Canadian Lawyer

42 A P R I L 2 0 1 7 w w w . C A N A D I A N L a w y e r m a g . c o m he expert can be a dif- ficult animal for a lawyer to cross-examine; they are testifying on some- thing that they know better than anyone. Business valuators are important in giving expert evi- dence in business deals, insol- vency and restructuring and transition planning in wealthy families. But if lawyers feel hamstrung or intimidated cross-examining valu- ation experts, they can take heart in knowing that there are several errors these experts frequently make and learn how to spot them. "It's always less effective to have your expert fight the other expert," says Jeff Pellarin, a chartered business valua- tor and president of Pellarin Inc. in Toronto and Calgary. A judge will often split the competing valuations down the middle, Pellarin says, and arrive at the median of the two. "It's most effective if you can undermine the expert's credibility when he's on the stand, and call into question his application of science," he adds. The valuations exercise is a complicated bit of math; however, Pellarin says, "there are about five or so common errors that valuators make that can be pointed out somewhat readily in cross- examination." Valuation using multiples Valuation using multiples is a process involving the identification of compara- ble assets and obtaining market values for these assets; converting the market values into standardized values relative to a key statistic; and applying the valu- ation multiple to the key statistic of the asset being valued. "One of the common ways to get a multiple is by looking at comparables," says Pellarin. For example, five compa- nies in the same industry traded hands the previous year, and "if I take the selling price of each and stir them up, I conclude what the 'multiple' is." An error that a valuator would make is to average them all, he says. Since most private companies operate in industries where selling prices aren't revealed, the five companies that the valuator comes up with aren't really a representative sample — they are the five that he happens to know about. There may be hundreds of companies in a particular industry; 80 may be sold in a particu- lar time period, but transaction figures may be available for eight only, "and you're lucky if you get that many." The other problem is that those eight are not a random of eight out of 80, Pel- L E G A L R E P O RT \ L I T I G AT I O N PAUL HOWALT T Cross-examining the business valuator Expert witnesses in valuation disputes make common mistakes and assumptions that can be drawn out in cross-examination By Elizabeth Raymer

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