Business Valuation Disputes: What Attorneys Should Expect
By: Eli C. Neal
Business valuation disputes can be challenging and complex when there are two experts on opposing sides.
Here’s what you should realistically expect:
1. The Valuation Will Be Rebuilt
In many cases, attorneys expect a forensic accountant to “check the math” on an opposing valuation report.
Both sides’ forensic accountants will often:
Reconstruct financial statements from raw data
Adjust for non-recurring or disguised transactions
Normalize owner compensation and discretionary expenses
Recalculate earnings or cash flow bases (EBITDA, SDE, etc.)
Recalculate the valuation procedures
This means there is often a parallel valuation model designed to test the original conclusions.
2. The Fight Is Usually Over Adjusted Earnings, Not Revenue
Most valuation disputes don’t hinge on top-line revenue.
They hinge on earnings and consideration of the following adjustments:
Owner perks disguised as expenses
Personal expenses run through the business
One-time gains or losses improperly included
Underreported cash income
Timing manipulation of revenue or expenses
3. The Importance of Discovery
If the company’s underlying financial data is suspected to be unreliable, discovery will be important. Attorneys should expect requests for the following:
General ledgers (not just summaries)
Bank statements across all accounts
Credit card records tied to the business and owners
Payroll records and contractor payments
4. “Normalized Earnings” May Be Contested
Many valuations rely on normalized earnings to reflect true economic reality.
Common disagreements over adjustments can include:
Whether owner compensation is “market rate”
The appropriate amount of add-backs
Whether discretionary spending is a personal benefit
Whether revenue trends are sustainable
5. Opposing Experts May Not Agree on Everything
In valuation disputes, it is possible for experts to:
Use different normalization assumptions
Apply different multiples or valuation methods
Disagree on growth projections
Produce materially different valuations from the same data set
Forensic accountants should make any disagreements transparent and clear to the parties, attorneys, and trier-of-fact. Forensic accountants should also be prepared to provide rationale for why their assumptions and methods are reliable.
Final Takeaway
Business valuation disputes take special care from the forensic accountants to produce transparent, thorough, and well-reasoned work products. 4 Corners specializes in insightful, reliable, and credible financial conclusions. We’d love to help you.
4 Corners is located in the Greater Seattle area, serving clients in Seattle, Bellevue, Redmond, and all throughout the Pacific Northwest. If you are an attorney or business owner and believe you could use our help, please give 4 Corners a call at 425.800.4792 or email us; we’ll listen to your situation and help you scope your project.
We’d love to help you.