Category: Property Valuations
Questions/Answers
What if the experts differ in their opinion of value?
If two or more experts differ in opinion as to the value of a closely held business and the difference is substantial, the cost of retaining the expert will likely increase as the expert is called upon to testify. In some instances, the expert may further assist the attorney with an analysis of the opposing partyís expert report. These additional services are billed in addition to the business valuation service. Asking the experts to discuss their differences may help identify facts that one failed to consider and may minimize costs to litigate. However, valuation experts may not be persuaded by another expertís perspective and this process can be counterproductive, allowing the opposing party to build a better case for their expertís opinion.
How much time will a business valuation take?
The time it takes to prepare a business valuation analysis can vary from a few hours for a very small business (i.e. Pizza Shop) to hundreds of hours for a large business (i.e. Product Manufacturer). Business financial information includes tax return filings, financial statements, general ledgers, bank statements, invoices and customer billing records. Obtaining accurate financial information in a divorce setting can sometimes be difficult. In some cases the business owner may need to be court ordered to produce business records which causes delays. Financial records must then be analyzed by the appraiser and questions must be answered promptly. The use of outside experts to conduct equipment or real estate appraisals will also delay a project if not addressed at the beginning of the engagement.
What type of valuation report should I ask for?
Professional standards dictate the minimum information that must be included in a business valuation report. However, in a divorce litigation setting the reporting requirements may be waived, allowing the expert to tailor the report to the needs of the client and the legal process. A letter stating the expertís opinion will be less expensive than a summary report or a detailed report, but may lack credibility, especially if the other party to the litigation has obtained a more comprehensive report. The size and value of the business should be considered. Generally, the value of a very small business can be successfully communicated in an abbreviated report, leaving the comprehensive report for larger business operations.
How much will a business valuation cost?
The cost of hiring a business valuation expert will depend upon a number of factors including the size and type of business, the accessibility of business financial information, the accuracy of the business records and the type of report being prepared. The cost of a business valuation can range from $10,000 to $50,000 or more, depending on the complexities. You should expect to pay a retainer before any work is started which can be as much as the entire expected fee. In the case of a very small business, an expert may perform valuation services for a fee that is less than the above range. You should discuss with the expert any scope limitations, the type of report and any other pertinent factors.
What is meant by the "Cut-Off Date," "Date of Classification" or "Date Marriage Ended"?
For purposes of the present value analysis, the cut-off, date of classification or date the marriage ended date refers to the date that marital property rights relative to the pension terminate. This date can be the separation date, the actual date of divorce, or some other date that may be mutually agreed upon by the parties. This date is different in every state, and is usually dictated by case law.
Helpful Tips and Facts
The Value of a Business
As one business appraiser says, value is what something is worth; price is what someone will pay. In business, nothing has intrinsic value.
Present Value
Nothing gets cheaper. For the spouse getting support this means that it is a good idea to negotiate a cost of living escalator into the separation agreement. A COLA, as it is called, ties increases in the local cost of living to the agreement, or it assumes a flat percentage increase.
Selling Personal Belongings - A New Beginning
Strange as it may seem, some people find a strange liberation in starting anew unburdened on household goods they have sold at fire sale prices. One woman ending a long marriage said the garage sale of her household goods was "a catharsis."
Household Goods go for Garage Sale Prices
In a divorce, nothing is more foolish than fighting over household goods because they command garage sale prices. Household goods include furniture, pots, pans, bedding, the porch furniture and probably everything stored in a self-store lockup. Don’t fight over it. it is just not worth it -- emotionally or financially.
Don’t Value Your Own Business
Putting a fair value on a going business often becomes an explosive issue in divorce actions. This is one area of a divorce where the services of an expert are a must.
Housing Bubble
In inflated markets, the bursting of the bubble can trap people in houses they can neither afford nor can sell. This happened in Japan in the 1990s.
