Bias in Valuations

A lot has been written and said recently about bias in valuations. Judges are commenting on it more frequently, and others within the BV profession are noticing and commenting on it. Having been around this business for 44 years, I thought it necessary to add my own thoughts to the mix.

First, the alleged or observed bias has been around probably as long as the BV profession itself. From my introduction to BV in 1980, I observed and was warned about valuation bias. Back then, it manifested itself more often in what is called the “hired gun syndrome.” There are fewer hired guns around today than there were back then. They still exist, but the advent of Daubert and the increased professionalism of the BV profession, in my opinion, have helped to lessen their numbers.

Further, my observation is that there are still as many cases where the values between the experts for the parties are significantly apart. This naturally leads to an observation of bias. So let's look at some of the reasons why these differences exist.

Expectations of the Attorneys

Take, for example, a business divorce case. Naturally, if you represent the plaintiff, your client and their attorney will want a high value. The opposite, of course, is true if you represent the defendant. If you come in with a low value on behalf of the plaintiff, your valuation might not see the light of day. I have been involved in cases where this happened. I submitted my value to the attorney, and I was no longer needed.

Hidden Bias

As a valuation expert, you obviously know the hand that feeds you. It is natural that you unavoidably would lean toward the value that best benefits your client. That means you might simply be choosing the assumptions that lean toward that higher or lower value. In your mind, you believe those assumptions are appropriate and you can support them. The opposing expert might choose the opposite assumptions, and he or she also believes in and supports the assumptions. How do you eliminate that hidden bias? I have always tried to stay in the middle and choose assumptions that were as though I did not represent either side.

Assumptions Provided by the Attorneys  

In many cases the valuation analyst is provided a set of assumptions by the attorneys relating, for example, to legal issues surrounding the case. The valuation analyst on the opposing side might have been given conflicting assumptions. This can result in a perceived bias, but it is really not a valuation bias. It is not necessarily a bias on the part of the attorneys either. They might have very valid arguments on both sides with the legal issues presented.

Information Provided by the Clients

Take, for example, a business divorce or a divorce case. The parties might have different views about the prospects of the subject business in the future. This can result in large disparities in the value of the business as determined by the valuation analysts on each side. In a recent divorce case  in Illinois, the two valuation experts were miles apart ($60 million versus $20 million) and the primary difference was caused by the outlook for the business and the industry. The business was the manufacture and sale of picture frames. One expert said it was a dying industry, and the other said it was a growth industry. While the clients did not necessarily drive these assumptions, it is emblematic of the issue here.  

The overall point is that there are a number of reasons why valuations might be disparate and thus appear to be biased. Valuation analysts are the messenger, however, so they bear the brunt of the criticism. I would urge a bit more caution in carrying the flag for valuation analyst bias and more discernment by the courts in determining why there is such a disparity in the values. 

Does bias exist? Will it always exist? I would say yes to both. To some degree, it is human nature. But it is not always as it seems.

Here are some recent articles on this subject from our own BVR files:

"Perception Grows of Bias in U.S. Valuation Experts," Business Valuation Update, April 2024

"Study says there is ‘clear evidence’ of bias among BV experts," BVWire Issue #236-2, May 11, 2022

"Proposed USPAP changes focus on bias," BVWire Issue #243-3, Dec. 21, 2022

 "In buyout dispute, ‘downward bias’ sinks expert’s fair value determination," BVWire Issue #225-4, June 30, 2021

"New York Times serves up scathing look at appraisers in Trump exposé," BVWire Issue #193-2, Oct. 10, 2018