Quick Read: Joint Retainers

We were recently jointly-retained to value a consulting firm for purposes of a potential share transaction between the two shareholders. One shareholder was on extended leave (“Shareholder A”) and the other shareholder had taken on the responsibility of running the firm (“Shareholder B”).

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Two specific issues of interest in this matter were:

1. How to reconcile or deal with conflicting information provided by the parties with respect to operations and prospects; and
2. How to present draft reports and avoid the natural tendency to focus on numerical conclusions rather than the supporting analysis and factual backup.

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Each of these issues is discussed below.

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Conflicting Information

It became clear that Shareholder A (presumably the seller) was quite optimistic about the firm’s future whereas Shareholder B (presumably the purchaser) was much more pessimistic about the firm.

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For example, before Shareholder A went on leave, the firm had been growing significantly due to multiple factors (i.e. it was a new firm, actively submitting proposals on as many jobs as possible, etc.). Shareholder A believed that the firm could continue this significant growth.

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Shareholder B, on the other hand, did not believe the firm could continue at its historical growth rates because the firm would only have one managing partner rather than two. Shareholder B, in fact, believed the firm’s revenue would decline due to this change in management.

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We, as business valuators, do not have the expertise or credentials to assess the credibility of individuals, unlike the role of a judge during a trial. In order to assess the most reasonable facts and background in this case, we completed the following procedures:

• We reviewed historical contracts obtained by the firm to explore which of the two shareholders was responsible for those successes;
• ?We reviewed as much interim data as possible (subsequent to the departure of Shareholder A) to assess business growth or lack thereof; and
• ?We compared “success rates” of converting bids to jobs before and after the departure of Shareholder A.

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Perhaps, not surprisingly, the analysis indicated a scenario somewhat in between the two conflicting representations of the shareholders. The “fettering out” process led us to determine, in our view, a reasonable amount of maintainable future earnings to utilize in our valuation.

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While a business valuator’s responsibility is to challenge, review and test assumptions and representations provided in any situation (not just in cases of two adverse shareholders), this issue was more significant in this particular joint retainer.

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Challenging or investigating representations made by parties in a valuation assignment is critical in any engagement to ensure the most reasonable, plausible and, in cases of trials, most persuasive valuation report is completed.

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?Draft Reports

?Draft reports have been the subject of discussion and debate for several years. Some issues that are commonly raised include:

1. ?Whether draft reports should be produced at all – this is an issue to be discussed with counsel and the valuators in any particular matter; and
2. Whether draft reports comprise part of an expert’s file to be included in potential cross-examination.

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In our joint retainer assignment, it was our view that a draft report would be very helpful. Draft reports provide the parties an opportunity to comment on factual support so that the valuator can correct, reinterpret or reconsider facts if necessary. Such comments can lead to a more accurate and effective final report.

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One of our concerns in providing a draft report in this jointly retained matter, however, was the likelihood that clients would focus disproportionately on numerical conclusions reflecting the valuator’s judgment and technical analysis rather than our understanding and communication of critical background facts.

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To avoid this issue, we distributed a draft report without including the significant numerical conclusions.

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The comments that arose from this draft report were helpful and consideration of those comments was made and reflected in the final report that was delivered shortly after.

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This type of draft report was very helpful in this matter and we will certainly consider such a strategy in future joint engagements.

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These two specific issues involving the assessment of conflicting information and how to communicate preliminary findings via a draft report were amongst a several issues that made this particular assignment both interesting and challenging. Counsel in this matter were extremely helpful and it was a pleasure to?be of assistance.

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?Hopefully, these thoughts from our recent joint engagement are helpful and/or interesting to you and your practices. If you or your colleagues require assistance in the areas of business valuation, damages quantification or family law matters, it would be our pleasure to assist you.

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For more information, please do not hesitate to contact Wayne B. Rudson, CPA, CA·IFA/CBV, ASA, CFE ([email protected]) or Vincent Lam, CBV, MAcc ([email protected]) at 416-598-4500.