AI-generated George Carlin triggers right of publicity lawsuit

A “comedy AI” tool has created an “impersonation” of George Carlin that has triggered a lawsuit by his estate, claiming violations of the late comedian’s right of publicity and copyright, reports Variety. BVWire watched the video on YouTube, but it has since been removed (the estate asked the court to order it removed).

Harmless impression? Speaking at the beginning of the video, the AI tool, called Dudesy, says: “I listened to all of George Carlin’s material and did my best to imitate his voice, cadence and attitude as well as the subject matter I think would have interested him today.” Dudesy makes it clear that what you hear is an impersonation that was developed “the exact same way a human impressionist would,” such as Andy Kaufman doing Elvis (or Rich Little doing everybody).

This lawsuit is among the first of what is likely to be many that will involve AI-generated images that are alleged to run afoul of copyrights or an individual’s right of publicity.

The right of publicity is a form of intellectual property that covers not only a person’s name and image, but also the signature, voice, and so on. It is an issue that often is overlooked because of a lack of awareness. The concept does not only apply to famous people—the average person has the right of publicity, and it has a value. Fundamental valuation techniques are used, but it requires the judgment and experience of someone who works with the right of publicity regularly.

Learn more: One of the foremost experts in this area is Mark Roesler (markroesler.com), who worked on the valuation of rights of publicity for the estates of Prince, Michael Jackson, and others. Roesler explained his methodology for the Jackson case (in Tax Court) during a BVR webinar (recording available). He also wrote a chapter on the topic in BVR’s Comprehensive Guide to Economic Damages, 7th edition (Chapter 28, “Damages and Right of Publicity Infringements”).

Court KO’s market comp analysis due to industry choice

What business is your subject company in? That’s a fundamental question, but it could be a major stumbling block in a valuation—as a new case shows.

New case: In an Illinois divorce case, the husband and wife were equal partners in a company, iTouch Biometrics, which offers live scan systems (inkless, digital fingerprinting for law enforcement, schools, etc.). The software is not sold separately but is part of an integrated package that includes hardware, installation, maintenance, etc. (a web search shows the company’s SIC and NAICS codes are for business services).

The wife’s valuation expert used an “investment method” based on his M&A experience with software-based companies and came up with $5.1 million. The husband’s expert used a capitalized cash-flow analysis (single period) to value the company at $1.2 million, using the factors in Revenue Ruling 59-60 to back up his opinion.

Wrong biz: The trial court found that the wife’s expert did not establish that the company was primarily a software company, so his market comps were not valid. The court rejected his analysis entirely and found that the husband’s expert provided the “only credible fair market value opinion presented to the court with proper foundation and basis.” The wife appealed but she did not prevail.

The case is In re Marriage of Bornhofen; 2023 Ill. App. Unpub. LEXIS 2062, and a case analysis and full opinion will be available on the BVLaw platform.

Survey results: Data collection tools

More than two-thirds (78%) of valuation experts use an online tool to collect documents and other information from clients, according to the first in a series of “Two-Minute Practice Builder” surveys. Practice management advisor Rod Burkert (Burkert Valuation Advisors), who initiated the survey, points to one respondent’s comment as to the reasons why valuation experts use a portal: “One reason is encryption and security. The other is professional branding, looking tech savvy. The third reason is to give clients confidence in the firm.”

The respondents’ tool of choice is ShareFile, used by over a third of respondents (36%), with SharePoint coming in at second place (see chart below). In the “Other” category are Smartsheet, Drake, Egnyte, DealRelations, FileInvite, and Client Axcess.

ShareFile	36%
SharePoint	20%
Dropbox	8%
Suralink	8%
OneDrive	8%
Other	20%

Of those who are not currently using a file-sharing tool for client information, over half (55%) say they are considering one. In addition to the reasons stated above, one commenter said: “Clients increasingly expect us to offer/use a portal for information sharing.” Of those who are kicking tires, half of them are looking at SharePoint and others are considering Dropbox or JetPack (or are not sure). But one commenter noted that Dropbox is a problem due to “confidentiality/integrity concerns.” Another respondent extolled the virtues of Suralink as a “fantastic platform for secure data exchange. It provides status of each outstanding request and comments can be swapped to cut down on back-and-forth emails. Highly recommend.”

Our thanks to all who participated—and we will have a new survey on another topic in the next issue.

USPAP Q&A addresses AI

AI tools are not a substitute for an appraiser’s judgment. That’s one of the main takeaways from a recent series of Q&As regarding the Uniform Standards of Professional Appraisal Practice (USPAP). Regardless of whether a valuation expert is required to comply with USPAP, it contains some useful information. In the new Q&As, this question was posed: “What is an appraiser’s USPAP obligations when using artificial intelligence (AI) in an appraisal assignment?”

Reliance: “When using a computer assisted valuation tool, an appraiser must not simply rely on the output of technology without an understanding that the output is credible,” says the response. This also goes for the use of a chatbot tool (which, as we’ve seen, can “hallucinate”).

Confidentiality: AI tools can also cause an appraiser to run afoul of USPAP’s confidentiality rules with respect to client information. “Although an AI chatbot is not a person, creating an inquiry with a chatbot that includes confidential information may allow the chatbot to capture that information for responses to inquiries by other human users, or the chatbot developers.”

Additional USPAP guidance on this issue can be found in Advisory Opinion 18, Use of an Automated Valuation Model (AVM), and Advisory Opinion 37, Computer Assisted Valuation Tools in the Guidance and Reference Manual (GRM). USPAP is administered by The Appraisal Foundation (TAF), which has a task force that examines automated valuation models and has issued two white papers on the subject.

Reminder: The 2024 Pepperdine private cost of capital survey is open

Each year, Pepperdine University conducts an annual survey of expected rates of return with respect to private companies. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. For a direct link to the survey, click here. The results are used to produce the annual “Private Capital Markets Report,” which is free if you fill out the survey—plus, you’ll get it a week early. Reports from prior years are available if you click here.

To retain good BV people, give them a purpose, advises Borrowman

BVWire has heard from young BV professionals that they are sometimes in the dark about the work they are doing. It’s not that they don’t know their job; it’s that they don’t know how it fits into the bigger picture. They urge managers and supervisors to give them this context about the work they are doing.

Give a purpose: This underscores the good advice given by recruiter John Borrowman (Borrowman Baker LLC), who has been sourcing talent in the business valuation and litigation support areas for over 20 years. “Your team members naturally seek purpose in what they do,” Borrowman writes in in his latest newsletter. “They want to understand how their work contributes to your deliverable. They want to know where and how they fit in. They don’t have the bird’s-eye view that you have. It would help if you shared it with them. Purpose-driven employees are more likely to stay and do their best.”

In addition to giving them purpose, two other elements will help with retention: autonomy (trust their abilities) and mastery (encourage new challenges), which Borrowman explains further in his newsletter.

Connelly case kicks off Heckerling conference

At the Heckerling Institute on Estate Planning in Orlando, Fla., earlier this month, the first session was a panel on key court cases of 2023, and “valuation was top of mind for many federal courts,” according to coverage in WealthManagement.com. Connelly v. United States was front and center—this is the case the U.S. Supreme Court will hear to resolve a circuit split. The question to be resolved is: How should corporate-owned life insurance (COLI) designed to fund the redemption of a deceased shareholder’s stock impact the fair market value of the subject company and the value of the decedent’s gross estate? A complete analysis of the valuation issues in the case by Roger Grabowski (Kroll) is in the January issue of Business Valuation Update.

The panel at Heckerling also discussed the Cecil case on tax affecting (a case that should be very familiar to valuation experts) and Schlapfer, a Tax Court case that was a “huge victory” for the taxpayer over the adequate disclosure issue.

