Challenging Expert Business Valuations At Trial

Where the value of a business is disputed at trial, work should start at discovery (if not before) to determine the facts upon which an opposing expert will base his/her valuation, and the reasons used therein in support of such business valuation. The final business valuation (expert report) should then be thoroughly parsed, to determine whether such ‘expert’ has used creative license to arrive at a particular conclusion, either increasing or decreasing the projected value of the business.

In a recent case I took to trial, I was presented with an expert report that projected future earnings to fall within a specified range, which resulted in a very attractive valuation for the owner/plaintiff. However, in reaching that conclusion, the Business Valuator had made the following assumptions or relied on the following information:

  1. That the owner’s spouse had not been actively involved in the business, as she had not drawn a wage;
  2. That it was appropriate to average earnings over the preceding 3 years, despite the fact revenues (and earnings) had fallen sharply during that time;
  3. That all ‘extraordinary expenses’ should be removed from each years expenses (and essentially that no provision should be made for unanticipated expenses);

Together, those assumptions formed the foundation of the export report, and resulted in a very attractive valuation (on paper) for the business owner. Conversely, at trial, I was able to show that foundation to be somewhat shaky, calling the valuation into serious question.

While every case is different, there are a number of things to look out for when parsing an expert’s valuation report (and this list is by no means exhaustive):

  • Is revenue stable or trending upwards or downwards, and does the expert’s report take that into account?
  • How competitive of an industry is the business in, and what are the growth prospects?
  • Is the industry under any significant pressure, and if so, whether the expert has taken those into account?
  • Do the facts which underlie the conclusions in the report align with the facts of the case?
  • What information was made known to the expert (and what information was kept from the expert)?
  • What portion of the value of the business (if any) is comprised of non-transferable personal goodwill, resulting from an owner’s particular abilities, characteristics, good name and reputation?
  • Was the enterprise valued on the appropriate date (i.e. the date in question in the case)?
  • Was the correct valuation approach used in the circumstances (asset approach, income approach, market approach)?
  • Was the buyer or seller under any compulsion to transact?
  • What level of due diligence did the expert perform, what did that involve, and was that appropriate in the circumstances?
  • Whether any employment (or other) expenses listed are reasonable, taking account of the position, market conditions, average weekly wages, and additional employer costs, such as vacation pay, CPP contributions, EI, Workers’ Compensation, training etc.?
  • Whether the report complies with Rule 53?

If you have a case involving the valuation of a business, call 647-495-8995 to speak to our experienced Hamilton and Toronto business lawyers today.

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