The Importance of a Second Valuation Opinion

Hi, welcome to ValuationPodcast.com, a podcast and video series about all things related to business and valuation. My name is Melissa Gragg, and I'm a mediator and business valuation expert in St. Louis, Missouri. Today, we are discussing the importance of a second valuation opinion with Michael Koeppel. In his 30 years of experience, Mr. Koeppel has been exposed to a host of industries, but his primary focus is on technology, manufacturing and service organizations. He's founded eCapital Financing, which helps startups in the LA area and Western New York regions. He also owns Lakelet Advisory Group, which is focused on turnaround situations, and he works with a lot of ESOP situations.

1. What is the difference between an expert and a consultant?
2. Who would want a review of a business valuation?
3. What kind of review do you undertake when assessing a business valuation performed by another valuator?
4. When should a business valuator not review the work of another business valuator?
5. When does it become inappropriate for a business valuator to assess the work of another valuator due to conflicts of interest?
6. In legal disputes, when does having separate business valuation experts for each party outweigh relying on a single review? 7. What strategies ensure an unbiased review of another valuator's work?

Melissa Gragg CVA, MAFF
Expert testimony for financial and valuation issues
Bridge Valuation Partners, LLC
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Michael Koeppel, CPA
https://www.lakeletag.com/
Cell: 716-984-5303
Email: MKoeppel@LakeletAG.com
https://www.linkedin.com/in/michaelkoeppel/

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Melissa (00:00):

Hi, welcome to ValuationPodcast.com, a podcast and video series about all things related to business and valuation. My name is Melissa Gragg, and I'm a mediator and business valuation expert in St. Louis, Missouri. Today, we are discussing the importance of a second valuation opinion with Michael Koeppel. In his 30 years of experience, Mr. Koeppel has been exposed to a host of industries, but his primary focus is on technology, manufacturing and service organizations. He's founded eCapital Financing, which helps startups in the LA area and Western New York regions. He also owns Lakelet Advisory Group, which is focused on turnaround situations, and he works with a lot of ESOP situations. So he's an amazing wealth of business information. But today we're gonna talk about something very interesting, which is in the situation where we have business valuation, people entering the space for whatever reason, right? We'll talk about a lot of reasons when, when they're entering into the space.

Melissa (01:05):

Sometimes there is something off about the valuation, or you could want some additional, I don't know, advice, maybe consulting. And Michael's kind of brought up this topic, and I think it's a great topic because we do see, I mean, you even see buy sell agreements stipulate to hire each person hires a evaluator, and then if you can't come to an agreement and you're 10% off or something, then you hire the third evaluator and if everything, you know, so we see that language. But what are you seeing, Michael, just kind of in general, about this topic that really kind of interests you, um, to talk about it.

Michael (01:47):

Over the last couple years, I've really been seeing an increase in the review of other business evaluators, uh, before the primary reviewer may have been the I r s Department of Labor for ESOPs. But today, given the challenges and the specific technologies involved and the complications between each industry, and sometimes companies within that industry, they need an expert, a, a normal C P A or someone who does generic business evaluators, just doesn't have the degree of expertise to opine on that company in that set of situations. And they look for somebody who does that. We do a lot of, uh, intellectual property work. Ironically, one of the largest, uh, areas for us is, uh, music in Nashville. Uh, and, uh, that has sign such specific challenges with it that a normal business evaluator, unless you've gone through and done scores of them, you couldn't relate to all the players involved, the royalty, the process and everything.

Michael (02:51):

And we're often brought in not only to do the business valuation, but on several engagements, I would say about half the engagements by a business evaluator that the client has already selected. They would, the, uh, attorney or the client or the judge would say, you know, I recommend you give Michael a call. He's done X and X, and he can, uh, help fine tune, uh, your report or processes given the nature of the specific industry. And there's nothing wrong with doing that at all. And again, I think it's growing, uh, geometrically and a lot of private equity firms are now getting a second opinion on business valuations. The, and the buy sell agreement, especially if there's intellectual property involved, you just don't wanna use a multiple, they want someone who's valued intellectual property and can add some significant value to it. One of the challenges, and it's becoming especially, uh, significant challenge in the world of ESOPs is that, uh, many companies will have their, uh, C P A do the business valuation.

