Differing Expert Witness Valuation Conclusions

Differences May Not Be the Result of Advocacy

Judges often make the assumption that business valuation experts always (or almost always) provide the opinions that their clients want and that explains the wide differences they see in valuation opinions.  This judicial attitude is fairly widespread based on my experience, and accounts for many decisions where courts “split the valuation baby.”

Reporting on a recent case is illustrative.  The writer first stated that the judge’s opinion disagreed with both experts, and that both of them had gotten it (their conclusions) wrong.  He went on:

The judge here, Ivy Bernhardson, called these experts “unquestionably qualified.” The problem she identified is just the nature of expert witness assignment in lawsuits. They had been asked to sift through facts, tweak financial assumptions and construct a spreadsheet that gave their respective clients the valuation number they had hoped for.

The Court stated as follows (Kim A. Lund, et al, v. Russel T Lund, III, et al, County of Hennepin, MN, Court File No. 27-CV-14-20058, Memorandum of Law and Order on Fair Value…, June 2, 2017.):

Both experts are highly trained and experienced professionals. Both have testified and provided valuation reports in many trials and contested valuation situations. While the Court finds that both [Plaintiff’s Expert] and [Defendant’s Expert] are unquestionably qualified to testify on the issue of valuation, the obvious, zealous advocacy in which they engaged on behalf of their respective clients compromised their reliability in this instance.

Unfortunately for courts and for business valuation experts, the issue quite often is not nearly so neat and simple.  Consider these possibilities:

  • The appraiser with the lower conclusion is reasonable, and the other appraiser has a much higher conclusion.
  • The appraiser with the higher conclusion is reasonable, and the other appraiser has a much lower conclusion.

Because of the large difference between the two appraisers in both instances, courts may assume that both are being advocative.  This simply may not be the case.  It would be better if all courts would look at the valuation process in its entirety before prejudging that all appraisers are advocates.

This post will not address the valuation issues of this recent case, nor will it address what the appraisers did.  I’m simply using the announcement as a springboard to talk about the elements of substantial private company valuations that can cause differences in valuation opinions, and even significant differences in valuation conclusions between experts.

In the final analysis, courts must decide on valuations in litigated matters.  I hope this post will be helpful for judges, attorneys, and appraisers as they look at different valuation opinions.

Six Sources of Differences in Expert Opinions

There may be more than six sources of differences in valuation opinions between opposing experts, but we will focus on the following six:

  1. Differences in legal guidance or assumptions related to this guidance
  2. Differences in information availability
  3. Access to management and due diligence opportunities
  4. Differences in valuation approaches or methods
  5. Differences in appraiser judgments and assumptions
  6. Mistakes

Let’s talk about each of these categories of potential differences in opinions of business valuation experts.  They may shed some light on how courts can look at valuation opinions of opposing experts without casting them in the light of “obvious, zealous advocacy.”

1. Differences in Legal Guidance and Related Assumptions

Differing legal guidance to appraisers can account for significant differences in valuation opinions.  For example, there judicial guidance regarding the applicability of valuation discounts may not be clear in certain valuation situations.  I recall a case many years ago when the law in a state was unsettled as to whether valuation discounts were applicable in statutory fair value determinations.  I worked for counsel on behalf of a company.  This counsel believed, based on legal research, that valuation discounts were not applicable.  Based on this guidance, I presented the fair value of an asset holding entity based on its adjusted net asset value.  Since I knew there was an open legal question, I also presented an opinion for the court’s consideration if it concluded that a marketability discount was appropriate.

I got the clear impression that, rather than being appreciative of the complete story (with and without a marketability discount), the court somehow believed that I was biased in the matter.  However, I was not biased.  The applicability of discounts in fair value determinations is a matter of statutory guidance or, in absence of such, of judicial interpretation of available statutes.  I made no such determination of applicability.  I presented a control value (net asset value) based on legal guidance from counsel, and then a discounted value in the event the court decided that discounts were applicable.