Damodaran posts his second data update for 2024

Focusing on the equity markets in the U.S. and across the world, Professor Aswath Damodaran (New York University Stern School of Business) has posted his second data update of 2024. He notes that the “mood has shifted” in the past year and the 2024 outlook is “much sunnier, with the consensus shifting to a soft landing and inflation largely under control.” But he sees a “challenge for equity market investors” and concludes that stocks are “overvalued by about 9%, to start the year.” In his post he has links to two datasets:

• Historical Returns on Stocks, Bonds, Gold, and Real Estate (1928-2023); and
• Historical Implied Equity Risk Premiums and Expected Returns (1960-2023).

Also, he provides two spreadsheets:

• Implied ERP calculator—Jan. 1, 2024; and
• Valuation of the S&P 500 on Jan. 1, 2024.

You can read his post (and see his video) if you click here.

Court figures fair value of startup biotech for dissenters

In a dissenting shareholder case in a federal district court in Georgia, neither the Black-Scholes method nor the prior transactions method convinced a court of the value of a startup biotech company. The company, which never generated any revenue, notified shareholders of a sale of certain assets and a joint venture. The company offered shareholders 15 cents per share, but the dissenters asked for $1.25.

Unpersuaded: In court, the company’s valuation expert came up with 21.7 cents per share using a “novel application” of the Black-Scholes model. The dissenters’ expert estimated the fair value to be $1.19 per share based on two prior transactions of the stock. The court was not persuaded by either expert and came up with its own estimate of 56 cents per share based on what existing shareholders had paid in the past.

The case is Abeome Corp., Inc. v. Stevens, 2023 U.S. Dist. LEXIS 220302 (Dec. 11, 2023), and a case analysis and full opinion are available on the BVLaw platform.

2023 NACVA Porter Award recipient gives back in a big way

A few years ago at a conference, BVWire had the pleasure of chatting with J. Richard Claywell, a Houston practitioner who has been providing business valuation and forensic accounting services since 1985. He has a “few credentials,” namely the CPA, ABV, ASA, CBA, ICVS, CVA, MAFF, CFD, ABAR, CVGA, MBV, and ICVS-A. While we talked, we noticed a logo of a helicopter on his shirt, so we asked him about it. It was the logo of the Vietnam Dustoff Association. After being prompted, Claywell told us some incredible accounts of his time as a medic during the Vietnam War and flying in on helicopters to evacuate and treat wounded comrades while dodging enemy fire. He is on the board of the association, which organizes reunions and provides “a safe haven for emotional healing as may be necessary,” according to its website.

Claywell’s spirit of giving back applies to the valuation profession as well, which is one reason why he is the 2023 recipient of the Thomas R. Porter Lifetime Achievement Award. This award is given to a NACVA member who has demonstrated exemplary character, leadership, and professional achievements to NACVA and the industry. Always willing to help colleagues, Claywell has taught at various educational institutes and universities and has been published in several publications. Over the years, he has volunteered on boards and committees at NACVA, starting in its very early years. Michael Kaplan and Lari Masten talked with Claywell and presented him with the award, and you can watch the video if you click here.

Last call! Take a survey on data collection tools

Please take a two-minute survey about the use of portals to collect client data. We will publish the results in next week’s BVWire. To take the survey, click here. This survey—and others we’re planning—will augment BVR’s Business Valuation Firm Benchmarking Guide, which examines many practice management issues and allows firms to see what works for their peers. Our thanks to all of you who already participated!

One-on-one encounters make attending live conferences a unique experience

In today’s world, some people may automatically choose the “attend virtually” option when registering for a conference, or they may want to attend in person, but there’s not enough in the travel budget to allow for it. But attending in-person has unique benefits that can easily outweigh the cost.

Case in point: At the recent NACVA super conference in Fort Lauderdale, Fla., we were chatting with a young practitioner who was “ecstatic” over being able to talk shop with Dan Van Vleet (The Griffin Group), who co-presented a session on S corp valuations at the conference (with his colleague Bill McInerney). The Van Vleet model has prevailed in several recent cases about tax affecting S corps. They spent time together during one of the several networking opportunities over the two-day event. From the way the attendee talked, the chat the two had was the highlight of his conference experience—which cannot be replicated in a virtual environment.

Conference speakers are very generous with their time and advice, and they typically stay for the entire event, so there are many opportunities to interact. These events draw the very top thought leaders in the BV world, so it’s a rare chance to rub elbows with these esteemed professionals. Make it a resolution for the new year to attend at least one in-person event—you’ll be glad you did.

Global BV News

Webinar series explains IVS update

Next month, the International Valuation Standards Council (IVSC) will host a series of webinars exploring the latest and most significant updates to the International Valuation Standards (IVS), which are set to be released at the end of this month. During these webinars, you can interact directly with IVSC’s technical staff and standards board representatives. The first webinar will be on February 5, and you can register if you click here.

Damodaran posts his first data update for 2024

At the beginning of each year, Professor Aswath Damodaran (New York University Stern School of Business) generously posts a great amount of data on his website that include risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and other data—all of which are free. He does a series of posts on his blog based on these new data, which contain his thoughts on what the data are best suited for and some caveats for users. His first post explains some of these data and gives the background of his annual analysis and contains links to his data.

Implied ERP of 4.60%: For the ERP, Damodaran favors a forward-looking method known as the “implied” ERP as opposed to the “historical” ERP. He backs this number out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond. He estimates the implied ERP in the U.S. to be 4.60% as of Jan. 1, 2024 (trailing 12-month cash yield).

Extra: Damodaran’s data on implied ERPs as well historical ERPs are included in the BVR Cost of Capital Professional platform (his data are used with his permission; he has no formal role or connection with BVR).

Hitchner’s ‘myth busters’ tackle two more issues

Jim Hitchner (Financial Valuation Advisors) and his team of fellow AICPA BV Hall of Fame alumni have taken on two more BV myths in his December issue of Hardball With Hitchner. Myth No. 6 on their list is this: “There are supportable methods for determining the optimal capital structure of a business.” He goes through some common methods for doing this, such as taking an average of the capital structures of guideline public companies, and concludes that these methods “are not always valid or supportable.”

Can be done: BVWire points out that, while it is true that there is no way to calculate the capital structure precisely that will maximize firm value, firms routinely determine a target capital structure by looking at a variety of factors (too many to discuss here). Once they determine the approximate proportion of debt and equity that is best given their circumstances, investment decisions are made accordingly, i.e., investments are financed in roughly the same proportion. Using these same factors (Hitchner discusses a few of them), the analyst can provide some level of support for an estimate of an optimal capital structure.

On to Myth No. 7, which is this: “The Hamada formula is the correct method to unlever and relever betas to account for differences in capital structures.” The formula is commonly used when valuing a company using public-company betas, which must be adjusted to the capital structure of the subject company. He cites several sources and texts in busting this myth, but he points out that it “can still be used in many instances.”

The other members of the myth-busting group are: Harold Martin (Keiter), Ron Seigneur (Seigneur Gustafson LLP), Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC), Ed Dupke (Dupke Consulting LLC), and Jim Alerding (Alerding Consulting LLC).

