Valuations: A Cautionary Tale

By: Joshua Levin-Epstein, Esq.
Levin-Epstein & Associates, P.C.

A recent decision from a Minnesota federal court in a contested valuation proceeding that rejected both of the experts’ valuation reports of a successful grocery store business shows the danger of the incorporation of client advocacy and bias into a valuation report.

The Minnesota federal court, in Lund v Lund, Decision, Order & Judgment, No. 27-CV-14-20058 [Minn. Dist. Ct. Hennepin Cnty. June 2, 2017], basically concluded that both of the valuation experts were hired guns.  In Lund, the Court explained that:

“Both experts are highly trained and experienced professionals.  Both have testified and provided valuation reports in many trials and contested valuation situations. While the Court finds that [the parties’ respective valuation experts] are unquestionably qualified to testify on the issue of valuation, the obvious, zealous advocacy in which they engaged on behalf of their respective clients compromised their reliability in this instance.”

The Court went onto further criticize both of the valuation experts:

“Looking at their contention at a high level, it is abundantly clear that their valuations are tailored to suit the party who is paying them. This cold fact cuts against both experts’ credibility in equal measure.”

While both experts used an income approach on a discounted cash flow analysis to value the business, their disagreement over every input and assumption contemplated in their discounted cash flow analysis calculation compromised the professional integrity of each report, according to the Court.  The Court concluded that the $100 million difference in the value of the business between the experts’ reports was attributable to client bias.

Valuation experts are often under immense pressure in valuation proceedings to deliver reports in line with client expectations; however, the inclination to satisfy the client cannot compromise professional objectivity.  Ultimately, valuation reports that are perceived by a court as contrived will backfire against the client and the expert because the courts are empowered to undertake an independent judgment in a contested valuation proceeding.  For experts whose professional livelihood depends on credibility, the Minnesota federal courts’ decision should serve as a cautionary tale.

Editor’s Note: At JBV, remaining neutral is a prime objective.