October 25, 2017 | Valuations
Without the right information, answers can hard to figure out. In one case, the expert could not figure out why the company he was valuing kept on manufacturing and selling creosoted railroad ties, even though that division of the business had not been profitable for a long time.
Also, the company was putting another $700,000 of capital improvements into the division operations. The other division of the business made mufflers, and was operating well while make a good profit and return on investment.
Why wouldn’t the company shut down the unprofitable side and keep the profitable one? The expert performed a site visit of both divisions, which were located in different cities. After visiting the unprofitable division, the expert had some additional questions for management.
When the questions were answered the mystery was resolved. The unprofitable division sat on the banks of a river. If the company closed it down, they would have to undertake an environmental clean-up of the creosote contaminated site that in the past had been leaching creosote into the river. The cost of this clean-up would have been greater than the assets of the other division. Now the expert had the information needed to properly value the business and not be caught without the facts in the litigation at hand.
There are many such examples in the valuation litigation arena. An attorney must always be aware of the work the expert is doing, and make sure they have all the information needed to fully understand the business and its operations.
Sometimes, the valuation expert will need help in getting some of this information. For example, the client might not want to pay for a site visit. But especially in litigation, a site visit and an interview with management can be invaluable in fully understanding the business. The attorney can be invaluable in submitting and obtaining answers to interrogatories and in asking the right questions on behalf of the valuation expert in depositions.
Another important factor is the attorney’s familiarity with the business. Often the attorney has a long-standing relationship with the client they are representing. This can help the valuation expert with getting facts that are important to the valuation conclusion. The expert and the attorney should meet and talk about issues the attorney may be familiar with concerning the business or business interest being valued.
Valuation is as much an art as it is a science and the art portion is often the most important element in arriving at a reasonable valuation conclusion, and one that is supportable to the trier of fact. As with any successful litigation, the attorney and the expert form a team that is essential.
This does not mean, however, that the expert is always an advocate for the client. The attorney and expert both want to reach a reasonable independent conclusion of value or determination of damages. The answer from the expert should be the same regardless of who the expert is representing. But the expert cannot do this without knowledge of all the pertinent facts, and not just the rote application of formulas and calculations.
For more information on the role of the business valuation expert, contact Filler & Associates.