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

Kroll conducts survey of cost of capital inputs

In the last issue, we presented results of several surveys on the various resources practitioners use for estimating cost of capital. Another perspective comes from Kroll, which recently had a webinar during which it polled the audience of 706 participants on several topics (15% of the audience consisted of Kroll employees). One question was: “Which methods/data sources do you use as the equity (market) risk premium (ERP) input in your cost of equity estimates?” Here are the results (respondents could select all that applied):

Kroll U.S. Recommended ERP	58.5%
Long-term historical average, published by Kroll	35.7%
Professor Damodaran’s implied ERP	23.7%
Supply-side ERP, published by Kroll	22.0%
Other historical or implied ERP sources (e.g., Market-Risk-Premia.com)	14.7%
Other/not applicable	13.5%
BVR Cost of Capital Professional	9.0%
Professor Pablo Fernandez’s survey of ERPs	4.1%

Poll results on other topics include:

• The percentage of survey participants who conducted valuations primarily based in North America was 78.4%;
• The percentage of survey participants who anticipate a recession will occur in 2024 in their home country was 43.3%;
• Thirty-eight percent of respondents are planning to start considering ESG factors in their valuations; and
• More than half (50.8%) of the respondents incorporate country risk adjustments directly in their discount rate estimates.

For more details, Kroll put together a survey report of the findings, and it is available if you click here. The webinar was conducted by Carla Nunes, managing director of valuation advisory services, and Jim Harrington, director of valuation services, both with Kroll. A replay is available if you click here.

The 2024 Pepperdine private cost of capital survey is now open

It’s that time again! Each year, Pepperdine University conducts an annual survey of expected rates of return with respect to private companies. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. For a direct link to the survey, click here. The results are used to produce the annual Private Capital Markets Report, which is free if you fill out the survey—plus, you’ll get it a week early. Reports from prior years are available if you click here.

Do you use a portal to collect client data?

We’d like to know—and so would your peers. Please take a two-minute survey about this topic, and we’ll present the results here when we get a good response rate. To take the survey, click here. This survey—and others we’re planning—will augment BVR’s Business Valuation Firm Benchmarking Guide, which examines many practice management issues and allows firms to see what works for their peers. Our thanks to all of you who already participated!

DealStats Hall of Fame members for 2023

Business brokers and other intermediaries generously contribute data to DealStats, making it the leading database of private-company and public-company M&A transactions. Individuals who send in the most transactions are inducted into the DealStats Hall of Fame, and the inductees for 2023 are:

• Jim DeShayes, Colorado Business Exchange (Fort Collins, Colo.)
• George Lanza, Plethora Businesses (Orange, Calif.);
• Neil Gerritsen, Alberta Business Sales Inc. (Edmonton, Alberta, Canada);
• Lance Schmidt, National Business Appraisers and Brokers (Mission Viejo, Calif.); and

• Teija Heikkila, National Kennel Sales & Appraisals (Grand Junction, Colo.).

BVR wishes to thank these individuals and all of the others for their outstanding contributions. If you or someone you know would like to join the DealStats Contributor Network, please click here.

Global BV News

The Winter 2023 edition of EVBM is now available

The European Association of Certified Valuators and Analysts (EACVA) and the International Valuation Standards Council (IVSC) have released the latest edition of the European Business Valuation Magazine (EBVM). The publication is free of charge and is intended to be a European platform to discuss practice issues in business valuation. The Winter 2023 issue features these articles:

• “Analytics on the Structuring and Pricing of Preferred Shares” (Dr. Christoph Engel, CFA, CVA);

• “Spanish Valuation Practice in a Nutshell” (Jesús Valero and Fernando Rojas);

• “Industry Betas and Multiples (for Eurozone Companies)” (Martin H. Schmidt and Andreas Tschöpel);

• “Transaction Multiples (Eastern Europe)” (Stefan O. Grbenic);

• News from IVSC;

• News from EACVA; and

• Interview: Christian Luft (chair, IVSC Europe Committee).

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

Save the date: June 20-21 for CBV Connect 2024

CBV Connect 2024, hosted by the CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter, will be held at The Bonaventure in Montreal. This is always an excellent event, and BVWire attended last year—you can see some of our coverage here and here. Details on registration and the agenda will be forthcoming.

What’s in the February 2024 issue of Business Valuation Update

Here’s what you’ll see:

• “AI Concerns, Experiments Highlight NACVA Confab” (BVR Editor). This is a recap of several interesting sessions at the December NACVA Business Valuation & Financial Litigation Super Conference in Fort Lauderdale, Fla. The sessions discussed ethics issues and presented some demonstrations of how to leverage AI in a valuation practice.

• “What Valuers Should Do While SCOTUS Mulls Connelly” (BVR Editor). Regardless of how the U.S. Supreme Court rules in the Connelly case, there are some steps valuers can take to better help their client business owners, many of whom could be sitting on ticking time bombs. The issue before SCOTUS is how does corporate-owned life insurance designed to fund the redemption of a deceased shareholder’s stock impact the fair market value of the subject company and the value of the decedent’s gross estate.

• “Two Ways to Treat the Vanishing Bonus Depreciation Tax Break” (BVR Editor). Michelle Gallagher and Nathan Olberding (both with Adamy Valuation) present a nice example of how to consider the sunsetting of the bonus depreciation rules in a valuation. The rules were enacted by the Tax Cuts and Jobs Act (TCJA).

• “Quality Control Is Now the No. 1 Concern of BV Firms” (BVR Editor). What keeps business valuation firm managers up at night? Mostly, they worry about maintaining control over the quality of the work product, according to the Business Valuation Firm Benchmarking Guide. This article presents the other top concerns.

• “‘Very Useful’ MPF Will Be Reissued in Revamped Form” (BVR Editor). Even if you do not practice in the area of fair value for financial reporting, valuers should take notice of a document that will be going out for public comment from the AICPA. The document is a revised version of the Mandatory Performance Framework, which was issued in connection with the Certified in Entity and Intangible Valuations (CEIV) credential, which was discontinued last year.

• “A Wealth of Rules of Thumb in the 2024 Business Reference Guide” (BVR Editor). At a recent conference, an audience member asked top valuation thought leader Gary Trugman (Trugman Valuation): “Do you use rules of thumb in your valuations?” He replied: “Absolutely! But only as a sanity check.” A good source of rules of thumb is the Business Reference Guide, which has been updated for its 2024 edition.

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/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.

BVR survey reveals COE data sources of choice

While the Kroll Cost of Capital Navigator continues to be widely used and accepted for estimating cost of equity (COE), BVR’s Cost of Capital Professional has been gaining considerable steam since its launch in 2018, according to a BVR survey. Some other resources for estimating the cost of capital have also seen an uptick in usage.

Pecking order: A question in the Business Valuation Firm Benchmarking Guide, 2023 Edition, asked: “Which of the Following Resources Do You Use to Estimate the Cost of Capital? (check all that apply.)” Kroll’s Navigator topped the list, at 74%, and the Cost of Capital Professional followed, at 35% (see table). The survey was conducted during May 2023-July 2023 and had 192 respondents. 

The 2018 BVR survey was done before the launch of the Cost of Capital Professional, but there have been other surveys since then. Jim Hitchner (Financial Valuation Advisors Inc.) has done regular surveys since 2019, finding that the Navigator has an 88% average usage rate versus 22% for the Cost of Capital Professional (click here for coverage). In the current BVR survey, the use of the Pepperdine studies and Damodaran’s data saw slight increases in usage, while the SBBI Yearbook showed a marked decline. Of course, all surveys have different sizes, demographics, and populations.

More steam? Given the recent hefty price increase for the Navigator, we would expect that the usage gap between the Navigator and the Cost of Capital Professional will continue to narrow. Also, more practitioners may look to the Pepperdine and Damodaran sources, which are free or of minimal cost. And, of course, this all depends on the level of price elasticity in the marketplace.

In any event, the Cost of Capital Professional has emerged as an effective lower-cost alternative for practitioners who do not need all the features the Navigator provides. Also, the two platforms (as well as the Pepperdine studies) produce “very close” results, according to tests Hitchner made. The question of “which source is best” is up to users to decide. The surveys show that some practitioners use several sources and compare the results, which is a welcome option for a process that is not perfect.

