By Joey N. Friedman, CPA, ABV, MAcc, MIB — President, Joey Friedman CPA PA. This article is published by Joey Friedman CPA PA, a Florida professional association. All forensic accounting, business valuation, expert witness, and litigation support services described herein are provided by Joey Friedman CPA PA. Mr. Friedman’s professional credentials and experience are exercised in his capacity as an officer, agent, and licensed CPA practicing under and on behalf of Joey Friedman CPA PA.
Quick Answer
The biggest red flags in a closely-held business valuation are: (1) unsupported revenue projections that diverge from historical trend, (2) unadjusted owner compensation that masks normalized earnings, (3) reliance on unreliable guideline-public-company comparisons when private-market data exists, (4) inappropriate discounts for lack of control or marketability not tied to facts, and (5) circular reasoning that uses the conclusion to justify the inputs. Attorneys should engage a rebuttal forensic CPA to systematically test each assumption before deposition or trial.
Closely-held business valuations done in litigation contexts — divorces, shareholder disputes, partnership dissolutions, estate matters — are routinely contested. The valuation expert your client retains will produce a number; the opposing expert will produce a different number; the two will defend their positions through written reports, deposition, and trial testimony.
For the attorney managing the litigation, the question is: what should you push your own expert to check, and what should you challenge in the opposing expert’s report? This article is a field guide to the red flags that consistently show up in contested closely-held business valuations.
Red Flag 1: The Valuation Date Is Convenient
The valuation date determines what financial information is “real” for the valuation. A spouse trying to minimize the value of a business they own may push for a valuation date that follows a known dip in revenue. Conversely, a non-owning spouse may push for an earlier date when the business was peaking.
What to check:
- Was the valuation date set by court order, agreement, or the expert’s discretion?
- Does the date correspond to a particular trough or peak in the business?
- Was the date convenient for one party?
- What happened to the business shortly before and shortly after the date?
If the expert chose the date independently, probe their reasoning. Valuation dates aren’t supposed to be optimized for either party.
Red Flag 2: Owner Compensation Looks Off
In a closely-held business, the owner sets their own salary. If the owner pays themselves substantially MORE than market for the position, the income approach valuation will be artificially low (high compensation reduces normalized earnings). If they pay themselves substantially LESS than market, the valuation will be artificially high.
What to check:
- What is the owner’s actual salary?
- How does it compare to BLS Occupational Employment Statistics for the position, geography, and company size?
- How does it compare to RMA Annual Statement Studies or industry-specific surveys?
- Has the owner’s compensation changed recently in a way that suggests positioning for valuation?
If the opposing expert’s report doesn’t include reasonable compensation analysis with supporting data, that’s a major weakness.
Red Flag 3: Personal Expenses Run Through the Business
Closely-held businesses often pay personal expenses — owner cars, personal travel, country club memberships, family member salaries for non-existent work. For valuation purposes, these should be added back to normalized earnings. If they’re not, the valuation understates the business’s true earnings power.
What to check:
- Did the expert analyze credit card statements for the business?
- Did they identify and add back personal expenses?
- Did they verify family member salaries (children, siblings, spouse) for actual services rendered?
- Did they identify discretionary perks (golf, vehicles, vacations) classified as business expenses?
The absence of personal expense add-backs in the report is suspicious. Closely-held business owners almost universally run some personal through the business.
Red Flag 4: One-Time Items Aren’t Adjusted
Non-recurring items distort earnings. A lawsuit settlement (paid or received), a major asset sale, a COVID disruption, a hurricane recovery — these one-time events shouldn’t drive valuation forward.
What to check:
- Did the expert identify and adjust for non-recurring items?
- Are the “one-time” items actually one-time, or are they recurring patterns?
- Are positive non-recurring items removed (e.g., insurance proceeds) the same as negative ones?
The valuation should normalize for non-recurring items in BOTH directions consistently.
Red Flag 5: Forecast Assumptions Aren’t Defensible
If the income approach used is a Discounted Cash Flow (DCF), the forecast assumptions drive the result. A 6% revenue growth assumption when the company has grown at 2% historically is a major red flag.
