Executive Summary
Business valuation expertise becomes most important when a decision will turn on a number that must be defensible—whether that decision is a settlement, a court ruling, a buyout price, a transaction price, or a damages claim.
In many matters, the dispute is not about whether the business has value. The dispute is about how value is defined (the standard of value), what is being valued (enterprise vs. equity; controlling vs. non‑controlling interest), and whether the inputs and methods can withstand scrutiny from the opposing side.
Engaging a valuation expert early can materially improve outcomes because the expert can help shape the information requests, identify the key value drivers, and reduce last‑minute surprises. Engaging too late often forces the valuation to rely on incomplete records, rushed assumptions, and limited rebuttal options.
This guide explains when to engage a valuation expert, what an expert typically does in disputes and transactions, the accepted valuation frameworks used in contested settings (including a simple numeric example), the documents commonly required, and the pitfalls that most often lead to credibility attacks.
When This Issue Arises
Ownership disputes, divorce matters, and partner exits
Valuation experts are often needed when ownership interests must be divided, redeemed, or bought out—especially in minority interest disputes, partner deadlocks, shareholder oppression claims, and divorce matters where a business is a significant marital asset.
In these settings, the expert’s work typically extends beyond a single “value number.” The expert may be asked to: (1) normalize earnings for owner compensation and discretionary expenses, (2) identify non‑operating assets and debt‑like liabilities, (3) interpret buy‑sell or operating agreement valuation provisions, and (4) quantify the financial impact of alternative assumptions so decision‑makers can see what actually drives the spread between the parties.
Early involvement also helps prevent avoidable discovery gaps. For example, if distributions, related‑party activity, or customer concentration are central issues, the expert can recommend targeted records to obtain before positions harden.
Transactions with price disagreements or contingent terms
In mergers, acquisitions, and internal transfers, an independent valuation can help parties anchor negotiations and reduce “pricing by leverage.” Experts are particularly useful when one or more of the following are present: limited financial transparency, significant normalization adjustments, heavy owner involvement, unusual revenue recognition, or material customer/supplier concentration.
Experts can also help when deal terms create post‑closing incentives to reinterpret performance. Common examples include purchase price adjustments tied to working capital, earn‑outs based on EBITDA or revenue, seller notes with covenants, and management compensation structures that affect post‑close reported earnings.
Engaging early can help avoid disputes about definitions. For example, a valuation expert can help translate “EBITDA” or “working capital” into clear, document‑supported calculations that align with the transaction documents and the company’s historical accounting practices.
Economic damages, lost profits, and diminution in value claims
Disputes involving alleged lost profits, diminished business value, or business interruption frequently require valuation expertise to align the damages theory with the facts. A recurring risk is overlap—claiming lost profits and a permanent value loss for the same economic injury without a clear framework that prevents double recovery.
Valuation experts are commonly engaged to: (1) test whether the alleged loss is temporary or permanent, (2) separate “but‑for” performance assumptions from actual historical trends, (3) assess the reliability of projections, and (4) quantify sensitivity—how much the outcome changes if a single assumption (growth, margins, churn, capacity, pricing, discount rate) is adjusted.
Tax, shareholder, or regulatory scrutiny
Valuations are also engaged when a matter involves reporting, compliance, or governance scrutiny (for example, valuation‑driven filings, transfers, or shareholder reporting). In these settings, a valuation that follows recognized professional standards and clearly documents assumptions is typically more resilient when challenged.
Because these matters may be document‑heavy, early engagement helps ensure the valuation is built on a consistent valuation date, a clearly stated premise of value (going concern vs. liquidation), and a record of how key inputs were derived.
Accepted Methods / Frameworks
Valuation experts generally work within three core approaches—asset, income, and market—then select the approach(es) that best fit the subject company, the available data, and the purpose of the valuation.
In disputes, methodology selection is often influenced by practical constraints: incomplete records, volatile earnings, heavy owner dependence, or a lack of credible comparable data. A defensible valuation explains why a method fits the facts and what the analyst did to address the limitations.
Asset, income, and market approaches (high level)
The asset approach estimates value by adjusting assets and liabilities to economic (fair value) and analyzing what remains for equity. This approach may be informative for asset‑intensive companies, holding companies, or situations where the earnings do not reflect the economic value of the assets.
The income approach converts expected future benefits into a present value. Common implementations include discounted cash flow (DCF) and capitalization of cash flow or earnings. In contested matters, the strength of the income approach often turns on whether projections are reliable and whether the discount rate is supported with transparent inputs.
