An expert witness valuation is an appraisal of a business’s value performed under legal requirements such that it is performed using generally accepted scientific methods by someone who has the requisite knowledge to perform such a calculation.
Such valuations are necessary in the context of financial reporting (i.e., to get a loan or be acquired) and tax matters (i.e., for estate planning and ownership interests transfers) as well as in litigation if there is a dispute related to the business valuation.
When Do You Need an Expert Witness to Provide Business Valuation Services?
When involved in litigation that requires a business valuation, it is important to use an independent expert who is familiar with valuation methodologies acceptable for triers-of-fact.
The methodologies used by this expert to value the business will be similar to those used for valuation prior to a merger or acquisition. However, the valuation performed for litigation must meet the standards related to scientific methodology and the appropriate experience of the expert performing the valuation.
This standard comes from the Supreme Court case, Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579 (1993).
Under the Daubert standard, the factors that may be considered in determining whether the methodology is valid are:
- Whether the theory or technique in question can be and has been tested;
- Whether it has been subjected to peer review and publication;
- Its known or potential error rate;
- The existence and maintenance of standards controlling its operation; and
- Whether it has attracted widespread acceptance within a relevant scientific community.
How Expert Witness Valuation Can Help with Dispute Resolution
A valuation expert witness is critical to the outcome of complex commercial litigation. It is the conclusions of this expert that will be used by the trier-of-fact to determine damages awards.
If the valuation does not meet the Daubert criteria the expert’s opinions may be excluded and the judge or jury will be left with only the business valuation conclusions of the opposing side.
A business valuation expert can also be used to help critique and evaluate the conclusions reached by opposing business valuation experts. In some cases, that valuation expert may be successful in excluding the opposing expert’s conclusions if they are shown to be unscientific.
Choosing the Right Expert Witness for Business Valuation
Choosing the right expert for business valuation is critical to accurate measurement and good decision-making as it relates to the valuation. In litigation, the business valuation can make or break your case. The expert should use rigorous analysis to calculate the business value but must also be able to explain his or her conclusions to the triers-of-fact in a clear and concise manner.
The expert should have experience in performing business valuations in both litigation and non-litigation contexts. The expert should also have the required qualifications to be admitted as a business valuation expert by the judge.
Dr. Donald May PhD, CPA, managing partner of DMA Economics, has vast experience performing valuations in litigation but has also performed valuations of over 200 closely held businesses and interests in those across numerous industries for financial reporting and estate planning.
Contact us today using the form on this page to learn more about how our services may be right for you.
