At one time or another, many agents become involved in litigation surrounding the agency or its principals and will require the professional support of a consulting organization that specializes in valuation litigation support services.
Why might a valuation expert be required? In the case of a divorce, the equity in the agency is considered part of the common marital property; a minority shareholder no longer employed by the firm may file a dissolution action to force a buyout; the agency may be damaged by the violation of a non-compete agreement and consequently lose a book of business. In all these cases, an equity claim being litigated needs a determination of fair market value. The parties may even reach a settlement-but typically not until after a fair market valuation report has been rendered.
Since every action has a claimant and a defendant, a valuation expert sits on each side of the table. Both experts will look at the same set of facts in assessing fair market value, but their conclusions will often be very different. This should not be so surprising, considering the subjective nature of assumptions that must be utilized in the process.
After assessing the credibility of the experts-looking for any biases the experts might have in favor of their respective clients-the judge or jury renders a conclusion with regard to a final award.
Working With a Valuation Expert:
The valuation expert should be viewed as part of the litigation team. These are some of the issues which agency principals should focus on if and when it becomes necessary to hire a valuation professional:
If your agency becomes involved in a lawsuit, your lawyer will typically ask its principals whether they know a consulting organization that specializes in the insurance industry. The principals' first thought may be to contact the agency's accounting firm-but one soon finds that most small accounting firms do little or no valuation work. At Harbor Capital Advisors, we often receive a call from a client for whom we've done some work in the past, or directly from the attorney representing the client, who might be a referral or who has already worked with us.
As in any valuation assignment, the agency principal works with the valuation expert by providing the information necessary for the valuation report. The subjective portion of the valuation assignment comes in the selection of premiums and discounts as well as in the pro forma adjustments to be used in the various valuation methodologies. The premiums and discounts are based on the relative risk factors of the agency's operation. The pro forma adjustments are based on how an agency would typically be run under third-party ownership, eliminating one-time income and expenses such as discretionary business expenses. The principal of the agency should be able to express reasonability of those risk factors, as well as the profit trend of the agency, to the valuation expert. Since the report will be severely scrutinized during the litigation process, it's important that the expert be able to defend his or her conclusions.
The valuation expert will also work closely with the agency's attorney who is preparing the case to go to trial. A copy of the valuation reports will be provided to the respective attorneys in the case for their review. Each side will confer with its expert in reviewing the other side's report. The purpose of this exercise is to be able to critique the valuation experts' reports on direct and cross examinations.
Before a valuation expert can accept an assignment, attorneys for each side will want to make sure that he or she is qualified. The valuator's education and professional training as well as his relevant work experience are evaluated to determine if the expert is properly qualified. Although the attorneys for either side can challenge the expert's qualifications, it's rare that the expert would have been selected without the appropriate qualifications in the first place.
The value of retaining a valuation expert from Harbor Capital Advisors (which works exclusively in the insurance industry) is that the pool of knowledge we bring to the table makes our valuation conclusions all the more credible.