valuation services bulletin

spring 2015  |  Table of Contents

10 Reminders for a Successful Divorce Valuation

Business valuations prepared for divorce purposes are much more challenging than valuations prepared for other purposes. That is because the rules differ among jurisdictions. There are no clear valuation guidelines for divorce in most states. For example, there is no specific definition of value in state statutes governing divorce. Also, divorce courts exercise a great deal of discretion – even if there is an abundance of judicial precedent (which can be confusing and contradictory).

Regardless of this complex landscape, there are some universal tips for valuation experts who perform divorce work – pieces of advice that apply no matter the jurisdiction.

1. Realize that it is a litigation. The very first point to realize in performing a valuation for divorce is that it is a litigation. How many times has one heard of an amicable divorce? Virtually all are contentious, some more than others. This is why, even though divorce cases may be a small percentage of the typical valuation practice, they account for a high percentage of the times valuation experts are called to testify as an expert witness. The valuation expert has to conduct himself accordingly, understanding that what he says and does are subject to challenge.

2. Nail down the valuation date. Very early in the process, get a clear answer to the issue of the valuation date. This is a fundamental aspect to understand up front. It could be the trial date, the complaint date, or the date of the divorce or separation. Most often there is an attorney involved (two attorneys if mutually agreed to or appointed by the court). Ask them to set the stage in terms of the valuation date – there could be multiple valuation dates as well.

3. Know the relevant valuation standard. Because the standard of value for divorce differs by jurisdiction, a complete understanding of the appropriate standard to use is needed. It changes by state and sometimes within a state (and even within counties in states). However, while it is the valuation expert’s responsibility to understand what the appropriate standards of value are, it is not his responsibility to choose the right one. That is something that should be agreed upon between the valuation expert and the client. Include it in the retainer letter. Because there is sometimes confusion as to the precise meaning of terms, make sure that everyone understands what the labels “fair market value,” “investment value,” and “intrinsic value” mean.

It is not up to the valuation analyst to make the law, but to follow it. If the standard of value is clearly entrenched in the jurisdiction, the valuation expert should follow that standard. Otherwise, he will run afoul of the law. If the standards are vague, advise the attorneys on the vagueness of the standard and ask their advice on what to do about it.

4. Read prior case law very carefully. Rules for divorce valuations vary not only from state to state, but also by counties within some states. Therefore, read the prior case law very carefully. It is an area in which the case law is not well developed.

There is no definitive case law in many states, and in many states the courts use “fair market value” when they really mean something else because the judges just find “fair market value” to be a convenient phrase. Also, family law courts treat discounts and premiums differently than courts in conventional valuation cases, so study relevant case law in this regard.

Do not just read articles about cases and listen to other individual’s comments about cases. Read the actual cases in the area where the specific valuation is going to be heard. With this approach, it will become evident the courts, the litigants and the attorneys are struggling with the same kinds of issues with which valuation experts must deal.  Each case has moving parts, and each individual situation is very specific in its facts and circumstances. The full situation that the parties are going through in their divorce should also be examined.

5. Develop questions for both spouses. In addition to questioning the attorneys early on, ask questions of the titled spouse and/or the outside spouse (depending on which one is a client). For mutually agreed to or court-appointed experts, expect to speak with both parties. It may be formal or informal, through depositions or interrogatories through the attorneys.

From the titled spouse, questions should be designed to collect information about the business, the type of entity, and the kind of business information that is needed, such as financial information and qualitative and quantitative information. From the nontitled spouse, ask questions that explore that person’s perspective and to raise any concerns or issues early on in the process in order to address them as the case moves forward.

6. Get a list of entities involved. Ask for a list of the entities and the types of ownership of the entities, the ownership by the parties to the divorce, a brief description of the overall situation, and the number of companies involved. For instance, is the real estate owned by another entity that is leased to the subject company? While the valuation expert may not be directly involved in valuing that real estate entity, he would want to make sure that he is consistent in terms of the lease payments and other aspects of the intercompany relationships between the real estate owner and the subject company that he may be valuing. Also, the valuation expert should try to get a feel for whether other assets exist that he should know about for valuation purposes. If the process becomes complicated, consider engaging a forensic accountant.

7. Memorialize key data. Put it in writing! This is one of the differences between valuations for divorce and valuations for other purposes. For example, after a telephone conversation when critical pieces of information have been shared, follow it up with a letter to confirm. When sending information requests to the attorneys, the litigants and the business owners, ask for written responses (even if they say the requested information does not exist). Why bother with this? This is a litigation, so cover yourself in case there is a challenge in court.

8. Be prepared to teach. Because of the small amount of case law developed, divorce courts tend to be not as cognizant of business valuation theory and methodology as other courts. Divorce courts hear so many different issues that it limits the depth they consider when they have to deal with business valuations.

9. Carefully manage your time and cases. With a divorce valuation engagement, valuation experts are generally not in control of their own schedule. It is not unusual to get a call at the last minute about various deadlines or court appearances. This can be a big problem unless time and cases are managed appropriately.

10. Watch your fees. In divorce work, valuation experts are paid by individuals, not company clients or law firms. And these individuals are shelling out a lot of money in connection with the divorce, so it often places an absolute ceiling on what can be charged. Sometimes valuation experts are working for the out spouse, and money is a problem. Many valuation experts will not take a divorce case without a retainer and an arrangement to be paid monthly. It is uncommon to charge above and beyond the retainer because the client views the valuation expert as a necessary evil and once the report is delivered or the valuation expert has testified in court, the client no longer has use for him, so payment could become a very serious problem.

Final thought: There are other issues that will be encountered in a divorce engagement, including buy-sell agreements, noncompete covenants, goodwill and the double dip. Therefore, valuation experts should be fully versed on these issues. Also, the lack of objectivity appears to be more prevalent in family law matters than in other types of cases. Therefore, the valuation expert must take extra care to avoid any pressure toward bias in favor of the client.