Michael (03:56):

And in the esop, especially the first couple of business valuation, that is the foundation of everything, that business valuation. And you need to have an expert in there. And the other side, or even the trustee will say, you know, this just doesn't cut it. You know, you gotta 10 page or 20 page report. I really need a detailed business valuation as a foundation to what the value of this company is for the employees and, and going forward. And too often we try to be, uh, and I've been a C P A for several decades. I don't wanna date myself, but, uh, we try to be all things to all people. And, and you gotta realize everyone has a niche in the value added. It gets to a point now with regards to even the Internal Revenue Service, I don't even consider doing my own taxes anymore. And nor nor should the C p A firm say, unless they have the niche and specialty, even if they have the niche and specialty and a big thing I'm finding now and including the, uh, big four, you have to be relatively independent. You don't wanna be doing the business valuation and also opining on the financial statements or, or in other areas within the company.

Melissa (05:03):

Mm-hmm. <affirmative>. Well, and, and you've, you've touched on a few different areas, and I will say even from a divorce perspective, you know, we're seeing a lot of times they'll be like, well, my c p a, you know, they've been doing the books for the companies and the personal and the family, and they extended family for decades or years. And, you know, they've done a valuation or two in their career, and they would be great. They, they told us what the value is already. You know, those types of things I think are happening. I think that if we dial back the conversation, just a tadd, one thing that business owners may or may not understand is there's a nuance between when, when, you know, like everybody says, it asks what I do. And I was like, well, I'm an expert witness. And they're like, oh, you're an expert.

Melissa (05:53):

And I was like, well, no. Like I actually testify in court for financial things. Like, like if there's a number, I go in and say what the number is and how we got there, and they're like, oh, it's actually a thing. And so in this space of even business valuation or even accounting, we have different people that are expert witnesses or experts, and you're talking about that term loosely as well. And then we have people that have the same expertise but could operate as consultants. And this may become important as we go through this discussion, because you can engage professionals for different purposes depending upon what you need. So what, how does this kind of fit into the second opinion, uh, situation?

Michael (06:43):

I think the second opinion situation should be based upon the, uh, differences that a company, uh, may have or require. I do not recommend having a second opinion because you don't like the value. Mm-hmm. <affirmative>, for example, you see that often with startups. They think they're the next Google, and they say, well, you should be adding a couple digits to my valuation. And you say, no, you need a sanity check. So they'll keep phishing out there, so they get someone who gives them that extra digit or two. That's not the purpose of the second valuation. I'm saying if someone is, uh, concerned about the methodologies utilized, uh, they read the report and say, uh, they really didn't understand their industry or, or our company. They don't realize how fragile this is, or they don't realize the niches of the product or the value added by getting the, uh, f d a approval or all these other circumstances.

Michael (07:38):

They need someone who can understand that. And the other thing is, Melissa, when you talk about working as an expert or versus a consultant, I cannot think of a situation where a, a true business failure does not work with the whole team. They're not going off and doing that. You have to be able to work with the C P A firm. You look down with their financial statements, for example, later on, I'll be looking meeting with you another, uh, relatively large c p a firm going through the work papers and saying, why is this adjusted this way? I don't understand it. You're not questioning it. You just want to have a better understanding of the situation. And obviously you have to work with the, uh, the client and the attorney. It is more of an art than a science. And that's what people really have to realize.

Michael (08:24):

With regards to business valuations. Let's assume that we can agree on the right methodology was used, but there's so many subjective materials in a business valuation that are based upon e experience facts and the circumstances of that client, the discount rate. What are you gonna use as your comps if you're gonna do a market analysis, the asset, what type of appraisal are you gonna use it for out there? I mean, you see some people trying to do an appraisal on the assets without actually physically view viewing the assets. But that's another problem with that. Mm-hmm. <affirmative>. And, and the other thing we're seeing more and more of is the courts themselves bringing in someone to review the work of others. And I've seen that, uh, right now with regards to a large, uh, bankruptcy. The trustee has two business valuations, one from one side and the other from the other side.

Michael (09:18):

And you call and say, well, this can't be the same company. One says, the company's virtually outta business and value should be zero or negative. And the other one thinks, oh, well this is, you know, the, the next Tesla, you know, and, and he said, where does the truth lie in this? And we would be working for the court in that situation, and we'd be working with the two, uh, business evaluators who did this? Tell me about this. Tell me about this, your art. Tell me about what you did in subjective, why you really think this discount is applicable. Why isn't this one applicable? And go through the things that are subjective. And I would say on my experience, the number one challenge by far, maybe one, two, and three, Melissa, are the fact that people do not properly document their assumptions. It is an art form, and it's very subjective.

