June 20, 2012 | Issue #117-3  

Stockdale’s ‘Top 10’ list for litigation experts—or, how to avoid the ‘nightmare’ of a Daubert or credibility disqualification

Just last week, John Stockdale Jr. (Schafer & Weiner) presented a case law update to the annual meeting of the Michigan Society of CPAs in Detroit. In the midst of his slides, he included the “Top 10 Issues With Experts,” or the problems that he and his law firm colleagues frequently encounter when working with appraisal experts in cases ranging from bankruptcy to shareholder dissent and oppression.

"I was first asked to talk about ‘nightmares in valuation cases’ over the years, but when I started reading through those cases, I realized that case nightmares come under two varieties: 1) being excluded under Daubert, or 2) you’ve given the testimony but you are found not credible,” Stockdale said. Rather than talk about the individual cases that resulted in these two situations, Stockdale chose to focus on the issues that lead to them—and the ways experts can avoid them:

  1. Communicate with the lawyer (see points 2 and 3).
  2. Understand the standard of value. In contexts such as shareholder dissent and divorce, “Michigan has unsettled standards of value,” Stockdale explains. “So you’re going to want to talk to your lawyer.”
  3. Understand the case. Or even more importantly, understand your role on the litigation team. The attorney is the quarterback, and depending on the case, he or she may want to make the call regarding what standard of value is appropriate to apply.
  4. Draft your report clearly.
  5. Put your backup in your report.
  6. Don’t argue in depositions or on the stand.
  7. Have a complete and detailed CV. Stockdale recalls a recent case in which the expert listed his two schools and his many hours of CPE, without specifying what all those hours entailed.
  8. Avoid technical jargon whenever possible in your written report and in testimony.
  9. Provide the documents you relied on.
  10. Ensure your credentials are current. Stockdale told of another recent case in which the expert allowed his credentials to lapse between his retention and trial.

Confusion over value and price continues, Pellegrino says

The views on valuation in last week’s BVWire—from Mercer doing the math on the Facebook IPO to the 7th Circuit’s doing its best to define the “gold standard” of valuation—were a bit “schizophrenic,” says Mike Pellegrino (Pellegrino and Associates). “Well, which is it: Is it price, as the court suggests, or is it intrinsic value, which is what Chris [Mercer] was getting to? Or are they the same?” Predictably, Pellegrino agrees more with Mercer:

With all due respect to Judge Easterbrook, he confuses value and price when he states that the value of a thing is what people will pay. Nothing could be further from the truth. You can highlight it, emphasize it, bold it, or write it in another font color, but that won't make it so: Price and value are disjoint concepts. An entire sector of the financial community (arbitrage) emerged just to take advantage of this misperception. [In any given case], price and value may be the same, but such overlap may be coincidental and in many cases, they should not be the same.

Consider once again the Facebook IPO. “Was that $38 price the value of FB's share?” Pellegrino asks. Was the IPO price the fair market value of FB? “Of course not,” he says. Although the context of a valuation complicates matters, “FB's free fall since the IPO bolsters the fact that a price does not equal value—and I still do not believe that FB's stock price represents its value.” The bottom line: “It will be a great day when the courts and many in our profession stop confusing price and value,” Pellegrino says. “In the meantime, if we have to run to a value premise definition for cover, then maybe the value premise definition is wrong.”

Damodaran asks: Are you a ‘pricer’ or a ‘valuer’?

 “A great deal of what passes for valuation in corporate board rooms, investment banks, and portfolio management is pricing, not valuation, and the evidence is clear, especially with Facebook,” writes Aswath Damodaran (NYU Stern School of Business) in his recent blog, Musings on Markets. On May 23, for example, the professor listed the hallmarks of a “pricer” versus a “valuer”:

Pricing is an exercise of gauging demand and supply, reading investor moods and determining what people will pay for an asset, rather than what it is worth. Valuation is about estimating what an asset is worth, given its earning potential, growth and risk. You can tell whether an investor or analyst is a “pricer” or “valuer” by looking at the tools that he or she uses. The tools of choice for most pricers are relative valuation (multiples such as PE or EV multiples), [which] assess how much you will pay for an asset by looking at what others are paying for similar assets (usually other companies in the same business), and technical analysis (where you use charts and indicators to gauge shifts in demand). The tools of choice for “valuers” are either discounted cash flow (DCF) or accounting-based (building off book value) models.