Think House, Not Home
A home is a state of mind and a habit of the heart; a house is a building on a piece of land. The word home is warm and fuzzy; house is cold and angular. Anyone in the market is well advised to think house, not home. Sophisticated buyers always throw a cold eye on a purchase. In other words, don’t pay more than you can afford. Don’t make yourself house poor buying that so- called "dream" house; it can become a nightmare to own a building you cannot afford. In a real sense, no one can ever buy a home; he or she must make it. Anyone who is buying a house should always remind himself or herself that there will always be another house on the market.
Depreciation Blues
The depreciation of an automobile should be considered in a property distribution. All roads, as they say, may lead to Rome; all the cars (or almost all of them) end, not in Rome, but in the crusher. When accepting a car as part of a property distribution, a party should think long term. What will it be worth when it’s paid for? And short term. How much does it cost to run? Always remember, the ultimate destination of all cars is a junkyard.
Date of Purchase or Date of Marriage
A common made mistake when determining the value of a marital asset purchased prior to the marriage is a failure to consider the fraction of time it was owned before the marriage. Taking the straight appreciated value of the asset without considering the ownership before marriage inflates the value of the marital portion.
Valuing a Business with Capital Assets
Expert valuators can determine the value of capital assets. And with the help of a good forensic accountant trained in tracing marital asset usage along with preparing a comprehensive business valuations, any attorney and his or her client can arrive at the negotiation table with the proper advice they need to present a reasonable settlement.
Stock Options and Divorce
Stock options can represent one of the largest assets divisible upon divorce. If this is the case, a proper value needs to be assigned to the options. This way an equitable property distribution can be awarded. The Black-Scholes Model is one of the more popular methods used for valuing stock options for divorce purposes. Don’t let yourself get shortchanged in the divorce settlement. Make sure you hire a professional who is familiar with valuing options, especially in divorce cases.
Stock Options as a Form of Compensation
Here is something to consider. If an employee is given options that can be vested only after 5 years of employment, and the value of the company stock rises significantly over the five years, the likely hood of the employee getting and increase in salary is minimal. This being said, often times stock options can sabotage the opportunity to get a salary increase, therefore this aspect should be considered especially if the options are far from being vested.
Recognizing Appreciated or Depreciated Value
Retirement accounts, stock options, and securities often either appreciate or depreciate in value over time and tracking the appreciation or depreciation of these types of assets can be quite burdensome. Hiring a trained professional to provide some type of tracking report is highly advisable.
You Will "Appreciate It" When You Find It
The appreciated value of an asset can be easily forgotten or intentionally missed, which is why it is very important in the information-gathering phase of your divorce to make sure you have furnished as much financial information to your lawyer as possible. A divorce lawyer is trained to recognize what types of assets will appreciate and how to uncover hidden value and if needed to a lawyer will consult will a forensic accountant for help.
The Contents of an Appraisal Report
Depending on the asset being valued, the report will be significantly different. The more complex the asset (like a business, or retirement account) the more in depth the report should be in explaining how the asset has been valued. If the report is very lengthy and is difficult to understand, expert testimony is almost always recommended.
Appraiser as an Expert Witnesses
An expert witness will certainly drive your costs up. If the asset’s appraised value will change the property award significantly, it may be worth it. Certain assets will warrant expert testimony more than others. For example, a house appraisal is far less complicated than a business appraisal, so it may be essential to have the business appraiser clarify to the court his or her procedures to arrive at the value.
The Valuation Date
An appraisal is done as of a specific date. This date is typically agreed upon by the parties and can either be the separation date or the date of the divorce. Agreeing on what date should be used for valuation purposes is often argued because it can severely alter the valuation amount of an asset. For example, the marital home may have appreciated in value since the separation date.
Postponing Income or Business Activity
A sneaky trick that many spouses undertake is attempting to postpone income or actions that would cause an active asset (like a business) to increase in value during the divorce process. For example, a divorcing spouse may decide to close a large business deal at a later date after his or her business has been valued for divorce purposes because the deal increases the value of the business substantially.
The Separation Date
The accrual value of a marital asset can be very different depending on the actual separation date the spouses agree upon. The separation date can be a heavily disputed issue when the value of certain marital assets increase or decrease significantly from apply one separation date or another.