Michael (10:10):

If you think the discount as a professional is 22%, and you've got the proof, and you've got done some research, and you lay out your justification, we may come in later and say, no, it should be closer to 30%, but understand where Melissa and her team were coming from, that's fine. But if you just put down a number in there, we'll use other analysis to get the number. And that's the number, the number one problem by far is the, the lack of documentation. The more subjective something is, the more you should document and substantiate it. You don't have to have a, uh, PhD, uh, dissertation in there with 2000 footnotes. But, but you should have some footnotes and references in there. But based on your experience, how did you come up with that number? That's the important thing. We're not in there when you do a second opinion to question the, uh, the opinion or the expertise of the other side. In most cases, we're just there to say, how do you just substantiate that number? Is it sustainable?

Melissa (11:10):

Yeah. And I think that, you know, interestingly enough that when, when we're looking at these different types of reports, um, I think it is important to understand the type of evaluator you're working with. You know, like, are they doing a couple valuations a month? Are they doing a couple valuations a day? You know, like, this becomes important because the velocity of seeing things like we are in a very volatile environment right now. You need to see what is happening around you. And with other companies that are in that same area. This is the first time you've valued something. You know, I think that a lot of times when there is miscommunication, the evaluator is not communicating the value in a proper way or they're not supporting their value with research. And third party, like, it's not Melissa's opinion, it's Melissa and Shannon Pratt and this organization and BV research and, and blah, blah, blah, blah, blah. It's like, how do you or the i r s said it, but you, you, we've kind of gotten people to this point of like, okay, I get why somebody would wanna look at this, but who, who is actually initiating a review? Like, like we're seeing this in litigation, you know, and we're seeing this in a state, but is it the business owner? Is it an attorney? Is it the ki, like where do you see people coming in and saying, Hey, this something not right here?

Michael (12:41):

Yeah. I would say right now, the, uh, the trend, and it is a trending of everything else, like in business is coming from, uh, the private equity and venture capital groups. They're the ones really putting up their money. Mm-hmm. <affirmative>, uh, they, you know, the other party is the seller and say, okay, our business has worth $15 million, and if you wanna buy 20% of it, we charge you x. And the private equity firms are getting smart enough to know that, uh, they don't do their own business valuations anymore. I think there's been a major problem. There's nothing wrong with that. Uh, I co-founded a very successful private equity firm, and, uh, we sometimes we just sit there over a cup of coffee and do it on the back of an envelope. Mm-hmm. <affirmative>, okay. This makes, uh, widgets. And the widgets are the multiple of all the other widgets companies are 4.6 times ebitda.

Michael (13:35):

So we're 4.6 times ebitda. Mm-hmm. <affirmative>, but realize now that's, that's the medium at best. And you gotta take into account the characteristics of the company. What's the upside, what's the potential for growth? Does it, uh, have the intellectual property? It really believes it has, what's the value? And the other thing that's so, so important, and I think much more important on younger and private companies than public companies, is the management. Hmm. That is the key. I'm a strong believer you can take a good management team, whether they're making widgets or overseeing software or medical devices. That same team adds a lot of value. Now, uh, during the summer, I wrote a three part article just on that very, very topic on the soft cost. The most important thing everyone say, you talk to business owners, and I belong to several c e o councils, and I'd ask throughout the, what's your number one asset?

Michael (14:29):

And they all say the employees, employees, employees. And I say, okay, what's the value of your employees? Your company's worth say $30 million. What's the value of your employees? What's slice of the pie? Is it if, uh, Barbara, the C F o who was with you for eight years left, what's the ramifications? What? And uh, they, they haven't, uh, taken a look at the nuances. And that's one of the reasons you get a second valuation in there. Okay. Do someone take into these factors, these most important factors? You just said the number one asset in your company. And how do they extrapolate that if someone's not viewing and spending focus on the employees, especially in a service company? I question the valuation in of itself because employees are a, a high risk. We, we know what it's like now in the market with regards to employees trying to get the employees, get the right employees.

Melissa (15:18):

Right. And I, and I think that, you know, even what you're talking about is having, you know, when private equity is coming in to buy a company or something like that, doing the valuation. And what we're seeing is also the consultants are coming in and doing a valuation on the seller. And it may not be known, and it may not be enunciated in writing, but the analysis is happening if, if there is an actual valuation and process. We're also seeing a review traditionally in litigation or a state. It's just that you don't like the value and you're wanting to seek an additional party. Um, to me, it really then becomes important for the evaluator to understand how easily things move the needle. You know, like if everything in your valuation is contingent upon it, re the company receiving the highest cashflow that it's ever received in the history of its life going into the future.

