New Rule 702 crackdown already impacting expert witnesses

Although they don’t officially go into effect until December 1, expert witnesses are already feeling the effects of the changes designed to strengthen Rule 702, which is the federal rule of evidence regarding testifying experts. Last year, we noted that the changes will result in more experts being excluded from testifying, and that is just what is happening—but earlier than we thought.

Early adoption: Courts have already been citing the pending changes when excluding expert testimony, points out a recent article by attorneys at the law firm Faegre Drinker Biddle & Reath. The article mentions several cases in different jurisdictions that have cited the pending changes, including one in which an appellate court reversed the district court’s decision to admit expert evidence.

Courts have a “gatekeeping” function under Daubert or similar standards to disqualify testifying experts who are not competent or who can’t offer helpful evidence. But the courts were not performing their gatekeeping function as rigorously as originally intended. The courts were going more to “weight than admissibility,” that is, just letting the experts testify and then the judge deciding on the weight to give that testimony or deferring that decision to the jury. The Rule 702 amendments “will not change the substance of the law as it was meant to be applied but that many courts have not been applying it correctly,” the article says.

Extra: Appraisers have the highest exclusion rate (38%) among financial experts under Daubert, per the most recent PwC study that examines exclusions.

Court has limited menu for steakhouse valuation

Without enough evidence, a court can only decide on a valuation with what it has to work with. In a Michigan case, two 50% owners of a Ponderosa steakhouse were locked in a battle over the Old West-themed eatery, with both owners engaging in oppressive conduct against the other. They left it up to the court to decide their fate, and it ordered one owner to buy out the other at fair value.

Dying breed: In Michigan, “fair value” can mean anything the court deems appropriate “under the totality of the circumstances.” Naturally, both parties were miles apart in their personal opinions of value. A business valuation was done, but the expert’s report was not entered into evidence nor did the expert testify. The owner being bought out said Ponderosa was a “dying breed” and the real value was in the real estate. An appraisal of the real estate was presented, and the expert testified that she did not include the value of the going concern nor the furniture, fixtures, or equipment. No competing evidence to her appraisal was offered.

With this scant evidence, the court concluded that the restaurant had a “fading popularity” and believed an asset approach was the most appropriate valuation method. It accepted the real estate valuation and made some adjustments, such as for equipment and both parties’ oppressive behavior.

More details can be found in the case, which is Herremans v. Fedo (In re Herremans), 2023 Bankr. LEXIS 1800; 2023 WL 4611429, and a case analysis and full court opinion are on the BVLaw platform.

New app for the Margrabe options approach to DLOM

Dr. Ashok Abbott (West Virginia University) is developing a calculator that uses the Margrabe options approach to estimating a discount for lack of marketability (DLOM). He would like feedback on the calculator, including suggestions for improvements, additional features desired, and possible extensions. You can access the calculator at dev.optionmodeldlom.com. Dr. Abbott’s contact information is on the calculator.

BIZCOMPS being upgraded with new platform

Users of BIZCOMPS will soon see a new look to the database of small private-company transactions. As of September 29, BIZCOMPS will be on a new platform that will provide new search capabilities, user-specific customization, and various export options. In fact, the platform is the same that is now used for DealStats, FactSet/BVR Control Premium Study, Guideline Public Company Comps Tool, and BVR’s Cost of Capital Professional. If you use any of those tools, you’ll already be familiar with the new BIZCOMPS platform, which will add helpful features and enhancements such as saved searches, deal alerts, and more. If not, you can watch a video that gives a preview of the updates if you click here.

VRC named M&A valuation firm of the year

Valuation Research Corp. (VRC) has been named Valuation Firm of the Year in M&A Advisor’s 14th Annual International M&A Awards. An independent judging panel of industry experts evaluated nominations representing over 250 individual companies from across the world. VRC won the award last year and has received the award a total of 11 times. For a full list of winners, click here.

NACVA adds to CVA and MFF ranks

The National Association of Certified Valuators and Analysts (NACVA) announced that 151 members recently earned their credentials (or are candidates). Of these members, 143 earned the Certified Valuation Analyst (CVA) credential (or are candidates) and eight members earned the Master Analyst in Financial Forensics (MAFF) credential.

According to a presentation given at its July conference, NACVA had 6,540 members at that time. The ASA stood at about 1,500 members with its business valuation credential, and the AICPA’s ABV credential came in at an estimated 4,000 members (see the September issue of Business Valuation Update for details).

CBV Institute opens registration for Student BV Challenge

The CBV Institute has opened registration for its Business Valuation Challenge, a national case competition for undergraduate students from top business schools across Canada. Student teams will compete with students from other universities in a test of their business valuation skills. Last year’s inaugural event was a “resounding success,” the organization reports, with 19 teams and 57 students from schools across Canada participating. CBV Institute will accept 25 teams into the competition, and a maximum of two teams per university can participate. The deadline to register is October 13, which is expected to fill up quickly, so it recommends that schools register their teams as soon as possible. More details are available if you click here. The actual event will take place virtually November 8-9.

