Worried judges grapple with AI, ask for help

Judges are increasingly concerned about artificial intelligence (AI) and its implications for the legal system and its use by testifying experts. Programs are being developed internally to educate the courts and lawyers on AI’s role in legal processes, and the valuation profession can play a key role in this effort, according to judges who conducted a session at the recent NACVA 2024 Business Valuation & Financial Litigation conference last week in Las Vegas.

New risks: While many judges recognize the potential of AI to streamline processes such as legal research, case analysis, and document summarization, they also worry about the risks it introduces, according to a panel that included Judge Steven I. Platt (retired full-time Circuit Court judge in Maryland who now does settlement and mediation work) and Judge Timothy Driscoll (New York State Supreme Court—Commercial Division). The session moderator was forensic accounting, business valuation, and litigation expert Michael Kaplan.

A primary concern, as you would imagine, is the reliability of AI outputs, particularly the risk of hallucinations, where AI generates false or fabricated information. Judges are also wary of biases embedded in AI algorithms, which can affect fairness and accuracy in cases where AI plays a role in forming arguments or expert opinions. These issues raise questions about how much courts can trust AI-generated evidence or analyses, the judges said.

Additionally, judges are concerned about the ethical and procedural challenges posed by AI. For instance, questions arise about whether the use of AI must be disclosed in court, how AI-generated materials should be scrutinized, and whether AI tools compromise confidentiality, especially when sensitive data are input into third-party platforms. Another pressing issue is the lack of clear rules and standards governing AI’s use, which places a burden on the judiciary to adapt quickly and develop appropriate guidelines.

Help needed: Valuation experts often act as educators to the courts when explaining their methodologies and processes, and this should extend to AI. The judges asked the experts in the audience to explain clearly how they verify AI outputs, cross-check data, and maintain accountability for their conclusions. Additionally, the valuation profession can work with judicial bodies to establish best practices and guidelines for the ethical and responsible use of AI, including how to address issues like bias and data validation. This proactive approach will help courts gain confidence in the use of AI and its ability to enhance, rather than undermine, the legal process.

The session covered much more, and there were some good questions from the audience—there is detailed coverage in the February issue of Business Valuation Update.

Comments started on proposed IRS regs regarding appraisers

Last week, we alerted you to proposed changes to its Circular 230 related to appraisers who do tax-related valuations. The revisions incorporate both USPAP and IVS standards into a new framework for determining appraiser disqualification. Under the proposed regs, all appraisals “should conform to the substance and principles” of USPAP or IVS.

Early comments: Comments have begun to be submitted, and one commenter says: “Incorporating both USPAP and IVS standards into the rule is a positive step towards ensuring high-quality appraisals.” But he expressed concern about “how inconsistencies between these two standards will be managed. Appraisers might find themselves in situations where the standards differ, and clearer guidance on which standard takes precedence would help avoid confusion and ensure compliance.”

We note that, back in 2018, The Appraisal Foundation (TAF) and the IVSC collaborated on a document, “A Bridge From USPAP to IVS,” that shows the differences between the two sets of standards and how appraisers familiar with USPAP can produce a valuation that is also compliant with IVS. Now may be a good time for a revision to this document.

Submit your comments: February 24 is the deadline for comments (electronic or written), and that is also the deadline for requests to speak at a public hearing, which will be March 6. Details on submitting comments and requests to speak are in the Federal Register document, which is available if you click here.

The valuation professional organizations (VPOs)—the AICPA, ASA, and NACVA—are reviewing the proposed regs for possible comment. BVR’s recently formed Leadership Council will be issuing some talking points for valuation practitioners to consider when submitting comments.

More details on the proposed regs are in the February issue of Business Valuation Update.

Court finds no personal goodwill despite a noncompete agreement

In a Florida divorce case, the husband appealed the trial court’s finding that the goodwill in his business, a provider of retirement plan and fiduciary services, was all enterprise goodwill. This was the finding even though there was a noncompete agreement in existence. In Florida, enterprise goodwill is a marital asset, but personal goodwill is not.

No analysis: The husband failed to show that the business depended on his own personal skill, reputation, or continued participation. Plus, his own testimony undermined his assertion that personal goodwill existed. He had taken over the book of business without specialized training from the former owner, and the value of the business did not decrease after the former owner was out of the picture. “In other words, the value followed the book of business itself and was not dependent on the identity of the owner,” the trial court wrote.