Melissa (16:18):

You know, like what is the substantiation for that assumption? And if it is preposterous, like I do a lot of litigation, and I, and I sit back and say, you know, would the judge think this is crazy? You know, like if when you look at it, you we're valuing, you know, these sunglasses at a million dollars, like, you better tell me that there's diamonds on these sunglasses or else there's not a chance in hell. I'm going to believe that. Now, that could warrant a second opinion, but that's typically like, why did you hire the person in the first place? Like, was that a related party? Was that something, and, and or when we're doing this, you know, there is, in, in some of the organizations that I am in and maybe, and you are in, we have review processes. We have ways that we have even internally reviewed, uh, other people's work. Like they pay us, like people pay me to review their work or to help them and probably pay you. But when you're doing a review like this, because there are some rules for us. But when you're doing a review, what do you, what kind of review do you undertake? Like when you're assessing that business valuation, that's done by some other evaluator? Like are you, do you have like a process, a method, or are you just saying, eh, they're totally off, they're totally right or wrong, right? Like, there's a process and I think people don't

Michael (17:49):

Understand. Yeah. The process. You're right there. There, there should be a process. And there needs to be a process if, uh, given a report, and they've asked us, and, uh, and the software, we do a lot of software analysis and business valuations, and they'll say, you know, could you please take a look at this? Uh, number one, uh, what's the experience of the evaluator? You can't beat experience. You, you just can't beat experience. Uh, the, the first section you go to, at least I go to is the, the bio section, believe it or not, and say, okay, they've really done this. They're educated, they've, uh, learned their tricks of the trade here. That, and that's fine. And that, and you know, they belong to these associations. He or she's been doing this for a decade. Uh, they published something in this industry or something. That's fantastic.

Michael (18:34):

Then the next thing you go to and say, okay, what, what are the assumptions they made? Are there reasonable assumptions? Mm-hmm. <affirmative> and, and what's the methodology? Let's use your example. You just, uh, delineated is, uh, they had a fantastic year immediately post covid once in a lifetime, uh, once in a generation year because of that. Are they using that as their basis for the valuation in, in some, well, that would, that could be very misleading. Maybe you have to put in some adjustments or at least note that, or say, you know, use an average of the last couple years or do some realistic, or have someone do some realistic projections on what the reality of it is going forward. 'cause you can't expect, you know, that utopia, that you know the unicorn to come in every single year that to help you out. And then, uh, if you look at the subjective side, if the basic foundation stuff's in there, the basics I'm talking about the loosey goosey income statement and balance sheets, uh, no cash flow in there.

Michael (19:38):

You have some concern even before you get to the professional subjective nature of the methodologies, the discount rates, uh, that what they use in the buildup rate and how they do that. Uh, what are the comparables that they're using for the, uh, competitors? Are they using, uh, fortune 500 companies? And this is a startup in someone's garage? I mean, what's the comps? And you have to go through the process, try, I try to take a, put myself in their shoes for a few moments and say, okay, give them what they learned or given what they have. It's not a perfect world. And I always, I cannot envisioned doing an opinion about someone else or opining on the work without talking to him or her. You know, I would call up hypothetically and say, Melissa, I was concerned that, uh, the gross profits for 22 and 23 are extremely arbitrary.

Michael (20:38):

And you could say, well, the reason was because of X, Y, and Z. Or please appreciate, as I noted below, they lost the controller and they still haven't closed the books for that, but we're required to have a value. So extrapolated based upon these industry numbers. Maybe it wasn't documented properly, said, oh, okay, that, that, that makes sense. But you have to talk to the other professional and treat the other party like a professional. They are mm-hmm. <affirmative>, as we take a look at other people's reports, others are looking at our reports on an almost daily basis. So you treat everybody fairly.

Melissa (21:12):

Yeah. And I, and I talk to, you know, so I do a lot of mediation where I'm sometimes the only expert in the room, right? Yeah. And in, in those situations, you're trying to kind of talk about these topics in a very transparent way and say, you know, like, here's the issues and they're gray. Um, but, you know, here's the risk. Here's the cashflow, here's the this. When you are just the single expert, and you know, like, and I will tell them, I'll, I'll say, listen, I'm gonna provide you guys with some, i, you know, the concepts of value, and you are gonna go talk to somebody about it, and you're gonna take these pieces of paper to somebody and they're gonna review my work. I wanna make sure that whoever you go to, if they're smart enough, they're not gonna find red flags in my reports.

