Hello
Welcome to the latest issue of Valuation Insights!
Our goal is to bring you key ideas and trends in business valuation -- so you and your clients can make decisions that get winning results.
We start with a look at how artificial intelligence (AI) is shaping the world of valuation, damages, and expert testimony - and how to deal with the inevitable changes that are coming.
Next, we discuss how a financial expert can facilitate a successful mediation.
We then review steps to ready and optimize your business for sale.
We then explore strategies to help bridge the gap between opposing expert opinions in a negotiation.
Finally, we share a valuable resource that can help make sense of the often-confusing area of business valuation -- and potentially resolve conflicts or disagreements before they become insurmountable.
On to the issue!
Valuation and Litigation Insights
News and Trends
Beyond the Hype of Artificial Intelligence
AI is everywhere -- even in the world of damages, valuation, and expert testimony.
In a decision made last year, the New York Surrogate’s Court (Matter of Weber, 2024 NY Slip Op 24258), excluded an expert witness’s AI-supported financial calculations.
The expert in question used Microsoft Copilot, a generative AI tool, to verify his calculations. However, the expert could not specify the prompts or inputs used in Copilot to arrive at his conclusions, nor could he adequately explain the tool’s methods or its accuracy for such tasks.
This expert’s use of AI to support his financial analyses raised serious concerns when he could not substantiate the AI-derived figures. This lack of transparency eroded credibility and highlighted a significant limitation of using AI as a substitute for established analytical methods.
This article highlights several best practices for using AI-derived calculations in supporting expert witnesses:
- Use AI as a supplementary, not a primary tool. AI-generated data should serve as an initial step, to be further refined and validated by traditional methods.
- Document AI processes. Experts using AI tools should document their processes carefully, noting each step where AI contributed to their analysis. By keeping a detailed record of the inputs used, prompts given, and outputs generated, experts can provide transparency if questioned about their methods.
- Cross-check AI results. Experts should manually cross-check AI results using established analytical frameworks and verify them against trusted data sources. This cross-verification process ensures that AI tools enhance, rather than replace, the thoroughness of expert analysis.
- Disclose AI usage. Transparency about AI usage during testimony or report preparation is crucial. Experts should proactively disclose any AI reliance to attorneys, courts, and other stakeholders, clarifying how AI contributed to the findings and noting any potential limitations. By disclosing this information, experts build trust and avoid appearing evasive or over-reliant on technology.
See more in the attached article.
quickreadbuzz.com
Things to Know
The Benefits of Involving a Financial Expert in Mediation
Mediation is all about resolving disputes through collaboration and communication.
But in order to mediate, the mediator needs to understand each side's position clearly.
In financial disputes, having a financial expert can make a big difference by breaking down complex issues into simple, understandable terms that help the mediator get to the heart of the matter.
Experts also help manage emotions and set realistic expectations, which can keep the process on track and improve outcomes.
Benefits of bringing a financial expert to a mediation include:
- Improved communication. An effective financial expert can explain complex issues explained simply, making it easier for mediators to grasp the key points and push negotiations forward.
- Realistic expectations. Experts can objectively present different scenarios. This can help both clients and attorneys set practical, achievable settlement goals and avoid emotional decisions.
- Better results. Armed with an expert’s objective analysis, the mediator can focus on the facts. This can reduce tension, increasing the odds the mediator can find a reasonable middle ground that could signal a "win" for both sides involved.
See more insights in the attached article.
quickreadbuzz.com
Best Strategies
Preparing a Business for Sale
Except for those who have done this more than a few times, selling a business takes far longer and is more involved than most realize.
What should a prospective seller expect, and how should they prepare?
What to expect
- A comprehensive business review. Expect the process to entail an exhaustive review of your business across every dimension, including accounting, finance, tax, legal, intellectual property, marketing, environmental, cybersecurity, privacy, and more.
- Restatement of results. An outside CPA or advisory firm may prepare a Quality of Earnings (QofE) report. The QofE typically normalizes sales and earnings before interest, depreciation, and amortization (EBITDA) – metrics which will likely form the basis for any offer price.
How to prepare
- Assemble your team. Your team should include a “supergroup” of specialists experienced in transaction execution, valuation, taxation, finance and accounting, legal issues, and insurance considerations. They will all be needed at some point in the process.
