Family law attorneys often ask me if they really need a valuation and how to work with a valuation expert witness in a divorce matter.
Here are some things to consider. What do you know about the business? Understanding whether you need a valuation has to do with several factors, some of them are about the business and some of the factors are about the strategy for testimony regarding valuation and maintenance issues.
Some simple questions you can ask your client are in reference to profitability, is the company making money or profitable? Has the revenue stayed the same as the past couple years or is it significantly different, either up or down? Does the owner receive a salary from the company or possibly distributions? You can also ask whether the company is a start-up or if there are any trademarks, patents or proprietary systems.
See if you can get 3 to 5 years of financial information such as balance sheets and income statements or, at a minimum, the company’s tax returns. This will give you a better idea of the operational history and you can share it with an expert to give them an opportunity to understand the complexity and scope of the valuation.
Why should you care about these questions? Typically these are the areas of contention in a divorce. The parties will disagree on what the future of the company means to the value more importantly one party may think the other spouse is destroying the business prior to the divorce – in order to lower the value. There are cases where the person operating the business will funnel money out of the business or invest heavily in new equipment, which may be unnecessary to the operations. In other cases the owner will pay themselves a hefty salary or, conversely, a very low salary given the responsibilities, either way the compensation may need to be adjusted. When you adjust salary you need to consider the issues surrounding “double dipping” which is simply using one number for compensation when determining the value of the business and using a different number for the calculation of maintenance.
What does the valuation have to do with strategy? Strategically you may want a valuation if the other party has already hired an expert or if there is any concern about whether a business asset is marital or separate or if there are several companies involved and the business structure is complicated. Typically when the parties get divorced both sides start to have completely different views of the value of the company, which makes it necessary to hire an expert to determine a supportable value of the company. Your expert is there to provide a defendable valuation opinion, not the highest or lowest number which benefits the client.
Normally you can contact a valuation expert, discuss some of the specifics of the company or the situation and then determine what type of valuation is necessary given the facts and circumstances. It's not always easy to determine whether you need a valuation but you can also hire experts to just review the documents. They will take a look at the specific issues you've identified and see if there's a better way to go about getting what you need.
Maybe you think there is no value to the business?
Sometimes there may be little value but the cash flow is supporting the lifestyle of one individual, which could affect maintenance. It might just be an exercise to prove some value and then support a position of limited/no maintenance. Experts can provide a better picture of the valuation, but can also serve as a consultant and help you develop the underlying theory for the negotiations or settlement strategy.
Try to fit the budget with the work needed. Valuations can be developed in stages, so you could hire an expert to (1) review the documents and give you an indication of whether the company is worth valuing (2) if there is value, then proceed to give you an idea of the value range in order to settle the case or prepare for negotiations and (3) finally, if you get close to trial or deposition, the expert can prepare final conclusions, schedules and/or a report, as well as prepare for testimony.
Let the valuation expert help you define the project. Be clear on what you need and then let them tell you what costs may be incurred. Scoping the project and proceeding in stages can save time and dollars as well as provide you and your client with a defendable position in court. Give me a call if you have any additions questions.
Melissa Gragg 314-541-8163