BGBC: 10 crushing questions to ask a business valuation expert

By Howard I. Gross, Steven W. Reed, Erika M. Gowan, Casey L. Higgs and Samuel M. Pollom

As part of your cross-examination, you wish to attack the expert’s work. You’re supposed to ask about the methodology, assumptions, procedures and how the opinion of value was determined. These are standard questions asked in cross-examination that we expect to hear. What about those questions that are not standard, but just as effective if not more? We compiled a list of 10 questions that could deliver a crushing defeat to the other side.

1. Have you personally sold a business or assisted a client in buying or selling a business in the same industry? How many have you sold?

Asking the expert if he or she has sold businesses in the past is directly aimed at the expert’s experience and knowledge on real-world issues. An expert who has sold businesses has firsthand knowledge of the selling process and is likely to have a better understanding of the marketplace. An attorney should be on the lookout for a business valuation expert who is purely theoretical and has little knowledge about buyers and sellers in the real world.

2. Do you know for certain if the amount you concluded to be the value of the business can be financed?

A good business valuation expert will consider more than one method as a check for reasonableness. And a great business valuation expert will take one step further by determining if the purchase price can be financed. If the opposing side’s expert determines a value for a business that cannot be paid off in five or seven years while also returning a reasonable amount to the owner, it is probably not a realistic price to pay for that business.

3. Does your valuation comply with generally accepted accounting principles?

Some valuation experts are stumped by this question. Generally accepted accounting principles do not govern the valuation field. However, there are well-accepted valuation principles such as Uniform Standards of Professional Appraisal Practice and Statement on Standards for Valuation Services.

4. Do you consider any text written by Shannon Pratt, Jim Hitchner or any other well-established author of valuation materials to be authoritative?

A conclusion of value is an opinion of the business valuation expert and is based on circumstances specific to that engagement. There is not one text that is authoritative or superior to another. For example, Shannon Pratt may have a difference of opinion from Jim Hitchner. If the expert admits that a particular source is authoritative, you can likely find previous valuations of his or hers in which a different source is used.

5. Did you conduct a site visit? If so, when?

Generally, site visits are important to a business valuation but this question is often overlooked by attorneys. If the expert did not conduct a site valuation, how do they know what they were valuing didn’t just vanish into thin air? A site visit must be performed to physically observe the valuation subject and corroborate those observations with the information obtained from the management interview and financial records. Trust but verify.

6. From your previous valuations, has any value you determined ever been substantially changed in a court decision? Has the value stood up in court?

This question further discredits the expert by showing the judge or jury that the expert’s been wrong in the past.

7. Have you ever been excluded as an expert? Has your testimony ever been excluded?

This is a direct hit at the expert’s credibility if he or she answers yes to this question.

8. Who hired you and how many times have you worked for them?

It’s all about perception. If the expert admits he or she has been hired by a client over and over again, the perception is that the expert will conclude a value to the client’s satisfaction whether or not it represents fair market value!

9. You advertise yourself as an expert for hire, is that correct?

The intent of this question is to show the judge or jury that the expert is a “hired gun” and is likely an advocate on behalf of his or her client. The value may be skewed to favor their side and may not represent fair market value.

10. How much of your professional time is devoted to expert testimony?

Score one for your side if you cross-examine a business valuation expert who spends more time on the “expert” part than the “business valuation” part. This kind of “expert” likely will be seen as an expert opinion for hire.

As CPAs who are accredited in business valuation and have significant expert testimony experience, we believe asking these questions during cross-examination of a business valuation expert could result in the judge or jury awarding you a crushing victory. We hope you find them useful (and we also hope you don’t use them against us).•

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Howard I. Gross, CPA/ABV/CFF, CFP; Steven W. Reed, CPA/ABV; Erika M. Gowan, CPA/CFF, CFE; Casey L. Higgs; CPA/CFF, CFE, CVA, and Samuel M. Pollom, JD, CPA, are with BGBC Partners LLP – Litigation, Forensic and Business Valuation. Contact BGBC at 317-633-4700 or visit www.bgbc.com. The opinions expressed are those of the authors.