When Do You Need One & Where Do You Get One? (Series: Valuation Fights in Litigation: Battle of the Experts)

Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.
2

The material in this webinar is for informational purposes only. It
should not be considered legal, financial or other professional
advice. You should consult with an attorney or other appropriate
professional to determine what may be best for your individual
needs. While Financial Poise™ takes reasonable steps to ensure
that information it publishes is accurate, Financial Poise™ makes
no guaranty in this regard.
DISCLAIMER
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MEET THE FACULTY
MODERATOR:
Kathryn Nadro Sugar Felsenthal Grais & Helsinger
PANELISTS:
Richard Claywell Office of J. Richard Claywell, CPA
Michael Fussman Baker Tilly
Garth M. Tebay Value Defined LLC
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ABOUT THIS WEBINAR
A dispute regarding the value of a business or business interest, other asset, or liability can often lead to litigation.
When do you need a valuation expert?
An independent, third-party expert is not necessarily required during the negotiation process although it may be
helpful. Once you head to litigation, an expert is all but required.
Are there credentials that are useful in identifying the appropriate expert? Are all credentialed experts the same or
are there advantages to one over another? The process of selecting the right expert begins with identifying the
issues in dispute. This webinar will help you by identifying and explaining key factors that you should consider in
selecting an expert for your litigation circumstances.
This webinar is delivered in Plain English, understandable to you even if you do not have a background in the
subject. It brings you into an engaging, even sometimes humorous, conversation designed to entertain as it teaches.
And, it is specifically designed to be viewed as a stand-alone webinar, meaning that you do not have to view the
other webinars in the series to get a lot out of it.
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This series of webinars teaches how commercial litigators use valuation experts in commercial disputes. Valuation is used by
market participants to determine the price they are willing to pay or receive to transact a sale of a security, a business, or an any
other asset. The same techniques are used to determine the price a party us willing to pay or receive to settle a claim or satisfy a
liability. It should be no surprise then that when there is a dispute between two or more parties regarding value, the same
valuation techniques and skills are necessary to resolve the dispute. Attorneys, accountants and business owners often rely on
independent, third-party valuation experts to assist in the resolution of disputes or potential conflict situations.
Some of the typical situations in which valuation experts are utilized include fair value financial reporting (GAAP accounting),
bankruptcy, income tax reporting, property tax appeals, estate and gift tax planning and reporting, dissenting shareholder
disputes, corporate transactions and disputes, divorce litigation, shareholder disputes or economic damages analysis as well as
many other business and legal purposes.
As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors, business owners,
and executives without much background in these areas, yet is also valuable to attorneys, accountants, and other seasoned
professionals. And, as with every Financial Poise Webinar, each episode brings you into engaging, sometimes humorous,
conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other
episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes.
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Dates shown are premiere dates; all episodes will be available on demand after
their premiere date.
EPISODES IN THIS SERIES
Episode #1 When Do You Need One & Where Do You Get One? 1/31/19
Episode #2 The Basics 2/28/19
Episode #3 Valuing Lost Profits for Litigation Purposes 3/28/19
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Episode #1 When Do You Need One & Where
Do You Get One?
© 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 8

WHY PERFORM A VALUATION?
• Merger or Acquisition
• Financial Reporting
• Tax Compliance
• Disputes & Litigation
• Consulting & Advisory

WHO REQUESTS A VALUATION?
• Who will be the user(s) of the valuation?
• Third parties (sometimes reliance, sometimes not)
oCourt, attorneys (investigations, disputes, contractual requirements)
oInvestors (disputes, buy-sell agreements, related party transactions)
oBanks (collateral, other financing, solvency)
oTrustees – ESOPS, bankruptcy, other (related party, transactions, 3rd-
party transactions)
oGovernment (tax, DOJ, or other regulatory)
oCompanies, auditors, and their advisors (tax accountants, tax
attorneys, bankers)

WHO REQUESTS A VALUATION? (cont’d)
• Is perception of independence/disinterestedness required?
oConflicts of Interest
oPrior experience with subject asset

INDEPENDENCE VS. ADVOCACY IN
LITIGATION
Lawyers are
advocates
Appraisers are
independent

EXPERT TESTIMONY
• Is an expert needed?
oIf yes, what kind of expert do you need?
oIf no, is it best practice to hire an expert anyhow?