The market approach applies pricing multiples derived from comparable companies or transactions to the subject company’s financial metrics. The strongest market approach analyses show the comp selection rationale, the multiple derivation, and the bridge from enterprise value to equity value.
Valuation “setup” items that affect everything
Before calculations begin, experts typically clarify key setup items that can materially change the answer: valuation date; standard of value (for example, fair market value vs. fair value); premise of value (going concern vs. orderly liquidation); level of value (controlling vs. non‑controlling); and what exactly is being valued (enterprise vs. equity; a class of units/shares vs. the whole company).
In disputes, these setup items are often the real battleground. Engaging an expert early helps ensure these decisions are made deliberately and documented clearly, rather than implicitly and inconsistently.
Calculation of value vs. conclusion of value
In transactions and early dispute posture, a calculation of value may be used to evaluate settlement ranges or negotiate a deal. It applies agreed‑upon procedures and is typically faster and narrower in scope.
A conclusion of value is typically more comprehensive and is commonly expected when a valuation must withstand formal challenge (for example, expert testimony or regulator scrutiny). It usually includes a fuller consideration of applicable approaches, more detailed support for assumptions, and clearer documentation of work performed.
Simple numeric example: normalized EBITDA × multiple (with an enterprise‑to‑equity bridge)
Assume a company reports EBITDA of $1,300,000. A valuation expert identifies two supportable normalization adjustments: (1) $300,000 of above‑market owner compensation and (2) $335,000 of non‑recurring expenses. Normalized EBITDA becomes $1,935,000 ($1,300,000 + $300,000 + $335,000).
If market evidence supports an EBITDA multiple of 5.5× for comparable companies (after considering risk, size, and growth differences), the implied enterprise value would be $10,642,500 ($1,935,000 × 5.5).
To reach an equity value indication, the analysis typically adjusts enterprise value for items that are not already captured in EBITDA. For example, if interest‑bearing debt is $2,400,000 and excess cash is $600,000 as of the valuation date, an illustrative equity value indication would be $8,842,500 ($10,642,500 − $2,400,000 + $600,000), before considering any other non‑operating assets or liabilities.
Accrual vs. cash‑basis financials
Many closely held businesses maintain internal records on a cash basis. In litigation and transaction contexts, valuation experts commonly convert or adjust results toward an accrual view to better match revenues and expenses to the periods that generated them.
The goal is not “GAAP perfection,” but a reliable economic picture that is consistent across periods and comparable to market data used for multiples or discount rates. Common focus areas include accounts receivable, accounts payable, prepaid expenses, deferred revenue, and revenue cutoffs around the valuation date.
Documents & Data Checklist
A valuation is only as defensible as the records supporting it. The following items are commonly requested early so the expert can identify normalization items, non‑operating assets, debt‑like obligations, and comparability factors:
- 3–5 years of financial statements (income statement, balance sheet, and cash flow if available), plus year‑to‑date results and trailing twelve‑month schedules
- Business tax returns for the same period (including all schedules, K‑1s, and depreciation schedules)
- General ledger detail and account listings (to support normalization items such as owner compensation, related‑party activity, and one‑time expenses)
- Owner compensation detail (payroll reports, benefits, retirement contributions, bonuses, and any perquisites recorded in operating expenses)
- Debt schedules and loan documents (including covenants, maturities, lines of credit, leases, and other debt‑like commitments)
- Customer and revenue support (major contracts, backlog, pipeline summaries, concentration analysis, pricing model, and revenue mix)
- Governing documents and transfer restrictions (operating/shareholder agreements, bylaws, buy‑sell agreements, and amendments)
- Cap table and ownership rights (classes of equity, voting rights, distribution rights, and any preferential terms)
- Non‑operating assets and liabilities (excess cash, marketable securities, non‑operating real estate, contingent liabilities, owner loans)
- Management interview inputs (roles, key personnel dependency, capacity constraints, and major risks)
- Industry and comparable data (peer set rationale, transaction databases searched, filters applied, and why comps were included or excluded)
In disputes, the “what was relied upon” file matters. A well‑documented record of source documents, assumptions, and calculations makes it easier to defend the valuation and identify exactly where opposing opinions diverge.
