Court KO’s AI-assisted damages analysis

The featured case in the January issue of Business Valuation Update is a New York matter in which a damages expert used an artificial intelligence tool to help with his analysis. The court determined his testimony to be unreliable and set standards for admission of testimony and reports based in part on the use of AI.

In the dark: The expert used a generative AI tool to cross-check calculations, but he was unable to explain the prompts he used, the sources the tool relied upon, or its operational mechanics. Also, the AI tool’s outputs changed when given the exact same prompts, causing the court to be concerned about consistency and reliability. The court also underscored the need for transparency, finding that the use of AI in legal evidence should be disclosed and subjected to pretrial hearings to ensure fairness and accuracy.

This is the first case we know of that addresses the use of AI in a valuation or damages context, and it provides some insight into how courts in other jurisdictions may respond.

The case is Matter of Weber, 2024 N.Y. Misc. LEXIS 8609; 2024 NY Slip Op 24258, and a case analysis and full court opinion are available on the BVLaw platform.

Should you change your models now for potential tax law changes?

No, it is not advisable to change your valuation and financial models at this time based solely on the potential for tax law changes. During the NACVA 2024 Business Valuation & Financial Litigation conference last week in Las Vegas, Carla Nunes and Jim Harrington, both with Kroll, pointed out that the uncertainty surrounding future tax policies makes premature adjustments risky and potentially inefficient.

Wait it out: While some provisions, such as the treatment of R&D expenses or bonus depreciation, may have bipartisan support and are more likely to pass, others—such as changes to corporate tax rates or global tax rules—are less predictable. Making changes now in your models could result in inaccurate projections and require further revisions later, leading to wasted time and resources.

A better idea is to maintain your current models while closely monitoring developments in tax legislation. Scenario analysis can be a valuable tool during this period of uncertainty, allowing you to prepare for a range of potential outcomes without committing to changes prematurely. This approach, while costly and time-consuming, provides flexibility and readiness to adapt once new laws are enacted. Waiting until the specifics of the tax changes are “signed on the dotted line” ensures that your models remain accurate and actionable.

We’ll have more from the NACVA conference in the next issue.

Last chance! What’s your revenue outlook?

Will your business valuation firm or practice revenue be higher in 2024 than it was in 2023? What’s your outlook for 2025? Please take just a few minutes to give us your observations—click here to take this month’s “Two-Minute Practice Builder” survey. The survey deadline is December 27, and it’s our last one for the year. Thanks for participating!

Grabowski gives update on company-specific risk guidance

At the NACVA 2024 Business Valuation & Financial Litigation conference last week in Las Vegas, Roger Grabowski, now retired from Kroll, gave an update on the upcoming valuation advisory from The Appraisal Foundation that will address the complex and often contentious topic of company-specific risk premiums (CSRP). This advisory, developed after years of deliberation and input from valuation experts, seeks to standardize the approach to assessing and quantifying company-specific risks. These risks arise from factors that differentiate the subject company from its industry or benchmarked peers, such as operational leverage, customer concentration, or geographic limitations.

Need to compare: Grabowski noted that one of the key challenges highlighted in the advisory is the lack of uniform terminology or understanding of CSRP. Historically, company-specific risk adjustments have faced criticism for being arbitrary, with limited evidence or methodology supporting the chosen premiums. This issue has been underscored in legal cases, such as those in the Delaware Chancery Court, where appraisals have been scrutinized for lacking rigor or objectivity. The advisory emphasizes the necessity for thorough comparisons and evidence-based methodologies when applying CSRP. That is, it’s not enough to just pick from one of the lists of risk factors because what are you comparing them to?

The advisory also advocates for a deeper analysis of guideline public companies’ disclosures, annual reports, and segment information to understand industry risk comprehensively. Grabowski observed that some analysts have stopped reading annual reports and 10-K filings, which is a mistake—those documents can reveal some valuable information that can inform the analyst about company or industry risk factors. He also discussed several academic research papers that can help analysts substantiate their CSRP estimates.

Ultimately, the new advisory will provide a framework for appraisers to systematically identify and justify company-specific risks. Grabowski’s parting remark: “Take care in applying CSRP—do not be arbitrary—pricing risk is difficult.”

Tomorrow—Live from New York City: Consolidation in the BV profession

Just like the accounting profession, the business valuation profession is consolidating. Valuation firms are acquiring other firms, and private equity is fueling a lot of this. What does this mean for your practice and the future of the profession? Join BVR chairman David Foster tomorrow, December 19, as he hosts a robust discussion with guests Ken Pia and Jay Fishman, both of whom are in the headlines thanks to their firms’ recent combinations with profession leaders CBIZ and Stout. They’ll give an inside look at the strategic benefits of the latest business valuation firm combinations. To register, click here.

Extra: Looking to buy or sell a practice? A new platform, BVFLS Transitions, provides a confidential listing service for valuation and forensics firms looking to exit and buyers wanting to expand.

Recordings available of meetings of IVSC standards boards

As part of the IVSC AGM 2024 program in Hong Kong in November, the IVSC’s standards boards (Business Valuation, Financial Instruments, Tangible Assets, and the Standards Review Board) hosted public meetings to ensure accessibility and transparency for those unable to attend in person. These public sessions provided participants with the opportunity to hear discussions on the boards’ latest work program, updates to the International Valuation Standards (IVS), and key findings from the recent Agenda Consultation. They also offered an insight into the working processes of the boards and their collaborative approach to advancing global valuation standards.
Recordings of all public meetings are now available on the IVSC website if you click here.