NATURE OF THE ASSIGNMENT
• Purpose of the Valuation:
oLitigation
odispute resolution
obankruptcy
osolvency
obuy-sell agreements

NATURE OF THE ASSIGNMENT (cont’d)
• Class of Asset/Liability
oBusiness enterprise or intangible asset
oReal estate
oPersonal property
oFinancial instruments and liabilities

NATURE OF THE ASSIGNMENT (cont’d)
• Other issues
oSpecific industry expertise/experience
oLegal/tax jurisdiction (venue and choice of law)
oLegal case (e.g. property damage/ marital dissolution, business
interruption, intellectual property infringement, etc.)
oProperty type: residential, commercial, manufacturing, agricultural,
etc.
oMarket locale
oValuation methods

ECONOMIC DAMAGES
• Lost profits are one type of economic damages
• Entire business value is another although there are similarities and they
can overlap

EXPERT TESTIMONY CONSIDERATIONS
• Must the expert be qualified by the court?
• What standards must the expert follow or meet?
• What kind of work product and methodology is expected of the expert?
• What methodology will the expert use?
• What care/precautions should the lawyer take when preparing and
working with the expert?

EXPERT TESTIMONY
• Frye: demonstrate expertise and apply methods/theories that are
generally accepted
• Federal Rule of Evidence 702: a qualified expert may testify if the
testimony is relevant and rests on reliable foundation.

EXPERT TESTIMONY (cont’d)
• The Daubert Trilogy
oDaubert v. Merrell Dow Pharmaceuticals – FRE 702 superseded Frye
and concluded that methods do not have to be generally accepted as
long as testimony is relevant and reliable.
oGeneral Electric v. Joiner – reaffirmed judge as gatekeeper of
admissible testimony and emphasized need for detailed expert report
as foundation of reliability.
oKumho Tire Co. v. Carmichael – broadened application of FRE 702
to more than scientists and granted more freedom to judge with
respect to considering the four factors of Daubert.

DAUBERT CHALLENGE
• Four Factors of Daubert
oTheory or technique can be or has been tested.
oTheory or technique has been subjected to peer review.
oPotential error rate is determinable, or standards exist for error rate
that is acceptable, and
oTheory or technique enjoys widespread acceptance in the profession.

PREPARATION FOR A DAUBERT
CHALLENGE
• Know and apply the standards
• Know the relevant professional literature
• Know the professional organizations
• Use generally accepted methods
• Consider multiple analytical methods
• Synthesize your conclusion
• Support your position
• Disclose all analytical assumptions and variables
• Subject the analysis to peer review
• Test the analysis and conclusion for reasonableness

ACCREDITING ORGANIZATIONS
• All disciplines
oAmerican Society of Appraisers (ASA)
oRoyal Institute of Chartered Surveyors
• Business and Intangible Valuation
oAmerican Institute of CPAs
oCFA Institute – Chartered Financial Analyst (CFA)
oInstitute of Business Appraisers
oNational Association of Certified Valuation Analysts (CVA)

ACCREDITING ORGANIZATIONS (cont’d)
• Real Estate
oAppraisal Institute
oNational Association of Master Appraisers
oNational Association of Auctioneers
oCertified Appraisers Guild of America
• Machinery and Equipment, Personal Property, Other Specialty
oNational Association of Master Appraisers
oNational Association of Auctioneers
oCertified Appraisers Guild of America

FINANCIAL REPORTING
• The Mandatory Performance Framework & Certified in Entity and
Intangibles Valuation (CEIV)
oAmerican Society of Appraisers
oAmerican Institute of CPAs
oRoyal Institute of Chartered Surveyors

