Expert opinions are only as reliable as the information upon which they’re based. Errors and incomplete access to information that’s relevant to the case can lead to incomplete analyses and inaccurate results.
Case in Point
To illustrate, consider the valuation expert who couldn’t figure out why a subject company continued to manufacture creosoted railroad ties, even though the division hadn’t been profitable for several years. In fact, the company had recently decided to add $700,000 of capital improvements to the unprofitable division. The healthier distributor cap division was keeping the entire company afloat — and the valuator wondered, “Why haven’t they shut down the unprofitable railroad tie division?”
He visited both facilities and asked additional questions. It turned out that the company would incur environmental clean-up costs if it shut down the unprofitable railroad tie division, which had been leaching creosote into a nearby river for years. The clean-up costs were a hidden liability that would have dissipated the assets of the distributor cap division. Now the expert had the information needed to properly value the business.
In another case, the expert valued a solo plastic surgery practice for the owner’s divorce. During cross examination, the attorney asked the expert whether or not he knew that the surgeon had suffered a major heart attack a year earlier. The expert was caught off-guard, and opposing counsel convinced the court that the health of the surgeon had a major impact on the value of the practice. Had the expert asked the health question in advance he might have been able to determine that the heart attack issue may not have impacted the value of the practice.
The Catch-All Question
To help ensure full disclosure of all relevant information needed to provide a reliable opinion, many experts ask a “catch-all” question usually at the end of their management interviews or written questionnaires. For example, an appraiser might ask:
“Is there any other information not addressed in this questionnaire (or interview) that could potentially impact the company’s future cash flow, risk or value?”
By asking this question, it demonstrates that the expert tried to obtain complete access to relevant information. But it also implies that the client, opposing party or attorney who failed to disclose a key fact was trying to hide something. This is especially true if the opposing side failed to disclose a detail that it knew enough to inquire about on cross-examination.
An Attorney’s Responsibility
Attorneys can also help experts obtain all the necessary information to perform a thorough, complete analysis. For example, a client might not want to pay for a site visit. But especially in litigation, a site visit and a concurrent interview with management can be invaluable in obtaining a complete understanding of the business. This is especially true when the expert is hired by someone outside of the business, such as a nonmonied spouse in divorce or a minority shareholder in an oppressed shareholder claim.
Attorneys can submit and answer interrogatories, as well as petition the court for access to company facilities and personnel during the discovery phase of the case. When an expert is blindsided on the stand, the attorney can step in and ask the right questions to minimize the damage done if undisclosed information comes to light.
Also not to be overlooked is the attorney’s familiarity with the business. Often the attorney is representing a client with whom he or she has a long-standing relationship. The attorney’s knowledge of the business can help the expert understand relevant information that could impact value. Even if the attorney wasn’t hired by a company’s controlling shareholder, he or she often obtains an in-depth knowledge of the business while going through the case. The expert and attorney should meet and talk about issues the attorney may be familiar with concerning the business or business interest being valued.
By openly sharing relevant information, attorneys allow experts to independently determine what information is relevant to their opinions. Although attorneys and experts work together, it’s important to respect the line between the attorney’s role as a client advocate and the expert’s role as an independent professional hired to help the trier of fact understand and interpret complex financial matters.