Melissa (22:04):

They're not gonna find those things, or they're gonna find it supported. Now, I support my work in court, so I'm used to that, right? A lot of times we're coming in and doing a, like, if I do a rebuttal report, I'm gonna say, well, I think that these were incorrect. You know, like, your assumptions were not great, and this is why, um, sometimes we're not coming in and saying that it could be different or better or worse. We're just identifying some of the issues. So I think the more professional you can be about identifying issues and having that discussion, um, is very helpful. But there's also times when we are called and we maybe shouldn't review the work of another business evaluator. Like what types of situations would we be in if we should just be like, no, I don't wanna go there. Like, I mean, yeah, besides like normal conflicts, but where do you see this happening?

Michael (23:05):

Uh, other than the normal conflicts. And I think for evaluators, the, uh, code of ethics really spells out the do and don'ts with regard to that, uh, area, Melissa. But in addition to that, when you do the business valuation, if you look at a report and they, they usually, before you even sign up for engagement, you know, someone will say, okay, here's the report from x Y B business evaluators. And you, you look at it and say, you know, it's pretty reasonable. I mean, I may have a discount value here, or I may not use, uh, this interest rate. And you know, in the back of my mind, I figure it, it'd probably be an immaterial difference. But there's nothing wrong with the report. You just don't like the conclusion of the report, maybe. But the report of itself and the professionalism utilized in the report, uh, I think should stand on its own.

Michael (23:56):

The value of when you would wanna walk away from it is, in many cases, if, you know in advance is a very litigious no-win situation. You cannot even get the proper accounting records and you, uh, do a lot of work with, with divorces and business valu. And you see that often is that, you know, you, you're, you're spending more of your work getting a subpoenas and depositions just to get some basic information. For example, the revenue earned or what the discounts are, or who owns the car and going all through that. Uh, life's too short for that. And you wanna work with and, and run where possible with a very, uh, uh, professional set of clients who understand that. See, when you do the mediation, Melissa, you have a significant, significant advantage in that you understand the business valuation and the processes you really do.

Michael (24:50):

So, but let's be very real, a jury does not, uh, if it's a jury trial, oh my, because, you know, it's, they're not experts in that. And in many, many cases, neither is the judge. Mm-hmm. <affirmative>, you spend a lot of time trying to explain it to 'em. Uh, that's why, uh, I don't wanna say contingent on who the audience is. The glossary's a very important part. You really gotta say, yeah, this is what the fair market value means, and this is what it doesn't mean. You really have to educate. But, so you average report 60, 70 pages other than yourself and the other business evaluator, no one's gonna read that, right? And, uh, they don't understand the nuances of that. And that's very important. But you also don't wanna be known to be out there to just find fault with other business evaluators for the sake of doing that.

Michael (25:44):

You, you gotta take a look. What's the true value I can add with regard to the proposition? And the other thing I would say, one I don't, is, uh, when they're not happy with the results, even though the process appears reasonable and the assumptions appear reasonable, but they're just looking for different results to shop it around, it's the same concern I have when, uh, used to be an auditor putting an auditor hat on when people would shop around for an opinion, could you live with this? If we account for it this way? Uh, I don't want to touch that, that that's a no-win situation. You want to be able to say, look, I, this is my professional opinion. This is what I do, uh, going forward. I can live with that.

Melissa (26:26):

Mm-hmm. <affirmative>. Well, and small businesses are messy. And I think that, you know, when you're in litigation, people think that there's fraud happening. They, you know, there's a lot of movement from an accounting perspective of money into personal and business, and people are like, oh my gosh, people didn't pay their taxes for 20 years. And like, who would do that? And I was like, all of my clients <laugh>. Yeah. You know, like, like we, we see all of this stuff and things aren't clean. Like we, we're not gonna have these perfect scenarios. But also I think that in, in the process of reviewing other people's work, they, you know, like I typically, even if we're doing it in a court situation, I'm typically looking for three major issues, right? That move the needle. Because if we're gonna dis, if we're gonna argue about a percentage point or two in the cap rate, or if we're gonna talk about it being like $25,000 difference in the cash flow, we don't have issues.

Melissa (27:27):

We just have, we are both in a reasonable range. We're just at two different numbers. It's really the issue of when you are, are almost bastardizing the process in order to get to a number. And that's really a hired gun evaluator, right? So that's gonna be a re reputation that follows that person that you need to be mindful of. But also in just looking at the work, we can come in and say, okay, here's the three issues. I think that you are not in a reasonable range here. I think you are not in a reasonable range here, and here's why I think you're, now, that doesn't necessarily mean I'm gonna come up with a new number. I'm just critiquing that report. A lot of times we'll see it in a very back, you know, like back office type of thing where we're like, okay, we got this report and somebody calls me and says, Hey, can you just take a look and see if it's off?

