Valuation services for divorce require consideration of some unique issues, plus other special issues not generally found in most other types of valuation work. Because a large percentage of our work is in the area of divorce, we are experienced in handling these special issues.
There are many issues an appraiser must consider when performing a valuation for divorce purposes. Some of the key issues, however, include the following:
- Consideration of state laws and statutes. Each state’s divorce laws and statutes vary, and this is certainly true in the area of business valuation. Some of the issues discussed below must be handled differently, depending on the state. Your appraiser will need to be familiar with your state’s unique laws and statutes in order to prepare a proper valuation.
- Standard of Value. An appraiser must use the appropriate standard of value, which will depend upon the relevant state jurisdiction. The standard will likely be either “fair market value,” “intrinsic value,” “value to the holder,” or “fair value.” The standard of value has implications for how certain valuation matters are handled by the appraiser, and therefore what the ultimate value of the business will be.
- Personal v. Entity Goodwill. This is an important issue in divorce valuations that can have a large impact on the amount of business value that will be subject to division between the spouses. Again, the appraiser must consider your state’s unique statutes and case law when dealing with this issue.
- Number of valuations required. In some cases, the appraiser must prepare a valuation of the business as of two different dates. If two dates are required, then the appraiser will have additional procedures to apply. Whether or not a second appraisal will be required for that business depends upon a few factors, including whether or not the parties were married before or after the subject business was started.
- Double dipping. This is a valuation issue that is unique to divorce valuations. It may or may not apply, depending upon whether or not the appraiser has been asked to determine a spouse’s income for spousal or child support purposes (in addition to performing a business valuation). The applicable state’s laws and statutes on this matter are important considerations for the appraiser.
- Active or passive appreciation in value. Another issue unique to divorce valuations, the appraiser is often asked to assist the parties and their attorneys in determining the amount of the increase (if any) in the business’ value that was due to the business owner’s personal efforts versus those factors that were beyond the owner’s control (economy, industry, etc). The attorney and valuation analyst often work together on this issue.
- Income determination. In addition to determining the value of the subject business, an appraiser is often asked to help determine the business owner’s income for support purposes. In performing this task, the appraiser must carefully consider the owner’s income flowing from the business, the owner’s compensation from the business, and other factors.
- Forensic accounting. In some cases, the business appraiser will be engaged to analyze the businesses records for purposes of determining whether or not, for example, personal expenses of the owner were paid by the business. Forensic accounting is also sometimes required when the business’s books are incomplete or are in poor condition. Of course, in other cases, more egregious matters may have to be addressed by the appraiser.
- Application of discounts. Especially when a business owner holds only a partial ownership interest in the subject business, discounts for lack of marketability and lack of control must be considered. As in many other issues discussed above, the appraiser must consider the state’s applicable statutes and case law.