What’s more, the mere existence of a noncompete agreement “does not transform the entire nature of the business,” the court wrote, especially considering the husband’s own testimony about his role. The appellate court upheld the decision of the trial court.

The case is Donahue v. Donahue, 2024 Fla. App. LEXIS 8801; 2024 WL 4795980, and a case analysis and full court opinion are available on the BVLaw platform.

A Pepperdine first: PE multiples up, VC down

“There’s something this year that I’ve never seen before” about private equity and venture capital multiples, remarked Dr. Craig Everett, project director of the Pepperdine Private Capital Markets Project. Deal multiples for PE investments have increased, while deal multiples for VC investments have decreased, according to the results of the project’s 2024 survey.

This divergence in trends was particularly striking, as he had never observed this phenomenon before. He speculated that this shift could reflect a “flight to quality,” where investors are showing a preference for the relative stability and lower risk of mature, profitable companies typically targeted by private equity, compared to the inherently riskier and more volatile investments in newer ventures pursued by venture capitalists.​

The survey results are in the 144-page “2024 Private Capital Markets Report,” which is available if you click here. The report is developed from an annual survey of expected rates of return with respect to private companies. Respondents include senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately held businesses, investment bankers, business brokers, limited partners, and business appraisers. Many valuation experts use the report as a sanity check on their cost of capital estimates.

NACVA adds to CVA and MAFF ranks

The National Association of Certified Valuators and Analysts (NACVA) announced that 50 members earned their credentials (or are candidates) during the fourth quarter of 2024. Of these members, 48 earned the Certified Valuation Analyst (CVA) credential (or are candidates) and two members earned the Master Analyst in Financial Forensics (MAFF) credential.

Tomorrow! BVR’s Cost of Capital Virtual Conference

Tune in tomorrow, January 16, for BVR’s live virtual conference devoted to the cost of capital. There will be six sessions starting at 8:00 a.m. PST/11:00 a.m. EST. You’ll hear all the latest news, research, theories, and applications on cost of capital during these sessions:

• Current Environment and State of Cost of Capital (William Harris);

• New Research on Decile 10 Firms (Dr. Michael Crain);

• Methods and Models to Support Unsystematic Risk Estimates in Cost of Capital (Ron Seigneur);

• Understanding IPCPL Theory (Malcolm McLelland);

• Advisory on Company-Specific Risk Premium (Danielle Goedert); and

• BVR’s Cost of Capital Professional Platform (Dr. Michael Crain and Adam Manson).

For more information and to register, click here. Note: If you are a BVR Passport Pro subscriber, you are automatically registered for this very special event.

Transaction multiples in Europe published

In the latest issue of the European Business Valuation Magazine (EBVM), Professor Dr. Stefan O. Grbenic, StB, CVA, has published transaction multiples for Central and Western Europe, as well as Southern Europe. This is part of an ongoing series, and the previous issue had multiples for Europe in total, and the next issue will continue with a regional breakdown into Scandinavia, Britain, and Eastern Europe. The transactions cover the period from April 1, 2021, to March 31, 2024, and provide the following multiples:

• Deal enterprise value/sales;

• Deal enterprise value/EBITDA;

• Deal enterprise value/EBIT; and

• Deal enterprise value/invested capital.

The author provides some things to consider when using the data, such as the transactions from the latest six months are given double weight in the calculations. He also states that, while the data are evaluated carefully, he denies liability for the accuracy of all the computations.

You can download the full issue and sign up for future issues if you click here.

Preview of the February issue of Business Valuation Update

Here’s what you’ll see:

• “USPAP/IVS Front and Center in Proposed Regs for Tax Valuations” (BVR Editor). The IRS has issued proposed regulations that would make changes to Circular 230 that would strengthen the agency’s ability to penalize or disqualify appraisers who do tax-related valuations. Two sets of valuation standards, USPAP and IVS, figure prominently in the proposed regs as benchmarks by which the IRS will scrutinize valuations. Public comments are due February 24, and a public hearing will be held March 6.

• “Grabowski on Using Academic Research to Back Up CSRP Estimates” (BVR Editor). Roger Grabowski, managing director (ret.) at Kroll, discusses the company-specific risk premium (CSRP) and how academic research can strengthen estimates and withstand challenges that the numbers are just picked out of the air.

• “AI Usage in Valuation: A View From the Bench” (BVR Editor). Judges are increasingly concerned about artificial intelligence (AI) and its implications for the legal system and its use by testifying experts. Programs are being developed internally to educate the courts and lawyers on AI’s role in legal processes, and the valuation profession can play a key role in this effort, according to judges who spoke during a session at a recent conference.