Valuation of business hit by COVID-19 in recent divorce case

If you haven’t done so already, sooner or later you will value a business affected by COVID-19. What do you do with several years of historical performance that the virus negatively impacted? Ignore those years? Assume the business will rebound? This was the issue in a recent divorce case in Arizona.

Typical scenario: The husband owned a construction company that had just one client: a company that owned and operated a number of hotels. During the height of COVID-19, the client sold off several of its hotels, putting a dent in the husband’s company’s revenue. Plus, the company stopped servicing several other of the client’s hotels (apparently due to the COVID-19-induced slowdown in travel).

In valuing the company, the husband’s valuation expert treated the prior years’ financials as outliers due to COVID-19 and used the current year for the numerator of a capitalized cash flow (CCF) analysis. The wife’s expert did not do that—he used an average of the past three years as his numerator for the CCF, three years that included pre-COVID-19 higher revenues. He justified this by saying that industry prospects “looked positive,” implying that the company could make up for the lost business. Of course, the two valuations were “wildly different.”

A court accepted the three-year look back and the wife’s expert’s higher valuation. The husband appealed, contending that those three years were impacted by COVID-19 and were not representative of future cash flows, which is what the numerator is supposed to represent. He argued that the numerator should be the current year’s cash flows, which represents the effects of the lost business going forward. But the appellate court affirmed the trial court’s decision, saying it did not “abuse its discretion.”

The case is Dawson v. Dawson, 2023 Ariz. App. Unpub. LEXIS 1003, and a case analysis and full court opinion will be on the BVLaw platform.

BVR kicks off ‘Two-Minute Practice Builder’ surveys

As any profession matures, the issue of practice management becomes more critical. Management and administrative issues that took a back seat when riding a growth wave must be dealt with when the landscape gets more competitive. BVR’s Business Valuation Firm Benchmarking Guide examines many practice management issues and allows firms to see what works for their peers. As a continuation of this project—and to delve deeper into certain areas—we’re kicking off a series of regular minisurveys with the help of Rod Burkert (Burkert Valuation Advisors), a former valuation practitioner who now devotes his time to helping others build their practices.

First one: Do you have a client “portal” to collect engagement information and documents? If so, what portal app or software are you using? Please answer these few questions by clicking here—it will take just two minutes. We’ll present the results here when we get a good response. Thanks for helping us help you!

AI studies top several McKinsey lists for 2023

Of interest to valuation experts are two works from McKinsey that examine artificial intelligence (AI). One is a report that we mentioned in an earlier issue that ended up as its No. 1 best-read report, “The Economic Potential of Generative AI: The Next Productivity Frontier,” which is available if you click here. A key takeaway of this report is that four areas of a company—customer operations, marketing and sales, software engineering, and research and development—could account for about 75% of the value that using generative AI could deliver.

The other is McKinsey’s survey, “The State of AI in 2023: Generative AI’s Breakout Year,” which ended up at No. 1 on its best-read survey list. The survey reveals the significant effects respondents expect on their industries and workforces. Some survey respondents reported that at least 20% of their EBIT in 2022 was attributable to AI use. Also, more than two-thirds of respondents say they will increase their investment in AI over the next three years. You can access the survey if you click here.

AI is a major trend that can impact a firm’s cash flow, growth, and risk, so analysts must consider it when valuing a company.

Global BV News

Kroll examines industry multiples in China

An analysis of the trading indices across various key industrial sectors in China as of Sept. 30, 2023, is contained in Kroll’s Industry Multiples in China 2023 report. Here are some highlights:

·         Consumer discretionary.Trading multiples surged as the sector experienced a post-pandemic upswing. Profits more than doubled, and revenue and market capitalization recovered to prepandemic levels, indicating a robust recovery.

·         Consumer staples.This sector witnessed a resurgence in net income, although trading multiples decreased year on year.

·         Information technology.This vertical saw an increase in trading multiples due to a fall in net earnings. However, total revenues in the industry experienced a slight recovery, fostering optimism for a more competitive IT sector.

·         Financial services. This sector demonstrated resilience despite distress in the property market, with trading multiples indicating confidence in its future prospects.

·         Real estate.There are challenges in this sector, but the data suggest a slight recovery in net revenue. However, trading multiples reflected a decline in net earnings, influenced by high inflation and interest rates.

·         Other sectors,such as materials, energy, and utilities, presented mixed signals, with varying performances and prospects.

To download the full report, click here. 

Delay in divorce decree does not change valuation date

In a Montana divorce case, the husband became an owner of a business right before marriage. When the couple divorced, the business was valued at $2.2 million, which the wife did not contest at trial. The court took three years to issue the final divorce decree. In the meantime, the business catapulted in value, and the husband got an offer to sell the business for $24.5 million.

Do over? The wife argued that the valuation date should be the date of the final decree, not the date of trial. Of course, this would give her a share of the huge increase in value of the husband’s business. But the appellate court disagreed, finding that “unique circumstances” call for the valuation date to be the date of trial. The wife had cleared out of the family home right after the trial and moved to California, and she had no involvement with the business. Also, the husband should not be penalized because of the court’s three-year delay in issuing the final decree.

The case is In re Marriage of Remitz, 2023 MT 212N; 2023 Mont. LEXIS 1105, and a case analysis and full court opinion will be on the BVLaw platform.

Update on guidance regarding the company-specific risk premium

Expect to see an exposure draft of guidance on the company-specific risk premium during the first half of 2024, reported Christopher Armstrong (KPMG), at the winter edition of the ASA’s Fair Value Conference last week. He is part of the group developing the guidance, and there will be a public comment period, he noted.

Preview: The group has issued a brief (click here) that provides a summary outline of certain key areas that will be explored in greater detail in the upcoming guidance, such as specific procedures for assessing discount rates and prospective financial information (PFI), as well as identifying and quantifying the elements of a CSRP. The guidance, which is voluntary, will be in the form of a Valuation in Financial Reporting (VFR) Advisory from The Appraisal Foundation (TAF).

Ray Rath (Baker Tilly US LLP) was the conference chair, and other topics included the future revision of the Mandatory Performance Framework (from the now-sunset CEIV credential), discount rates and volatility for contingent consideration, fair value audits, and the latest on the AICPA business combinations guide. Beside Armstrong, speakers included Marianna Todorova (Kroll), Mark Smith (AICPA), Mark Zyla (Zyla Valuation Advisors), Gary Roland (Kroll), Mark Edwards (Grant Thornton), Amanda Miller (EY), and Vincent Covrig (Crowe LLP). More coverage will be in a future issue of Business Valuation Update.

Practice opportunity: Buy-sell agreements

A “vast opportunity” for appraisers can be found in buy-sell agreements, according to Jeff Tarbell (Houlihan Lokey) and Riley Busenlener (Chaffe & Associates Inc.), who is also an attorney. They conducted a session on buy-sell agreements at the 2023 American Society of Appraisers International Conference recently in New Orleans.

Poorly drafted (if at all): Many closely held companies do not have these agreements in place, which allow for transfers of interests when an owner exits the business due to some triggering event, such as retirement, death, divorce, and the like. And when they are in place, they are typically poorly drafted when it comes to addressing the value of the firm at a triggering event and the selection process for the appraiser. Opportunities exist for appraisers to help draft the valuation provisions in the agreements and when a valuation is needed in the future.