- Organize your information. Prepare a data room and process for smooth communication with potential suitors. Review your financial data repeatedly to ensure it is sanitized, vetted, and accurate.
- Know your story, and tell it through the numbers. Understand key historical trends, so unusual or one-time items can be explained to an outsider in an understandable manner. Normalize historical trends and show the normalization calculations, so it is clear what "business as usual" looks like.
- Identify and address potential financial concerns to minimize potential investor surprises.
- Consider preparing a sell-side Quality of Earnings (QofE) report that can communicate this information -- telling your story, including potential investor upside.
Presenting financial information in an organized manner can increase a buyer’s confidence in the business model and financial projections, thereby increasing the odds of a more favorable transaction and overcoming objections before they are even asked.
See the attached article for more details.
quickreadbuzz.com
Getting to “Yes” Using Valuation Experts
It’s a classic litigation situation. Each party has retained their own credible valuation expert, and these specialists have arrived at differing opinions of value.
How can the parties reconcile the differences, or at least reduce the value gap? What strategies can they pursue to get to a “yes," thereby avoiding costly and lengthy litigation? The attached article provides some useful insights.
Can the parties effectively leverage a meeting between the experts to resolve differences?
Some factors impacting the potential outcome of such a meeting are:
- Key assumptions. Can differences in a couple key assumptions, such as compensation adjustments, be identified? Reducing the differences to 1 or 2 items might be sufficient to resolve differences. The “80/20” rule likely applies, and a good valuation expert ought to identify where to look.
- Additional data. Can management provide additional information and context that can resolve experts’ differing interpretations of financial data?
- Margin of error threshold. If the percentage difference in values gets to around or below a certain margin of error (say, 10%), then can the parties split the difference and call it a day?
If the experts are to meet, certain parameters to consider include:
- Whether the outcome of the meeting be binding. What authority will the experts have?
- Whether “splitting the difference” is a realistic outcome.
- Recognition of the experts' and the parties' bias or openness to contradictory information.
- The potential role of differing valuation dates and subsequent events.
- Whether to make the meetings virtual or in-person.
- Who will be present at the meetings.
While it can take work, effectively using expert reconciliation can help avoid trials and unsatisfactory agreements, leading to a result that satisfies everyone involved (or disappoints everyone in equal measure).
See more details are in the attached.
quickreadbuzz.com
Announcements
Public Service Announcement: Shannon Pratt's The Lawyer's Business Valuation Handbook
I thought I’d put out what I consider a “public service announcement” for my friends in the legal industry.
Based on my experiences, I do believe a lot of conflicts involving valuations can be resolved, or at least minimized, through better understanding of underlying valuation issues, and improved overall communication among attorneys, judges, mediators, and experts.
If only there were a resource that could help with this.
Actually, there is.
The third edition of Shannon Pratt’s The Lawyer’s Business Valuation Handbook came out last fall. One volume pretty much covers any situation where one might encounter a business valuation.
It is written for lawyers and judges and gets to the essence of the issues without going into needless detail that should only concern specialists. There are loads of resources as well. For example, the “Checklist for Reviewing a Business Valuation Report” is something I use myself.
I recommend ordering a copy for you, a colleague, or perhaps a judge who you think could benefit from some clarity on valuation issues. (Imagine sending him or her a copy, and then being able to refer to a section that clearly explains a valuation concept you would like to get across.)
The book is available from the ABA website per the link.
Members of the ABA get a discount. As an ASA member I can get a discount as well, if you’d like to order through me. If you are interested, send me an email.
(No, I do not have a financial interest in sales of the book. I did contribute a chapter on lost profits and business valuation, though.)
americanbar.org
In Closing
That's it for now. If you found this issue of Valuation Insights useful, please forward it to a friend or colleague.
And if you have a valuation or damages-related issue you would like to discuss, let me know! Our team at at Grobstein Teeple, LLP are here to help.
You can reach me one of the ways below.
Talk to you soon!
Will
William W. Thomsen
Director
Grobstein Teeple, LLP
www.gtllp.com
Call me at 818-502-4950
Valuation and Litigation Insights