Common Pitfalls + Rebuttal Strategies
Waiting too long to engage the expert
Late retention limits the ability to shape discovery, preserve clean financial narratives, and test assumptions before they harden into positions. It also increases the chance that the valuation will rely on estimates rather than verifiable records.
A practical rebuttal strategy is to document what information was unavailable due to timing and show how the opposing opinion relies on speculation, incomplete periods, or untested assumptions.
Using unsupported assumptions or “rules of thumb”
Valuations are frequently attacked when key inputs are asserted without record support (growth rates, margins, discount rates, multiples, or normalization amounts). This is especially common when analysts borrow generic multiples or industry “rules of thumb” that do not fit the subject business.
A rebuttal strategy is to force transparency: identify each input, its source, and how sensitive the conclusion is if that input moves. If a single assumption drives most of the value difference, that is often the most efficient focal point for challenge.
Failing to separate operating vs. non‑operating items
Disputes often involve excess cash, non‑operating real estate, owner loans, contingent liabilities, or debt‑like commitments embedded in operating expense. Omissions in this category can move value materially and are commonly targeted in cross‑examination.
A rebuttal strategy is to walk the bridge from enterprise value to equity value and verify each adjustment against documents as of the valuation date. The bridge should be arithmetic, not narrative.
Mixing standards or applying discounts/premiums inconsistently
Whether discounts for lack of control or marketability apply depends on the standard of value and the interest being valued. An analysis can become internally inconsistent if it uses public market multiples (minority, marketable) but then applies additional adjustments without explaining what is already embedded in the multiple.
A rebuttal strategy is to align every adjustment with the governing standard and show that the same economic factor is not being counted twice (for example, in both the cash flows and the discount rate).
Confusing the engagement role and disclosure posture
In disputes, the difference between a consulting role and a testifying expert role can change what will be disclosed and when. Planning this early helps avoid wasted work, rework, and avoidable disclosure issues.
A rebuttal strategy is to keep workpapers organized, calculations traceable, and assumptions clearly labeled so that if testimony becomes necessary, the analysis is already in a defensible form.
Choosing an expert who is not dispute‑ready
Technical competence is necessary but not sufficient. Opposing counsel often targets unclear workpapers, inconsistent definitions, or an inability to explain methods to a non‑financial audience.
A rebuttal strategy is to insist on clear schedules, traceable calculations, and plain‑language explanations that match the record. The best expert opinions read like a step‑by‑step chain of logic rather than conclusions in search of support.
FAQ
Who performs business valuations in disputes?
Valuations are typically prepared by professionals with specialized valuation training and experience in contested matters. When the dispute turns on accounting records, normalization adjustments, and damages issues, a CPA with business valuation credentials is often a strong fit.
What is the difference between a consulting expert and a testifying expert witness?
A consulting expert helps develop strategy and analysis behind the scenes, while a testifying expert provides opinions that may be disclosed and challenged in deposition or trial. Planning the role early helps avoid rework and disclosure surprises.
How early should a valuation expert be engaged?
Engaging early—when a dispute is anticipated rather than after it is fully litigated—usually improves outcomes. Early involvement helps target document requests, identify key valuation drivers, and reduce last‑minute uncertainty.
Can a valuation expert help during mediation or settlement talks?
Yes. A defensible valuation can clarify reasonable ranges, identify the drivers of disagreement, and support negotiation positions. Experts can also stress‑test the assumptions used by the other side.
What if the opposing valuation appears flawed?
A valuation expert can analyze the opposing work for methodological issues, unsupported assumptions, or internal inconsistencies, and then prepare rebuttal themes and cross‑examination support. The most persuasive challenges focus on data sources, consistency, and transparency.
Is industry‑specific experience required?
Industry familiarity helps, but methodology and dispute experience are usually more important. A strong expert can learn the business model quickly and apply consistent valuation standards, supported by reliable documents and comparable market data.
Sources
- AICPA — Statement on Standards for Valuation Services (VS Section 100 / SSVS)
- IRS — Revenue Ruling 59-60 (valuation factors and fair market value framework)
- International Glossary of Business Valuation Terms (common definitions used across valuation practice)
- Uniform Standards of Professional Appraisal Practice (USPAP) — General appraisal standards (as applicable to business valuation work)
- Federal Rules of Evidence — Rule 702 (expert testimony reliability framework)
CTA + Disclaimer
Contact the team at Joey Friedman CPA PA to discuss your business valuation needs.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Outcomes depend on specific facts and circumstances.