Moran interviews IVSC Asia director Konialidis

The fastest growing part of the world for the valuation profession is the Asia-Pacific region, believes Ray Moran (FON Valuation Services), marketing director at the International Institute of Business Valuers (iiBV). He recently interviewed Nicolas Konialidis, the Asia director at the International Valuation Standards Council (IVSC). He is based in Singapore and noted that about a third of the IVSC’s member organizations are from the Asia-Pacific region. They also discussed the V20 (Valuation 20) Conference to be held October 27-29 in New Delhi. The Assessors and Registered Valuers Foundation (AaRVF) and the IVSC co-host the event. You can watch the video interview if you click here (the video includes links for more information on the conference). BVR is a media partner for the event.

What’s in the October issue of Business Valuation Update

Here’s what you’ll see:

• “Practical Considerations in Normalizing the Risk-Free Rate” (Ronald D. DiMattia). Some valuation firms and practitioners have advocated that the risk-free rate of return (Rf) should be normalized when it is believed to be too low because of Federal Reserve Bank policies. Recent arguments for doing so have been based on technical economic analyses but have ignored practical aspects of normalizing Rf. This article is intended to address those practical considerations.

• “Do Fairness Opinions Adequately Address Fairness to Shareholders?” (Gilbert E. Matthews). This article concludes that opinions that speak to fairness of an acquisition to a SPAC are inadequate when they do not consider the impact on unaffiliated shareholders.

• “Heat Maps for Valuing Venture-Backed vs. Closely Held Firms” (BVR Editor). During a recent BVR webinar, Joe Orlando (Exit Strategies Group) and Eric Sundheim (Mercovus Valuations) presented some heat map charts that illustrate the differences between the due diligence, tools, and approaches to valuing a venture-backed firm versus a closely held company.

• “Valuers Suggest Enhancements to AI-Powered PDF-to-Excel Tool” (BVR Editor). BVR recently partnered with Nambri Technologies to offer Nambri TaxXL, an advanced AI enterprise SaaS software application designed to convert PDF tax returns into Excel spreadsheets. During a recent demonstration webinar, valuation practitioners suggested some enhancements, which triggered some planned updates to allow for the application to handle additional tax forms.

• “New Book Offers Template for Assessing ESG Impact on Firm Value” (BVR Editor). Based on some case studies, a new book includes a template that summarizes steps in assessing whether ESG factors are material enough to integrate into a valuation. The book is Valuation and Sustainability—A Guide to Include Environmental, Social, and Governance Data in Business Valuation, edited by Dejan Glavas (ESSCA, School of Management, Boulogne-Billancourt, France), who also wrote several chapters.

• “Valuation Matters Highlighted in the Estate of Cecil” (Rajesh Khairajani and Kinjal Shah). A discussion and the valuation implications of several issues in this case: tax affecting an S corporation, applying an asset approach to value a going-concern business, reliance on a single comparable company, and discounts applied to arrive at per-share value.

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,” “FactSet Mergerstat/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: 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 October 2023 issue of Business Valuation Update.

BV movers . . .

People: The National Association of Certified Valuators and Analysts (NACVA) has named its outstanding members for the third quarter of 2023: Trisch Garthoeffner, ABV, CVA, EA, MAFF, MAcc, president of Anchor Business Valuations & Financial Services LLC (Naples, Fla.); and John E. Barrett Jr. CPA, ABV, CBA, CVA, MST, MBA, of Barrett Valuation Services Inc. (Cranston, R.I.).

Firms: Stout has acquired Torrey Partners, an economic, forensic accounting, and valuation services firm headquartered in San Diego with 25 professionals who provide expert analysis and discovery assistance throughout all phases of litigation, primarily in the areas of business, economic, marital dissolution, and intellectual property disputes … CliftonLarsonAllen LLP (CLA) has acquired Richards Witt & Charles LLP of Garden City, N.Y., a firm that provides a range of accounting services to businesses throughout the New York tristate region, with a focus on small and medium-sized automobile dealerships and restaurants … Eide Bailly has expanded its footprint in southern California by acquiring Torrance, Calif.-based Raimondo Pettit Group, which has 55 staff members in three offices; they provide audit, tax, business management, and financial consulting services.

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

CPE events

Private Equity Roll Up of Professional Practices Valuation Considerations, September 27, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Dean Driskell (J.S. Held) and Brandon McFarland (J.S. Held). CPE credits: 2.0.

This session will focus on private equity roll-up acquisitions of professional practices and the possible effect of these transactions on business valuation for various purposes (i.e., divorce, economic damages, gift and estate tax compliance, etc.).

FREE WEBINAR: Turn PDF Tax Returns Into Excel Spreadsheets in Minutes—TaxXL, October 3, 10:00 a.m.-10:50 a.m. PT/1:00 p.m.-1:50 p.m. ET. Featuring: Nataliya Kalava and Murali Minnah (Nambri Technologies). CPE credits: 1.0.

Nambri TaxXL—now offered by BVR—which converts PDF tax forms to Excel spreadsheets, will be demonstrated. The export feature from TaxXL will be used to perform a financial analysis of the subject company.