How Good is your Expert Business Valuation Report in your divorce?

1. Basics of Business Valuation

Before diving into attacking a business valuation report, it is crucial to understand what these reports entail. A valuation report estimates the fair market value of a business by considering factors like earnings, assets, liabilities, market position, and economic conditions. Three main approaches are typically used: 

• Income Approach: This approach will lean heavily on the business’s projected cash flows. 
• Market Approach: The market approach as a valuation method is used to find the value of a business by comparing it to other similar businesses that have sold recently.

• Asset Approach: This approach attaches more value to the assets held by the business, such as real estate or intellectual property and bases the value on the business’s assets minus liabilities.

 Each method has its strengths and weaknesses, assumptions, and limitations. Often, depending on the nature of the business, one approach will be far more reliable than another. By understanding these, an attorney can begin to evaluate the probative value of the expert’s analysis. 

2. Expert’s Qualifications

We would first look at the expert’s curriculum vitae. Upon evaluation of this document, we may challenge the credibility of the expert findings based on their education, qualifications, experience, or potential conflicts of interest. For instance: 

• Credentials: If the expert lacks certifications like CPA, ABV, or CFA, this may undermine their credibility. It can also undermine their report if the credentials he or she has are inferior to our expert’s. 
• Prior relationship with the client: An expert who worked with the client could be viewed as biased due to a pre-existing business relationship. 
• History of suspect valuations: Past involvement in cases where his or her valuations have been lost in court can be used to question the expert’s reliability. 

We investigate the expert’s educational and professional background, publications, and previous testimony to reveal any potential biases or issues with their professional standing.  All of this can be used to discredit an expert in pending litigation.  If the opposing party brings an expert to court whose credentials are in question, it can provide our client with an advantage in negotiation and trial by examining this history. 

3. Methodological Flaws

Business valuation reports must be thorough, accurate, and based on reliable methods. Attorneys can impeach a valuation report by finding methodological flaws, including: 

• Faulty financial assumptions: For instance- let us say there is a valuation report that indicates a business can expect a growth rate of 9% over the next 5 years.  But certain city or county ordinances make expansion prohibitively expensive.  Considering certain obstacles to growth, an expectation of 9% growth may be overly optimistic.  Assumptions about the future are always fodder for examination of an expert’s report.  A weak business valuation report will indicate that future revenue, expenses, or economic growth are either overly optimistic or pessimistic. 
• Improper valuation methods: If the income approach was used on a business that is heavily dependent on tangible assets, the valuation can be attacked. Or, if the income approach is used despite a business experiencing fluctuating or unpredictable cash flows, it may indicate an inaccurate valuation.   
• Wrong market comparable: If the market approach was used to value a business, we would heavily scrutinize the selected comparable to evaluate whether they are truly indicative of the value of the business.  If the business used in comparables relied on by the expert are not truly like the business being valued, that report can be successfully challenged in negotiation and trial. 

In Re Marriage of Ackerman is a case where the court saw weaknesses in both valuation methods used by the experts in that case and the failures by the experts to provide reliable evidence upon which the court could rely. 

4. Inconsistencies or Omissions

Valuation reports can be fraught with inconsistencies in numbers, methodologies, or conclusions. Examples include: 

• Assets and Liabilities: If the expert prepares a report that fails to identify significant liabilities or assets, the valuation is immediately compromised. A compromised report like this will not be useful in negotiations or trials. 
• Missing Explanations: If the valuation report fails to explain why the method used was selected or why assumptions were used, it is easier to question the expert’s judgment and call the report into question. 
• Prior inconsistent statements: An attorney can compare the expert’s prior reports, testimony, or publications to identify any inconsistencies with the current report. It is common for an expert to take one position on an issue in one case and present the complete opposite position on the same issue in another case.  This sort of evidence can be highly probative when presenting your case to a judge. 