The speakers gave some basic background info on these agreements and their impacts on valuation, one obviously being that they impact marketability discounts to some extent. It’s important to be very specific about certain things, such as triggering events, which can be tricky (e.g., what constitutes a “disability”). The panel mentioned that they rarely see anything in buy-sells that talk about the qualifications of the appraiser to be chosen or any specific standards that need to be followed for the valuation. One idea they felt was a good one was that the buy-sell can use the “qualified appraisal” definition in the tax law’s Section 170 concerning charitable contributions.

Coverage of more sessions at the conference is in the December issue of Business Valuation Update.

Need to value a stadium seat license?

Often overlooked by estate professionals or dismissed as having no value, sports stadium seat licenses have an active public market that can be used as a starting point for a valuation, according to Jackson Crispin (Willamette Management Associates) in a recent article. For example, STR Marketplace offers fans the ability to sell or transfer seat licenses, and these markets frequently report transaction data. Not all sports teams allow their seat licenses to be sold in these marketplaces, and, even when they do, there are other valuation considerations, such as the location of the seats, outliers in the data (e.g., for a major rivalry game), transfer restrictions the teams impose that can trigger a marketability discount, and more, Crispin points out. The article appears in the October 2023 issue of Willamette’s Perspectives, which you can read if you click here.

Kroll releases Valuation Insights Q4 2023

In the Q4 2023 edition of Valuation Insights, Kroll experts provide a recap of current global economic and financial market conditions and discuss the implications of a higher cost of capital on valuations, M&A, and IPO markets in the fourth quarter of 2023 and 2024. There is also a look at SPACS (1H23 highlights) and market multiples for North American and European industries. To access the full issue, click here.

Preorder deal on the 2024 Business Reference Guide

The 2024 print edition of the Business Reference Guide (BRG) by Tom West is now available for preorder at a 20% savings if you click here (valid through December 31). Now in its 34th year, it contains the latest industry-related information including “rules of thumb,” pricing tips, benchmarking information with comparison data, industry resources, and general industry data on nearly 700 types of businesses. There is also an online version with a fully searchable database, and it includes the print version of the guide. The print edition will be available in February 2024.

Global BV News

‘Landmark’ update to IVS approved

Two years in the making, the International Valuation Standards Council (IVSC) has unanimously approved the forthcoming edition of the International Valuation Standards (IVS), set for release in January 2024. The “landmark” update represents a “significant evolution in the IVS,” the organization said in a statement. Some sections, particularly IVS 500—Financial Instruments and IVS 104—Data and Inputs, have been extensively updated. Also, the 2024 edition will feature improved navigation and integrated digital tools, “making it the most accessible and intuitive IVS to date.” When the new version is released, the IVSC will host a series of complimentary webinars on the changes.

Do-over case may need an active/passive appreciation analysis

In an Alaska divorce case, an appellate court remanded the case back to the state’s Superior Court because the findings on the husband’s business as marital property were not detailed enough to allow for appellate review.

Biz mash-up: Several businesses were involved, some started before the marriage and some after the marriage, and the lower court treated them all as one entity and classified them as marital property. The husband argued that his business was separate property and was started prior to the marriage and was simply expanded during the marriage by the other businesses. The appellate court agreed that the lower court erred in classifying one of the businesses as started during the marriage and sent the whole matter back to the lower court to do a more thorough analysis. For businesses started prior to marriage, an analysis may have to be done to separate active and passive appreciation in the business value during the time of the marriage.

The case is Lymburner v. Axhelm, 2023 Alas. LEXIS 106; 2023 WL 7017099, and a case analysis and full court opinion are on the BVLaw platform.

Extra: There is an online application that produces a passive appreciation factor on a national level for businesses in the retail sector. It was developed by Dr. Ashok Abbott (West Virginia University) and is available if you click here. Feedback on the app is welcome!

Even more takeaways from the AICPA FVS confab

In the last two issues, we presented some takeaways from the first two days of the AICPA & CIMA Forensic and Valuation Services (FVS) Conference in Las Vegas last month. There were over 60 sessions to choose from over the three days, and here are some things we learned on the third day:

• For estate/gift tax valuations, to meet the adequate disclosure requirement, the IRS should be able to replicate your conclusion of value;

• Over a third of attendees of a brand valuation session say they have the most success with the ktMINE royalty rate database;

• As for R&D at software companies, it’s easier to treat it as capex than leaving it in as an operating expense;

• A perfect storm of issues is looming over the cannabis industry: lack of reform and declining demand for the product on top of rising interest rates and inflation;

• In a poll, two-thirds of attendees say their most common areas of practice are family law and gift and estate work;

• Another attendee poll found that the most common error in valuation is a failure to normalize earnings properly; and

• In misappropriation of trade secrets cases, reasonable royalty is the damages measurement used the least (prevailed in only four cases in recent years).

We will have expanded coverage of the conference starting in the January issue of Business Valuation Update. Next year’s FVS conference will be in Dallas at the Hyatt Regency, Oct. 28-30, 2024.

M&A buyers get over 50% of synergy value, per MARKABLES study

When one company buys another, it’s a 1 + 1 = 3 deal because of synergies. The target company is worth more than its market cap (or estimated fair market value) because of what the acquirer can do with it. Of course, sellers know this and try to hike the price up to capture as much of that differential as possible. Historically, it’s been about a two-thirds-one-third split, with the buyers forking over about a third of the value of the synergies to sellers. But this split is now about 50-50, and a new study from MARKABLES confirms this.

New study: A MARKABLES analysis of data from 605 public takeovers between 2010 and 2022 finds that the buyer gets between 56% and 58% of synergies, depending on the calculation method. This confirms findings in similar research done by the Boston Consulting Group. This is all discussed in an article, “Synergies in Accounting and Valuation,” by Christof Binder, co-founder of the MARKABLES database. The article is available if you click here.

This interesting article provides insights and empirical data on how synergies are viewed, quantified, and used today across different groups of stakeholders. It also discusses the current initiative of the International Accounting Standards Board (IASB) to improve disclosures about synergy.

Global BV News

Global ‘key players’ in valuing intangibles per QYResearch

QYResearch has published an updated research report on the global market for valuation services for intangible assets. According to the table of contents of the report, “Global Intangible Assets Valuation Service Market Research Report 2023,” it contains analyses of the size of the market, competition, segmentation, dynamics, and profiles of what it calls the world’s “key players” providing valuation services for intangible assets. It’s interesting to note that these profiles also include the revenue and gross margins these firms generate from valuing intangible assets. The report lists the sources of these data as “secondary sources, expert interviews and QYResearch, 2023.”

The report identifies the key players as: Ernst & Young, Deloitte, Duff & Phelps (now Kroll), EverEdge, KPMG, PwC, Roma Group, Valuation Services Inc., Management Planning Inc., IRE, Appraisal Economics, H&A, Cambridge Partners, MARKABLES, and Value Management & Options Corp.

Reminder: IVSC seeks board members

The International Valuation Standards Council (IVSC) is seeking applications for roles on three of its technical standards boards, with two openings on each of the Tangible Assets Board, Business Valuation Board, and Financial Instruments Board. The new board appointees will start their terms in the second quarter of 2024. Applications can be submitted online through the IVSC website, and the closing date for applications is December 18. For more information, click here.

IVSC chair Alistair Darling has died

Alistair Darling,chair of the International Valuation Standards Council Board of Trustees (IVSC), has passed away. “Today marks the loss of a remarkable leader and a good friend to myself and the valuation community,” said Nicholas Talbot, IVSC chief executive. “Alistair Darling’s wisdom and guidance as the Chair of the IVSC were invaluable. His advice, always given with generous spirit and deep dedication, has profoundly shaped our organization for the better. Alistair had a unique ability to lighten challenging moments with his humor and wit, reminding us of the joy in our work. His presence was not just professional but deeply personal to all who knew him. I am personally grateful for his good humor and mentorship and will miss him immensely. His legacy at the IVSC will endure and continue to inspire us all.”