What to check:
- What growth rate did the expert use, and how is it supported?
- Do the forecast assumptions match historical performance?
- Are industry trends incorporated?
- Are capital expenditure assumptions consistent with historical patterns?
- Is the terminal growth rate (long-term) reasonable (typically 2-4%, never higher than long-term GDP growth)?
Forecast assumptions are the most flexible (and therefore most contestable) part of a DCF. They should be supported by data, not just expert judgment.
Red Flag 6: The Discount Rate Is Inadequately Supported
The discount rate (often weighted average cost of capital or cost of equity) translates future earnings into present value. A 2% difference in the discount rate produces a substantial difference in value.
What to check:
- Risk-free rate used (should match valuation date)
- Equity risk premium used (typically 5-7%)
- Beta or industry-specific risk adjustment
- Size premium (typically 2-5% for smaller companies)
- Company-specific risk premium (often disputed)
- Marketability adjustment
If the discount rate is presented without clear components, or if the components are unsupported, that’s a weakness.
Red Flag 7: Comparable Companies Aren’t Truly Comparable
If the market approach is used, the comparable companies must be truly comparable to be reliable. A $50M software company isn’t comparable to a $2M services business.
What to check:
- Industry match (SIC/NAICS code)
- Size match (revenue range)
- Geographic relevance
- Growth profile match
- Margin and profitability match
- Capital structure
The expert should justify each comparable selected. Unjustified selections suggest cherry-picking.
Red Flag 8: Multiples Are Applied Without Adjustment
Comparable multiples need adjustment for differences between the comparable and the subject. An unadjusted average multiple is usually a red flag.
What to check:
- Were size adjustments applied?
- Were growth rate adjustments applied?
- Were capital structure adjustments applied?
- Was the median used or the mean (median is usually more appropriate)?
- Was the range presented or just a point estimate?
The application of multiples is often where opposing experts get sloppy.
Red Flag 9: Discounts Are Stacked or Double-Counted
A common error is applying multiple discounts (DLOM + DLOC) without recognizing that they may overlap or interact. Another common error is applying a discount to a value that already reflects the discount factor.
What to check:
- What discounts were applied?
- What was the base value before discounts?
- Is the base value control or minority?
- Is the discount appropriate for the base?
- Are discounts compounded mathematically correctly?
The discount section of a valuation report is often the most technically complex and most prone to error.
Red Flag 10: The Reconciliation Is Just Averaging
When multiple approaches are used (income + market + asset), the final value is reconciled. A defensible reconciliation explains why specific approaches deserved more weight given the facts. A weak reconciliation just averages the indications.
What to check:
- Did the expert weight the approaches differently and explain why?
- Is the weighting consistent with the strength of each approach for this specific business?
- Or did the expert just average?
Averaging the approaches without justification is a sign of inadequate analytical depth.
Red Flag 11: The Expert’s Independence Is Questionable
Beyond methodology, the expert themselves can be a weakness:
What to check:
- Was the expert the longtime advisor to the business or to one of the parties?
- Did the expert prepare tax returns for the business?
- Was the expert engaged on a contingent fee (prohibited for expert witness work)?
- Does the expert have history of being excluded or limited in prior cases?
An expert with independence concerns can be challenged on those grounds at deposition or trial.
Red Flag 12: The Expert Holds No Valuation Credentials
Most CPAs do not have valuation credentials. The valuation work performed by a non-credentialed CPA is vulnerable to Daubert / Frye challenge.
What to check:
- Does the expert hold ABV (AICPA), ASA (American Society of Appraisers), CVA (NACVA), or CFA?
- How recent is the credential?
- How many valuations has the expert performed in the last 12-24 months?
If the opposing expert lacks valuation credentials, that’s a primary challenge in deposition and trial.