FINANCIAL REPORTING (cont’d)
• Introduced in 2017, the CEIV is a new credential intended to assist
preparers of financial statements in choosing an expert to assist with the
fair value measurements necessary for financial reporting purposes
oPost-acquisition opening balance sheet
oAsset impairment testing
oMark-to-market of certain assets
oFresh start balance sheet upon emergence from bankruptcy

PROFESSIONAL STANDARDS
• Uniform Standards of Professional Appraisal Practice (USPAP)
• American Society of Appraisers – standards by discipline
• American Institute of Certified Public Accountants SSVS No. 1
• National Association of Certified Valuation Analysts
• Regulatory Rules & Regulations – U.S. Dept. of Labor, ERISA, IRS &
US Treasury, CMS (now known as BCRC), Stark Laws
• Statutory and Jurisdictional Requirements – Delaware Law and other
states; Divorce

PROFESSIONAL STANDARDS (cont’d)
• Federal Rule 26(a)(2)(B)
• Income Tax Reporting – IRS Revenue Ruling 59-60; State & Local Tax
Regulations; Non-U.S. Jurisdictions
• Financial Reporting – FASB ASC 820; Fair Value Measurements;
Mandatory Performance Framework
• Contractual Standards
• Others?
• Private Equity Group (PEG)

BUSINESS VS. ASSET VALUATIONS
• Both business and asset valuations use the same approaches – an
interest in a business is an asset to the equity holder or note/bond
holder
oBut they often require different methods.
• Asset valuation entails a single homogenous class of asset (single asset or
small group of similar assets) versus an assemblage of possibly diverse
assets that comprise a business enterprise or going concern.
• Assessing a different benefit stream – enterprise cash flows (earnings) vs.
asset cash flows (earnings).

BUSINESS VS. ASSET VALUATIONS (cont’d)
• Business valuation typically assumes the business will continue as a
going concern (i.e. indefinite life), whereas most assets have a finite life
or diminishing economic returns.
• The assessment and quantification of risk varies significantly. A business
enterprise is a portfolio of assets with varying degrees of financial risk
and often the weighted average of the risk inherent in the assets is
considered a reasonable equivalent of the risk in the business enterprise.

BUSINESS VS. ASSET VALUATIONS (cont’d)
• Asset characteristics that are inherently unique, such as legally protected
intellectual property, typically make application of market approaches
more difficult.
• Certain discounts and premia are often applied in certain methods for
business valuations and would be much less frequently used in asset
valuations.

TYPE/CLASS OF ASSET/LIABILITY
• Business Valuation
oInvested Capital or Business Enterprise
oClass of Equity or Ownership – common, preferred, LP, GP, options,
warrants
oL-T Debt – notes, bonds, convertible debt

TYPE/CLASS OF ASSET/LIABILITY (cont’d)
• Real Estate & Related Assets
oLand
oBuildings and site improvements
oFavorable/unfavorable leasehold interests (NOTE: new accounting
standard will require recording of asset and liability for all leases)
oEasements and rights-of-way
oDevelopment rights

• Personal Property & Related Assets
oMachinery, equipment, furniture, fixtures, etc.
oVehicles, aircraft, marine vessels
oGems, jewelry, art, collectibles, etc.
oLeasehold improvements

• Other Assets & Liabilities
oIn-process research and development projects
oFinancial instruments – derivatives, swaps, unconsolidated investments
in affiliated entities, non-marketable securities
oNotes and accounts receivable
oInventory
oDeferred revenue liability
oContingent liability – “earn outs” liability, litigation liabilities

• Intangible assets
oTechnology-based (including intellectual property) – patents,
customized software, databases, trade secrets
oMarketing – related (including intellectual property) – tradename,
trademarks, copyrights, domain names, service marks, trade dress,
newspaper mastheads, non-competition agreements
oContract-based – licenses, permits, favorable supply contracts, leases,
mineral rights
oCustomer-related – customer lists, customer contracts, customer
relationships, order backlog
oArtistic-related – literary works, musical works, photographs, films,
videos, plays, operas, ballets

