Going on the offensive
3 issues to raise during depositions and cross-examinations

Depositions and cross-examinations provide an opportunity for attorneys to discredit opposing experts and poke holes in their valuation analyses, assumptions and conclusions. A successful offensive against a valuator compromises the reliability of his or her qualifications and report, regardless of a subject company’s “true” value.

By default, it also presents the other side in a more positive light and may persuade the court to accept the opposition’s conclusions — or at least to “split the baby.”

But drafting pertinent deposition and cross-examination questions can be a daunting task — especially for attorneys who are unfamiliar with business appraisal issues. The following potential weaknesses and pitfalls may impair a valuation expert’s effectiveness.

1. The independence issue - One way to discredit an appraiser is to imply that he or she is a “hired gun” or advocate for the client. Professional standards require valuators to be independent and unbiased. Some experts compromise their perceived objectivity by specializing in one specific side, such as monied spouses in divorce or taxpayers in IRS proceedings. Others change their positions on major issues, depending on which side hired them. A review of previous testimony transcripts may reveal these conflicts of interest.

Appraisal experts must also disclose any financial interests in or relationships with their clients in appendices to their valuation reports. Highlighting any ongoing relationships between the valuator and the client — or noting a failure to disclose the relationship — is a sure-fire way to discredit the expert.

For instance, the Sarbanes-Oxley Act (SOX) prohibits accounting firms from concurrently providing certain consulting services for their public audit clients. Attorneys could use SOX to argue that the ongoing relationship between an auditor and its audit client prevents the firm from objectively providing valuation or expert witness services.

In addition, some attorneys address independence by focusing on whether the expert has been paid for his or her time. Most professional standards specifically prohibit appraisers from accepting fees contingent on the case’s outcome.

Moreover, if the client has an outstanding balance — including anticipated deposition or courtroom time — an attorney could claim that the expert has a vested interest in the case’s outcome. An unhappy client who blames his or her valuation expert for an unfavorable ruling may not pay the expert’s bill.

2. The quality control issue - Mathematical errors and deviations from acceptable valuation principles provide other effective means of discrediting a valuator. Time permitting, all mathematical computations should be recalculated and tied back to original source documents. To illustrate, all columns and rows should add up and profits should tie to the company’s income statement..

Material misstatements can have a dramatic impact on the appraiser’s conclusion once corrected. But small errors chip away at the report’s reliability and should be brought to the court’s attention as well.

Also inquire about the administrative procedures of the expert’s firm. To cut costs, some firms employ junior staff members to perform the legwork and the testifying partner simply performs a superficial review of the subordinate’s work. Other firms implement no quality control procedures and issue reports without requiring any formal peer review.

3. The subjectivity issue - Addressing subjective issues can be particularly effective if the valuation expert’s judgment disproportionately favors the client’s financial interests. Here are several subjective areas that can materially affect the outcome of a valuator’s report::

• Adjusting for reasonable officers’ compensation,
• Tax-affecting the income of S corporations,
• Building up discount and capitalization rates (for example, support for small-stock premiums, company-specific risk premiums and long-term sustainable growth rates),
• Selecting guideline companies in the market approach (for example, selection criteria, fair market value vs. strategic value and cash-equivalent values),
• Estimating valuation discounts (for example, using averages and customizing samples to match the distinctive characteristics of the subject company), and
• Weighting the valuation methods.

Professional opinions and subjectivity are inevitable parts of the valuation process. By bringing subjective components to light, however, an attorney can introduce uncertainty into a seemingly rock-solid case.

Invaluable assistance

A valuator can provide invaluable assistance by helping to review the opposition’s valuation report, prepare a rebuttal report, and draft effective deposition and trial questions from a technical perspective..

In addition to helping attorneys hone their offensive strategies, an awareness of these points can also help attorneys fend off ambushes by opposing counsel — creating the likelihood of a successful outcome.