The typical approach to business valuation in the event of dispute is for both parties to appoint their own expert. These experts each present a report, understandably not based on the same information, and typically the opinions are diametrically opposed contributing to a protracted and costly court experience.
I was engaged to help settle a dispute where both parties had briefed their own valuers. Their valuation opinions differed by 20% on a $3 million asset. Interestingly, but not unusually, the lower figure was from the valuer for the party looking to buy out the other. On closer examination it was apparent that different instructions had been given to the two valuers and consequently the opinions were based on different methodologies causing the significant valuation range. Unfortunately this resulted in considerable cost and delay in settling which could have been avoided.
So is there a better way? In my experience yes.
Appointment of a single expert
The appointment of a single expert, if some simple guidelines are followed, can often lead to a much more cost effective solution for your clients. These guidelines include:
- Make sure that the expert is appropriately qualified and specialises in business valuation.
- Ensure the expert is truly independent. This usually rules out the existing accountant.
- Where possible, ensure the key facts relevant to the valuation are agreed by both parties prior to commencement.
- Have the expert meet with both sides to discuss the valuation before providing their opinion as to value to try and avoid a situation where new information comes to light late in the process.
- Be clear on the instructions, for example, at what date is the valuation to be effective?
What if a single expert cannot be agreed?
Even when the appointment of a single expert is not possible applying the above guidelines will be helpful. In addition, I would highly recommend that the expert for each side:
- Is given the same brief (including date of valuation and any specific assumptions which are to be applied); and
- Be given access to the same information.
It is important to understand that once an expert has provided a written report containing their opinion human nature often suggests it will be difficult for that opinion to be retracted or revised. It is valuable therefore for experts to confer earlier, rather than later, in the process where possible.
An alternative approach
Another cost-effective approach that works well in certain circumstances is for one party’s expert to prepare a draft valuation report and for the other party’s expert to critique that valuation, or better still, for the two experts to meet in order to form a joint view. In these instances the total cost can be shared equally between the parties. My experience is that this approach can reduce costs and is particularly helpful for simpler or lower value businesses where the costs of two experts can be prohibitive.
Hot Tubbing
I was appointed as an independent expert to value a business for relationship property purposes. Despite attempting to obtain buy-in from both parties to the process the matter later went to arbitration as neither party agreed with my opinion. Each party subsequently appointed their own expert and all three of us turned up to the arbitration.
The cost at this stage was just about as much as the valuation range and we were each expecting to be in the witness box for at least two hours. Legal counsel agreed to a process known as “hot tubbing” – legal slang for concurrent expert evidence whereby the experts are sworn together and have a chance to answer the same questions, effectively cross-examining each other.
In this case hot tubbing provided considerable time and therefore cost savings, allowing the valuation issues to be robustly debated for the benefit of the arbitrator.
Ironically the arbitrator agreed with my opinion.
Conclusion
Should you require a valuation stop and consider whether the usual approach of appointing your own expert will provide the best outcome. There might be a better option.