How Business Valuation Methods Helped Resolve a Complex Prenup Battle
SITUATION: A law firm client for whom we have previously provided business valuations for divorce cases asked us to apply a valuation formula spelled out in a prenuptial agreement. At first glance, the formula appeared straightforward. However, the formula was established many years in the past based upon the economic and business environment at that time, reflected a small number of companies, and contained undefined or ambiguous terms.
The current divorce involved hundreds of businesses in a complicated organizational structure. The attorneys called us because certain members of our team are valuation experts who are CPAs with decades of experience working with complex financial statements and tax returns.
STRATEGY: FSS was provided with organizational charts, CPA-prepared financial statements (for the entities that had them), tax returns, and thousands of pages of supporting documents. Sifting through this data was one of the key challenges we faced. A printout of the organization chart was so large that it resembled a mural, wrapping around the walls of a large conference room. Some entities were consolidated for financial statements or tax return purposes, with multiple layers of consolidations of companies owned by other companies. There were many foreign entities, including financial statements denominated in foreign currencies. Bases of accounting differed, as did the type of tax reporting required across the varied industries and jurisdictions.
Our extensive experience in providing business valuations in divorce cases combined with our expertise as CPAs in financial statement reporting and domestic and international tax preparation enabled us to:
- inventory, sort and organize each entity in the marital estate.
- apply the formula from the prenup agreement incorporating typically applied business valuation approaches and methods where there were undefined or ambiguous prenuptial agreement terms.
- cross check that each consolidated entity was accounted for separately and that all of the hundreds of entities were included in the formula calculation.
- prepare a range of values.
- Provide to our engaging counsel calculations anticipating how the opposing side might interpret the formula and any undefined or ambiguous terms to give strategic insights to our engaging counsel.
RESULTS: The opposing side attempted to ignore the prenup agreement and demanded a settlement that was 10 times greater than the values we had calculated. An opposing expert lacking the financial sophistication of our team members claimed that incomplete and unusable data had been provided to them.
In a Zoom call with the mediator, the opposing expert, and opposing counsel, we successfully refuted the opposing expert’s claims. Point by point, we explained to the mediator where in the document production each “missing” document resided and why the opposing expert’s claims appeared to be due to their lack of experience, not a lack of production by our engaging counsel’s client. We even prepared a detailed roadmap to the documents for the other expert to use. The mediator instructed him to complete his work.
Shortly afterwards, the attorneys let us know that the opposing side had substantially lowered their demand, enabling the case to be settled.