What Your Own Expert Should Document
To preempt these challenges in your favor, ensure your own valuation expert documents:
- The standard of value used and why
- The valuation date and its basis
- The approaches considered and why specific approaches were applied or excluded
- All normalization adjustments with source documentation
- Forecast assumptions with supporting data
- Discount rate components with source data
- Comparable selection with comparability analysis
- Multiple adjustments
- Discount selection with study citations
- Reconciliation weighting with justification
- Independence statement
- Credentials and recent experience
A well-documented valuation report doesn’t eliminate disputes but reduces the surface area for attack.
Frequently Asked Questions
How do I find a credentialed valuation expert?
Start with the AICPA’s ABV directory (https://www.aicpa-cima.com/account/professional-credentials/abv-credential), the American Society of Appraisers, NACVA, or recommendations from attorneys experienced with the kind of matter you’re handling. For Florida divorce, look specifically for experience with Florida case law and Florida-court testimony.
What if my expert disagrees with the opposing expert on every issue?
That’s normal in contested matters. The court (or settlement negotiation) ultimately weighs the credibility of each side’s methodology. Strong methodology with thorough documentation typically prevails.
How do I prepare for the deposition of an opposing valuation expert?
Have your own expert evaluate the report and identify the weaknesses. The weaknesses become deposition topics. Specific questions about methodology, supporting data, and assumptions usually surface the weaknesses your client needs exposed.
Is it worth challenging an opposing expert’s credentials?
Yes, if there’s a legitimate credential gap. Daubert / Frye challenges (excluding the expert from testifying) are difficult to win but can succeed when the expert lacks specific specialty credentials.
Does Joey Friedman CPA PA provide valuation services for Florida litigation?
Yes. The firm provides business valuation services for Florida divorce, shareholder oppression, partnership dispute, and commercial litigation matters. Joey Friedman holds the ABV (Accredited in Business Valuation) credential from the AICPA.
Working with a Forensic CPA on Closely-Held Business Valuation Matters
If you are an attorney handling a Florida matter involving closely-held business valuation — divorce, shareholder dispute, partnership dissolution, estate — engaging a credentialed valuation expert early is critical. The methodology described in this article is the foundation; your specific matter will have its own contested issues.
Joey Friedman CPA PA, through its President Joey N. Friedman, CPA, ABV, MAcc, MIB, provides business valuation services throughout Florida, including rebuttal expert services for matters where an opposing expert report has already been submitted. Contact the firm to discuss your specific matter.
About Joey Friedman CPA PA
Joey Friedman CPA PA is a Florida professional association providing forensic accounting, business valuation, expert witness, and litigation support services. The firm is led by Joey N. Friedman, CPA, ABV, MAcc, MIB, who serves as the firm’s President.
All services described in this article are provided by Joey Friedman CPA PA. Engagement letters and professional services are issued by the firm. Joey N. Friedman signs in his capacity as the firm’s President — as an officer and agent acting on behalf of Joey Friedman CPA PA, not in any personal or individual capacity. Mr. Friedman’s professional credentials — including CPA license, ABV (Accredited in Business Valuation, AICPA), and ACFE membership — are exercised under the firm.
To engage Joey Friedman CPA PA, contact the firm:
- Phone: 954-282-9615
- Contact form: Contact the Firm
Disclaimer: This article is for informational purposes only and does not constitute legal, accounting, or tax advice. Engagement of Joey Friedman CPA PA is subject to a written engagement letter executed between Joey Friedman CPA PA and the engaging party. No attorney-client or accountant-client relationship is created by reading this article.
Related coverage from Joey Friedman CPA PA
- Evaluating the Opposing Expert’s Business Valuation
- Business Valuation Accountants: What ABV-Credentialed Sets Apart
- Income Normalization in Florida Divorce: Add-Backs, Owner Comp, and the EBITDA Bridge
- Shareholder Oppression: How to Value the Minority Interest
About This Service
This article is part of Joey Friedman CPA PA’s broader practice in business valuation expert witness services. Visit the main service page for a complete overview of how we support attorneys, businesses, and individuals across Florida and nationally in financial disputes, litigation, and forensic engagements.