I have been a single expert in the Family Court for business valuations and superannuation valuations for a number of years now and I thought that I would put forward my observations of the system.
The single expert system was introduced in part to reduce the costs of litigation.
Superannuation valuations are almost always performed by a single expert as there are established formulas for the valuation of defined benefits superannuation schemes and there is rarely any disagreement as to the value of the superannuation interest. The single expert system delivers value in reducing the costs of superannuation valuations.
A single expert in business valuations is rarely half the cost of two experts, it is probably about two thirds. There are a number of reasons for this:
- The Rules require that all correspondence is to be in writing. This slows the process, but is important in that both sides are clear as to what instructions are provided. In business valuations, it is almost always necessary to have a conference with the party operating the business. We always invite the other party or their legal representative to attend the conference and if requested make available our notes of the conference.
- It is often necessary to explain in more detail the principles of business valuations and valuation methodologies so that the lay person understands the process and how the valuation was derived. In the single expert system, you need to consider what questions both parties are likely to have about the valuation and try to address those areas in our original report. Under the two experts system, simple questions are often resolved quickly verbally. The single expert system requires those questions to be answered in writing.
- Following the serving of the initial report, the parties have 21 days to ask questions (in writing) of the expert. The reply must also be in writing. The problems with this process occur when the questions relate to the fundamentals of accounting or business valuations, and the explanation of those fundamentals in a form that a lay person can understand can be difficult to do cost effectively in writing. Where those questions may arise from a misunderstanding of accounting concepts or fundamentals, it is our approach to arrange a conference call between the parties legal representatives in order to determine the underlying premise or concern behind the question. If there are still issues to be resolved following the conference call, we address those issues in writing.
- Often we are asked as a single expert conduct a financial investigation as well as a valuation of the business. Under the two experts system, our approach to a financial investigation would be to perform a preliminary investigation and then provide an opinion as to the probability whether a more detailed investigation would confirm the party’s suspicions. The single expert instructions often require that a detailed investigation is undertaken.
The single expert system for the valuation of most small businesses is effective. In valuations of small businesses where future maintainable earnings methodology is employed, there is often only two areas of dispute – the capitalisation rate and future maintainable earnings, which are both subjective opinions of the expert. It is my experience that my peers are often within a similar range of capitalisation rates and future maintainable earnings. That may be as a result of the process of the choosing a single expert, where the experts are respected and known by the solicitors which as weeded out the extremes or ‘cowboy’ operators.
Many small businesses are valued using the net realisable assets methodology and there should be no reason for any difference between the reports provided by a single expert and that of two experts.
It is the area of more complex trading businesses, where the use of a single expert should be considered carefully. I believe there is merit in having two experts because one expert may uncover something about the business that was missed or have a different interpretation of the same facts. The process of the joint statement of experts has proved to be an important mechanism for the experts to consider the others view and present only the important areas of agreement and disagreement of the valuations before the court.
What is your experience of the single expert system?
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