Suffice it to say that, before examining the opposing real estate appraisals, there was a 30% percentage difference between my lower conclusion with a marketability discount and that of the other appraiser.  There was no bias on my part, but nevertheless I was painted with that brush by the court, or at least it seemed so while I was there.  Or maybe the court thought my client company was biased, and I was tainted because of my client.  That hardly seemed fair.

This situation can arise at any time there are differing legal opinions about the appropriate level of value in a litigated valuation case.  Look at the levels of value chart below:

Levels of Value

If one side has a legal opinion at one conceptual level of value on the chart above and the other has an opinion at a different level (higher or lower), and that guidance is provided to each side’s business appraisers, there is a substantial (conceptual) difference in value at the outset that has nothing to do with appraiser bias.  Note that I’m not talking about the amounts of any premiums or discounts, but just to their applicability (or not).

As a business appraiser, if I am provided with legal guidance at a particular level of value, I will reference that guidance and provide the desired opinion.  If there is some debate on the issue, I have typically provided an alternate opinion at the other (lower or higher) level of value.  That determination is a legal one and not one for business appraisers to make.

The point of this discussion regarding legal guidance is that business appraisers, following reasoned legal guidance from counsel, should not automatically be deemed as advocative for their client’s interests.  At least that’s my opinion.

2. Differences in Information Availability

In an ideal valuation situation, both (or all) appraisers would have access to the same information.  However, not all situations are ideal.  Differences in information availability can occur for several reasons, including:

  • The appraiser for the non-company side is not provided with full financial information that is provided to the appraiser for the company side.  This should not be, but in litigation, some attorneys play hardball with information access for the “out” side.
  • Access to key non-financial documents is sometimes not shared with both sides.
  • The appraisal is historical in nature and there is limited access to historical financial data.  Even in historical situations, there is often unequal information access because one side or the other has documents that the other does not have.  These differences should be eliminated in discovery, but that is not always the case.
  • In some cases, both sides have access to key governing documents, but the documents themselves are subject to differing interpretations.  This could apply to operating agreements, buy-sell agreements, legal contracts, and others.

Business appraisers must deal with information shortfalls in reasonable fashion.  However, the existence of information differences, and the valuation assumptions these differences require, can be the cause for perceptions of bias for one side’s appraiser or the other (or both).

3. Access to Management

In some litigated situations, the “out” appraiser is denied access to management or he or she is denied the same access to management as the “in” appraiser.  Differing access to management can cause differences in valuation assumptions that can be interpreted by courts as advocative by one appraiser or the other.

In a fairly recent matter, counsel for the company refused to allow me to conduct interviews with key managers of a substantial business.  We were required to conduct our management interviews in the context of depositions.  This was the first time in a long career that this has happened to me, but it did.  Problems include the following:

  • Depositions are an awkward forum at best for management interviews.  The appraiser is not asking the questions, but a lawyer is doing so.
  • Follow-up questioning is strained at best.  It is difficult to anticipate all follow-up questions in the preparation phase, and even more difficult to coach an attorney on follow-up in a deposition setting.
  • It is easier for managers being deposed to answer truthfully but incompletely in a deposition without instant follow-up.
  • The “boss” may attend the deposition and have an intimidating effect on managers being deposed.

I could go on, but suffice it to say that it is better, in my opinion, for both sides to have equal access to management and to be able to form their own opinions.

As a basic protection, if I am being provided with limited or no access to management, I ask counsel to make a formal request for the interviews.  Then, if there is a refusal, it should be in writing.  That way, it would be difficult to hold their own refusal to visit with management against me in terms of information questions I might have asked if I had conducted a formal management interview.

4. Differences in Valuation Approaches or Methods

There are three basic approaches to valuation: (1) the asset approach, which focuses on the valuation of (usually) tangible assets; (2) the income approach, which deals with the capitalization of income or the use of the discounted cash flow (or future earnings) method; and (3) the market approach, which may include comparisons with transactions in public or private company interests.

For most profitable operating companies, the asset approach is of limited use.  Appraisers may capitalize historical or anticipated earnings under the income approach or they may utilize the discounted cash flow method, with a forecast of future operations and the development of a terminal value.