5. Challenging Adjustments

Often, experts will find that a business owner has used the account to provide for personal expenses.  Valuation reports should consider these and provide for adjustments to the valuation if there are discretionary expenses, confusion about personal goodwill, or discounts (like marketability or minority discounts). An attorney, working with a business valuation expert can scrutinize these adjustments by: 

• Personal expenses: There ought to be an evaluation of the expenses of the business.  In the case where some expenses are obviously personal, adjustments should be made.  Other expenses will be arguable whether they were personal or business.  If the expert added back personal expenses, an attorney could argue that these were legitimate business costs, affecting the valuation. 
• Scrutinizing goodwill allocation: The allocation between personal and enterprise goodwill can impact the overall value, particularly in service-oriented businesses. For instance, a CPA firm that is reliant on the owner to interact with the clients can have a high degree of personal goodwill.  If, on the other hand, goodwill is not dependent on the owner, then enterprise goodwill can be valued higher. 
• Critiquing applied discounts: Discounts for lack of control or marketability must be justified. If a spouse only owns 18% of a business, then they do not have control over the business and the value will be discounted due to his or her lack of control.  Despite this, however, if the discounts applied by the expert are too high, it may indicate an attempt to undervalue the business and call into question the reliability of the report. 

Attorneys can use industry standards and comparable reports to question the reasonableness of these discretionary decisions. 

6. Data Quality and Sources

Accuracy of data is paramount in valuation. Many of our clients are involved in businesses that do not have sufficient data about their marketing, sales, production, or financials.  If an expert’s valuation is based on inaccurate or incomplete data, it can lead to a report that will be subjected to impeachment. We examine:  

• Outdated or incomplete financials: Using old or incomplete financials means an expert could miss critical recent developments affecting the valuation of the business.  
• Unreliable market data: Comparable or industry data must be relevant, current, and accurate if they are to be relied upon in negotiation or trial. Your attorney and expert need to be able to assess the date used by the opposing party to determine whether there is reason to believe that report is unreliable. 
• Over-reliance on subjective factors: Experts will sometimes make assumptions about the company’s future performance or economic outlook based on subjective evidence.  This could mean they are listening to their client indicate there is no intent to grow the business. This is often a lie that a person in divorce will tell to get as low a value as possible.  Likewise, someone on the other side will inflate the growth potential to get as high a value as they can.  Without relying on objective evidence, experts can be coerced into preparing a valuation report that is inflated or deflated based on the goals of the client. 

Evaluating the information an expert relied upon and setting the expert for deposition can expose these data-related issues. 

7. Your own Valuation

Often, people will try to save on divorce litigation costs.  This can lead the parties to agree on a joint expert to prepare an “independent” report.  Even so, the report needs to be evaluated looking at the items discussed above.  If the report provided by the joint neutral expert does not align with what our client wants, we will recommend obtaining a different report from a different expert.  This report can be a powerful tool in challenging the initial joint report. Our expert can: 

• ID flaws: Just because the parties agreed at the outset to hire a joint neutral expert does not mean the report will be reliable. We can scrutinize whether and how the original expert’s methodology or assumptions were flawed. 
• Provide a new valuation: A second expert preparing a second report can provide a new valuation that may be more accurate.  
• Highlight industry norms: Support the rebuttal valuation with accepted practices and standards to reinforce its credibility. 

Building a Case for Impeachment 

Attacking the credibility of a business valuation report requires careful preparation and an ability to evaluate the methods and conclusions reached by the expert. By impeaching the expert’s  

• qualifications, 
• methodology, 
• assumptions,  
• and providing a report of our own, 

We can weaken the impact of an inaccurate report and build a case for an equitable solution. The right attorney can help ensure that their clients receive adequate representation throughout this process and a fair outcome for their client.  

Seabrook Law Offices is here to help you with your Business Valuation Report in your Divorce

Don’t leave your financial future to chance. If you’re navigating the complexities of a divorce and have concerns about the accuracy or fairness of a business valuation report, you need an experienced advocate on your side. Reach out to Seabrook Family Law today to discuss your case. Our team will carefully evaluate your expert’s report and develop strategies to ensure your interests are protected. Schedule a consultation with us, and let’s work together to secure a fare and just outcome in your divorce.