• “An Inside Look at Two Acquisitions in the BV Profession—and More” (BVR Editor). The debut program in BVR’s “Fireside Chat” series, hosted by BVR chairman David Foster, explored two recent acquisitions in the business valuation space: the acquisition of Marcum by CBIZ and the acquisition of Financial Research Associates by Stout. But the conversation expanded beyond the mergers to discuss some important issues in the valuation profession.

• “How a Small BV Practice Scales Up Amid a Labor Crunch” (Ben Towne). Insights from a small firm that uses a combination of full-time local employees, remote contractors, and international “in-house” talent to meet clients’ growing needs. It is a challenge to coordinate this widely dispersed team, but the advantages more than compensate.

• “VRC Gives an Update on Deals and Fund Valuations” (BVR Editor). A panel of leaders from Valuation Research Corp. (VRC) held a media roundtable in early December during which they discussed developments in their two primary practice segments: portfolio valuations and transactional services.

• “Research Update: Recap of Research Papers on Assessing Company Risk” (BVR Editor). A listing of research papers and sources cited by Roger Grabowski, managing director (ret.) at Kroll, that are helpful in substantiating otherwise subjective estimates in business valuations, especially in the estimation of company-specific risk.

• “Book Review: What’s New in the 5th Edition of Financial Valuation Applications and Models?” (Harold Martin). A review of Jim Hitchner’s new edition that is over 2,100 pages and has undergone substantive updates to existing material as well as new chapters on topics not previously discussed.

• BVLaw Featured Case: “Business’s Goodwill Determined to Be Enterprise Only; Covenant Not to Compete Does Not Change the Nature of the Goodwill,” Donahue v. Donahue, 2024 Fla. App. LEXIS 8801; 2024 WL 4795980 (Nov. 15, 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,” “ktMINE Royalty Rate Data,” “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 February 2025 issue of Business Valuation Update.

BV movers . . .

People: Cindy MacAulay, CPA/CFF, CVA, MAFF, has joined HHM CPAs as partner in the firm’s Memphis office; she has almost 30 years of experience in forensic accounting, including financial investigations and litigation support and consulting services, with significant experience in family law … Matt Howard, CPA/ABV, CVA, has been promoted to director at Carmel, Ind.-based Blue & Co. LLC in the Transaction Advisory Services Group where he performs business valuation, transactional due diligence, quality of earnings, buyer representation, litigation support, and other consulting services; he also helps manage the small-business, dental, and veterinary service lines.

Firms: The private equity ownership stake in Citrin Cooperman has flipped from Blue Mountain Capital to Blackstone, a “monumental day for the accounting profession,” said Allan Koltin, who advised on the deal, in a statement to the CPA Practice Advisor … Atlanta-based Smith + Howard has acquired Richmond, Va.-based consulting firm Fahrenheit Advisors, expanding its service offerings to include human capital management consulting services … Memphis-based Reynolds, Bone & Griesbeck PLC has acquired local firm Scott and Pohlman PC … Atlanta-based Aprio has expanded in Denver with the combination with Pontiff + Associates PC and Elite Tax & Accounting LLC, two accounting firms in the city … Saginaw, Mich.-based Yeo & Yeo CPAs & Advisors has acquired Amy Cell Talent, which will be rebranded as Yeo & Yeo HR Advisory Solutions.

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

CPE events

Cost of Capital Virtual Conference, January 16, 8:00 a.m.-1:30 p.m. PST/11:00 a.m.-4:50 p.m. EST. Up to 6 CPE credits available.

This is a half-day virtual conference that will present the latest news, research, theories, and applications on cost of capital. Featuring sessions led by industry experts William Harris, Dr. Michael Crain, Ron Seigneur, Malcolm McLelland, and Danielle Goedert, the conference covers topics from the current state of cost of capital (post-U.S. elections) to new research and the resurgence of IPCPL theory.

Valuation Case Studies and the Application of Valuation Methodologies; Compelling Case Studies: A BVR Series, January 22, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Andrew Mackson (InteleK Business Valuation & Advisory) and Mikhail Munenzon (InteleK Business Valuation & Advisory). CPE credits: 2.0.

Actual real-world valuation case studies across various industries and valuation purposes, including the valuation approaches and methodologies considered, selected, and applied in these valuations, are presented.