Melissa (28:25):

And, and again, is it off by millions or is it off by like a hundred thousand? Because if sometimes if we can give them a range, right? Based on that. So we run the valuation and then take those subjective pieces and say, okay, what if they were different? What is the result? And if we can run the calculations and the result is still like, ah, you're, you're still in that same range. We are giving feedback that is reasonable, not necessarily that it is perfectly proper, right? We're not, we're not validating that they are per nobody is perfect in these situations. You know, the,

Michael (29:04):

It's a challenge though, uh, and I find, you know, that's a, a significant challenge. And I would say before we do it, the engagement letter is so important in a review is so, so important. They expect another business valuation, and sometimes it's really a multiple step dance. They will engage us and say, you know, what do you think of this? And I say, I am challenged that they didn't use the market approach with regards to that. And guess what? And I will put that in a letter or something. And that's the report. I'm not gonna quantify if they would've picked these groups of companies that, unless that was part of the initial engagement. Now, often they would look at that and say, oh, that makes sense, Michael, could you reassess this situation if you were using a business valuation? I say, well, I'd have to reevaluate it.

Michael (29:58):

I'll make the assumptions that their financials are correct unless you want us to really dig into it. Let's make the assumption that they're correct. And then I'll look at the methodologies they utilize, and if they would utilize the methodologies I delineated in your letter, it's almost another engagement. Too often they expect you, you know, you give 'em a report and say, oh, guess what? The, the marketability issue just doesn't stand to have any merit. Well, what's the ramifications? You say, well, that's not our engagement. We were engaged to tell you if this stands on its own or if I'd have some concerns with it. So you really gotta sp spell that out in engagement letter and educate them as well. Mm-hmm.

Melissa (30:36):

<affirmative>. And I think a big part that people may not understand and, and we haven't talked about, is that I do a lot of negotiation for deals, for litigation, for mediation. Everything in the world of finance is a negotiation. Okay? So these business valuations are a point in time in space that is, is an idea of a value, right? Yes. It doesn't necessarily, like, it doesn't necessarily mean that it is perfection. It is going to tell, like, so the business order comes in and says, well, this value is, this is the value. Like it can't be anything else. In reality, it is a premise to a negotiation. So even if they've, they've put forth the valuation, that is their negotiation, that is their support for the negotiation of that number, you're coming in also and maybe saying, okay, if that would've been different, or could I support a different version of this reality? Again, it is to set the stage for a negotiation between these two points. It is not necessarily like the word of God, you know? Yeah. And so it's,

Michael (31:51):

It's not cast in stone, Melissa. And the key is, uh, as evaluators, we know as our assumption pages, our pages and page, if you follow all these assumptions, and you know, if the snow and Tibet is 16 feet or whatever, whatever, whatever, and you keep going through that helps, uh, guide us through it. But the, another professional business evaluator and the same firm could probably do the valuation. It's gonna be a little bit different. I mean mm-hmm. <affirmative>, as, as you know, the discount rate add one or 2% to something which is very subjective, you got a different answer.

Melissa (32:22):

Right? Right. Is there any times when it becomes inappropriate for us to assess the work of another evaluator due to conflicts of interest? Or where would you see difficulties there?

Michael (32:35):

Uh, I, I would see the difficulties there. If there's a, a conflict, uh, we go against, uh, many of the same firms over and over again versus our niche, and they go through us, and, and it's professional respect, right? And that's not a conflict of interest. Uh, conflict of interest may be if, uh, you, uh, one of our largest, uh, private equity firms gives us a significant amount of work, and they're on the other side of the table. I I even though it may be within the code of ethics, I won't, I, I even if the other parties waive that and they have offered, oh, we can waive that, Michael, we want you to do that. For example, in music industry, you know, the nuances, I said, I'm not, I'm not comfortable doing that because it's a no-win situation. And even the perception mm-hmm. <affirmative>, it's always not the, uh, independence itself.

Michael (33:23):

It's the perception of independence that could be a problem down the road. Mm-hmm. <affirmative>. Mm-hmm. <affirmative>. And the other thing, if I really take a look at it and not comfortable that's gonna add any tangible value, I mean, we got enough to work to do. You don't wanna do something to take someone's money or take through it. Now, you may go through the process and say, you know, guess what? It's as using your analogy. It's within the, the range. Yeah. So, you know, the differences in material, despite we may use the different methodologies, the differences in material, but you wanna go into something knowing that, uh, it's not gonna add to tangible value. Yeah. And you also, the only other thing I would say is when you do a review of another professional's business valuation, it's gotta be very thorough because 99% of the time your review's gonna be scrutinized and compared to theirs and say, okay, Michael, if you say to just why, tell us why, tell us why the predecessor, the, the initial review was wrong. So you have to be able to substantiate and feel very strongly about that opinion.

