Expert Witness Valuation Methods (With Example)

With complex finance and law, expert witnesses can greatly impact crucial legal battles like divorces or intellectual property disputes. These methods are critical in providing neutral, objective assessments of asset value, which help courts and juries make informed decisions. Expert witnesses use many different valuation methods, from income-based to market-based or asset-based methods.

The method depends on factors such as the assets in question, industry trends, and the valuation’s purpose. Picking the right method is important for ensuring that legal proceedings are accurate and trustworthy. 

Considering the importance of an expert witness business valuation, one must also be aware of the types and limitations of the same. Let’s discuss just that.

Expert witness valuation

Expert witness business valuation is important in disputes or other legal cases where assessing the company’s value is necessary. This value reflects the projected future profits the owner expects to generate, making it uncertain and dependent on forecasts.

Now, let us discuss the other aspects of expert business valuation.

What is expert witness valuation?

Expert witness valuation involves determining the value of a business or a property within a legal setting by a specialist known as the expert witness. These individuals offer their opinion and analysis to the court or parties involved in legal disputes. They have specialized knowledge and expertise in business valuation or real estate assessment. 

The legal dispute between Apple and Samsung began when Apple filed a lawsuit against Samsung, alleging that Samsung had copied the look and feel of its iPhones and iPads. Apple hired two expert witnesses (a Professor of marketing and an economist) to support their case. After reviewing the detailed valuation report, the juries ruled in favor of Apple, awarding them $1.05 billion in damages. Later, recalculating this amount resulted in a total of $930 million. This valuation is vital in determining damages in intellectual property disputes. 

How does expert business valuation work in business conflicts?

Expert witness business valuation is important in resolving business conflicts by objectively assessing a company’s worth. Here’s how it typically works:

Step 1: When a business conflict arises, such as a partnership dispute or a merger/acquisition negotiation, parties may engage expert witness valuators to assess the value of the business in question.

Step 2: The expert witness valuator works with the involved parties to define the scope of the valuation. This includes determining the purpose of the valuation (e.g., for litigation, transaction, or internal decision-making), the relevant valuation date, the standard of value (e.g., fair market value, fair value), and any specific methodologies or approaches they will use.

Step 3: The expert witness valuator gathers relevant financial and non-financial information about the business, including financial statements, market data, industry trends, management interviews, and other relevant documents.

Step 4: Applying various valuation methods determines the expert witness valuation.

• The income approach (discounted cash flow analysis, capitalization of earnings).
• Market approach (comparable company analysis, precedent transactions).
• Asset-based approach (adjusted net asset value, liquidation value).

Step 5: For an accurate expert witness valuation, the valuator makes adjustments to the financial information as necessary to reflect the true value of the business. This may involve normalizing earnings, accounting for non-recurring items, and considering the impact of market conditions and specific risks. 

WHAT ARE THE DIFFERENT TYPES OF EXPERTS IN BUSINESS VALUATION?

When hiring someone to evaluate your business, there are two key factors: their qualifications and experience.

Qualifications refer to the training and certifications earned. There are three main types:

1. Accredited Senior Appraiser (ASA)
2. Chartered Financial Analyst (CFA) and
3. Certified Valuation Analyst (CVA) 

Each of these requires different levels of education and experience, which helps in performing an accurate expert witness valuation, which in turn helps resolve conflicts and informed decision-making.

Experience, on the other hand, is about the kinds of businesses the expert has worked with and the types of valuations they have performed. Different situations call for different expertise. For instance, if you are dealing with a private business, you’ll want someone who knows how to deal with the unique challenges of valuing a company where financial information is less transparent.

By considering both business credentials and experience, you can find the right person to give you an accurate and reliable valuation of your business.

WHAT ARE THE LIMITATIONS OF EXPERT WITNESS VALUATION?

Expert witness valuation, while valuable, has its limitations. A few of them are:

• Subjectivity & Data Limitations – Subjectivity is particularly evident in expert witness business valuation, where differing opinions may arise due to individual expertise and experience. Additionally, the accuracy of valuation reports heavily relies on the quality and availability of data, which can be limited.
• Complexity – Another problem is that expert witness valuation can be hard to understand. The methods involved often deal with complicated financial and industry stuff, which can be confusing for non-experts. 
• Conflicting Interests – Conflicting interests may also influence expert witness valuations, as experts may face pressure to align their opinions with the interests of the party that retained them. 
• Uncertainty – Valuation involves predicting future outcomes and assessing uncertain risks. Expert witnesses may face challenges in accurately predicting future market conditions, technological advancements, or legal consequences, which can introduce uncertainty into their valuations.

How to do expert witness valuation?

Expert witness valuation involves testimony on the value of assets, businesses, or other properties in legal proceedings. There are several methods used for valuation. They are:

Expert witness valuation methods with Examples

Expert witness valuation methods include various techniques used to determine the value of a business or estate. The valuation methods include the income, market, and asset approaches, each tailored to specific contexts and types of valuation.

1) Income Approach – As an expert witness in business valuation, employing the Income Approach involves assessing the income-generating potential of the asset under consideration. This method requires projecting future cash flows the asset is expected to generate .