More takeaways from the Las Vegas AICPA FVS conference

In the last issue, we presented some takeaways from the first day of the AICPA & CIMA Forensic and Valuation Services (FVS) Conference in Las Vegas earlier this month. There were over 60 sessions to choose from over the three days, and here are some things we learned on the second day:

• The keynote speaker, a “focusologist,” reported that 70% of the workforce is disconnected and disengaged (“the way we’re working is not working”)—one major fix is to give more feedback to staff;
• The AICPA set up a university task force to raise awareness among students of the FVS profession;
• There is no need to use a normalized risk-free rate (for now at least) because we are now back to more normal conditions;
• For economic damages, the tricky part is segregating losses from the alleged bad act from losses resulting from other factors—a causation analysis is the key (the expert should never opine on causation, but it’s fine to discuss indicia of causation);
• In a litigation matter, if you get documents dumped on you at the last minute, ask for more time, but, if you don’t get it, footnote it and reserve the right to do a supplement to your report; and
• If a business owns its real estate, the cleanest way is to treat it as an excess asset with the business just renting at market prices.

We’ll have takeaways from the third day in the next issue, and there will be expanded coverage starting in the January issue of Business Valuation Update.

Next year’s FVS conference will be in Dallas at the Hyatt Regency, Oct. 28-30, 2024.

Noncertified occasional valuer is not a qualified appraiser, per Tax Court

For tax purposes, the most important requirement under the qualified appraisal rules is that the valuation be done by a qualified appraiser. The requirements are set out in Section 170 of the tax law and related regulations. A qualified appraiser is one who either has relevant credentials or enough experience. But how much experience is enough? A new case gives some guidance.

New case: In a Tax Court case involving a charitable contribution of shares in a closely held corporation, an investment banker did the valuation. He had no certifications from any professional appraiser organization and testified that had done valuations only “on a limited basis” just a year before the engagement. He also said that, at the time of the trial, he was performing business valuations for prospective clients “once or twice a year” (presumably gratis) to solicit their business. The court ruled that the investment banker was not a qualified appraiser, so the donors are not entitled to a charitable tax deduction.

There were other defects in the valuation report and other issues in the case, which is Hoensheid v. Comm’r (In re Estate of Hoensheid), T.C. Memo 2023-34, and a case digest and full opinion are available on the BVLaw platform.

Catch up on the ASA conference via recordings

We attended the ASA 2023 International Appraisers Conference in New Orleans but could not get to every session we wanted. Fortunately, the ASA makes recordings of the sessions available if you click here. Here are a few things we learned from listening to some of the recordings:

• A new study shows that customer concentration does not automatically mean higher risk—it depends on the strength of the relationships with those customers;
• When thinking about hypothetical buyers for a going-concern business, the likely buyers are those with the greatest expected synergies;
• The tax break from identifying personal goodwill when a business is sold is so significant that the IRS automatically red flags transactions that make a personal goodwill election;
• Don’t assume your business as a sole practitioner does not have value, even with nonrecurring revenue—and there are alternate payment arrangements that can be done with the buyer;
• Buy-sell agreements represent a “vast opportunity” for appraisers to help draft certain provisions and to perform valuations when needed; and
• How useful are ESG ratings in valuation? Anheuser-Busch would have received high ESG scores for embarking on its woke promotion for Bud Light, but look what happened (Kellogg’s Froot Loops is the latest brand to come under fire for its wokery).

Of course, being in-person at the conferences is the optimal experience (we learn a lot outside of the actual sessions), but the recordings are the next best thing. Next year’s ASA conference will be in Portland, Ore., Sept. 15-17, 2024.

New issue of Willamette’s Perspectives is released

The October 2023 issue of the quarterly digital publication Perspectives, from Willamette Management Associates, has been released, and you can access it if you click here. This publication replaced the firm’s Insights publication, and the articles in this latest issue are:

• ·         “Preferred Equity in a Rising Interest Rate Environment” (Ben R. Duffy and Jacob L. Hudson);
• ·         “Considerations for Valuing the Stadium Seat Licenses of Sports Teams for Estate Tax Purposes” (Jackson Crispin); and

• “Convertible Bonds as a Component of a Company’s Capital Structure” (Keegan M. Pando and Weston C. Kirk). Kirk also served as editor for this issue.

December super conference in Florida from NACVA

The year 2023 will go out with a bang with the last major conference of the year: the NACVA Business Valuation & Financial Litigation Super Conference that runs from December 14 through December 16 virtually and in-person from Fort Lauderdale, Fla. There are over 40 sessions in four tracks, and you can attend the full conference or just one (or more) sessions with the á la carte option when you attend virtually, and each session you choose is $110 ($99 for NACVA members). Up to 30 CPE hours are available. You can find more information and how to register if you click here.

Global BV News

Here are the winners of the BV Challenge in Canada

The CBV Institute has announced the winners of its second Business Valuation Challenge, a national case competition for undergraduate students from top business schools across Canada. The competition saw 21 teams (69 students) test their business valuation skills, and here are the top three teams:

• British Columbia Institute of Technology (BCIT): Paul De Blois, Maya Khera, Jin Wook Ryu, and Sangbeom Woo;
• Concordia University: Andreana Moulinos and Paulina Moulinos; and
• Toronto Metropolitan University: Billy Arseneault, Dennis Chen, George Chibukhchyan, and Vansh Saini.

The top three teams received cash awards, and the members of the first-place team will receive complimentary enrollment to Level 1 in the CBV Program of Studies.

“I would like to take this opportunity to congratulate the members of the first-place team from British Columbia Institute of Technology, along with those who placed second and third,” said Dr. Christine Sawchuk, president and CEO, CBV Institute. “With demand for CBVs at an all-time high, the BV Challenge is an excellent opportunity to introduce undergraduate business students to our rapidly expanding and evolving profession. We look forward to further growing this case competition in the coming years with the goal of exposing even more students to the dynamic and rewarding world of business valuation.”

More details on the competition are available if you click here.

Reminder: IVSC seeks board members

The International Valuation Standards Council (IVSC) is seeking applications for roles on three of its technical standards boards, with two openings on each of the Tangible Assets Board, Business Valuation Board, and Financial Instruments Board. The new board appointees will start their terms in the second quarter of 2024. Applications can be submitted online through the IVSC website, and the closing date for applications is Monday, Dec. 18, 2023. For more information, click here.

Some golden nuggets from the AICPA FVS confab

It was great to see the turnout at the AICPA & CIMA Forensic and Valuation Services Conference in Las Vegas last week. The attendee list on the mobile app contained about 900 names (including staff, speakers, and exhibitors), and it was about a 50-50 mix of valuation and forensic practitioners. There were over 60 sessions to choose from over the three days, and here are some nuggets from the first day:

• We’ve just “scratched the surface” with AI, which is poised to add several trillion dollars of value to companies;
• The updated AICPA business combinations guide is expected to be published in Spring/Summer 2024—and the PE/VC guide is also being revised;
• Young practitioners need the “why” as well as the “what,” especially when doing mundane tasks—tell them the reasons and what’s at stake;
• Although the recent Cecil case was a win for tax affecting (even the IRS tax affected), it will not be a slam dunk going forward;
• Professional liability claims against experts are more than just the amount of fees—triers of fact feel that’s too low, so a 2x-to-3x multiple of fees is the typical range;
• If a client wants to fire the attorney on your engagement, the expert should stay out of that conversation—it’s a no-win;
• The new amendments designed to put more teeth into Rule 702 go into effect December 1—but courts have already been citing them when deciding to exclude expert testimony; and
•  A practice opportunity exists for verifying ESG-related claims companies make—they are often not true.

