Questions a family lawyer can ask to discredit an expert witness’ use of the transactions method of the market approach to valuing a small- to medium-size business.
By James R. Hitchner, Financial and Valuation Expert
When using the guideline company transactions method for the valuation of small- to medium-size businesses, analysts usually rely upon data acquired from comparable transactions in the private sector. One of the most widely used databases for the valuation of private businesses is “DealStats” (formerly “Pratt’s Stats”). For small- to medium-size businesses – say $25 million in value or less – there are 26,689 transactions involving U.S. sellers, and 85% are private buyers of private businesses.
There is a dearth of relevant information about these transactions, which can make them risky to use as a primary valuation method. This is where a family lawyer can attack support for the use of this method; here are two examples of cross-examination questions to use when you wish to discredit the use of the transactions method of valuation. This is also a good primer for valuation experts preparing to testify in court.
Cross-Examination 1
Q: Would you buy a business without knowing whether or not you would assume the liabilities?
A: No.
Q: Would you buy a business if all you knew was what the seller told you were the revenues?
A: No.
Q: Would you buy a business if all you knew was what the seller told you were the earnings?
A: No.
Q: Would you buy a business without seeing a financial statement or organized financial information?
A: No.
Q: Would you buy a business if all you were given was one year’s financial information?
A: No.
Q: Would you buy a business if you had no idea about its future growth prospects?
A: No.
Q: Would you buy a business if you had no idea about its historical growth, none at all?
A: No.
Q: Would you buy a business without knowing anything about the company-specific risk factors?
A: No.
Q: Would you pay the same price for a business if you didn’t know whether or not the inventory was included?
A: No.
Q: Would you buy a business based on a multiple of earnings from a transaction database that had instructions that stated you shouldn’t do that?
A: No.
Q: Did you use DealStats and the IBA database for transactions in your valuation?
A: Yes.
Q: I just asked you several questions about what you would do and what type of information you would want if you were to buy a business, correct?
A: Yes.
Q: Do the transactions from the DealStats and IBA database contain any of that information?
A: No.
Q: So, it is your testimony today that it is okay for your client, my client, and the Court to rely on these transactions to determine value, but you would not buy a company with your own money with such a deficient amount of information. Is that correct?
A: Well, I am not buying the business: I am just trying to value it.
Cross-Examination 2
A concise, surgical, and potent line of questioning on the transactions method.
Q: The transactions you relied upon do not have anywhere near the sufficient amount of detailed information to support a value, correct?
A: It’s the best we have.
Q: You said in your report that you put less reliance on the transactions method of valuation because it was more unreliable than the other methods you used, correct?
A: Yes.
Q: You said it was more unreliable because you didn’t have a lot of information about the transactions, correct?
A: Yes.
Q: Did you also state that you used it as a corroborating method, not a primary method?
A: Yes.
Q: Okay. Is it fair to say, then, that you placed some reliance on a method you deemed unreliable?
A: I already answered your question.
Jim Hitchner (CPA/ABV/CFF, ASA) is managing director of Financial Valuation Advisors and CEO of Valuation Products and Services (VPS). He is also an inductee in the AICPA Business Valuation Hall of Fame and a Charter Member of the AAML Foundation’s Forensic & Business Valuation Division. www.finvaluation.com
Learn more on this topic at the AAML/BVR National Divorce Conference, May 8-10, 2019 www.bvresources.com/events/national-divorce-conference-2019
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