Two Experts, Two Opinions

Often in cases where the quantum of finan­cial loss or business value is at issue, two financial experts will give two different opinions about the value of a business or the financial losses suffered by one of the parties.  When the differences in opinion are significant, there is a risk that one or both testimonies will be ignored, lose credibility or, at the very least, create confusion among the stakeholders.  And beyond that, the litigants find themselves in the difficult situation of negotiating a settlement based on divergent valuations. As well, the court faces the challenge of understanding the reasons for the difference in the opinions.   While financial expert witnesses, like Chartered Business Valuators, strive to uphold their duty to remain independent and objective, significant differences in opinions can be met with allegations of expert bias and advocacy.

So how is it that two experienced expert witnesses form conclusions that are dramatically different from one another, yet seemingly based on the same set of facts?  And, how can experts and counsel work toward improving the presentation of expert evidence in a way that encourages settlement and better informed judgements, as well as reduces the perception of bias on the part of experts?

An important part of the solution involves understanding why expert opinions differ from one another.

There are four key elements that underpin an expert’s opinion on business valuation or damages quantification: 1) the facts of the case, 2) assumptions made by the expert, 3) the application by the expert of an appropriate valuation or damages methodology, and 4) the expert’s own professional judgment.

Expert opinions can vary significantly because of differences in one or more of these four elements:

1. Facts of the Case – One expert considered, or was given access to, different facts and evidence than the other expert;
2. Assumptions – Each expert made different assumptions where facts are not available, unclear or contradictory;
3. Methodology – Different valuation or damages methodologies were used by each expert, resulting in different conclusions; and
4. Professional judgment – Each expert’s own experience and expertise gave rise to differences of opinion on subjective matters in their calculations.

Some of the differences in the above elements may be within the expert’s control; for example, the expert’s selection of a discount rate.  Or the differences may be outside of the expert’s control because, for example, it is a matter of law that is in dispute and the expert is instructed by their client's counsel to make certain assumptions pending the court’s finding on the matters in dispute (such as, the selection of one valuation date over another).

The following matrix summarizes how the above four elements can lead to differences in expert opinion evidence, why these elements can contribute to the difference, and how some of these elements are within an expert’s control and some are outside of it.

By way of example, consider a scenario whereby a business valuator is asked to prepare a valuation in the context of a matrimonial dispute.  Expert A arrives at a value of ABC Company, a business owned by one of the spouses, of $5 million and Expert B arrives at a value of $10 million for the same business. Here is how the four elements contributed to this difference:

1. Difference in Facts: Expert A was allowed full and unfettered access to the management of ABC Company, while Expert B was not.  Expert A had access to additional facts that Expert B was not, and these additional facts served to have a downward impact on the value of ABC Company.  Had Expert B been provided with the additional information, his/her conclusions would have been lower.
2. Difference in Assumptions: Based on instructions provided by counsel, Expert A used a valuation date of January 1, 2016, while Expert B used a valuation date of July 31, 2015.  On September 15, 2015, ABC Company lost a significant customer.  Expert A considered the negative impact on the value of ABC Company of having lost the customer, whereas Expert B did not (because the loss occurred after the valuation date used by Expert B).  Accordingly, the valuation date used by Expert A tended to have a downward impact on value relative to the valuation date used by Expert B. The correct valuation date is a matter of law and was outside of the expertise of both experts.
3. Difference in Methodology: Expert A selected an adjusted book value method to determine the value of ABC Company because, in Expert A’s opinion, the company’s expected future earnings were not sufficient to justify any goodwill value in the business.  Expert B used a capitalized earnings approach because, in Expert B’s opinion, there was sufficient income to justify goodwill. Expert A and Expert B’s expectations about the Company’s future earnings were influenced by different facts gathered and different assumptions made (see #1 and #2 above).
4. Difference in Matters of Judgment: Expert B selected a capitalization rate of 20% in determining the capitalized earnings value of the business. Expert A prepared a critique report of Expert B and concluded that a more appropriate capitalization rate would have been 25%.  The assessment of a capitalization rate was based on each expert’s own opinion and professional judgment.  The higher discount rate selected by Expert A had a downward impact on the value of the business, all else being equal.

When the parties are looking to settle the dispute, or when a trier of fact is considering the expert evidence, it is important to understand why the expert opinions diverge, and what the root causes of the difference are.  Once those causes are determined, the trier of fact and/or the parties can work to close the gap by determining how best to narrow the differences. In our matrimonial example, if a significant reason for the difference in the experts’ opinions is 1) information asymmetry between the experts and 2) the selection of the appropriate valuation date, then a way to narrow the differences may be to first provide full access to the facts and information to both valuators and for the parties to either agree on a single valuation date or for a trier of fact to render a decision on the correct valuation date to use. 

Experts can assist their clients and the courts by explaining the reasons for the differences in opinion.  As courts look for more effective and less expensive ways to resolve conflicts, alternate approaches to presenting expert evidence are emerging that can encourage this communication. These include Concurrent Evidence, Jointly Appointed Experts and Expert Conferences and Joint Expert Statements.  In the recent article, “Reforming expert evidence”, alternative approaches to presenting expert evidence were explored. Each approach encourages experts to come to a mutually agreed opinion or present their differences in a way that allows the parties and the court to make informed decisions about why their opinions are different. It’s this evolution in how expert evidence is presented that will hopefully lead to common ground in financial cases.

Experts on either side of a case will often strive to be professional and offer informed opinions, yet a number of factors can lead each in different directions. However with new approaches to presenting expert evidence to choose from, litigators can reduce or eliminate these road blocks, and better, save their clients’ time and money.

Originally published in National Magazine, June 2015