Following Professional Standards
I worked on a case recently for a divorce matter where the other expert had been appointed by the court. The other expert was a CPA and held the ABV designation from the AICPA. The husband’s attorney contacted me because he had no confidence in the report prepared by the court appointed expert.
The expert’s report stated that the Standard of Value was Fair Market Value. The expert stated the following: “The market based approach was not used because I found no comparable equity transactions either in the business or in the marketplace. I also found no public companies.”
I was not surprised he did not find any public companies because the revenues for the company was approximately $138,000. He used various multiples, considered Rules of Thumb, to arrive at his value for the company. I was curious as to why he would use the Rule of Thumb method instead of the multiples derived from either Pratt’s Stats, Done Deals, BizComps, or the IBA Database. I looked at the IBA and BizComps databases and determined there were 474 IBA and 231 BizComp sales transactions for this company’s SIC code. This case did not settle at mediation so it was set for trial. The market methods not used were not the only issues I had with the report, but is the only issue being discussed in this article. I printed all of the sales transactions from the two databases for the appropriate SIC code and took them with me to court.
In trial, the expert was asked how he performed his search for data to apply the Market Approach. The expert testified he did not do a search of any of the databases to determine if there were any comparable company sales transactions. The attorney asked me how the Market Approach worked and the various methods that can be used. The attorney guided me through his questions and he finally asked me about the comment in the expert’s report. I explained that I had looked at both the IBA and BizComps and held up the approximately 700 private sales transactions that could have been considered for the Judge to see.
The wife’s attorney had no questions.
As I left the witness stand that Judge made the comment, “Now that you have completely destroyed the credibility of my expert, I am not sure what to do with this.” When you do a business valuation, make sure you follow your professional standards and do all the work necessary to support your positions. BAP
Richard Claywell is the co-author of Capitalization and Discount Rates: The Value of Risk, contributing author of the NACVA Fundamentals Theory & Techniques training materials. He is also the Director of Education for IACVA and is responsible for all IACVA business valuation course materials for all countries Outside the USA.
Mr. Claywell has made presentations of business valuation topics in Germany and China, Korea and Taiwan. He is also a contributing editor to Practitioners Publishing Company’s Guide to Practical Estate Planning (2008).
Mr. Claywell is the chief architect for Business Valuation Manager Pro business valuation software program and the accompanying Professional Report Writer. Mr. Claywell can be reached at (281) 488-7531 or by e-mail to firstname.lastname@example.org. © 2016 J. Richard Claywell – all rights reserved.