• Goodwill
oEnterprise goodwill
oPersonal goodwill
oAssembled workforce (for US GAAP subsumed into goodwill). For
U.S. income tax, it is a Section 197 intangible asset)

WHAT IS AN INTANGIBLE ASSET?
• Intangible assets – nonphysical assets such as franchises,
trademarks, patents, copyrights, personal goodwill, enterprise
goodwill, equities, mineral rights, securities, and contracts (as
distinguished from physical assets) that grants rights and privileges
and have value for the owner.
oSource: International Glossary of Business Valuation Terms as agreed to by the American
Institute of Certified Public Accountants, American Society of Appraisers, Canadian
Institute of Chartered Business Valuators, National Association of Certified Valuation
Analysts, and The Institute of Business Appraisers

TYPES OF INTANGIBLE ASSETS
• Intellectual Property (legally protected)
oPatents
oTrademarks
oCopyrights
oTrade secrets

TYPES OF INTANGIBLE ASSETS
• Intellectual Assets (unregistered but codified)
oDrawings
oSoftware
oBlueprints
oDocuments
oDatabases
oFormulas
oRecipes

TYPES OF INTANGIBLE ASSETS (cont’d)
• Intellectual capital (uncodified human and organizational)
oCollective corporate knowledge
oIndividual employee skills and knowledge
oKnow How
oOrganizational culture
oCustomer satisfaction

VALUATION PROCESS
• The purpose of the valuation determines the standard of value.
• The highest and best use of the assets of the business as a group must
be assessed:
oCurrent use as a going-concern.
oAlternative use, assets separate and independent of one another.
• The highest and best use and the purpose of the valuation determines
the premise of value:
oFair value (financial reporting): value in-use or value in-exchange
oFair market value: going-concern or liquidation (orderly or forced)

VALUATION PROCESS (cont’d)
• Based on the premise, the appraiser must consider all three valuation
approaches and choose the most appropriate.
• The best methods are determined based on the approaches that are
most appropriate, the availability of the data, and the purpose of the
valuation.

VALUATION APPROACHES
• Income Approach
oCapitalization of Earnings
oDiscounted Cash Flow
• Market Approach
oSales Comparison
oGuideline Company Transactions
oGuideline Public Companies
• Cost Approach
oAdjusted Balance Sheet
oLiquidation
1. Forced
2. Orderly

STANDARDS OF VALUE
• The purpose of the valuation determines the standard of value
oMarket value – real estate financing
oFair market value – tax compliance, some litigation and disputes,
regulatory
oFair value – GAAP financial reporting
oStatutory Fair Value – some litigation and disputes
oInvestment Value – investment advice, decision making
oIntrinsic Value
o“Fairness” from a financial point of view
o“Solvency” considering a “fair valuation” of the company’s assets

HIGHEST AND BEST USE
• The highest and best use is the reasonably probable and legal use of an
asset that is physically possible, appropriately supported, financially
feasible, and results in the highest value:
oIf the expected future benefits are maximized through the continued
operation of the group of assets in the business in which they are
currently engaged, the appropriate premise is value in-use as a going-
concern.
oIf the expected future benefits are maximized through the piecemeal
sale of the underlying assets independent of one another, the
appropriate premise is value in-exchange or liquidation.

PREMISE OF VALUE
• Going-Concern
oValue of the assemblage of all the production inputs as an operating,
functioning business.
oIt includes all of the assets, tangible and intangible as well as goodwill
as embodied in a good reputation, trained workforce, established and
successful procedures, tested systems, and necessary licenses and
permits.
oIn a healthy, profitable company, this value is typically more than the
sum of the liquidation values of the firm’s assets.

PREMISE OF VALUE (cont’d)
• Liquidation
oTwo premises:
1. Orderly
2. Forced (Auction Value)
oThe cumulative value of the firm’s assets net of its liabilities
considering the proceeds from the sale of the assets as if sold
piecemeal and independently of one another, not as a group.
oIn some circumstances, the liquidation value of the business is
determined net of certain closing costs such as severance pay,
remediation costs, etc.

