10 Time-Tested Ways to Build a Defensible Divorce Valuation

Business valuations prepared for divorce purposes can be much more challenging than valuations can be for other purposes because the rules differ among jurisdictions. There are no clear valuation guidelines for divorce in most states. For example, there’s 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).

In a chapter from Business Valuation in Divorce Case Law Compendium, 4th edition, the author covers 10 universal tips for valuation experts who do divorce work—pieces of advice that apply no matter the jurisdiction.

1. Realize that it is a litigation. The very first thing to realize in doing a valuation for divorce is that it is a litigation. How many times have you heard of an amicable divorce? Virtually all are contentious, some more than others. Therefore, even though divorce cases may be a small percentage of the typical valuation practice, they account for the fact that a high percentage of the occasion’s valuation experts are called to testify as an expert witness. The valuation expert has to act accordingly, understanding that what you say and what you do 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 upfront. It could be the trial date, the complaint date, or the date of the divorce or separation. Most often, you’re dealing with an attorney (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, you need a complete understanding of the appropriate standard to use. It changes by state and sometimes within a state (and even within counties in states). However, while it is your responsibility to understand what the appropriate standards of value are, it’s not your responsibility to choose the right one. That’s something that you and the client should agree to.
   
   
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, you must read the prior case law very carefully. It’s an area in which the case law is not well developed. In many states, there’s no definitive case law and 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 you need to study relevant case law in this regard.
   
   
5. Develop questions for both spouses. In addition to questioning the attorneys early on, you need to ask questions of the titled spouse and/or the outside spouse (depending on which one is your client and what kind of access you have). If you are mutually agreed to or court-appointed, you can expect to speak with both parties. Sometimes, it’s informal and sometimes more formal, through depositions or interrogatories through the attorneys.
   
   
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, does another entity own the real estate that is leased to the subject company? While you may not be directly involved in valuing that real estate entity, you would want to make sure that you are consistent in terms of the lease payments and other aspects of the intercompany relationships between the real estate owner and the subject company that you may be valuing. Also, try to get a feel for whether other assets are out there that you need to know about for valuation purposes. If things get 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, if you have a telephone conversation and when you get critical pieces of information, follow it up with a letter to confirm. When you send information requests to the attorneys, the litigants, and the business owners, ask for written responses (even if they say that what you want does not exist). Why bother with this? This is a litigation, so you need to cover yourself in case you are challenged 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, you’re generally not in control of your own schedule. It’s not unusual to get a call at the last minute about various deadlines or court appearances. This can be a big problem unless you manage your time and your cases appropriately.
   
   
10. Watch your fees. In divorce work, individuals, not company clients or law firms, are paying you. 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 you 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’s 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 you have testified in court, the client has no use for you, so payment could become a very serious problem.

Conclusion

You’ll encounter other issues in a divorce engagement, including buy-sell agreements, noncompete covenants, goodwill, and the double dip. Therefore, you 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.

To learn more about generating a defensible divorce valuation, be sure to check out BVR’s Business Valuation in Divorce Case Law Compendium, 4th edition. Preview the table of contents and look inside the compendium to learn more about this indispensable tool for every divorce professional to stay ahead of the game.

Want to expand your professional divorce knowledge even more? Then don’t miss the AAML/BVR Virtual Divorce Conference next month! This one-of-a-kind event starts on September 9 and brings together leading matrimonial attorneys, financial experts, and profound thought leadership from around the country. Gain critical insights from nationally recognized presenters, increase your practice proficiency, and earn 16.5 CPE/CLE, all from the comfort of your home office.

If you would like to see a preview to the Virtual Divorce Conference, then be sure to register for Mission Critical in Divorce: 10 Key Insights in 60 Minutes. This free preview for the conference brings together attorneys, valuation professionals, and industry experts into one action-packed, 60-minute session.