategies presented above. The ability to adeptly address complexities within multiple valuation dates and opposing expert reports are essential in the resolution of complex business disputes.

Additional resources to help you navigate through additional business valuation complexities in litigation are listed below.

ADDITIONAL RESOURCES

• Active vs. Passive Appreciation of Closely Held Companies
• Constructing a Lifestyle Analysis- A Multipurpose Analytical Tool in Marital Dissolution Engagements
• Valuing Stock Options of Start-up Companies: A Complex Issue in Marital Dissolutions

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