Should Pre-Litigation Appraisals be Admitted in Current Litigations?

It is Likely Best to Assume That They Will be Admitted

Peter Mahler of New York Business Divorce Blog wrote a post today titled “Disclosure of Estate Tax Stock Appraisals in Shareholder Disputes.” The question addressed is if or whether, in the context of contested stock valuation procedures stemming from elections to purchase in statutory dissolution or dissenting shareholder cases, pre-litigation appraisals rendered for estate tax purposes (or other purposes) should be discoverable. That’s a good question. Read Peter’s post for his comments regarding the law. I’ll comment briefly as a business appraiser and businessman.

First Response: Facetious

I have said the following before and even had it put in front of me at a deposition.

In litigation, if evidence (like pre-litigation appraisals) is supportive of my opinion, it will not be admitted.  If it is not supportive, it will be admitted.

In this case, I make clear that the comment is facetious.

Next Response: More Serious

Peter Mahler’s question regarding the admissibility of pre-litigation valuation reports is a good one. Many closely held companies have appraisals conducted for any number of purposes over time. The shareholders of the companies also have, for gift or estate tax purposes, their own appraisals from time to time. The point is, it is not at all unusual in a statutory fair value matter like Mahler writes about for pre-litigation appraisals to be around.

Should they be admitted into evidence in a statutory fair value matter?  One party or the other will certainly desire that the pre-litigation appraisal be admitted into evidence.

Suppose the issue goes the other way.  Assume the statutory fair value determination precedes the death of a shareholder. Is the statutory fair value appraisal (or appraisals) relevant for purposes of a later estate tax appraisal? Certainly, the Internal Revenue Service will ask to see it (them).

The question is, what will any given court in a current valuation proceeding do about admitting pre-litigation appraisals into evidence?

One side or the other will assume that the pre-litigation report supports or affirms or impeaches the other side’s now current appraisal.  It is not necessarily so simple.

Pre-Litigations Appraisal Will Differ from Current Appraisals

Every appraisal must be defined in a number of ways:

  • Valuation Date. The valuation date sets the time at which the hypothetical transaction represented by the appraisal is assumed to occur. The value of any company can or will change over time. So a first question for comparing a current appraisal with a pre-litigation appraisal is simply, when did it occur in relation to the current valuation date. Things change over time with the economy, industries, and companies.
  • Standard of Value. Every appraisal must be rendered under a particular standard of value to describe to the reader the kind of value being determined and the rules of valuation applicable to the appraisal. There can be significant differences between appraisals rendered under the fair market value standard, the (statutory) fair value standard in a particular state, the (accounting) fair value standard for financial reporting purposes, or some other standard. When comparing a pre-litigation appraisal with a current valuation date, it is necessary to examine the standards of value under which they were rendered – same, different?
  • Level of Value. Readers of this blog are familiar with the levels of value chart that is used by business appraisers. The version we use, which is consistent with the Integrated Theory of Business Valuation, is reproduced below:levels of value
  • Clearly, if one appraisal is rendered at the nonmarketable minority level of value (the lowest in the chart above), and another is rendered at the strategic control level of value (the highest level), then their conclusions will differ substantially, even if all else is equal. The top level would represent the value of the business as a whole in a strategic, synergistic hypothetical transaction.  The lowest level represents the value of an illiquid minority interest. They may represent the same company, but they are different valuation interests.
  • Qualifications of Appraisers. Business appraisers often earn valuation credentials that reflect their education, background, and experience in rendering appraisals. Were the credentials of the appraiser(s) rendering the pre-litigation appraisal comparable to those of the current appraiser(s)?
  • Appraisal Standards Followed. Credentialed business appraisers are required to follow the valuation standards of their respective organizations. Those without appraisal credentials, like industry experts or investment bankers, may not follow appraisal standards at all.
  • Methodologies Employed. An appraisal that is an appraisal is an appraisal. Not. Appraisals must employ appropriate valuation methodologies based on the facts and circumstances. Each appraisal must make appropriate normalizing adjustments relevant at their respective valuation dates. And each appraisal must make and support reasonable valuation assumptions in reaching their conclusions. Not all appraisals are created equal.

The Pre-Litigation Appraisal is Admitted

Assume you are in litigation to determine the current value (statutory fair value, fair market value, accounting fair value) of a business or business interest. Assume further that a pre-litigation appraisal has been admitted into evidence. Assume still further that this pre-litigation appraisal’s conclusion appears to call into questions your (or your appraiser’s) current conclusion.

The bottom line is that you will have to compare the two appraisals along the lines outlined above. It complicates life in court to have to reconcile a current conclusion with a pre-litigation appraisal. This is the historical equivalent to the admission of a subsequent event that would appear to call a current appraisal’s conclusion into question.

In either case, depending on the economic stakes, you may need to obtain an independent appraisal review of the pre-litigation appraisal, the current appraisal, or a comparative review of both in order to address any apparent discrepancies. I wrote a post about independent appraisal review in litigation some time ago.

Concluding Thoughts

I’ll let Peter Mahler address the legalities of admission of pre-litigation appraisals (or for that matter, the valuation-disrupting equivalent, the subsequent event). As an appraiser, I always ask so that I’ll know if there are any pre-litigation appraisals. I want to know this regardless of the side we are working for.

Rather than wonder if an appraisal will be admitted, my preference is to address its existence in any current report, regardless of whether it appears to support or contradict my own conclusion.

If you find yourself in the situation where an apparently conflicting, pre-litigation appraisal report has been admitted into evidence, give me a call.  Let’s see if we can use the comparative logic outlined above to place it into appropriate perspective or if you need a more formal appraisal review. Either way, give us a call at 901-685-2120 or an email at

New Books on the Way

  • An Attorney’s Handbook for Buy-Sell Agreements (in production).  This book provides guidance based on 30-plus years of dealing with buy-sell agreements. Importantly, it provides for the first time ever, anywhere, draft template language for the valuation portions of buy-sell agreements that will work for clients or companies.  You will not want to miss this book!
  • Business Valuation: An Integrated Theory Third Edition (with Travis Harms). The draft is due to the publisher (Wiley) shortly and will be available subject to their publication schedule. This book updates the Integrated Theory of Business Valuation and will include the Integrated Theory on an equity basis and on an enterprise (total capital) basis, as well. This book will be must reading for all business appraisers and anyone interested in business valuation.

E-mail me if you would like to be notified when these books become available.

In the meantime, be well!


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

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