Melissa (34:25):

Mm-hmm. <affirmative> mm-hmm. <affirmative>. Well, and I think in some legal disputes, we will have situations where we have multiple opinions and we have multiple providers. And I will tell you that, um, you know, I probably, I feel like I do a velocity that's a lot higher than a lot of people that I know in the profession. And based on that, I can see certain patterns in other experts and when they defer from their patterns. And I think that you have to be mindful about that as a professional. And as you do work, especially if you're high, highly concentrated in an area, or even as you start to go more national and operate around the country, like this is very important when you defer from your own patterns, right? So I, I think that a lot in valuation is being consistent until you consistency, until you change, and then be consistent for that methodology or change, right?

Melissa (35:28):

Not that every valuation is same, but if you're going to evaluate something, you can't start taking sides. You're like, you really, like, you almost have to work individually on your, IM your, your neutrality. Because the stories of people will always encourage you to be like, yes, it is worth more or no, the sky is falling. You know, like, these are gonna be impassioned business owners. And I think that you have to understand, you have to be able to match does the financials match what the story is? Because if that's not matching up, there's still gonna be, um, a, a disconnect and you know, like, are there strategies that you look at to kind of help you not be biased? You know, like how do you remain unbiased when you review another evaluator's work, even if you're seeing them back and forth? And I think professional integrity is one of 'em, but you know, what else do you see? Because it is important for us to not put ourselves in a position where we're kind of burning bridges in our own community, right?

Michael (36:38):

Yeah. The, the strategies to be, uh, unbiased, it's, uh, very, very important. Um, every client, every case, every business valuation is, uh, different. Whether it's the same industry or not. And you have to work with in those parameters, you have to treat the other side, uh, very professionally because they're gonna be reviewing your work sometime and vice versa. And there's nothing wrong with it. The vast majority of our work gets reviewed. We may not think of it, but the I r s and Department of Labor for ESOPs, they're constantly reviewing our work. You just may not be sitting across the table from them, but believe me, there's someone, someone in the country reviewing it, dotting the i's and crossing the T's. You treat the other professionals as you would wanna be treated. You know, if you have a discrepancy of it, pick up the phone or go down to their office and say, please help me understand, uh, the situation.

Michael (37:29):

You never wanna surprise the other party, uh, unless there's really, you really don't wanna surprise the other party. You wanna give them some professional courtesy of what's going on saying, I strongly disagree with this opinion of this approach, or you not at least taking a look at a discounted, uh, cash flow methodology. I'm concerned about that. If you would've done that, the difference would've been material we think you should have. And then, so when they see your report, they say, oh yeah, we, we expected to see that from them. And, and to be very candid with everyone. Now, it all depends on who your client is, whether it's the attorney and you have client attorney privilege or, or the company itself is what you can communicate with re to them in regards to, uh, written correspondence. Uh, and I think the written correspondence is very important.

Michael (38:16):

We've become so, uh, informal, I think maybe too informal in this work, because if you're reviewing someone else's work sooner or later, it's gonna coming in front of either a mediator like yourself, Melissa, or, or a judge. You wanna have a, a path to tell, even if it's a note, you know, you know, without prejudice, uh, please understand. You wanna try to send them, uh, at at least an email and copy the appropriate parties on it so you can build up your case for it and, and just be, uh, candid with them through it. So you just don't pick up the phone and talk to the, uh, other side, but the documents say, you know, per a conversation, I wanted to stress to you the following couple of points, could you please help me understand the differences between these points and sit down and have a conference with them. I think that's the other thing, to help them be unbiased. And the other thing, remember who your end client is and, and just be candid with them.

Melissa (39:06):

Yeah.

Michael (39:07):

It, it, it's tough Sometimes. It's very, very tough to tell a client, you know, you got an ugly baby here. Mm-hmm. <affirmative>, uh, given what the, the fact that they didn't have the financial statements, the other party didn't have X, Y, and Z. They, they did the best they could and we, we can't, we don't opine on it or we gotta make such absurd assumptions that you really want us to proceed.

