When hiring a financial expert, is industry or professional experience more credible?

BVLaw Alert notes two recent cases which demonstrate that, between two otherwise qualified business valuation experts, the one with the better industry and company-specific experience may fare better in court:

• In Ringgold Telephone Co. v. Comm’r, T.C. Memo. 2010-103 (May 10, 2010) the U.S. Tax Court assessed the built-in capital gains tax triggered by a telecomm company’s sale of a 25% partnership interest after conversion to an S Corp. The IRS’s expert had only recently returned to BV practice (after ten years off) and had never valued a telecommunications firm. “Consequently, [he] took a more mechanical approach to the valuation of the [taxpayer’s] interest, relying heavily on historic data without significant adjustment to reflect prevailing market conditions in the telecommunications industry,” the court found. By contrast, the taxpayer’s expert was a CPA/ABV who had devoted the last ten years (and 25% to 75% of his time) to telecomm appraisals. On the basis of his “substantial experience,” the court found he “was able to factor in the specific conditions and outlook of the telecommunications industry, as well as the economic outlook in general, existing on the valuation date,” and adopted his appraisal.

• In Trahan v. Trahan, 2010 WL 2342653 (La. App. 1 Cir.)(June 11, 2010), the husband owned a profitable chemical company. The parties’ experts used a DCF approach with essentially the same inputs, but the wife’s expert adjusted the company’s profit margins (up) and operating expenses (down) according to industry averages and his own “judgment call.” On cross-examination, however, he conceded he didn’t know about the rising costs of chemical companies generally or the specific cost increases this company faced. By contrast, the husband’s expert used lower profit percentages and higher operating costs based on his extensive discussions with company management and his work with similar phosphate firms. Overall, the court found his DCF values to be more credible, because he was “more aware of the [company’s] activities” and his “numbers were more clearly supported by historical evidence.”