Fieldnotes
Lighter entries, observational and grounded. Tips, short reflections, and practice-facing pieces.
Fieldnotes • Spring-Summer 2025 • Land
The Art and Craft of Valuation
By Jim Alerding
The concept of whether a business valuation requires art or science is as old as business valuation itself. The answer, of course, is that it requires some of each. In that sense, it is a craft.
This is an important concept to recognise when a valuation of a business, business interest, or intangible asset is offered by an expert in litigation. In recent years, the science part of a business valuation has seemed to grow in perception, while the art part languishes in the background.
There is no doubt that judges and juries like certainty. The more the methodology evolves into scientific formulas, the more such applications are presented and argued by experts when performing a valuation for litigation.
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For example, reviewing valuation journals today, the reader can find any number of articles on the use of regression analyses and other scientific data. Certainly, regressions can be—and are—very helpful in defining some of the methodologies used by most valuation analysts. They provide specificity to the results of applications of valuation-related models. They, and other scientific approaches, give greater assurance to the results of the applications of valuation approaches and methods.
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What they do not do is take the art out of the ultimate conclusion of value. It is this professional judgement that is ultimately so important to the credibility of the valuation assignment. Of course, valuation professionals are still likely to arrive at different conclusions of value on the same engagement, at least in part because of the application of professional judgement. So how does the trier of fact determine which professional has the right conclusion of value?
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To answer that question, it is important to note one other important fact: when the standard of value—often in litigation—is “fair market value” (FMV), it is a hypothetical result. One cannot prove the FMV conclusion in the marketplace because it is a hypothetical transaction between hypothetical buyers and hypothetical sellers. It is not the same as a “transactional value,” which is the value that a purchase or sale of a business or business interest achieves in practice.
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Some may not know that all of the major BV standards allow for a range of values as a conclusion of value. Most valuation experts will arrive at a single-point valuation conclusion, and that is what most attorneys and judges are used to seeing. In some litigation situations, however, a range of value might be a more effective way for the valuation expert to present their conclusion of value. (Interestingly, some scientific models result in a range of values as a statistical conclusion—for example, in determining damages in a population of similar items using sampling techniques.)
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So where does this all lead? Attorneys should be aware of the “art” part of valuation and ensure that the valuation analyst is allowed to explain how they arrived at a conclusion of value using informed professional judgement. The attorney should also be aware that the opposing expert’s valuation likewise involves a measure of informed professional judgement. It is important that the differences in these professional judgements, as well as the methodologies applied—which are part of that judgement—be examined and explored, so that the attorney can assist the trier of fact in distinguishing between the two valuation conclusions.
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It could be that there is some bias in one or both valuations. The attorney needs to be aware not only of any bias, but of its effect on the conclusion of value. But it is equally necessary for the attorney to understand the impact of professional judgement on each valuation expert’s conclusion of value, and how to explain this to the judge or jury. Remember that it is legitimate for each valuation expert to utilise professional judgement, so it is also the attorney’s role to argue the value of their expert’s work to the court. What is important is that the valuation expert is free of conflicts of interest and provides an unbiased conclusion of value.
Once the attorney is comfortable that their expert has done just that, they can then be the advocate for the client—convincing the court that their expert has reached the more credible conclusion of value.
Fieldnotes • Spring-Summer 2025 • Land
My Top Tips on Reviewing a Single Joint Expert’s Valuation Report
By Fiona Hotston Moore
I typically take on 40 to 50 engagements as Single Joint Expert each year. I am also regularly instructed as either Shadow Adviser or Party Appointed Expert, where I’m asked to review the valuation report prepared by another Single Joint Expert (SJE).
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The Single Joint Expert is appointed and instructed jointly by all the parties in the dispute. Their primary duty is to assist the Court, and this duty overrides any obligation to the instructing parties.
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Where instructed as Shadow Adviser by one of the parties, my role is to review and critique the SJE report. I will provide to them my opinion on the report and suggest areas where my instructing party should consider raising questions of the expert. The Shadow Adviser does not have a duty to the Court.
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Sometimes the Court may allow one or all of the parties to instruct their own expert in a matter, in addition to the SJE. If instructed in this way as a Party Appointed Expert, the primary duty is to the Court and, as with the SJE, this overrides any obligations to the instructing parties.
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Valuation is inherently subjective, and I am reviewing the report to give a view on whether the expert’s judgement is within a reasonable range or whether it can be challenged.
The key areas I consider when reviewing the valuation report produced by another SJE are:
Has the SJE given an opinion on all matters in the written instructions?
It sounds obvious, but I do come across SJE reports that omit to address some key aspects of an instruction.
At what date is the valuation given?
The report should state the effective date of the valuation. Was the effective date supported by sufficient evidence at that date?
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Identification of the purpose of the valuation
The SJE report should confirm the background to the matter and their instructions.
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Limitations on the SJE report
If the SJE encountered problems with obtaining evidence, then I would expect this to be explained, and for the SJE to give a view on the impact on their opinion.
What valuation methodology has the expert adopted?
The choice of methodology will be determined by the information available, the business sector, and inevitably, the valuer’s preferred approach.
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The most common issues I come across in reviewing valuations based on future maintainable earnings are:
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Failure to adjust historic EBITDA for exceptional trading or changes to the business
Not deducting a commercial salary for the business owners
An inappropriate choice of EBITDA multiple or applying a multiple to profits after tax rather than EBITDA
Not considering whether a normal working capital adjustment is required
Not checking the equity value against the valuation assessed on net asset value
Adding the balance sheet net assets to the equity value and so double-counting the value of the trading assets
The typical issues I find in net asset valuations are:
Not considering the latent tax on properties
Including provisions and liabilities that are not substantiated
Minority discounts
Whilst ultimately the application (or not) of a minority discount is a matter for the Court to decide, I would expect the SJE to have outlined the evidence relevant to whether a discount might be applied, and to give a view on the likely percentage discount (if any).
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Exhibits
The report should list all the key evidence that was considered by the SJE, and normally I would expect the key documents to be included as exhibits.
In my experience, the Shadow Adviser has a key role in assisting the client in understanding the SJE report, drafting appropriate questions, and giving the client peace of mind in knowing that they have had a second opinion on a piece of evidence that might be critical to the outcome of their legal dispute.