In the weeks leading up to the IPO, an “army of banks” (led by Morgan Stanley) developed an “offering” price for Facebook, Damodaran adds. “While I am sure that there was an intrinsic valuation done somewhere along the way, I will also wager that it was done to preserve appearances and that it had little or nothing to do with the price that was eventually set.” To set that price, the banks most likely used two variables: the prices at which investors were transacting in the private market for FB shares (in the mid-40s) and what institutional investors indicated they would be willing to pay. Much of the background “chatter” was also framed in terms of pricing, Damodaran says, with the optimists arguing that FB was trading at less than other social media companies and the pessimists saying it was trading at much higher multiples of earnings or revenues than Google or Apple. “Any attempt at full-fledged valuation, where you confronted the uncertainty and attempted to make estimates, was viewed as an exercise in speculation and guesswork.”

How will you price BV talent? Look to the BB/BVR survey, of course

Have you tried to recruit new business valuation analysts recently? Are you concerned about how to retain the talent you already have?

If so, “then you know the shortage of good BV talent has returned,” says John Borrowman (Borrowman Baker). “Successfully competing for that talent requires careful attention to compensation structures in your practice,” and making sure those pricing structures are current and competitive within the industry and your market. “Participate now in the BB/BVR BV Salary Survey to ensure that you have the data you need to make smart choices,” Borrowman says. The deadline for data entry is Friday, June 29. Click here to go to the Welcome Page and get started.

Back for a limited time: BVR’s free, state-by-state economic summary

It became an instant bestseller—and it cost nothing! When we announced recently that Adam Manson, BVR’s manager of financial research, had just compiled a comprehensive “State-by-State Summary of Economic Information” as our latest complimentary resource, over 200 folks downloaded their copy.

After we moved the summary to accompany the Economic Outlook Update, the demand persisted—and so, for just two weeks, we’re posting the state-by-state economic summary at our free downloads page. Adam still hopes the list will elicit contributions of additional state economic sources. Please send your suggestions to adamm@bvresources.com.

Which profession is more prone to divorce litigation?

We just did a quick search by SIC code of all the marital dissolution cases in BVLaw (over 1,240 to date) and found that—by far—there were more published court decisions concerning the valuation of doctors’ practices than any other profession. Law and dental firms ranked second and third, respectively—and, interestingly, when we limited our search to just the past three years of divorce cases, it looks like dental practice valuations are catching up:

SIC Code


No. of cases reported in BVLaw

No. of cases reported in the last 3 years


Offices and clinics of medical doctors




Legal services




Offices and clinics of dentists




Accounting, auditing, and bookkeeping services




Engineering/architectural services




Offices and clinics of chiropractors



Be ready for your next dental practice valuation

On June 26, Part 6 of BVR’s Online Symposium on Healthcare Valuation, "Valuing Dental Practices," covers what may be fast becoming the most frequent subject of valuation—not only in divorce cases, but also in the context of buying and selling practices and consulting. Join Ron Seigneur (Seigneur Gustafson), Jim Andersen (Burr Pilger Mayer) and Bernard Slota, DDS (Cosmetic Dentistry) as they discuss the operational and clinical particulars that influence dental practice valuations, including professional compensation, patient mix, and industry demographics.

IASB and FASB reach ‘tentative’ agreement on lease accounting

Last week the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) “tentatively” agreed on a “dual-model” approach for treating leasing expenses, from both the perspective of the lessor and the lessee.

“The Boards previously agreed that leases should be recorded on the balance sheet, but have continued to discuss the classification and pattern of expenses in the income statement,” according to a joint release. In last week’s decision, the boards decided that some leases would be accounted for using an approach similar to that proposed in the 2010 exposure draft, while others would be accounted for using an approach that results in a straight-line lease expense.

For a more complete discussion of the boards’ decisions at their June 13 meeting, here is a summary.

IVSC publishes new guide for improving audits

The Professional Board of the International Valuation Standards Council (IVSC) has just released the exposure draft of The Role of the Professional Valuer in the Audit Process. In particular, the board is soliciting input on seven specific questions concerning how professional valuers can better understand the role of auditors and the regulatory environment in which they operate, and how they can most effectively assist auditors as well as entities during the audit process.

“The views of professional valuers, reporting entities, and auditors on this exposure draft are especially welcome,” says the board in the introduction to the draft. Comments are due by Sept. 15, 2012.

New executive director for IIBV

The International Institute of Business Valuers (IIBV) has just named Michael Badham as its new executive director. Badham will focus primarily on presenting IIBV’s educational programs and promoting its “mission,” including the establishment of BV professional and ethical standards and the exchange of valuation-related information and ideas on a global level. To read Badham’s first public statement, click here.


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Copyright © 2012 by Business Valuation Resources, LLC
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