In divorce cases where the value of a company is in question, family law counsel are facing an increasingly common concern: How do they ascertain the value of the business in a way that provides the most accurate result for their clients—yet in the most cost-effective way possible?
A full business valuation backed by expert testimony may be necessary depending on the complexity of a company or case. But one size does not necessarily fit all where divorces and business valuations are concerned. Family law attorneys and their clients may be able to save time and money depending on the prospects for settlement, the depth of valuation information required, and the way valuation data will be used.
Using these criteria, family law attorneys may want to consider looking for a business valuation expert who offers a phased approach to business valuations.
Phase 1: Calculation of Value Presented in Schedules
The most cost-effective option and perhaps the most useful for cases with a high probability of successful settlement is one where the expert produces calculations of value in schedules that are not disclosed to other parties or a finder of fact. In this scenario:
- The business valuation expert is engaged as an “undisclosed consulting expert” whose work product falls under the attorney work product privilege.
- The attorney or client has control of the access to business information or has obtained voluntary discovery of business information between the parties.
- The business valuation expert performs limited calculations of value contained in schedules that provide a range of estimates of business values, based upon assumptions agreed upon between the business appraiser and the client.
- Calculations of value schedules, which are marked “For Settlement Purposes Only,” are distributed only to the counsel who engaged the expert and the counsel’s client.
Phase 2: Calculation of Value Presented in a Restricted Appraisal Report
In the second phase, the role of the business valuation expert is disclosed to the parties. The level of data collection and analysis also increases—though not to the degree found in a full business appraisal. This phase typically is most useful in cases with a reasonable probability of successful settlement and where increased understanding about the valuation of a business can help facilitate settlement discussions. Under phase two:
- The work of the business valuation expert to assist with settlement efforts is disclosed.
- The business valuation expert performs calculations of value based upon the asset, market, and income approaches.
- The expert provides either a range of estimates of business value or a single point estimate of value in a “Restricted Appraisal Report” as defined in Standards Rule 10-2 of the Uniform Standards of Professional Appraisal Practice.
- Distribution of a Restricted Appraisal Report, which is marked “For Settlement Purposes Only,” is limited to parties that are identified in the report. This enables attorneys to share the Restricted Appraisal Report with a mediator and opposing parties and their counsel and settlement advisors.
- The Restricted Appraisal Report clearly discloses that it is limited and cannot be used in litigation by any of the parties. If the parties cannot reach a settlement and litigation must move forward, a full Appraisal Report would be necessary (see Phase 3 below).
Phase 3: Conclusion of Value Presented in an Appraisal Report
Phase 3 includes an opinion of business value and has the greatest level of due diligence and disclosure. As a result, it is the most expensive of the three phases. However, the expense is often a necessity in cases where assets and corporate holdings are complex, business values are litigated, and where settlement possibilities are more limited. In Phase 3:
- The business valuation expert is disclosed as a testifying expert.
- The expert may assist with discovery efforts to obtain all necessary business valuation data.
- Business valuation experts perform all of the valuation approaches and methods they deem necessary and appropriate and present a conclusion of value as a single amount.
- The conclusion of value is presented in an Appraisal Report, as defined by Standards Rule 10-2 of the Uniform Standards of Professional Appraisal Practice.
- The business valuation expert is available for depositions and expert testimony if required.
Clearly, costs are an important consideration in the settlement or trial of a divorce case. We can help you assess the most cost-effective way to approach disputed valuation matters. To learn more about our business valuation services, contact us for a consultation or visit our Litigated Business Valuation Services page for additional insights.