How much is a business or business interest worth? This question is not easily answered. It is the role of a business valuation (BV) expert to arrive at their conclusion of value to assist the Trier of Fact with the answer. I sat down with Brian Foltyn, CVA, at his favorite coffee shop to discuss what goes into being an expert witness. Coincidentally, we arrived at the same time.
Me: I understand that, historically, the valuation of a privately held business was deemed as more an art than a science. There was some guidance provided by the IRS but minimal reporting standards, which may have resulted in business valuators serving as advocates for their clients rather than experts. Is this still the case?
Him: No. The valuation profession has grown and transformed with the availability of data. There is now much more scrutiny of business valuators’ competency and qualifications. Recently, Daubert challenges have become more frequent as attorneys have become familiar with the case law in which it has been used.
Me: How, then, have BV and BV theory evolved?
Him: BV has significantly evolved over the last two decades, which has been primarily driven by regulatory bodies, such as the IRS, United States Department of Labor (DOL) and the Financial Accounting Standards Board (FASB). In addition, many professional organizations now exist to define and enforce the professional standards. Valuation professionals in the U.S. can choose among several valuation credentials available from many different organizations, each with its own set of criteria for attainment. I think that the National Association of Certified Valuators and Analysts (NACVA), the American Society of Appraisers (ASA), and the American Institute of Certified Public Accountants (AICPA) are all credible professional organizations—and whose professional standards are more similar than different. The valuation credentials offered by each organization include the Certified Valuation Analysts (CVA) offered by NACVA, the American Society of Appraiser (ASA) Certification offered by the ASA, and the Accredited in Business Valuation (ABV) offered by the AICPA.
Me: Are there any other valuation credentials out there?
Him: Yes. Several, such as the CFA or Chartered Financial Analysts by the CFA Institute, amongst others. However, beware. Some credentials are informally referred to as “toxic” because they can be obtained with minimal efforts. Holding a toxic credential could cause an expert’s competency and/or qualifications to come into question.
Me: In addition to the qualifications that we just discussed, what are some of the necessary skills a BV expert witness should possess?
Him: To reach a reasonable conclusion of value, a business valuator should have the appropriate skills, knowledge, experience, education and training in the fields of finance; accounting and auditing standards; economics; tax; valuation law; strategic planning; statistics; common sense; research; and oral and written communication. It would not be uncommon if a BV expert’s report is used during trial, which typically contains a voluminous amount of data and complexity broaching most of the fields I just mentioned. However, the effectiveness of an expert’s testimony can be lost if this information is confusing or boring. Hence, the need of strong oral and written communication.
Me: In general, I know that business valuators can provide two main types of services: (1) an objective and independent opinion of value of a business or business interest or (2) an advisory or consulting role in determining a value. Where does a calculation of value land between these two services? Can a business valuator provide expert testimony for a calculation of value?
Him: It depends. A scattering of cases over the past few years have accepted calculations of value into evidence and, in some of those cases, the calculated value is the value the court accepted. The Arizona case Larchick v. Pollock rejected the use of a calculation report, but an appellate court ruled it was wrong to do that and sent the case back to the lower court, 503 P.3d 128 (Ariz. Ct. App. 2021). The trial court excluded the evidence of a business valuation expert because he had submitted a calculation of value report and was then asked to testify to it. The expert self-admitted that he would not testify to a calculation of value and had explained in his engagement letter that, if he had to testify, a valuation engagement would be required. Despite the exclusion by the trial court and the self-admission of the inadequacy of a calculation of value for testimony purposes, the appellate court nevertheless ruled that a calculation of value is not unacceptable per se. Larchick is the first case I am aware of where the witness himself has said he would not testify to a calculated value and the court (appellate court, in this case) said “not so fast.”
Me: Do the professional organizations that you listed, like the AICPA, provide guidance on whether a calculated value can be admissible in court?
Him: First, it is my understanding that the courts do not have to follow any standards that the expert witness might be required to follow or believes they might be required to follow. Notwithstanding this, the AICPA Business Valuation Standards do not prohibit the use of a calculated value in litigation, but they do say, “A calculation engagement does not include all of the procedures required in a valuation engagement, as that term is defined in the [statement on standards for valuation services]. Had a valuation engagement been performed, the results might have been different.”
Me: OK, last question. Your appearance is quite striking. Has anyone told you how handsome you are?❦
Originally published in Arizona Attorney Magazine, March 2024. Reprinted with permission.
