Hitchner busts more BV myths

Does the fair market value standard assume a financial buyer, without synergistic benefits? “This is not true and is indeed a myth,” writes Jim Hitchner (Financial Valuation Advisors) in his September/October issue of Hardball With Hitchner. And his answer would be the same for a subject noncontrolling interest versus a controlling interest. In backing up his position, he examines the definitions of fair market value, investment value, and the key word “hypothetical.” Under certain circumstances, he notes, fair market value can apply to valuations involving both financial and strategic buyers and sellers, as well as a controlling or minority interest. He cautions analysts not to “mix strategic purchases with financial standalone transactions when preparing a transaction method.”

He also tackles another myth: that the levels of value the BV profession uses are a settled and static issue. “This is patently false,” he writes. He goes through the 30-year evolution of the levels of value chart from its first three-level version to the current four-level version (another control level of value was added). Some unsettled issues remain, he notes, such as the existence of empirical data for quantifying marketability discounts on controlling interests and the use of control premium studies. Hitchner advises analysts to make sure they are using the most current chart that reflects the latest views on levels of value.

Earlier this year, Hitchner busted two other BV myths: one that claims that the IRS only accepts USPAP standards for federal tax-related valuations and the other that you cannot rely on restricted stock studies for estimating a marketability discount for federal tax valuations (click here for our coverage).

Hardball With Hitchner is a monthly publication. For subscription information, click here.

More AI woes add to cautions

Artificial intelligence is a much-talked-about topic around the business valuation conference circuit, and most of it is cautionary. One story going around is the one about the attorney who wrote a brief using AI, which cited cases that didn’t exist. In the news recently is a case of another attorney whose client is suing him for making a faulty closing argument that was written with help from a generative AI program. The case involves rapper Prakazrel “Pras” Michel, who was found guilty back in April on a number of charges, including conspiracy.

The American Bar Association does not yet have any guidelines on the use of AI in the legal profession, according to the article from Associated Press, though a new task force is studying the issue. AI usage at law firms is in its early stages, but 50% of lawyers expect to use it within the next year. The rapper’s trial is said to be the first time that generative AI was used in a federal trial. Click here to read the article.

What to do: If you plan on using anything that AI generated, check it first! You may also want to consider developing an internal policy that addresses matters such as some specifics as to how AI should be used, confidentiality of client information, and—as noted above—a careful review of the outputs.

Testimony of damages expert excluded due to no basis

In a Pennsylvania breach of contract case, the plaintiff’s damages expert was to testify as to lost profits. Opposing counsel filed a Daubert motion, claiming the expert’s pricing calculations (a key component to the lost profits analysis) could not be based on anything in the record.

In—for now: The court allowed the expert to testify, and it would be admissible at trial as “long as there is a basis for those assumptions in the record.” After the expert’s testimony but before the jury’s verdict was entered, the opposing side moved that the testimony be struck because the expert’s assumptions “had no factual basis in the trial evidence.” The court did not rule on the motion until after the trial. The jury found the defendant liable for the breach of contract and awarded $25 million in compensatory damages.

After entering the judgment, the court granted the motion excluding the expert’s testimony and asking for a new trial on damages only. The expert’s testimony was not based on the trial record. Specifically, without the expert’s testimony as to pricing calculation, the jury could not have reached the damages award it did reach, of $25 million. The plaintiff filed a motion for reconsideration, but it was denied.

The case is Paramount Fin. Commc’ns, Inc. v. Broadridge Inv’r Commc’n Sols., Inc., 2023 U.S. Dist. LEXIS 154020; 2023 WL 5635772, and a case analysis and full court opinion are on the BVLaw platform.

Any impact to multiples from Section 174 changes? Not in this industry

The tax code’s Section 174 requires research and experimentation (R&E) expenses to be capitalized and written off over time. This is a change the 2017 Tax Cuts and Jobs Act made that became effective starting with calendar year 2022. Capitalization versus expensing is not simply an accounting optic—it can trigger unplanned tax liabilities that could impact cash flow. Efforts are underway to eliminate this change in the tax law. In the meantime, has the change had an impact on valuations in the marketplace? Not for architectural and engineering (A/E) firms, according to industry experts Rusk O’Brien Gido + Partners. “Regarding the marketplace for A/E firms, we have yet to observe any material impact on valuation multiples of publicly traded firms or in private market transactions (mergers acquisitions) from this change in the tax code,” they wrote in a recent article. “This is likely due to remaining uncertainty over whether or not the tax code may be amended and the ability of many firms to mitigate the impact through various tax strategies.”

They advise appraisers to take this tax law change into account—especially for the technology, healthcare, manufacturing, and engineering industries. Many firms have already paid unexpectedly large tax bills, they point out, meaning a reduction in cash balances (or increased debt) could reduce equity value.

Extra: Rusk O’Brien Gido + Partners publishes a regular study of current trends in the transacted values of architecture, engineering, and environmental consulting firms. To order the latest version, click here.

