In May, I’ll be speaking at the AAML/BVR National Divorce Conference in Las Vegas. My topic is “How to Present Complex Finance to Judges.” Given that every divorce trial I’ve seen has been a bench trial, the topic focuses on judges. However, many of the same presentation techniques are certainly applicable to juries, as well.
The idea for this post is simple. I’m asking readers to provide me with examples of the best demonstratives they have seen to present complex financial and valuation issues in court.
I’ll also be talking about concepts and ideas, so any thoughts regarding conceptual approaches or philosophical approaches to court testimony would also be helpful.
My first testimony was in 1981, so I’ve been doing this for a while and have some ideas of my own that I’ll share in the presentation.
If there is a good response, and with your permission, I’ll share some of the demonstratives and ideas in my May presentation and in another post or series of posts on this blog.
An Early Demonstrative (1992)
My first book, Valuing Financial Institutions, was published in 1992. By 1992, I had testified in numerous cases involving the valuation of banks. I found that it was difficult for judges to understand how banks worked, and how their balance sheets interacted with and drove their income statements.
I’m not proud of the graphics today, but the following figure was presented in Chapter 8 of Valuing Financial Institutions, “Overview of a Banking Company.” The figure gave me a platform to simplify how banks work and was very helpful in numerous court testimonies regarding banks.
Banks don’t make widgets or software or provide services like other companies. They raise capital and build a building or branches and hire people. Then they can take in deposits, which can be used to make loans.
Deposits generate interest expense, and loans generate interest income. The difference is net interest income, the primary income stream of community banks.
In any event, the diagram above was helpful when I used it.
A More Recent Demonstrative re Fair Market Value
As a business appraiser, I’ve had to explain the concept of the standard of value (fair market value) on many occasions in court, in speeches, and in meetings with clients.
We all know the definition, probably by heart. But mere recitation does not convey the ideas and concepts and nuances underlying fair market value.
I’ve developed a number of graphics over the years to try to make fair market value come to life for judges. My most recent figure is as follows:
Fair market value occurs at the intersection of hypothetical negotiations between, yes, hypothetical willing buyers and hypothetical willing sellers. What does that mean? The figure above shows that intersection in the context of the characteristics of hypothetical willing buyers and sellers.
Asking for Your Help
If you have a favorite demonstrative for presenting complex financial concepts to judges, please do share. I’ll use any shared visuals or concepts with attribution unless told otherwise. We can all learn from each other, so here is a way for all of us to share our expertise. Please do share.
One More Figure from New Book
In my forthcoming new book on buy-sell agreements, I’ve added substantially to the materials found in my former books. The core recommendation of the book is that most companies could benefit from amending their buy-sell agreements to what I call the Single Appraiser, Select Now and Value Now (and Annually Thereafter) valuation process.
An example of the reasons I don’t recommend multiple appraiser processes can be seen here. There are three appraisers in a valuation process. Appraiser 1 concluded that fair market value was $100 per share. Appraiser 2 reached a conclusion of $200 per share. The third appraiser’s conclusion is to be averaged with the conclusion of Appraiser 1 or 2 that is closest to his conclusion. This sounds reasonable, however, it is not. Look at what happens as we consider different conclusions for Appraiser 3.
For significant ranges, there is a linear relationship between the average of Appraiser 1 (blue dashed line) and Appraiser 3 (purple solid line), up to a conclusion of about $149 per share for Appraiser 3.
For significant ranges, there is a linear relationship between the average of Appraiser 2 (red dotted line) and Appraiser 3, down to a conclusion of about $151 per share for Appraiser 3.
Now look what happens as Appraiser 3’s potential conclusion would increase from $149 per share (actually, $149.99 per share) a very small amount to $151 per share (actually $150.01 per share). It is then averaged with the $200 per share conclusion of Appraiser 2. The average conclusion jumps 41% over this very small range (or falls similarly if moving down from higher to lower).
The fairly typical provision noted above, where the third appraiser’s conclusion is averaged with the closest of the other two conclusions, is a landmine, or, as I have described before, a ticking time bomb.
A number of years ago, I was involved in a multi-million dollar litigation (that’s in terms of appraiser and attorney fees) that revolved around the issue illustrated in the chart. Fortunately, I was not Appraiser 3, who in that litigation was under enormous pressure from every point of view. And fortunately for Appraiser 3, the case settled prior to trial, so there is no written decision regarding this phenomenon. I say fortunately for Appraiser 3, but it is unfortunate that we don’t have a decision to highlight the folly of this fairly typical averaging provision.
What I can say today is that I recognized the problem of the disjoint created by the averaging process in that buy-sell agreement, but did not demonstrate it as clearly in my report or in the mock trial held in the matter as in the figure above.
So we have a third illustration of potential demonstratives straight from my new book, which we hope to have in print by the end of the first quarter 2019. If you would like to be notified about the new book when it is available, please send me an email at:
I look forward to hearing from some or many of the readers of this blog!