Shannon Pratt’s, The Lawyer’s Business Valuation Handbook 3rd Edition
Book Review
This fall, the American Bar Association released Shannon Pratt’s The Lawyer’s Business Valuation Handbook 3rd Edition. This publication has been edited by Roger J. Grabowski, FASA and Alina Niculita, ASA, ARM-BV, CFA, MBA. It is a comprehensive guide for attorneys (and judges) to enable them to better understand the substance and basis of the valuation expert’s work. In this article, Michael G. Kaplan reviews the book.
I Had a Problem!
I received a phone call from an attorney. He was representing a client involved in a hotly contested lawsuit involving the impairment of the value of a business. He gave me some background information and soon asked me how much this was going to cost. I answered with, “From the brief overview that you just gave me, I would estimate somewhere in the range of $25,000 to $30,000.” His response was, “Wow, that is a lot of money. There is not much for you to do. My client has all the tax returns and bank statements. How could it be so costly for you to do your calculations?”
I Had a Problem!
I met with an attorney with a client who was attempting to purchase the interest of a minority shareholder. She provided me with a copy of the shareholder agreement that defined the parameters of a shareholder buyout. The agreement specified that the minority shareholder’s interest was to be valued at “the net value of the company on March 19, 2018, if the business were to be sold on that date to a bona fide purchaser in accordance with Generally Accepted Accounting Principles and IRS Rules and Regulations.” With the agreement in place, the attorney and her client believed that the valuator’s assignment was very clear. From my perspective as a valuator, the only thing that was clear is that the language in the agreement was problematic. Prior to my retention, neither the attorney nor her client had any understanding of or appreciation for the ambiguities and conflicts that the language of the shareholder agreement created, and the accompanying obstacles to getting the matter resolved.
I Had a Problem!
Early in my career, one of my regular referral sources, a family law attorney, believed that valuation work was “voodoo”. An otherwise excellent and successful attorney, he expressed little or no interest in understanding how I “employed my voodoo” and went about formulating a valuation opinion. All he wanted from me was the number, and because he had little interest in understanding what I had done, he looked to me to explain to the court how I derived it. In retrospect, that was a highly risky position to take. This perspective of counsel allowed for a substantially increased possibility that the court would exclude my testimony. An excellent example of this risk is set forth in the ATA Airlines, Inc. vs. Federal Express Corporation matter. As stated in the appellate decision: “If a party’s lawyer cannot understand the party’s own expert, the testimony should be withheld from the jury. Evidence unintelligible to the trier or triers of fact has no place in a trial.”
My Colleague Had a Problem!
After my colleague presented a session on business valuation for judicial officers, one of the judges approached him with a logical and very relevant question: “How is it that two opposing business valuation experts—each with exemplary educational and experiential qualifications, each with the same deck of evidence—can reach greatly divergent conclusions as to the value of the same business? Both experts were impressive. How can I determine who should I believe?” My colleague proceeded to explain how to weigh the evidence, assumptions, and perhaps even more important, personal bias could have substantial impact on the outcome, and that it was important for the judge to focus upon the reasons for the differing opinions.
What Does This Mean?
These scenarios describe real-world situations that valuation experts deal with regularly. Accordingly, it is critical for valuation experts to understand that most business valuations are done in the context of legal issues. Mergers and acquisitions, marital dissolution, shareholder disputes, estate planning, succession planning, estate and gift tax, business litigation, bankruptcy and restructuring, and others are areas that have legal issues at their foundation, and attorneys leading and managing the process. Most attorneys have much less of an understanding of business valuation and its dynamics than do the valuation experts.
Concepts that are second nature to valuation analysts are typically foreign to the attorneys: “Standard of value”, “levels of “value”, differentiating between “value”, “price” and “proceeds”, establishing the levels of “risk” and “marketability”, the impact of the economy and industry, are concepts that are familiar to valuation analysts, but elusive to many, if not most, legal practitioners.
Bridging the Gap
This gap in the understanding of substance of the valuation expert’s work can lead to less-than-optimal decisions by the members of the legal community. If only the attorneys had a resource that they could access at will to enable them to better understand the valuation expert’s work and work product, it would facilitate more productive communication between attorney and valuation expert, and inevitably more value being delivered to their clients.
Shannon Pratt’s The Lawyer’s Business Valuation Handbook 3rd Edition is such a resource. This publication, edited by Roger J. Grabowski, FASA and Alina Niculita, ASA, ARM-BV, CFA, MBA, is a comprehensive guide for attorneys (and judges) to enable them to better understand the substance and basis of the valuation expert’s work. This book addresses the world of business valuation in a straightforward and understandable manner. It addresses the broad-brush concepts; the generally accepted approaches and methodologies, the process, the analysis, rules of thumb, the evidence and assumptions, the authoritative and non-authoritative sources, professional standards, credentials, and issues relating to legal proceedings.
Shannon Pratt’s The Lawyer’s Business Valuation Handbook also addresses valuation issues in specialized legal matters commonly involving business valuation. This would include: tax matters, shareholder and partner disputes, marital dissolution, real property holding companies, employee stock ownership plans, and others.
One very important quality of this work is that it presents the material in a manner that is most useful to a legal practitioner, rather than a practice guide targeted at the valuation expert. Another important quality of this work is that it has been authored and edited by leading professionals in business valuation. The 40 chapters in the book are also supplemented with supporting “Exhibits” and an “Index of Court Decisions.”
This work is not only a resource for attorneys to gain an understanding of the many dynamics and challenges involved in business valuation, but also just as likely to be a catalyst for ongoing productive and enlightening interaction between the retaining attorney and the valuation expert.
Recommendation/Conclusion
I suggest valuation practitioners who work with attorneys to point out to your attorney contacts that they should consider adding this The Lawyer’s Business Valuation Handbook 3rd Edition to their library. I also suggest you consider adding it to your library to use as a resource when explaining your work to attorneys and judges.
Michael G. Kaplan, CPA, ABV, CFF, CVA, MAFF, has more than 40 years of experience in the areas of forensic accounting, business valuation, and litigation consulting. He is principle of Kaplan Forensic Valuation Consultants. Mr. Kaplan is called upon regularly to serve as a forensic expert in litigation matters, including business litigation, professional malpractice matters, fraud and embezzlement, intellectual property, marital dissolution, loss of earnings, employment matters, and partner and shareholder disputes. He has qualified to testify in court as an expert witness in approximately 250 matters. Mr. Kaplan has also served as a court-appointed expert and accounting referee.
Mr. Kaplan is actively involved in the educational field. He has served on the faculty of the Marshall School of Business and Leventhal School of Accounting at the University of Southern California. He has lectured to various bar association groups, CPA groups, appraiser groups, and other professional organizations. Mr. Kaplan has also lectured at regional and worldwide conferences of international associations of accounting firms. He has developed and presented continuing education programs in financial and management accounting, economic damages, forensic accounting, business valuation, and the CPA’s role in litigation. He has also authored publications in the areas of business valuation, lost profits, litigation practice marketing, valuation practice management, and expert testimony.
Mr. Kaplan is a principal member of the training development team of the National Association of Certified Valuators and Analysts™ (NACVA®) and the Consultants’ Training Institute™ (CTI™). He is the recipient of NACVA’s Circle of Light award (the highest distinction awarded to NACVA instructors), Instructor of the Year award, Instructor of Exceptional Distinction awards, and Outstanding Member award.
He is the lead instructor of the Litigation Bootcamp for Financial Experts, Foundations of Financial Forensics, and Expert Witness Bootcamp.
Mr. Kaplan may be contacted at (818) 888-0066 or by e-mail to Michael@KaplanForensics.com.