For sizable private companies, it may be possible to make comparisons with publicly traded guideline companies.  However, size differences alone will sometimes preclude the use of what is called the guideline public company method.  In other cases, it is simply not feasible to identify sufficiently comparable public companies to use this method.

Sometimes, it is possible to value private companies based on comparisons with transactions in other private or public companies.  However, this method is often not available because of limitations on comparable transactions

The bottom line is that appraiser judgment is required.  Business appraisers should show that they have considered all three general approaches to valuation.  They should then explain why each approach, and methods within the approaches, are used in their appraisals.

Suffice it to say that different decisions regarding valuation approaches and methods can cause some differences in valuation conclusions.  Different methods used, however, should not be considered as a source of bias unless the appraiser(s) cannot convincingly explain why they have used (or not) particular methods.

We have now examined four broad categories of items that can cause differences, even significant differences, in valuation opinions between appraisers of the same asset at the same time.  Now it is time to talk about the big fifth category.

5. Differences in Appraiser Assumptions and Judgments

Appraisers must make valuation assumptions and judgments in every appraisal.  The following list is not complete by any means, but is indicative of the kinds of assumptions that must be made.

  • Asset methods.  There may be differences in the appraisals of underlying assets used by different appraisers.  Which appraisal(s) and which assumptions are the more reasonable?
  • Earnings methods.  Earnings must be adjusted and analyzed. Valuation is a prophecy of the future. Which appraiser’s analysis best captures the outlook based on historical analysis?  Normalizing adjustments must make sense. Working capital requirements may impact expected cash flow.
  • Forecast assumptions for DCF.  Appraisers must make assumptions regarding the outlook for the future when using the discounted cash flow method.  Assumptions must be made about expected growth in sales and earnings.  Margins must be examined.  Capital expenditures and working capital assumptions should be reasonable.  In the final analysis, how does the forecast look in light of a company’s history and reasonable expectations for its future.  This determination is in light of the expected operating and competitive environment.
  • Terminal value estimation for DCF.  The terminal value in a DCF valuation method often accounts for 50% or more (or much more) of the value in a five year forecast of earnings.  Is the terminal value multiple reasonable?  Is expected growth reasonable, and are assumptions about capital expenditures and depreciation reasonable in the terminal value estimation.
  • Sensitivity analysis.  DCF valuation conclusions are often quite sensitive to even modest changes in assumptions.  Does the appraiser make the reader aware of the sensitivity of the conclusion to changes in assumptions?
  • Guideline public company method.  Is the guideline public company method used?  Should it be used?  Are comparable companies realistically comparable?  Are valuation inferences regarding multiples reasonable in terms of differences in expected cash flow, risk and growth between the guideline companies and the subject company?
  • Guideline transactions method using private companies.  It this method used?  Should it be used?  Are the comparable transactions realistically comparable in terms of business lines, size and timing?  Are valuation inferences regarding multiples reasonable in terms of differences in expected cash flow, risk and growth between the guideline companies and the subject company?
  • Weights assigned to methods in correlating conclusions.  Are the weights assigned in the process of reaching conclusions reasonable?  Do they make sense in light of the overall analysis?
  • Consideration of premiums and discounts at the enterprise level.  Does the appraiser use discounts or premiums that do not appear to be supported?  Examples might include key man discounts or control premiums.
  • Treatment of nonoperating assets.  The existence of nonoperating assets on a company’s balance sheet can have a material impact on valuation.  Are nonoperating assets identified and valued appropriately?  Is the impact of nonoperating assets removed from the operating analysis?
  • Consideration of valuation discounts at the minority interest level.  When the valuation subject is a minority interest, appraisers may use minority interest and/or marketability discounts.  Are these discounts determined based on their impact on the expected cash flow, risk and growth from the viewpoint of minority investors?  If not, there may be a credibility issue.

We have noted a number of possible assumptions that may be made in the appraisal process.  This list is not meant to be complete but illustrative.  Interestingly, in most valuation situations, the majority of the differences between the conclusions of appraisers in litigated situations can usually be boiled down to differences in two or three assumptions.

