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March 28, 2023 Marital Property

Effective Use of a Business Valuation During a Financially Complex Dissolution Matter

By: Lisa Oeltgen

As practitioners, we have all had those cases where the greatest portion of the divorcing family’s wealth and monthly income is obtained from a maritally owned business concern. Sometimes married partners own or manage the business jointly, other times, only one partner is involved, and the other partner may be only marginally aware of how the business operates.  Very seldom is the goal to place the business for sale on the open market, more typically, counsel for the parties seek to value the business for division at mediation or trial. This article explores the valuation process and the steps taken to arrive at a value.

In many cases, family law practitioners have formed a relationship with a business valuator in their area whom they have come to know over time and through reputation.  If this has not yet been your experience or if counsel is new to the field of family law, it is wise to seek out the recommendations of other family attorneys who will be able to point you in the right direction.  Qualified business valuators are typically CPAs who have obtained the Accredited in Business Valuation (ABV) status and often their Certified Valuation Analyst (CVA) and Certified Financial Forensic (CFF). Some have accreditation in other fields as well, such as Certified Information Technology Professional (CITP).

Once you have successfully procured your valuation expert, it is important to discuss the scope of the work so expectations are clear.  Will the expert be required to prepare a final Report with a Conclusion of Value in expectation of Trial, or will they be asked to complete a Calculation of Value in order to assist with strategic planning or for use in a mediation setting for settlement purposes only? The distinction is important, as it will affect not only the terms of the engagement that counsel and his or her client will enter into, but also the time, cost and valuation methodology associated with the valuation.

For example, if the purpose of the initial engagement is to seek a proposed value from the valuator that is to be taken into settlement discussions and/or mediation only, then the Calculation of Value will often be the accepted method of practice for this endeavor.  Client, counsel, and the CPA will agree upon what valuation approach to use and the process is typically much less invasive than the full evaluation needed for the Conclusion of Value.  The shortcomings are obvious: less certainty with regard to the final number and no ability to use the Calculation of Value in Court at Trial.  Two benefits of this method would be to utilize the information gathered as a discussion point in settlement, especially where litigation is not imminent, and to create work product that can be reconstructed and enhanced with some additional work into a final Conclusion of Value.

A Conclusion of Value is the appropriate path to valuation when a practitioner has no doubt that the dissolution is heading for Trial, that there will be no agreement achieved in settlement, or settlement has already been attempted and failed.  In preparing a Conclusion of Value, the business valuator will complete an engagement letter with client and counsel and all three valuation approaches will be considered: asset, income, and market approach.  This form of valuation considers detailed reporting requirements and quite often the business valuator will speak with both parties as owners, visit the location site(s) of the business(es) being valued, speak with accountants for the business(es) and review prior tax years, P & L statements, financial statements prepared for the entity previously, and any other documents that tend to give insight into the value of the business concern.  This can even include information regarding any alleged premarital ownership or funding by either married partner.

For purposes of litigation, the Conclusion of Value is the only engagement that will result in an opinion by the business valuator that is sufficiently solid enough to be utilized in litigation.  Should you find yourself with a completed Calculation of Value and Trial is looming, it is imperative that the engagement be revised to complete the Conclusion of Value with adequate time to be prepared for Trial and to exchange all expert Reports timely as required in your respective jurisdiction. 

In addition to knowing what type of engagement you are seeking from your business valuator, make it your goal to learn about the business valuation process. This will ensure that you are able to effectively conduct a comprehensive and sound direct examination of your valuation expert.  Work with your business valuator to learn about significant valuation terms and concepts: marketability discounts, capitalization rates, risk adjustments, tax effecting the value, and normalization of key salaries, just to name a few.  The well-seasoned business valuator will know that there are no foolish questions from counsel while going over the information, prior to finalizing the Conclusion of Value Report. Counsel should know the Report as well as the business valuator at the time of Trial to redirect effectively after cross examination. Further, counsel will need to be able to cross-examine the opposing counsel’s business valuator and this can only be done if counsel is familiar and well-versed with the subject matter. 

In summary, a well-prepared business valuator with a firmly constructed Conclusion of Valuation can be the key to achieving the most accurate business value at Trial for your client.  As this is quite often the largest asset on the table during a dissolution, your client will be the true beneficiary of you knowing this process inside and out before being put to the test at Trial. Make it your business to know your client’s business. 

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Lisa J. Oeltgen

Esq., Lexington, KY

Law Offices of Lisa J. Oeltgen, PLLC
ABA Section of Family Law Marital Property Committee Vice-Chair