Suppose an expert values a promising tech startup developing a new fitness app. Due to its early stage, the company has a limited financial history for the income approach. Here’s an example with hypothetical numbers for each approach:

Income Approach (Discounted Cash Flow):

• Projected Free Cash Flows (FCF):
  • Year 1: $1 million
  • Year 2: $2 million
  • Year 3: $4 million
  • Year 4: $6 million
  • Year 5: $8 million
• Discount Rate: 20% (considering high risk for early-stage startups)

2) Market Approach – In expert witness business valuation, the Market Approach looks at similar assets recently sold in the market. This method relies on supply and demand, assessing the prevailing market conditions and prices of comparable assets.

A  valuator checks the current market conditions and prices of similar assets. They employ their expertise to find the right market data and adjust for differences between the assets they value and those sold. 

Identifying similar tech startups in the fitness app space that have recently been acquired.

• Find the average Price-to-Sales (P/S) ratio of those acquisitions, which might be 5x.
• The target startup’s projected revenue for next year is $10 million.

3) Asset Approach – For an accurate expert witness business valuation, employing the Asset Approach involves assessing the value of an asset based on its underlying assets and liabilities. This method involves calculating the asset’s net value by subtracting its liabilities. This approach is useful in where the asset’s income-generating potential or market comparables may not accurately reflect its true value.

Suppose the startup has limited tangible assets, with office equipment valued at $100,000.

• The core asset is its intellectual property (IP) related to the app, which can be challenging to value objectively. However, based on expert opinion and potential future licensing deals, the IP is valued at $20 million.

What are the qualifications required to become an expert witness valuator?

To become an expert witness valuator, you need a combination of unique knowledge, solid industry experience, and specific qualifications:

• Unique Knowledge and Robust Industry Experience – You must have specialized knowledge in expert witness valuation methods and techniques related to the industry in which you provide expertise. This means understanding how businesses operate, their financial structures, and the factors that affect their value.
• -Strong Business Acumen and Impressive Academic Credentials – A strong business sense is crucial. It involves understanding how economic factors, market trends, and industry dynamics impact the value of a business. Academic credentials such as finance, economics, or business administration degrees can provide a solid foundation.
• Certification and Licensing – Depending on your jurisdiction, certification or licensing may be required to practice as an valuator. As mentioned, certifications like the CVA / ASA / CFA show your expertise and adherence to professional standards.
• -Competence, Experience, and Specific Knowledge – Demonstrating competence through experience in expert witness business valuation is essential. This includes a successful valuation report and a deep understanding of relevant laws and regulations.
• Forensic Economics Expertise – Besides traditional valuation skills, expertise in forensic economics is important for an expert witness valuator. This involves the application of economic principles to legal cases, often during litigation or disputes. You should be able to analyze complex financial data, assess damages, and communicate your findings effectively to judges or juries.

When do businesses need expert witness valuation?

Businesses may need expert witness valuation services in various situations, including:

• Partner Dispute – When business partners decide to go their separate ways, the departing party often aims to sell their ownership stake. Involving a business valuation firm helps determine a fair value for this stake, ensuring equitable consideration for the business partners.
• Alternative Dispute Resolution – If a disagreement arises but parties prefer to avoid litigation, they may opt for alternative dispute resolution methods, such as mediation. In such cases, an independent mediator or arbitrator may engage a business valuation firm to produce an impartial expert witness valuation report.
• Litigation – Whenever litigation arises concerning the value of a business attorneys often engage an expert witness to provide testimony in court. This scenario represents one of the most common instances where businesses and attorneys utilize the services of an valuator.
• Divorces – In divorce settlements, assessing the value of assets can lead to disagreements. When parties can’t agree on an asset’s value, they seek an independent expert witness valuator.

How can Eqvista help?

Eqvista’s expert witness valuation services offers comprehensive expert witness tailored to clients’ specific legal dispute requirements. Eqvista ensures accurate assessments that can withstand court scrutiny by combining advanced valuation methodologies with a team of experienced professionals.

• Eqvista’s expert witness provides support, which includes professional testimony and guidance to help clients with their legal cases.
• Eqvista’s valuation reports adhere to regulatory standards and legal requirements, giving clients confidence that their valuations are per applicable laws and regulations.
• Eqvista’s expert witness valuation ensures transparency throughout the valuation process, keeping clients informed and involved at all stages.
• Eqvista offers comprehensive litigation support, assisting clients in preparing for legal proceedings and providing strategic advice based on our valuation knowledge.

Clarity in valuation with Eqvista – Connect Us

On the whole, Expert witness valuation methods are critical tools in legal proceedings, ensuring fairness and transparency throughout the valuation process. These methods protect the integrity of asset valuation by providing impartial and well-supported assessments.

Eqvista conducts the business valuation accurately per the current market conditions and technologies. Get your business valuation services tailored to suit your needs from our NACVA-certified analysts, and we provide valuable insights in understanding complex issues. Be a part of our 14000+ trusted companies. To know more about expert witness valuation, contact us today!