Financial Expert Witnesses
By: Steven Babitsky, Esq.
Any expert witness who deals with numbers, valuations, discounts, etc. must be able to clearly and articulately explain where the numbers come from. Many of these experts are, in fact, unable to do so while under stress during their deposition.
Here is an example that arose during an unscripted demonstration at a SEAK Expert Witness Conference:
Q. Sir, you are a CPA and a business valuation expert?
A. That is correct.
Q. What did you do in this case?
A. I studied a family owned company to determine its fair market value.
Q. What did you conclude?
A. Using the discounted cash flow method I estimated the fair market value at $7,000,000.
Q. What marketability discount did you use?
A. 5%.
Q. Please share with me the formula you used to come up with the 5%.
A. FMV=VTE × 5%
Q. That’s fair market value = total equity × 5%?
A. Yes.
Q. That is how you used the 5% to get to the $7,000,000, correct?
A. Exactly.
Q. I asked you for the formula you used to come up with the 5%.
A. Well there is no formula per se.
Q. How did you come up with the 5%?
A. There really is no formula. I looked at the totality of the business and came up with the 5%.
Q. Is that the best explanation you have sir?
A. Unfortunately, it is.
Conclusion:
Financial experts who cannot explain their methodology and where they get their numbers from run the risk of easily being discredited.