“To err is human—but to really foul things up you need a computer.” – Unknown
Today’s business owners face a decision that would have sounded like science fiction a decade ago: Should I use artificial intelligence to value my business, or do I still need a professional appraiser?
With AI-driven valuation tools promising near-instant results at minimal costs, the appeal is obvious. But when it comes to business valuation, taking the cheaper or faster path can have real financial and legal consequences. In fact, many IRS cases and court disputes show that cutting corners on valuation can cost far more than doing it right the first time.
So, what’s the right approach? As with most things in valuation: it depends. Why do you need a valuation? How complex is the business? Who might scrutinize the conclusions?
The Case for AI: Speed, Scale, and Simplicity
Let’s acknowledge what AI does well. Today’s various AI platforms can process massive datasets in seconds—scanning for industry data, market trends, and publicly available pricing multiples far faster than any human.
For businesses with straightforward operations and abundant market data—like franchises, retail, or SaaS companies—AI can generate fairly accurate preliminary valuation multiple that trumps a quick Google search or asking your buddy at the driving range.
The Human Factor: Context, Judgment, and Assumptions
Yet the core of business valuation is not about raw data—it’s about the interpretation of that data, and more importantly, the projection of future outcomes.
Valuation fundamentally rests on three pillars:
Projected future cash flows
Assessment of risk
Expected future growth
All of these are based not just on hard historical facts, but on assumptions. Valuations involve educated judgments about the future—something AI, for all its power, still struggles to get right without context.
This is where an experienced appraiser makes the difference. Professional judgement, industry insight, and qualitative analysis to shape forward-looking models that reflect reality—not just statistics.
For example, imagine a family-owned company planning for succession, or a manufacturing business with outdated equipment and environmental liabilities. What about a consulting firm whose success hinges on the founder’s personal relationships? These nuances don’t appear in datasets—but they deeply impact value.
AI also falls short in making normalization adjustments—removing non-recurring expenses, adjusting for owner compensation, or evaluating the sustainability of current cashflows into the future. These judgments are subjective and contextual.
Purpose Determines the Process
One of the biggest pitfalls is treating valuation as a one-size-fits-all process. In reality, the purpose of the valuation should dictate how it’s done—and whether utilizing AI as a tool is appropriate.
If you need a valuation for tax purposes—especially for estate and gift tax planning—then IRS rules under Section 170(f)(11) require a “qualified appraisal” from a “qualified appraiser.” An AI-generated estimate won’t meet those standards.
Selling to a strategic buyer? A valuation based on synergy assumptions and strategic value looks very different from one aimed at a financial buyer focused on cash flow. Professional appraisers tailor their methodology accordingly, and likely calls for an appraiser with experience in the transaction space.
In legal matters like divorce, shareholder disputes, or buy-sell disagreements, the valuation must stand up under cross-examination. A court won’t accept a black-box estimate with no supporting explanation. We’ll leave attorneys cross examining an AI bot to science fiction… for now.
The Cost of Getting It Wrong
As we highlighted previously in a real-world cautionary tale: In Estate of Hoensheid v. Commissioner, a taxpayer claimed a charitable deduction using a “free appraisal” from their financial advisor. The IRS disqualified the entire $3 million deduction because the valuation didn’t meet qualified appraisal standards.
A professional appraisal from a reputable firm would have come with a cost, but it would have been an investment that saved millions in lost tax benefits. The takeaway: if it matters, don’t wing it with free or cheap estimates of the human or AI variety.
A Smarter Future: Human Expertise + AI Efficiency
The best modern valuation practices combine the strengths of both worlds. Skilled appraisers are using AI to assist with data collection, screen comparables, and perform industry analysis. This enhances efficiency—without compromising quality or credibility.
This hybrid model allows professionals to focus their time and expertise on what matters most: assessing future cash flows, weighing risk factors, and applying assumptions that reflect the business’s true value drivers.
How to Decide
Ask yourself:
What’s the purpose of the valuation? Internal ranges for multiples may allow AI as a starting point; legal or tax matters likely require a professional.
How complex is your business? Unique circumstances call for experienced judgment not captured by AI.
What are the consequences of being wrong? If large sums, taxes, or compliance are on the line, accuracy, accountability, and defensibility matter.
Will the results face outside scrutiny? Opposing counsel, the IRS, or transaction partners may demand transparency and justification for assumptions. Don’t slide your phone across the table and ask them to type their question into ChatGPT’s prompt box.
The Bottom Line
AI is changing how we think about valuation—but it hasn’t changed the fundamentals of the art. Business value is driven by assumptions about future cash flow, risk, and growth—not just reams and reams of data and numbers. These assumptions require informed judgment and an understanding of the specific situation at hand.
For simple range estimates, AI has a place. But when your business represents your life’s work—or your largest asset—professional appraisal remains the gold standard.
Need guidance? HBK’s Valuation Group has been helping business owners understand and defend their company’s value for nearly 30 years. Reach out to 941-909-7194 or afrank@hbkvg.com to discuss your valuation needs.
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