6. “Mistakes”

Sometimes a portion (or all) of the difference between the conclusions can be the result of a mistake or mistakes on the part of one of the appraisers.  Mistakes are embarrassing, but they happen.  Hopefully they have been discovered and corrected prior to trial.  But they do happen.

Additional Filters for Courts

We have gone through a litany of items that can cause differences between the conclusions of appraisers in litigated valuation situations.  I noted that, in most cases, the differences can be boiled down to differences in just a small number of assumptions.  Courts do have additional filters that should considered when looking at differing valuations.  These filters include:

  • The relative credibility of the reports.  Credibility can be judged in terms of writing style, tone, accuracy, content, and the like.
  • Credibility of the respective testimonies.  All experts are not the same.  How do they perform on direct testimony?  Can they maintain their objectivity under cross-examination?  Was opposing counsel able to elicit impeaching testimony?
  • Consistency with prior writings and opinions.  As one who has written a great deal over many years, I am accustomed to having something I’ve written brought up as potential impeachment.  I’ve been pretty consistent over the years and have a decent memory about what I have written. I’d recommend that other appraisers work on their historical record.
  • Relative value in light of comparable valuation evidence.  This is a biggie.  All valuation is relative.  What are the implied valuation multiples of the respective conclusions.  When compared with available market multiples, do they make sense?  Which conclusion makes the most sense.  Too often courts assume that both experts are hired guns and never look at the relative comparisons of conclusions with market evidence.
  • Equities of the situation from a court’s point of view.  Most valuation disputes occur in courts of equity.  The business appraisers cannot make “equitable”  assumptions, but courts can reach what they believe are equitable decisions.  Both appraisers can get burned when neither conclusion matches a court’s view of the equities of the situation.  And court decisions often say what they must say to reach equitable conclusions, regardless of the damage to appraisers.  That’s a risk of the game for business appraisers.

In addition to the valuation-related items we began with, we understand that courts do have additional filters through which to look at expert opinions.

Wrapping Up

The fact of differences in conclusions between business appraisers in litigated situations may not be the result of advocacy on both of their parts.  I believe that courts should begin with an assumption of appraiser neutrality and move away from that assumption only when there is direct evidence that one or both appraisers are being advocative.

Be well,




Valuation is important for business owners for many reasons.  One of these reasons is for the operation of buy-sell agreements.  If you are thinking about your buy-sell agreement (and you should be), then take a look at Buy-Sell Agreements for Baby Boomer Business Owners, my Kindle book on the topic.

I’ve priced it at $2.99 so you won’t have to think about the expense.  So click on the image of the book.  You will be taken to Amazon.  Then buy the book.  Don’t be mislead by the price.  It is a full length book.  If you like it, as most readers have, please take a few minutes and review the book on Amazon!

Please note: I reserve the right to delete comments that are offensive or off-topic.

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5 thoughts on “Differing Expert Witness Valuation Conclusions

  1. Thank you for raising this subject. I truly believe that the majority of professionals seek to provide unbiased valuation opinions based on analysis and judgment. So one would truly hope that judges would start all reviews from that baseline.

    However, it should be recognized that valuators can and should be advocates for their professional, properly reached conclusions as they seek to have the process they applied and the basis for the final value estimate understood. That is not client advocacy….it is effective action to support an opinion of value believed to be “essentially correct”.

  2. Very well written and right on point. As a business valuer and as a qualified mediator or neutral, I see these elements consistently and work on these types of cases nationally. The Harvard Business Program on Negotiation recommends mediation in parallel with litigation. Why? It helps to address these issues and has a high success rate, saving time and money, bringing closure and addressing the emotional issues. As a consultant isn’t that what we should be doing? What does that do? It brings in more clients.

    When working with both parties an effective mediator that also has business acumen can build trust, ask pertinent questions and help the parties to see their own and the other party’s weaknesses as presented in the information in this article. The clients really appreciate this. The clients want closure.

    Thank you Chris for bringing these points to our attention.

    Michael Gregory, ASA, CVA, MBA, Qualified Mediator with the Minnesota Supreme Court

  3. I agree with the sentiments voiced by Richard and Mike. And thank you, Chris, for addressing the subject of divergent opinions.

