Battle of the Experts: Reconciling Vastly Different Views of the World

Using the Neutral Financial Expert

It is common that opposing financial experts in matrimonial and commercial litigation often render drastically different opinions of value with respect to the same business.  Judges are frequently unable to reconcile the two, and it is often the case that the true answer lies somewhere in the middle.  Undoubtedly, the most efficient means by which to reconcile and compromise the two valuations is through the engagement of a neutral valuation expert, either by court appointment or by consent of the parties.  Most business valuators arrive at their opinion of value via the income approach, and it is rare for valuators to employee only a market based approach.  The income based approach, which is almost always a component in every business valuation report, is comprised of only a few fundamental variables: expected future cash flow, risk associated with the future cash flow (discount or capitalization rate), and anticipated growth of revenues and net economic benefits (i.e., net cash flow).  First, the neutral valuator needs to simply determine whether the non-neutral experts have meaningfully different opinions as to more than one of the three fundamental variables.  Even before expert reports are finalized, it is often helpful to separately determine the future expected revenue and related growth rates and compare these with the initial informal opinion of each non-neutral expert; for a reasonably mature company, it is often the case that both non-neutral experts have a similar view regarding anticipated revenues and growth.  Similarly, discount rates for relatively mature companies determined using the “build-up method” are often within a range of about 18% to 22%.  Once the differences and the reasons for the difference are isolated with respect to expected future revenues and the discount rate (and why), each non-neutral expert’s profit margins and “normalizing” adjustments for such items as “reasonable compensation,” excess perquisites and personal expenses, non-recurring income or expenses, etc. must be analyzed and reconciled.  In instances where appropriate, other specialty neutral experts, such as compensation experts, may be engaged to expedite the process while enhancing the quality of the ultimate result.  Through this approach, it is quite possible to completely obviate the cost associated with the preparation of formal written valuation reports because it often becomes obvious that remaining or unreconciled differences are simply not worth the distraction and cost of litigation.  If done properly, neutral experts can significantly reduce total legal and expert costs.  The savings are directly correlated with the timing or the stage of the matter when the neutral is engaged – the earlier, the greater the potential savings.

If you would like a copy of our quick reference guides with respect to the new alimony rules or tax affecting in a business valuation context, please email Jcipolla@cipollacpa.com.

Cipolla is frequently a court-appointed neutral, acting, in effect, as a consultant to the court, which sometimes leads to an expert report and related testimony when the non-neutral financial forensic experts are far apart in terms of their opinions and conclusions.  We perform this forensic accounting function in business divorce, matrimonial, commercial litigation, fraud investigations (including white-collar and tax investigations) and personal injury claims, as well as in Bankruptcy Court and insolvency proceedings.  With respect to matrimonial litigation, we frequently value businesses and perform income and lifestyle analysis, including a savings component, to help determine alimony (including changed circumstances) and Pendente Lite support.  We also frequently conduct net worth analysis and asset tracing to determine exempt or immune assets for purposes of equitable distribution.

Cipolla has been involved with tax and white-collar criminal defense, forensic accounting, valuation and damages assessment for over three decades and, according to the New Jersey Law Journal readership survey, was recognized as the best matrimonial financial expert, the best economic damages accounting firm and the best business valuation firm, and one of the top forensic accounting firms, litigation accounting firms and business accounting firms in the New York Metropolitan area.  At Cipolla & Co., “we peel the onion” to provide thoughtful, comprehensive and thoroughly researched opinions and conclusions.  www.cipollacpa.com