What Everyone Ought To Know About Business Valuations & Divorce!
Valuations prepared for divorce purposes often present some unique issues.
Read on to learn about the valuation issues that may be encountered during a divorce engagement.
Here are the Top 10 things you need to know.
1. Divorce = Litigation
The most important thing to keep in mind is that divorce proceedings are litigation and like all litigation, involve parties who disagree on a variety of issues, one of which may be the value of the spouse’s business.
In most cases, each party will engage their own valuation expert.
Often, the valuation expert is asked to provide expert testimony on his/her findings.
Therefore, it is imperative that your valuation specialist is able to properly communicate the valuation analyses and conclusions in terms that the judge/mediator can understand.
2. What is the Relevant Date?
It is important to establish valuation date(s) very early in the process.
This is a fundamental aspect and can have a big impact on value. The valuation date may be current, the date the complaint was filed or the date of separation.
In addition, gifts may need to be separately analyzed.
3. Where Are You?? Know the Jurisdiction.
The standard of value for divorce valuations often vary not only from state to state but also from county to county within the same state.
In many states, the courts use the term “a fair market value,” yet, the definition/interpretation can be different simply by crossing state lines.
Case law may not well fully developed so it may make sense to get guidance from an attorney familiar with the law in the jurisdiction where your case will be heard.
4. Separate but Equal!
If both parties have mutually agreed to the selection of the valuation expert or if the valuation expert is court appointed, then it is important that the valuation expert gets both sides of the “story.”
Limiting the due diligence to only one party may not give a full picture and overlooking items that impact the value, especially if there are cash or personal expenses related issues.
5. Who Owns What?
Key factors include: a list of all of the entities being valued, the type of ownership interest(s), and an understanding of the relationship between/among the different entities. For example, real estate is often owned by a related entity and is leased to the subject company.
These lease payments may impact the value of the operating business and/or the real estate.
6. Put it in Writing!!
Make sure to memorialize key data. Divorce proceedings are litigation.
Various parties may promise to provide information, then fail to do so.
Telephone conversations may be forgotten, misinterpreted or ignored.
Document all conversations, information requests and any information provided to you verbally.
7. Valuation Expert as Teacher: Be Prepared to Teach.
Divorce courts deal with many issues. Some may have limited experience in dealing with business valuations.
Hence, it may be necessary to speak on a basic level and educate the court on business valuation theory and methodology.
8. Be Prepared – To Wait! Carefully Manage Your Time and Cases.
Since litigation is often involved, the valuation expert may have limited control of his/her schedule.
Court appearances may be uncertain and are often delayed / cancelled / rescheduled.
The valuation expert may be required to testify for ten minutes or two days. Be prepared but expect delays.
Be cognizant of your client’s financial situation.
Your client may be the dependent spouse with limited financial resources.
Address the fee up front to avoid disputes/collection problems.
This is particularly important if the engagement involves a complex matter that will be time consuming and expensive.
10. Final Thoughts:
Don’t forget buy-sell agreements, personal goodwill, non-compete covenants, and the double dip of alimony and equitable distribution may impact the divorce related valuation. It is important that your expert be fully versed on all issues.
Also, the valuation expert must be objective and avoid the perception that he/she is an advocate for the client!!