COMMONLY ACCEPTED LOST PROFITS
METHODS
• Market Share Approach
• Before-and-After Approach
• Yardstick Approach
• Sales Projection Approach

AVOIDANCE/INSOLVENCY VALUATIONS
• Balance Sheet Test
oA company is insolvent if its debts exceed its assets on a fair value
basis
• Adequate Capital Test
oA company is engaged in (or is about to engage in) a business or a
transaction for which it has reasonably small capital
• Cash Flow Test
oA company is incurring debts that would be beyond its ability to pay as
such debts mature.

ABOUT THE FACULTY
KATHRYN NADRO
knadro@sfgh.com
Kathryn Nadro is an associate with Sugar Felsenthal Grais & Helsinger where she
works with the Labor & Employment and Commercial Litigation practice
groups. Kathryn's practice focuses on representing companies and individuals in
commercial litigation as well as employment and labor matters.
Kathryn has broad experience defending companies in contract, fiduciary duty and
trademark litigation in state and federal court. Her successful representations include
favorable resolutions for her clients in both pre-trial proceedings and at
trial. Additionally, Kathryn counsels clients on employment and labor issues,
including discrimination claims, executive compensation disputes and worker's
compensation claims.

ABOUT THE FACULTY
Richard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in
Business Valuation, Accredited Senior Appraiser, Certified Business Appraiser, International Certified
Valuation Specialist, Certified Valuation Analyst, Certified in Merger & Acquisition Advisor, Master Analyst
in Financial Forensics, Certified in Fraud Deterrence, Accredited in Business Appraisal Review. Richard
has been valuing closely held companies since 1985. Richard’s practice is restricted to business valuation,
economic damages, profit enhancement and exit planning.
Richard has been an instructor for the National Association of Certified Valuation Analysts for many years,
has been an instructor for the Internal Revenue Service and the International Association of Consultants
Valuators and Analysts (IACVA). Richard is currently the Director of Education for the IACVA and is
responsible for the business valuations materials being taught in 55 countries. Richard has taught business
valuation or economic damage courses in China, Korea, Taiwan.
Richard has performed over 1,000 business valuations since 1985. Richard has testified in Texas County
Court, Texas State Court, Bankruptcy Court and Texas State Courts. Richard has given testimony in
economic damages (lost profits), shareholder disputes, personal injury, wrongful termination and divorce.
52© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
RICHARD CLAYWELL
richard@biz-valuation.com

MICHAEL FUSSMAN
Michael.Fussman@bakertilly.com
Michael is a director in Baker Tilly’s Forensic, Litigation & Valuation Services
group and has more than 15 years of experience involving valuations, mergers
and acquisitions, real estate accounting, company analysis, securities fraud,
contract disputes, intellectual property, business fraud, and licensing
transactions. Michael has experience from both the litigation and principal
investor perspective. He was also one of the founding members of the Internet
start-up, Salon 123, Inc.

GARTH M. TEBAY
gtebay@valuedefined.com
Mr. Tebay is a practicing Certified Public Accountant, Certified Valuation Analyst,
and Certified in Mergers & Acquisitions with over 33 years of experience. He is the
founder and Managing Partner of Value Defined, LLC, a business valuation and
litigation support firm in Maumee, Ohio. He is also the Managing Partner of Tebay
Mosley Associates, LLC, full service accounting, tax, and consulting firm in Maumee,
Ohio as well as Managing Director of Source Companies Great Lakes Region, LLC
(an affiliate of Source Companies, LLC in Pennsylvania) which provides value growth
consulting and investment banking services to owners of medium-sized businesses.

The material in this presentation is for general educational
purposes only.
It has been prepared primarily for attorneys and accountants for
use in the pursuit of their continuing legal education and continuing
professional education.
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DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to
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When Do You Need One & Where Do You Get One? (Series: Valuation Fights in Litigation: Battle of the Experts)

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