Often, business valuation professionals rely on client-prepared financial projections to calculate lost profits and diminution in value. However, courts may exclude expert testimony that’s based on speculative or unreliable projections. To withstand scrutiny, valuators must support their conclusions with market-based evidence and a rigorous analysis of case-specific facts. Serving as a recent example of how expert testimony may be inadmissible due to flawed financial assumptions is the landmark case Endless River Technologies, LLC v. TransUnion, LLC (6th Cir., Dec. 18, 2024).

Trial Court Admits Valuation Evidence

In Endless River Technologies, the U.S. Court of Appeals for the Sixth Circuit addressed a contractual dispute. The case involved ownership of the source code for a proprietary platform that served as an online marketplace for insurance leads.

In 2014, the parties entered into an agreement that called for the defendant (TransUnion) to finance the platform’s development and the plaintiff (Endless River) to develop the platform and provide ongoing technical support for an annual fee. The agreement limited the parties’ liabilities to direct damages, waiving claims for consequential, incidental, indirect, special, or punitive damages. In addition, it stipulated that upon termination, the intellectual property rights to the platform would revert to the plaintiff.

In 2018, the defendant terminated the partnership, citing underperformance, but failed to return the platform’s source code. The plaintiff subsequently sued for breach of contract. At trial, a jury awarded the plaintiff $18.3 million in damages.

To arrive at that figure, the jury considered testimony from the plaintiff’s valuation expert who applied a “venture capital approach.” His original report concluded that the platform’s value was $18.9 million as of March 31, 2014 (the contract date) and $59.4 million as of December 1, 2021 (the date the report was issued). His report didn’t value the platform as of April 2, 2018 (the breach date).

The valuator’s conclusions were based entirely on an unverified pre-development profit projection model the plaintiff prepared when negotiating its development agreement with the defendant. The model assumed the platform would generate no revenue during the year of development, $16.7 million in revenue in the second year and $213 million in revenue by the fifth year. However, the platform generated only $240,000 in revenue between 2016 and 2018.

Appellate Court Rejects Expert Witness

On appeal, the Sixth Circuit found that the valuator’s testimony was “riddled with defects.” First, the court determined that, under applicable law, the appropriate valuation date was the breach date (April 2, 2018). Although the valuator testified that he valued the platform on that date, his testimony conflicted with his original report, undermining the admissibility of his testimony. The court ruled that the expert’s testimony was irrelevant because he used the wrong valuation date in his report.

In addition, the court ruled that the foundation for the valuator’s conclusions was speculative and unreliable. It rejected the expert’s “wholesale reliance” on the plaintiff’s profit projections without verifying their feasibility with market-based evidence. Moreover, the expert failed to reconcile the “stark gap” between those projections and the platform’s actual performance.

Lessons Learned

This case demonstrates how courts may exclude expert testimony that’s based on speculative financial assumptions and improper valuation methods. While the trial court initially admitted the plaintiff’s expert’s valuation evidence, the appellate court excluded his testimony under Rule 702 of the Federal Rules of Evidence, finding it both irrelevant and unreliable.

Our experienced business valuation professionals understand the required relevance and reliability thresholds for the admissibility of expert testimony in federal courts. We can help you avoid similar outcomes by developing independent, market-based assumptions to arrive at value conclusions you can count on. Contact us.