    Based on my reading of the case, I believe that one of the experts appears to have made at least one big mistake. We are human, after all. But, in my experience, two methods–DCF under the income approach and guideline public company analysis under the market approach–will, if they are deployed correctly, produce results that are within 10% of one another. If the gap between results under these two methods get much bigger than that, the likelihood of material error in the work of the valuation professional rises precipitously.

    Unfortunately, the judge’s lack of valuation expertise prevents her from being able to differentiate between advocacy and a mistake, so she jumps to the conclusion that both experts were advocates for their clients. I believe she’s dead-wrong: both experts are long-standing professionals who have written extensively and contributed much to what we know and how we practice business valuation. Each has earned the high regard in which he is held among his peers.

    To be sure, I have seen instances where a BV practitioner masquerading as an expert was, in fact, an advocate for her/his client. In each case, it was a CPA who did not work full-time as valuation professional. I hasten to add that, as a CPA myself, I am most assuredly NOT saying that each and every CPA who doesn’t work full-time as a valuation professional advocates for their clients, rather than for their professional opinions. I’ve seen instances where it didn’t appear to be the case.

    But in both groups of CPAs that I have observed–advocates for opinions and advocates for clients–no CPA had what I call a ‘high-level valuation credential’: none was an Accredited Senior Appraiser, for instance, and none held the Chartered Financial Analyst designation. As one who holds both designations, I believe that there’s a good explanation for why they didn’t: the sky-high opportunity cost of obtaining either or both of them. I cannot imagine any circumstances under which anyone who made the required huge investment of time and effort will get a worthwhile return by working only part-time in valuation.

    Moreover, those who appeared to be advocating for their clients personified the characterization that the late Sen. Paul Tsongas hung on then-Gov. Bill Clinton during the 1992 presidential primaries. Clinton, said Tsongas in his Massachusetts accent, was “a pander bear.” Politicians aren’t the only people who pander.

    In my view, anyone who offers expert testimony in valuation services should work full-time in valuation. In the panoply of CPA-firm services, valuation is the brain-surgery equivalent. Who would like to be operated on by a part-time brain surgeon?

    Unfortunately, few clients know enough about valuation to think like that. Indeed, some who can might find a part-timer perfectly acceptable, esp. in litigation where the client is willing to roll the dice on the outcome. But more than a few of the part-timers whose valuation work I have had the opportunity to review over the last 25 years appear to have taken what I call ‘The Jeopardy Approach to Valuation’: they start off with the answer (e.g., ‘The client believes this equity stake is worth $Y. They are a long-time client who has made our firm a lot of money, esp. through referrals, etc.’) and then back into the question (‘What set of assumptions can I create that will result in a conclusion of value that is close to $Y?’).

    I have long believed that the solution to this problem is high-dollar instances of malpractice litigation whose stakes would create ugly publicity but would also drive the price of malpractice insurance through the roof. That does not appear to have happened. . .yet. But we can hope. Part-time valuation practitioners do the serious valuation community a huge disservice. Even if the market for brain surgeons could tolerate part-timers, I doubt that the community of brain surgeons would. If we in the full-time valuation community don’t self-regulate responsibly, the heavy hand of government will make us wish we had. The advent of the C.E.I.V. designation, which is long overdue in my view, may be just the leading edge.

  4. Dear Chris, have been following you for years and have the first book. Regarding appraisers differing, did you hear about the young man just out of college in 1933 applying for a teaching job in Texas? He was interviewed by the local school board, whose chairman said, “Do you believe that God made the world in six days as it says in the Bible, or did it take him 4 million years like Darwin says? The young man, who really needed the job, though for a minute and said. “I can teach it either way.”

    PS: Please more info about “The Myth of the Minority Discount” !!! Thank you.

    • Bill,
      I had not heard about the teacher you mentioned before now. That’s a good story. I do tell a “whiskey story” that has certain similarities! I’ll talk more about the “myth of the minority discount” in the near future! Thanks for your comment!