In the Exhibit Hall, two vendors of AI-powered tools drew noticeable interest from attendees: Valid8, which helps examine data in financial documents (bank statements, check registers, ledger transactions, etc.), and Valutico, which does a full-company valuation including a qualitative analysis, comp selection, cost of capital—and even ESG adjustments.

We’ll have more takeaways in next week’s issue.

Next year’s FVS conference will be in Dallas at the Hyatt Regency Oct. 28-30, 2024.

Recovery of both lost profits and disgorgement not allowed in New York case

In a New York case, the issue of damages involved a Lego interpretation model of the Second Beit Hamikdash, or Second Holy Temple, and an alleged infringement of the copyright on this model (click here to see the model).

Daubert challenge: The court struck the plaintiff’s expert’s damages of a product related to the Temple Product but allowed testimony of damages on the Temple Product. The court also struck the plaintiff’s expert’s testimony that the plaintiff should be awarded lost profits on the Temple Product plus a disgorgement of the defendants’ profits. Both may not be awarded, the court ruled. The court also struck portions of the defendants’ rebuttal testimony and report.

The case is JBrick, LLC v. Chazak Kinder, Inc., 2023 U.S., Dist. LEXIS 174473 (Sept. 28, 2023), and a case analysis and full court opinion are on the BVLaw platform.

Don’t hold your breath over the DOL valuation regs, some say

While in Las Vegas, BVWire stopped in at the ESOP Association’s Employee Owned Conference, billed as the largest ESOP conference in the world. In the reception area and the Exhibit Hall, we ran into several providers of ESOP valuation services, who told us they are not very confident that the Department of Labor will issue its much-awaited proposed valuation regs by year-end as expected (see our prior coverage). They are also worried that the regs will reflect the DOL’s tough stance on valuation issues and that stakeholders may not get a sufficient chance to comment on the proposal. We pointed out that there is supposed to be a two-to-three-month public comment period before the regs are finalized. One individual wondered whether there would be a public hearing. We don’t know whether there will be or not, but the valuation profession would certainly welcome that. Stay tuned!

AI is high on the radar at the AICPA FVS section

One of the eagerly awaited issues for 2024 at the AICPA FVS section is the continued understanding of artificial intelligence and its implications for forensics and valuation practitioners. This point was made during the FVS Forum session at the AICPA & CIMA Forensic and Valuation Services Conference in Las Vegas last week. The session had a panel of FVS section leaders who discussed the section’s five-year strategic plan, which includes several main goals, including building a global FVS community, providing for enhanced education for the FVS professional, and increasing FVS brand awareness and reputation. Other developments the FVS leaders are looking forward to most in 2024 include increased outreach efforts to universities and the Emerging Professionals Project, which will determine the needs of young FVS professionals and how best to satisfy those needs.

More details on the FVS section’s plans will be in the January 2024 issue of Business Valuation Update.

BV firm benchmarking guide for 2023 just released

How does your valuation practice stack up against its peers? Data from over 190 business valuation firms and practices have been collected and distilled into a concise reference guide that focuses on different aspects of practice management and practice building. Sections include: “Practice Performance”; “Staff Hiring, Promotion, Partner Requirements and Compensation”; “Billing and Fees”; and more. BVR partnered with leading BVFLS practice management expert Rod Burkert (Burkert Valuation Advisors) to help ensure the survey and resulting guide will be of the most help to BV practices. You already have access to this guide if you are a subscriber to BVR’s BVResearch Pro platform. If you are not, you can purchase the guide on an a la carte basis if you click here.

BVPro adds new guide on valuing jewelry stores

BVR’s BVResearch Pro platform adds new content continually to its collection of over 20,000 articles, books, special reports, court case digests, webinar transcripts, and more. Just added is a 113-page guide, What It’s Worth: Valuing Jewelry Stores. The guide includes industry intelligence (from Vertical IQ), key benchmarks from DealStats, valuation expert insights, court cases, and rules of thumb from the Business Reference Guide. If you are not a subscriber to BVResearchPro, you can purchase the guide on an a la carte basis if you click here.

Global BV News

IVSC seeks board members

The International Valuation Standards Council (IVSC) is seeking applications for roles on three of its technical standards boards, with two openings on each of the Tangible Assets Board, Business Valuation Board, and Financial Instruments Board. The new board appointees will start their terms in the second quarter of 2024. Applications can be submitted online through the IVSC website, and the closing date for applications is Monday, December 18. For more information, click here.

Calculation report used in court but had no rival

Most valuation analysts will not use a calculation report in court. But what if the other side has nothing? In an Alaska divorce case, the husband did not engage a valuation expert for his steel fabricating business, but the wife did. Her expert did a calculation of value and came up with a range of values because of problems with the underlying data. The trial court took an average of the range to determine the value for purposes of the marital estate.

Affirmed: On appeal to the state’s Supreme Court, the husband did raise any issue with the calculation report, but he argued that the court should not have used an average, citing a case (Lundquist v. Lundquist) But that case “does not require a ‘bullseye figure,’ nor does it foreclose averaging valuations in every case,” so the average value was affirmed.

The husband also argued that the trial court improperly included goodwill in the business value without first determining whether the goodwill was marketable. But the Supreme Court did not entertain that argument because the husband did not bring that issue up during the regular trial.

The case is B.M. v. R.C., 2023 Alas. LEXIS 102, and a case analysis and full court opinion are on the BVLaw platform.

Hitchner goes after another BV myth

Does the concept of “known or knowable” live up to its name? No, says Jim Hitchner (Financial Valuation Advisors) in his November issue of Hardball With Hitchner. The concept is not as known or knowable as it should be, he says. Hitchner has taken on this concept as his latest myth-busting effort. He’s done several of these before, but, with this one, he’s enlisted a group of AICPA BV Hall of Famers (click here for our prior coverage).

The problem: To Hitchner’s “complete surprise,” the AICPA is the only business valuation group that deals directly with the “known or knowable” concept in its standards. “This is a problem that I believe should be rectified, as this can be an area of abuse in business valuation,” he writes. He goes on to “shed some light on this important concept” by examining what is said about it in IRS Rev. Rul. 59-60, the AICPA BV standards, the AICPA Subsequent Events Toolkit, and some dictionary definitions.

We point out that, in addition, all the main business valuation books (Pratt, Trugman, Hitchner) and others discuss the concept. Trugman’s book, Understanding Business Valuation, 6th edition, has a nice section on it and also has a listing of treatises and court cases. Also, we did a search on BVResearch Pro of the phrase “known and knowable” and got 253 hits, including articles, webinar transcripts, court cases, and more going all the way back to 1996. As you can see, there’s a lot of material about the “known or knowable” concept.

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

McKinsey examines value impact of generative AI

A recent McKinsey report shows the various areas of business operations and the expected value impact from the use of generative AI. Four of these areas—customer operations, marketing and sales, software engineering, and research and development—could account for about 75% of the value that using generative AI could deliver, the report says (see the chart below). The report is “The Economic Potential of Generative AI: The Next Productivity Frontier” and is available if you click here.

For business appraisers doing their due diligence on a subject entity, this chart (and the entire McKinsey report) can help assess the potential impacts on value (in terms of cash flow, risk, and growth) of efforts to deploy AI in various areas.

This report was mentioned at the ASA 2023 International Appraisers Conference during a session, Using Automated Valuation Models—If You Dare, that Rob Schlegel (Houlihan Valuation Advisers) and Byron Miller (BM Appraisals) co-presented.

