Payroll Services by Extra Help, Inc. and Teresa Katubig sued Kimberlyn Haag in an Illinois state court. They asked the court to determine the value of Haag’s 25{d61575bddc780c1d4ab39ab904bf25755f3b8d1434703a303cf443ba00f43fa4} shareholder interest in Payroll Services.

Pursuant to the shareholder agreement, Haag retained an expert who offered an opinion about the fair market value of the shares. Payroll Services and Katubig asked the court to reject the expert’s report on the ground that it was a “calculation” and not a “valuation.”

After the report was revised, and against Payroll Services’ objection that the expert merely changed the report’s title, the court decided that the expert’s opinion did, in fact, constitute a valuation. An appellate court agreed with that decision.

Facts of the Case

Katubig was the president of Payroll Services. Haag was an employee. Katubig and Haag entered into a shareholder agreement that gave Katubig 75{d61575bddc780c1d4ab39ab904bf25755f3b8d1434703a303cf443ba00f43fa4} ownership and Haag 25{d61575bddc780c1d4ab39ab904bf25755f3b8d1434703a303cf443ba00f43fa4} ownership of the business. Payroll Services later fired Haag and exercised its option to purchase her shares.

The shareholder agreement allowed the parties to agree upon a business valuation company and to abide by its determination of the business value. In the absence of agreement, it allowed each party to retain a business valuation company. In that event, the purchase price for the shares would be based on an average of the two valuations.

Payroll Services hired the Anders firm to prepare a valuation of the company. Haag hired Kemper Group to prepare a valuation.

An accountant employed by the Anders firm opined that Haag’s shares were worth nothing. That accountant referred to his analysis as a “valuation engagement.”

An accountant employed by the Kemper Group opined that Haag’s shares were worth $587,000. That accountant referred to her analysis as a “calculation engagement.” The accountant explained that a calculation engagement is based on a methodology defined by the accountant’s client and may differ significantly from a valuation engagement.

Haag requested payment of the average of the two values. Payroll Services objected, contending that a “calculation” is not the “valuation” required by the shareholder agreement. Payroll Services filed suit, asking the court to declare that it owed Haag nothing.

Expert Testimony

Haag argued that the shareholder agreement did not define the term “valuation.” In her view, the agreement did not require a “valuation engagement” and did not prohibit a “calculation engagement.”

Payroll Services countered that “valuation” is a term of art that is defined by the American Institute of Certified Public Accountants (AICPA). The AICPA’s Statement on Standards for Valuation Services, however, defines valuation as the process of determining the value of a business.

The AICPA statement describes both a valuation engagement and a calculation engagement while noting that a valuation engagement results in a “conclusion of value” while a calculation engagement results in a “calculation of value.” Whether to use a valuation engagement or a calculation engagement is decided by the accountant’s client.

The Anders accountant testified that business valuations can be prepared by using an asset approach, a market approach, an income approach, or a hybrid of those methods. Which method to use was a matter of professional judgment.

The Anders accountant noted that Payroll Services was in debt because it had recently purchased some other companies. Since the debt exceeded the company’s equity value, the accountant employed an income stream approach to decide that the shares had no market value.

The Kemper accountant testified that she could not prepare a valuation engagement because Payroll Services refused to provide the financial information that she needed. She therefore agreed with Haag to prepare a calculation engagement.

The Kemper accountant used the comparable company approach to valuation. She considered the price that Payroll Services had paid to acquire similar companies. Her valuation was based on that comparison.

The Kemper accountant testified that a valuation engagement should consider the economic reality of the company. She did not believe that the Anders accountant’s valuation reflected that reality because the stock of an ongoing enterprise that is regularly acquiring competing companies is probably not worthless.

Trial Court Decision

The court initially decided that Haag’s expert did not make a sufficient “valuation” as that term is used in the business valuation industry. Given the parties’ dispute as to whether the shareholder agreement required the term “valuation” to be defined by industry standards, as well as the dispute as to whether a calculation engagement satisfies the industry standard for valuations, the court granted Haag leave to file a new expert report.

Haag’s expert then prepared a “full valuation.” Payroll Services objected that the full valuation used the same methodology as the calculation engagement and arrived at the same conclusion. Payroll Services asked the court to reject the report because it was little more than the former report with a new title.

Haag’s expert explained that she conducted new research and calculated a book value in preparing her new report. The new information she received persuaded her that comparing Payroll Services to recent purchase prices of comparable companies would yield that most realistic valuation. She also explained that she rejected the income stream analysis relied upon by Payroll Services’ expert because the company’s acquisition of new businesses created debt that made the income stream an unrealistic measure of the company’s value.

The trial court determined that Haag’s new expert report met the definition of “valuation” as it was used in the business valuation industry. It accordingly admitted the report and awarded Haag the average of the two competing valuations.

Appellate Opinion

Competing methods for valuing property can yield dramatically different conclusions. In many cases, a judge or jury will decide which of two competing methods arrived at the most accurate result.

In this case, however, the judge merely needed to decide whether each expert produced a “valuation” as required by the shareholder’s agreement. If they did, the judge’s role was limited to calculating the average of the two valuations.

The appellate court rejected the trial court’s initial decision that a calculation engagement is not a valuation. The court noted that the shareholder agreement did not specify the means by which a valuation was to be made. The AICPA recognizes that both engagements are valuations and leaves it to the accountant and the client to determine which engagement to use.

The appellate court also rejected the holding that the term “valuation” should be defined according to business valuation industry standards. Since the parties did not adopt a particular definition of “valuation,” the court gave the term its ordinary meaning: an estimation of worth, especially one that is made by a professional. Regardless of its label, Haag’s expert prepared a valuation that met that definition.

Haag’s only obligation was to retain an expert to prepare a business valuation. She did so. The shareholder agreement left no room for the courts to decide which expert prepared a better valuation. Since both parties obtained valuations prepared by business valuation experts, the appellate court affirmed the trial court’s decision to award the average of those two valuations to Haag.