Written by Mark Norris
A valuation rebuttal report is a report that is used for litigation purposes whereby a critique is made of the valuation report of the opposing expert, and then a revised valuation conclusion is provided. The goals to be achieved with a rebuttal report include:
• Reduce fees to the client because a detailed appraisal report is not prepared;
• Communicate to the reader, potentially a “Trier of Fact” (Judge or Jury) that these are the areas that both experts agree on, and these are the areas where they do not agree; and
• As a result of the areas of disagreement, a revised value conclusion is provided.
The valuation standards that we, Tucker & Meltzer, as a Firm comply with include those established by the Statement on Standards for Valuation Services No.1 (SSVS) issued by the American Institute of Certified Public Accountants (AICPA) Consulting Services Executive Committee, the National Association of Certified Valuators and Analysts (NACVA), and the Uniform Standards of Professional Appraisal Practice (USPAP). All of these standards are generally divided between development standards and reporting standards. Where the engagement is for the purpose of litigation, the appraiser does not have to comply with the reporting standards. This allows the appraiser to work with the attorney from a legal strategic perspective in developing the means of communicating their conclusion of value. Hence, the acceptance of a rebuttal report. However, the appraiser still must comply with the development standards if they are issuing a conclusion or opinion of value. That basically means that the appraiser has performed enough work to support the conclusion or opinion of value that they are offering into evidence and testifying to.
This is extremely important, as evidenced by a question I was given by the opposing attorney on cross examination in a recent litigation case. The attorney, who was probably coached by the opposing expert, asked me: Did you perform enough work in accordance with standards to issue an opinion of value? He knew that my rebuttal report did not reflect all of the disclosures that would have documented my compliance with standards, and if I answered anything but the affirmative, the Judge would have had significant reason to discount my opinion of value, and rely more heavily on the opposing expert’s value conclusion. Obviously, that represents a position that no valuation expert wants to be in.
Another important thing to remember when critiquing an opposing expert’s report is to never gloss over a valuation method that is deemed a “sanity check” only. A sanity check is generally defined as a valuation method that is used and sometimes included in the valuation report, that is not intended to be relied on to develop a conclusion of value. Rather, it is used to support the values produced by other valuation methods. It is not intended to be the primary method of valuation because either the data used in the method is not sufficiently reliable, or the method itself is not an acceptable method to be relied on, in and of itself.
In two recent litigation cases where I issued a rebuttal report, the opposing experts included the market approach in their valuation reports and referred to the value produced by the market approach as a “sanity check”. In both cases, the value produced by this valuation approach did support values produced by other valuation methods. Since it was referred to as just a sanity check, I did not address it in detail in my rebuttal report. I realized to my surprise that when each of these experts described their sanity check to the Judge during their testimony at trial, it sounded as if the reliance placed on this valuation approach was much more than just a sanity check. I also realized that the Judge probably didn’t thoroughly understand the concept of a sanity check and placed more reliance on it than should have been placed. Fortunately, in each case, I was able to perform a more detailed analysis of the valuation approach the evening after they testified in preparation for my testimony the next day.
In the first case, I realized that the opposing expert had utilized the sales transaction database incorrectly, thereby producing a value that was in excess of $800,000 higher than if properly calculated. When calculated properly, the value produced by that approach was within $4,000 of my value conclusion. I was even able to direct the Judge to the website that had specific directions on how to correctly use the data.
In the second case, similar to the first case, the opposing expert also described the market approach as much more than a sanity check once he was on the witness stand. Four sales transactions were used to develop a value for the “sanity check”. Although never mentioned by the opposing expert in his testimony, in my testimony, I clarified to the Judge that two of the transactions were in excess of 10 years old, one was in excess of five years old, and the remaining transaction had revenues that were 88 times that of the company being valued. It was also located in Hawaii as compared to the company being valued being located in Maryland. In my opinion, this valuation method should have never been included in the valuation report in the first place for the above reasons.
In hindsight, in both cases, I would have preferred to have documented my criticisms of the opposing experts’ sanity checks in my rebuttal report. I did not realize how much of a difference in meaning a sanity check was when read in a report versus being explained, in a very liberal manner, on the witness stand.
In conclusion, if you are a valuation expert, remember that the issuance of a rebuttal report does not relieve you of complying with development standards. In addition, never gloss over valuation methods referred to as “sanity checks” by your opposing experts. If you are an attorney involved in litigation, and you have directed your valuation expert to prepare a rebuttal report, remember to confirm that they have complied with development standards. In addition, make sure that they don’t gloss over valuation methods referred to as “sanity checks” by your opposing experts in their report.
For more information on this topic, contact Mark Norris.