Preview of the January issue of Business Valuation Update

Here’s what you’ll see:

• “Business Valuation Year in Review 2024: The Rise of AI” (BVR Editor). It was an exciting year for the business valuation profession in 2024. Last year, our annual review highlighted the challenges in recruiting and keeping staff, which remains an issue for the profession. This year, we spotlight technology, and we also make some overall observations based on all the conferences and webinars we attended during the year and from the many opportunities we’ve had to speak directly with many of you.

• “BVLaw Review: The Top Valuation Cases of 2024” (Jim Alerding). The BVLaw platform added over 60 cases during 2023, bringing the total to almost 4,400 cases in the database—plus accompanying case analyses that hit the valuation highlights. This article is a rundown of some of the more important cases for 2024.

• “Rethinking the Site Visit in the Post-COVID-19 Era” (BVR Editor). During the pandemic, the physical on-site visit to a subject company vanished. Valuers used other means, including virtual tools, to inspect the business and complete their valuations. Now, in the post-COVID-19 era, will things return to normal, or will technology eliminate physical site visits? Have they lost their importance? Paul Hood and Tim Lee share their thoughts.

• “Update on Incorporating ESG Factors Into a Business Valuation” (BVR Editor). There is a great deal going on with environmental, social, and governance (ESG) matters, including new regulatory and disclosure requirements, research studies, and guidance on integrating ESG factors into business valuations. This was all discussed during a recent BVR webinar with Carla Nunes (Kroll) and Nene Gianfala (Chaffe & Associates), who gave a comprehensive picture of the current ESG landscape and the impacts on valuation.

• “Common Errors Addressed in Final AICPA Business Combinations Guide” (BVR Editor). At the ASA conference, Adam Smith of PwC, who was on the task force for the guide, discussed some common errors in practice the guide addresses, particularly with respect to the returns on intangible assets and inventory valuation.

• “RESEARCH UPDATE: Featured Paper: ‘Expert Guide to Navigating Forensic Accounting and Valuation Professional Standards’” (BVR Editor). A monthly roundup of research papers of interest to valuation experts. The featured paper discusses the standards put forth by the AICPA, ASA, NACVA, and the CFA Institute, including USPAP. While they may be “complex and confusing,” they do not conflict, but there are differences. It’s up to the practitioner to determine the appropriate standards to follow based on the nature of the engagement. Other papers covered include financial forecasting, bias in ESG ratings, and whether the market puts a value on corporate culture.

• BVLaw Featured Case: “New York Surrogate Court Finds Testimony Based on AI as Unreliable and Sets Standards for Admission of AI-Based Testimony,” Matter of Weber, 2024 N.Y. Misc. LEXIS 8609; 2024 NY Slip Op 24258 (Oct. 10, 2024).

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends”;

• Regular features: “Ask the Experts” and “Tip of the Month”;

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “Stout Restricted Stock Study and DLOM Calculator,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: A chart of the latest court cases that involve business valuation issues with one case featured in a detailed analysis.

To stay current on business valuation, check out the January 2025 issue of Business Valuation Update.

BV movers . . .

People: Josh Shilts, CPA, ASA, ABV/CFF/CGMA, CFE, has joined Dean Dorton as a director in the firm’s Valuation and Forensic Services as part of the acquisition of Shilts CPA, a forensic accounting and valuation firm based in Jacksonville, Fla.; this is part of Dean Dorton’s broader vision to meet the growing demand for specialized advisory services in the middle market.

Firms: Stout has acquired DebtX Analytics Inc., a provider of loan valuation services and stress testing to banks, insurance companies, private equity, and government agencies … An alternative practice structure has been created between Dallas-based Springline Advisory, a business advisory platform backed by private equity firm Trinity Hunt Partners, and HM&M Advisory LLC, also from Dallas. Through this arrangement, Springline Advisory will give HM&M greater access to the capabilities and the geographic reach of larger firms … Raleigh, N.C.-based Cherry Bekaert has acquired Katz Nannis + Solomon of Waltham, Mass., a full-service CPA firm specializing in accounting, tax, and advisory services with strengths in the technology, life sciences, financial services, venture capital, and consumer goods sectors … Atlanta-based Smith + Howard gets its first Mid-Atlantic office with the acquisition of Richmond, Va.-based consulting firm Fahrenheit Advisors, a management consulting, business advisory, and executive search firm with more than 140 professionals … San Jose, Calif.-based PP&Co has acquired Delucchi Hawn LLP, a firm with 14 professionals, including three partners.

Please send your professional and firm news to us at editor@bvresources.com.

CPE events

BVR Fireside Chat—How Recent BV Transactions Change the Profession, December 19, 10:00 a.m.-10:50 a.m. PT/1:00 p.m.-1:50 p.m. ET. Featuring: David Foster (BVR), Jay E. Fishman (Stout), and Ken Pia (Marcum). CPE credits: 1.0.

Join BVR Chairman David Foster as he hosts a robust discussion with guests Ken Pia and Jay Fishman. Both are in the headlines thanks to their firms’ recent combinations with professional leaders CBIZ and Stout. We’ll discuss the strategic benefits of the latest business valuation firm combinations and what the radical change means for the future of the business valuation profession—and for your practice.

Valuation of an Early-Stage Enterprise Using the Income Approach, Jan. 7, 2025, 10:00 a.m.-11:15 a.m. PT/1:00 p.m.-2:15 p.m. ET. Featuring: Russell Frawley III (Frawley & Co. PLLC). CPE credits: 1.5.

This webinar will present a case study of an early-stage biopharmaceutical (BioPharma) company that requires an IRC 409A valuation in connection with the grant of nonqualified stock options to its officers.

Holiday Break

After taking time off for the holidays, BVWire will be back on Wednesday, Jan. 8, 2025. We wish you a safe, joyful, and prosperous holiday season!