Hello
Welcome to the latest issue of Valuation and Litigation Insights!
We keep you informed on key ideas and trends in business valuation -- that help you and your clients make decisions that get winning results.
In this issue, we will look at the recent "shop talk" in the business valuation world. Recognition of how partner friction can decrease value and the implications of AI are highlighted.
We then explore how, with the increase in alternative dispute resolution instead of trials, the role of valuation experts is shifting from that of a "hired gun" to an advisor that can help the mediator or arbitrator help resolve issues.
Next, we share insights into the concept of standard of value, and why that can be key to understanding why valuation opinions can be so different.
Finally, we discuss how a court has dealt with a valuation expert who used accepted methodology but potentially unreasonable assumptions.
Let's dive in!
Valuation and Litigation Insights
News and Trends
Highlights from the American Society of Appraisers (ASA) September 2024 International Conference
The ASA held its Annual International Conference in Portland, Oregon on Sept 15-19. Below is a distillation of key takeaways from valuation thought leader Jim Alerding's recent BVWire blog post:
Valuation discount for a difficult partner. In tax valuations, a new valuation discount for having a difficult partner is gaining traction.
My take: this makes a lot of sense. How many cases have I worked on have involved some kind of value destruction due to a "difficult partner?" A lot. This issue is not limited to tax reporting contexts.
Artificial intelligence (AI) marches on in valuations, with predictable concerns. Almost half (48%) of BV practitioners are using AI in some way in their work, mostly for research. However, 52% are NOT using AI, due to trust issues, data confidentiality concerns, and fear of AI “hallucinations."
My take: with all due respect, aren't the reasons for not using AI the same basic concerns we might have with our human support staff?
In a rapidly changing world, valuation conferences like the one in Oregon help advance the entire profession.
bvresources.com
The role of valuation expert is evolving
Ready for a paradigm shift? Get your valuation expert much more involved in the alternative dispute resolution (ADR) process.
So says the Honorable Christopher Yates, an appeals court judge at the 3rd District of the Michigan Court of Appeals.
In his view, ADR can be extremely effective in resolving complex civil disputes - particularly when compared to the costly and often drawn-out court system.
But in order for the process to work, ADR requires sophisticated, well-informed mediators and arbitrators. And all too often, the attorneys arguing the cases are not the best people to educate the mediators and arbitrators about the salient facts and issues, particularly when they involve valuation and economic damages.
Judge Yates notes that valuation experts have traditionally been bit players in litigation, relegated to preparing a report, appearing at a deposition, and perhaps offering some offer testimony if required. But these days are changing. The embrace of ADR processes has created the opportunity for experts to play a more enhanced role as a partner of the litigating attorney from start to finish. According to Judge Yates, these days only "unsophisticated and overconfident" attorneys assign these old-fashioned "plug-and-play" roles to their experts.
Valuation experts can offer a lot more to the ADR process, by facilitating a clearer understanding of key economic and financial issues from a neutral standpoint. This can result in much more productive discussions in ADR sessions. Early involvement of experts in ADR can also bring the competing parties to understandings about how and why a dispute should settle before or soon after a case is filed.
In short, Judge Yates says experts save attorneys time and their clients money.
Consider enhancing your ADR process by collaborating closely with your valuation expert.
quickreadbuzz.com
Things to Know
"Optimistic" projections will not get an expert's opinion tossed out
Life Under the New Daubert Rules: "Optimistic" Does Not Mean "Unreliable"
The revamped Federal Rule of Evidence 702 empowered US courts to more proactively exclude unreliable expert testimony.
But that does not mean anything that seems unreasonable will get thrown out.
In a federal district court in Washington, American Northwest Distributors sued Four Roses Distillery, LLC, the supplier of Four Roses bourbon, for damages for improperly terminating its distribution agreement. It received an award in arbitration based on the fair market value of lost distribution rights. The judge at arbitration found, that while the damages expert had the required expertise, he was not persuasive as to the amount of damages, and his estimate was reduced in the final award.
American Northwest then went after the new distributor using the same damages expert, this time in court, and using the same damage amount. But this defendant invoked Daubert to try to exclude the expert, stating his prior testimony at arbitration was found to be overly optimistic, and hence unreliable.
But the court said the expert's "optimism" did not make his testimony unreliable per se. The expert had disclosed his assumptions and methodology for determining lost profits, and the defendants did not show that the methods themselves were not reliable. So, the defendant's arguments went to weight rather than admissibility of testimony.
Based on this decision, a court would not throw out an overly optimistic analysis on the basis of its being unreliable, as long as it used accepted methodology. However, the odds are that that opinion would be challenged in court by a competing, more conservative, valuation.
bvresources.com
What is value? Understanding standards of value
You might be surprised when two appraisers arrive at a very different values for the same business.
Sometimes it is because the appraisers are applying different standards of value.
But what is a standard of value? And why does it matter?
Understanding this can be a big deal when it comes to reviewing an opinion of value.
This article from Marcum LLP provides a useful overview of this topic.
marcumllp.com
In Closing
That's it for now. If you found this issue of Valuation and Litigation 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 of Valuation and Litigation Services
Grobstein Teeple, LLP
www.gtllp.com
Call me at 818-502-4950
Valuation and Litigation Insights