Stories are key in BV—including in job postings

A good valuation report tells a story that ties into the numbers—and this same mindset should be used when writing job postings, advises BV recruiter John Borrowman (Borrowman Baker LLC) in his latest newsletter. Don’t just do a run-of-the-mill posting—tell a story about the opportunity the job provides. For example, client contact and autonomy are high on the list for many candidates, so tell them about that in your story. If you’re not sure what to say, ask your staff about what it’s like at your firm and work their comments into the posting. Borrowman offers more tips on this in a video (click here).

BVR ASA booth buzz: Art of Valuation book sparks interest

At BVR’s exhibit hall booth at the 2023 American Society of Appraisers International Conference in New Orleans, one of the items that generated a lot of attention was a new book, The Art of Valuation. BVR does not offer the book, but we featured it at our booth because it’s an important work that deserves attention. The book is a wonderful collection of essays by top veteran experts from overlapping valuation disciplines who tell stories that go beyond the technical issues and get into the heart of appraisal. In essence, the stories inspire practitioners to always strive to improve their thinking about valuation to elevate their own work and the profession as a whole. The book is available from The Appraisal Foundation, and you can click here to order it.

AICPA lets you cherry-pick some FVS conference sessions

Almost 60 sessions are offered at the upcoming AICPA & CIMA Forensic and Valuation Services Conference November 6-8 in Las Vegas live and online. But not everybody needs to attend the entire slate of sessions, so the AICPA allows virtual attendees to pick and choose some sessions using a “select 7” option. This allows you to focus on specific topics that match your needs. With this option, you can choose any seven sessions from the main conference agenda. You will receive access, agenda creation, and material download instructions a few days before the conference starts. What’s more, you can adjust your agenda at any time. For more details, click here.

Check out the V20 conference October 27-29

Designed as the first truly global business valuation event, the V20 (Valuation 20) Conference will be held October 27-29 in New Delhi, India. Click here for the full agenda and details on how to register.

The Assessors and Registered Valuers Foundation (AaRVF) and the International Valuation Standards Council (IVSC) co-host the event, which coincides with the annual G20 finance meeting in India The AaRVF is a Registered Valuers Organization the government of India recognizes. Many valuation groups have signed on as participating organizations. BVR is the media partner for the event.

The V20 Summit has several objectives, including raising awareness about the importance of valuation in the global economy and facilitating dialogue and the exchange of ideas among valuation professionals, policymakers, and other stakeholders. Another goal is identifying opportunities and strategies for leveraging valuation to achieve sustainable economic growth and development and advocating for policies and initiatives that support the development of the valuation profession and promote its role in driving economic and social progress.

BV movers . . .

People: Emmett Mulcahy, CPA, CVA, has been admitted to the partnership at St. Paul, Minn.-based Redpath and Co. Ltd.; he joined Redpath in 2008 and leads the firm’s business valuation service, providing valuations for clients ranging from small family-owned businesses to large corporations in the areas of financial reporting, gift and estate planning, corporate strategic planning and tax compliance, matrimonial dissolution, and ESOPs.

Firms: Houlihan Lokey Inc., the global investment bank, has launched a new practice within the firm’s Financial and Valuation Advisory (FVA) business called Sustainability Advisory Services; the new practice will provide clients with strategic counsel on sustainability and environmental, social, and governance (ESG) issues and to assist boards of directors, investors, and management teams in successfully navigating the ever-evolving global sustainability business landscape … Brentwood, Tenn.-based LBMC is adding Strothman & Co., an accounting firm based in Louisville, Ky.; this deal expands LBMC’s geographic footprint across multiple states, adds 60 professionals, and brings LBMC to a total of five locations, with more than 850 team members. Both firms have business valuation practices … Raleigh, N.C.-based Cherry Bekaert is adding Elgin, Ill.-based PKF Mueller LLP, which provides a range of accounting, auditing, tax, consulting, and business advisory services (including valuation) to a wide array of clients, including privately held and publicly traded companies, local governments, and nonprofit organizations across a variety of industries.

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

CPE events

Untangling Assets and Uncovering the Truth: A Deep Dive Into Divorce Financial Forensics, October 27, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Michele Laws (Divorce Dollars). CPE credits: 2.0.

Learn the methodologies, tools, and techniques needed to untangle complex financials in the context of divorce proceedings.

Storytelling for the Expert Witness (A BVR Workshop), November 1, 10:00 a.m.-1:45 p.m. PT/1:00 p.m.-4:45 p.m. ET. Featuring: Michael G. Kaplan (Kaplan Forensics) and Jesse Wilson (Tell the Winning Story). CPE credits: 4.0.

Trial lawyers say that the best story wins. A forensic expert/jury trial consultant and communications specialist reveal powerful storytelling skills that can transform technically accurate, matter-of-fact testimony into a compelling and persuasive story.