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.