The nuances of divorce valuations and testifying in court create difficulties that make divorce engagements especially challenging. That is one reason why BVR is pleased to join forces with the American Academy of Matrimonial Lawyers (AAML) to present the National Divorce Conference in Las Vegas May 8-10 at the ARIA Resort & Casino. This is the only event of its kind, and it brings together the leading matrimonial attorneys and financial and valuation experts.
Here are some “don’ts” to keep in mind for your next divorce engagement. You will learn more about these—and other—issues at the conference.
- Don’t fail to assess risks before you take the engagement.
You need to know exactly what you’re dealing with before you accept a divorce engagement. By doing sufficient due diligence upfront, you can head off problems that may come later. For example, if the client is the “out” spouse, find out what access to information he or she will have and whether the business owner-spouse will be responsive or not. Also, before taking the engagement, ask to see tax returns or financial statements to spot potential risks, such as unexpected assets, unlikely financial ratios, or a heavy debt load.
- Don't overlook case law, statutes, and professional standards.
In a recent Florida divorce case (Hebert v. Cote), one of the valuation experts was barred from testifying because he failed to meet the state’s statutory requirements for valuing an asset. The disqualified expert also breached the valuation standards in several aspects. Attorney David Levy (Berger Schatz), one of the co-chairs of the National Divorce Conference, advises you read and know the statutory requirements in your state as well as the applicable case law and the relevant professional standards.
- Don’t limit your document requests.
Hidden assets are common in divorce, so the valuation expert often has to help ferret them out. Therefore, when making document requests, ask for “everything,” meaning all documents related to anything that involves the divorcing parties as either beneficiaries or fiduciaries. This includes tax returns, trusts, estate plans, and wills—including the wills of other individuals (such as the spouses’ parents) in order to see whether the spouse will inherit anything. Be as broad as possible in your request and be aware that you may not always get everything you ask for, but you need to ask anyway.
- Don’t blindly accept information.
Business valuations can be rigged, especially in an acrimonious divorce matter. Therefore, be on the alert for attempts to influence the valuation by, for example, manipulating projections. From the expert’s perspective, he or she must be an unbiased analyst who is essentially working for the trier of fact. On the other hand, the attorney’s role is to be an advocate for the client. This puts the experts in the middle, and the courts will look to the experts to not only accept everything that is given to them, but also look objectively at the facts and evidence in support of their opinions.
- Don’t assume all cash is visible.
In a cash-intensive business, there’s always the possibility that owners will remove or conceal money. Although you’re not required to ferret out unreported income, you should do a “smell test” for it by, for example, comparing ratios to similar firms. Another way is to do a lifestyle analysis to see whether what’s reported as income is enough to support the owner’s standard of living. If you think cash is being siphoned off, how do you prove it? Experts have used surveillance techniques to get a sample of the level of business done in order to extrapolate it.
- Don’t confuse the court.
For an appraiser to be a good expert witness, he or she must be able to explain highly technical and complex financial concepts in a simple way. Forget about presenting a pile of spreadsheets—you need to boil it all down to a few effective pictures, graphs, charts, or other visuals. And, instead of using technical terms, use simple and commonly understood words.
- Don’t ignore the new tax law.
It’s been more than a year since the new tax law was enacted, and, while the thinking continues to evolve, experts have a much better handle on the impacts on valuation. In divorce, the loss of the deduction for alimony payments will affect negotiations, as will the change in the relationship between the dependency exemption and the child tax credit. For businesses caught up in divorce, the new tax law impacts practically everything in the valuation analysis. Now more than ever, tax professionals need to be brought into a case.
- Don’t practice law.
The valuation expert is not a lawyer and the lawyer is not the expert, so everyone should stay in their lanes. Your reports should not be citing court cases, statutory authority, or other legal precedent unless you have specific legal instructions to do so. At the same time, it is essential that the analyst read all case precedents in the relevant jurisdiction, since family law valuations are less structured and less consistent than in any other area of valuation practice.
- Don’t forget about visual cues when testifying.
Too few experts think about giving credible visual clues when testifying in court. Sometimes, it’s not what you say or how you say it, but how you appear when you are saying something that has more of an impact. This involves using gestures and facial expressions effectively, creating situations where you can step out of the witness box and become a teacher (such as using a flip chart or other visual aid), and guarding against the chance of being perceived as demeaning or arrogant.
- Don’t fall into the ‘cost savings’ trap.
There are potential perils when clients try to save money on valuation experts by hiring a joint expert and/or asking for a “calculation” instead of a “valuation.” You need to have a clear understanding of the differences between valuations and calculations and the need to address issues upfront such as the level of work required and scope of services expected by the intended user and for the intended use, identification of the “client” and the involvement of the client in certain determinations, the potential for bias, issues of reliability, and more.
For more on divorce and valuation, be sure to attend the AAML/BVR National Divorce Conference, May 8-10 in Las Vegas or attend the webcast from the comfort of your office. A valuation or financial expert and an attorney will co-present many of the sessions. The event is designed to provide different perspectives between the financial and legal experts, something that is crucial to understand. And the conference sessions will explore what the courts require and how to coherently present and support their opinions.