A recent New York case, Rosenthal v. Erber, provides insight into what courts look for in valuation expert opinions. This article explains why the court rejected an expert opinion that the company was worthless — and offers lessons about the importance of using reasonable, market-based assumptions and why experts need to maintain independence to avoid being perceived as “hired guns” by the courts. 
Rosenthal v. Erber, 2023 N.Y. Slip Op. 32750 (N.Y. Sup. Ct. Aug. 8, 2023). 

Background

The case involved a boutique optical store. Each party owned 50% of the corporation’s shares. The respondent ran the store, while the petitioner was a passive investor. 
The passive investor filed a petition to dissolve the corporation in February 2021. The respondent subsequently made an election to buy the petitioner’s shares for fair value.

Divergent opinions 

In determining fair value, the court largely agreed with the valuation from the petitioner’s expert that was based on the weighted average of several methods. However, it found that certain assumptions were “somewhat inflated.” 
Among other things, growth rates used for the discounted cash flow and capitalization of earnings methods were “far too optimistic,” and comparables used in the guideline public company method were “not that comparable.” The court made an across-the-board 20% reduction in value for these “aggressive assumptions.” It also reduced the pricing multiple used in the guideline transactions method from 2.7 to 2.0. After these adjustments, the court valued the company at $283,816 ($141,908 for a 50% interest). 

The respondent’s expert valued the company at $0, but the court gave no credit to his opinion. A major factor in his valuation was the respondent’s claim that the company owed nearly $385,000 in rent, based on a questionable letter from the landlord. In contrast, the petitioner’s expert assumed that the outstanding rent was about $95,000, based on the landlord’s invoices. The court said the conclusion that the company was worthless significantly undermined the expert’s credibility, given the “significant value [respondent] continues to derive from it.”

It also criticized the respondent’s expert’s reliance on the company’s tax returns, which had been shown to be inaccurate, rather than its financial statements or QuickBooks® records. “It is troubling,” the court observed, “that an expert would purport to render a serious opinion on the Company’s value based only on its tax returns, knowing his client could easily have given him a more complete set of records.”

Garbage in, garbage out

It’s critical for valuation experts to use reasonable, market-based assumptions and empirical evidence and to maintain independence to avoid being perceived as “hired guns” by the courts. Business owners should also share all relevant financial information with their experts to help them perform comprehensive analyses. Please contact us if you have any questions.