Melissa (39:30):

Yeah. And I think that, you know, my experience with working with other experts is that I prefer to work with other experts that are above board. That I believe that I am, right. I prefer to work with, like, I don't need, we don't need to work together to make sure our numbers connect. I need you to be independent and I will be independent. And if we do similar decent work, like, and we, and we do have those conversations. 'cause I do wanna make sure like, are you seeing this cash flow the same way I'm seeing it, right? Because if we both come in with different cash flows, we saw the same information. If we're talking about, well, I think it should be up here and I think it should be, that's fine. Those are assumptions. But, but I always, I don't care what the situation is.

Melissa (40:16):

If there is another evaluator involved, I will request even if everybody is uncomfortable, even if it's in litigation, to have that conversation before we put anything in writing. Yes. 'cause I don't, I only will, and this is for anything. I will only email things that will protect me, but I will not email things that will destroy you. Okay. Okay. So I will have conversations with you about the things that I am really concerned are going to destroy your credibility in this process. And, or maybe you didn't get this right, like maybe it would be better for you to come back and, and say an adjustment in your valuation because you didn't understand something than for me to come in and say that was incorrect because you didn't even understand valuation theory. And so I think you

Michael (41:07):

Don't, you don't wanna go the Gotcha. No, you wanna give them the professional courtesy, and you're right, Melissa, it is the thing. It has to be the evaluator's professional opinion on these things. And you're gonna get pressure from the council, especially on product liabilities and other things saying, well, my, you know, I, I think I could have got a little bit more money on this, or I think their margins would've went up if it wasn't for the, the matter associated with this case. You gotta use your professional opinion now. They can give you information that you may not have been privy to and that may impact your decision, but the decision has to be yours.

Melissa (41:42):

Yes. Absolutely. And I think this was a really good, um, discussion today because I, I think that more of us are, are entering in, there's so much strategic things happening. There's so many combinations of business entities or startups or failures or this or that or buy-ins and buyouts that we're always coming up against other, um, experts. I also think that there are less experts out there. And so that we really, like, we are a reflection upon the entire industry. And I've, I've talked about this in a lot of public forums of like, we are the problem. And so if we don't start to do our job and check the, the attorneys and put everybody in their place that we are the expert and we know this, then you're gonna continue to get that backlash of like somebody telling you how to do your job when they don't understand what your job is.

Melissa (42:36):

Right. And I think that that's the part of the issue, but also knowing other people that are willing to review your work but not like tear you down, I think is also important. Like we're, our goal is to help each other and to help the court or the purveyor, uh, understand the value. And so if you can't communicate that and somebody can come in and say that you not only didn't communicate it, but you messed it up, that's gonna be a problem. But Michael, I'm gonna show some information about how they can contact you and maybe, maybe you could give, you know, like are you reviewing reports? Are you, you know, like I have some people that will call and say, Hey, I'm evaluator, but like I need somebody to look at my stuff to make sure, you know, and like, is this something that people could reach out to you for? Or how would they, um, connect with you,

Michael (43:28):

Melissa? We do that. That's a significant, uh, part of our work is to, uh, review the work of others and, uh, consult maybe not even be the primary, uh, business evaluator contingency on the industry and the nature of it. Uh, and, and that's an important part. And the other thing Melissa just went, it doesn't have to be adversarial process. And, and that's the thing, just has to be personal. It never has to get personal, just walk through it. And I think with regards to that, the attorneys, uh, maybe can, uh, shed some light on it. They can argue all day in court against each other and then go out for a, uh, a beverage afterwards as best of friends. Mm-hmm. <affirmative>, you just gotta stand what's best for your client still within the rules and, uh, conduct yourself professionally and ethically and you'll be shocked at how much business you can get.

Melissa (44:14):

Yeah, absolutely. And I think if we all understand that it is an art and there is concepts of science and that we are all kind of professionally trying to do the best work that we a we can, um, I think we can assist others and, you know, maybe not have, there's still gonna be times where there's huge, like I have a case right now where it's like one is 2 million, one is 24 million. Like how are we gonna bridge that gap? Right? Yeah. So there's misunderstanding and there's positioning in there, you know, so again, what do these things tell us? We have to understand it and kind of convey it. But I appreciate this discussion with you, Michael, and I'm sure we're gonna have more discussions in the future. So, um, reach out if you have questions, but, um, Michael is a great resource and um, I would prefer you call him about all these hard things. <laugh>.

Michael (45:12):

Well, Melissa, please thank you and your team for, uh, setting this up, and it's always a privilege to work with you.

Melissa (45:18):

Awesome. Well, we'll talk to you soon. Thanks Michael. Hey tr,

Michael (45:21):

Have a great day all.