Several industry reports of note

Some valuation firms and practices that have specialties in various sectors put out some interesting industry-specific reports, and they are free. Here are a few recent ones (click on the titles for the links):

• “The Food Monitor,” published by B. Riley Advisory Services, a firm that has a specialty in working with and appraising large and well-known companies in the food service industries, provides information on most commodity food products, including industry trends, market pricing, and their relation to the valuation process;

• “Value Focus: Auto Dealer Industry,” from Mercer Capital, has midyear 2023 data on sales, blue-sky multiples, and guideline public companies; and

• “Global Software Sector Update—Fall 2023,” from Kroll, and a companion report with valuation data, examines M&A deal volume and data from public transactions in the software sector, including firms offering business intelligence and analytics, communications and collaboration, marketing, cybersecurity, and more.

Global BV News

CBV Institute adopts IVS

The Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO) and standard-setter, has announced that it will adopt International Valuation Standards (IVS). The decision to adopt IVS (which the International Valuation Standards Council developed and issued) comes after a multiyear stakeholder consultation process. Starting immediately, CBVs have the option of using either IVS or CBV Institute’s existing valuation practice standards for valuation engagements (Standards 110, 120, and 130). “The adoption of IVS is a significant milestone for CBV Institute,” said Dr. Christine Sawchuk, president and CEO, CBV Institute, in a statement. “It aligns with our commitment to uphold the highest standards in business valuation practice, both in Canada and internationally.”

The Fall 2023 edition of EVBM is now available

The European Association of Certified Valuators and Analysts (EACVA) and the International Valuation Standards Council (IVSC) have released the latest edition of the European Business Valuation Magazine (EBVM). The publication is free of charge and is intended to be a European platform to discuss practice issues in business valuation. The Fall 2023 issue features these articles:

• “Dealing With Uncertainty in a Changing World” (Maud Bodin Veraldi, CCEF);

• “Synergies in Accounting and Valuation” (Christof Binder, Ph.D., MBA);

• “Dealing With Historical Capital Structure Volatility in Valuation” (Professor Dr. Matthias Meitner, CFA, and Prof. Dr. Kenneth Lee, CFA);

• “Industry Betas and Multiples for Eurozone Companies” (Martin H. Schmidt and Andreas Tschöpel); and

• “Transaction Multiples for Scandinavia and Britain” (Stefan O. Grbenic).

Click here to view the issue, and you can sign up for future issues.

What’s the ‘Barbie buzz’ worth?

Having a product prominently displayed in a hit movie has value—but how much? In his pre-IPO valuation of footwear company Birkenstock, Professor Aswath Damodaran (New York University Stern School of Business) examined the firm’s intangibles, one of which was the “Barbie buzz”: having a pink version of the company’s sandals appear in the big blockbuster movie, which “hyper charged the demand for the company’s footwear.”

Revenue bump: All buzzes fade “but not before they create a revenue bump and perhaps even increase the customer base for the long term,” Damodaran writes. He estimates that it will push up the revenue growth rate from 15% to 25% over the next year before reverting to a compounded growth rate of 15% a year in the following four years.

The other main intangibles he valued were the brand name (which has the biggest effect on value), a celebrity customer base, and good management. You can read his full valuation if you click here.

Active depreciation charged to business owner in divorce

In a South Carolina divorce case, the business owner (husband) appealed the family court’s decision on the valuation of the family business. The valuation was done on the date of filing of the marital litigation, but the value apparently dropped during the litigation. The family court found that any change in value was attributable to the actions of the husband.

High bar: The appellate court noted that it will affirm “unless the appellant satisfies his burden of showing the preponderance of the evidence is against the family court’s findings.” The burden was not satisfied, so the appellate court affirmed the family court’s decision on the matter regarding the change in value. Other matters affirmed included accounting for personal goodwill and the court’s selection of a value within the range of evidence presented.

The case is Clampitt v. Clampitt, 2023 S.C. App. Unpub. LEXIS 381, and a case analysis and full court opinion will be on the BVLaw platform.

The No. 1 valuation issue that triggers an IRS audit

Discounts continue to be the No. 1 red flag that triggers an IRS audit, according to former IRS manager Michael Gregory (Michael Gregory Consulting LLC), speaking at the recent American Society of Appraisers (ASA) International Appraisers Conference in New Orleans. Gregory worked for the IRS for almost 30 years on valuation matters and continues to interact with the agency (he has over 70 contacts there). He is now in private practice, and he helps clients who have IRS disputes regarding business valuation issues as well as other matters.

Explain it: Make sure you have a clear and complete explanation that supports your discount estimates, whether they be for marketability or control, Gregory advises. We point out that we have heard the same remarks directly from IRS officials.

In addition to valuation issues, Gregory also specializes in mediation and conflict resolution, and he told the audience that his website offers some free e-books (click here).

Regulatory uncertainty regarding ESOP valuation is a major problem

The regulatory uncertainty around valuations for employee stock ownership plans (ESOPs) is a significant burden that creates undue risk and can “hamper employee-owned businesses,” says Alex Brill, a senior research fellow at the American Enterprise Institute, in a new paper. He’s referring to long-awaited rules on the fair market value of company shares to be bought by an ESOP—a key to the setup and ongoing operations of these vehicles. Without final rules, the DOL has resorted to regulating through litigation, winning many cases alleging that the ESOPs overvalued (and thus overpaid for) the stock of the sponsoring companies. Valuation experts say the DOL uses rules that are not consistent with accepted valuation standards.

New-law mandate: The paper points out that, while Congress recently directed the DOL to establish guidance on ESOP fair market valuation, the new legislation (contained in the SECURE 2.0 Act of 2022) does not provide a deadline for issuing the guidance. “It is critical that DOL issue guidance for ESOP valuation promptly through a formal notice-and-comment rulemaking that permits stakeholders to offer feedback on a proposed regulation,” Brill concludes.

You can read Brill’s paper if you click here.

We point out that, although there is no official deadline, a DOL official stated that regs will be issued by year-end, according to a blog post from the National Center for Employee Ownership (NCEO). Once the proposed regulations are issued, there will be a two-to-three-month public comment period before they are finalized.

Will the AICPA FVS conference be the biggest of the year?

It was the biggest business valuation conference of 2022, and this year’s version should also draw a huge crowd. The AICPA & CIMA Forensic and Valuation Services Conference will be three days, November 6-8, in Las Vegas live and online. There are almost 60 sessions on everything from emerging issues (artificial intelligence, cryptocurrency, and ESG) to specialized topics (portfolio valuations, complex structures, trade names, and cannabis firms) to perennial favorites (expert testimony, reasonable comp, goodwill impairments, and cost of capital). The AICPA also allows virtual attendees to pick and choose some sessions using a “select 7” option so you can focus on specific topics that match your needs. For more details on the conference, click here.

Global BV News

Cross-border M&A examined in new CBV Insights

For several reasons, the prevalence of cross-border transactions involving Canadian companies is expected to expand over the next several years. In the latest edition of CBV Insights, Stephanie Lau, CFA, CBV, advises Canadian sellers on a few strategies they can employ when engaging with a foreign buyer—and why they should not base their exit timing solely on the strength of the loonie (the Canadian one-dollar coin), the report says. To read the report, click here.

IVSC signs MOU with French accountants

During the recent annual general meeting of the International Valuation Standards Council (IVSC), a memorandum of understanding (MoU) was signed to commemorate the IVSC’s partnership with the two leading accountancy professional bodies in France, the CNCC and CNOEC. “This significant event underscores the importance of collaboration and the IVS within the French valuation community,” the IVSC said in a statement.

Extra: The “IVSC Annual Report” for 2022-2023 is now available (click here to view).