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Beware of 'Calculations' of Business Value
Recent cases highlight how dangerous experts can be when they report that their finding of business value is based on a “calculation.” This wording has special meaning, implying a quick, cheap set of procedures that is tantalizing, especially for clients and attorneys struggling with placing a cash-equivalent value on an intangible asset, such as equity in a privately held business. Calculations are usually based on assumptions of the client (or perhaps the attorney), not on the independent judgment of the appraiser. But danger lurks in the darkness of ignorance, for these simplified “valuation” procedures are too often a crippled form of analysis without complete judgment that mistakenly conveys the assurance of a formal opinion expected of an expert.
Cases in Point
In In the Marriage of Hagar (2010 WL 4807559, Iowa App., Nov. 24, 2010), the appellate court addressed the husband's interest in a small chain of family owned dry cleaning stores. In the trial court, the family CPA estimated that the businesses were worth anywhere from $71,000 to a negative $120,000. His calculation report cited “industry rules of thumb” and indicated that his conclusions did not require the same professional judgment as a complete valuation analysis. After the trial court valued the businesses based in large part on the CPA's figures, the wife appealed. The appellate court agreed with the error, finding “we do not use [the CPA's] calculations because he admittedly did not use judgment.”
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