Business Valuation In a Collaborative Divorce

One of the more complex issues faced by many divorcing couples involves the valuation of businesses and business interests that are property of the marital estate. Conducting a business valuation requires a variety of analyses, including examination of the economic environment, industry developments and the unique attributes of the business being valued. These questions must be answered in all divorce situations, but when appraisal of a business is conducted in conjunction with a collaborative divorce, it is fundamentally different from one carried out in a more adversarial divorce setting.

Collaborative vs. Contentious

A business owner going through a divorce may represent to the non-titled spouse that the business is very unhealthy and will soon seek bankruptcy protection when, in reality, the business has produced consistent income over time and should reasonably be expected to do so in the future. Some non-titled spouses may feel that it is not worthwhile to retain a business appraiser, but the business may be the largest of the marital assets. In a typical contentious divorce, however, most non-titled spouses will seek an appraisal.

Business appraisers accredited by respected professional organizations undergo specialized training, and are required to maintain their accreditation through continuing education. (The accrediting organizations in the U.S. are the Institute of Business Appraisers, American Society of Appraisers, National Association Certified Valuation Analysts, and the American Institute of Certified Public Accountants.) Having common standards for appraisers does not mean, however, that any two will come up with similar valuations of a given business concern. Even with commonly accepted professional standards and valuation methods, two business appraisers valuing the same entity can arrive at entirely different results based on, among other things, differing methodologies and interpretations of supporting data. Each appraisal may be equally valid, and supportable by the same data.

Problems with 'Dueling 'Experts'

Hiring two or more “dueling experts” to conduct business valuation analysis in a litigated divorce can be extremely unproductive. Some common problems with this method are:

• When each spouse retains a separate business appraiser, there is a duplication of certain work.
• Extensive requests for documents and information sent multiple times to the titled spouse add to the cost of the valuation.
• One party may use document production, the valuation process, and the overwhelming cost of continuing litigation as leverage to force an inequitable settlement.
• Comprehensive valuation reports must be structured to withstand cross-examination in court. This may cause valuation reports to be more detailed than they need to be.
• Business appraisers must prepare themselves and counsel for defense of their reports in court, which can be expensive.
• In some cases, the adversarial nature of each spouse retaining a business appraiser may create bias in the business appraiser's opinion of value.
• The litigation process may span years, causing business appraisers to sporadically work on valuation projects as information becomes available to them. This creates an inefficient work process that increases project costs.

Each business appraiser independently arrives at a formal opinion of value, which forces the appraisers to defend their opinions and criticize each other. This structural process problem does not easily allow business appraisers to find common ground in what is a subjective opinion of value.

Problems with a Single Appraiser

In a litigated divorce, the business owner and non-titled spouse may seek to avoid duplicative work by jointly retaining a single business appraiser. Even when this is done with the best of intentions, one spouse may disagree with the appraised value. In this case, the spouse that disagrees with the appraised value may retain another business appraiser to value the business. At that point, the appraisal process begins anew. This structural problem perpetuates the adversarial nature of valuing a business in a divorce.

Business Appraisals in Collaborative Divorce

Valuation in a collaborative divorce setting can be structured to arrive at a reasonable value of a business that also minimizes emotional and financial costs.

If a business appraiser is retained in a collaborative divorce, he or she must state in the engagement letter that, if the collaborative process breaks down, the appraiser will not participate in any subsequent litigation related to the divorce. According to the Uniform Collaborative Law Act, the valuation report and work product resulting from the collaborative divorce also are not admissible as evidence in court. Uniform Collaborative Law Act. Uniform Law Commission. July 2009. With these safeguards in place, the parties are more likely to be open and honest with the evaluator concerning the business and its value.

In a collaborative divorce setting, the following appraisal scenarios are possible. These scenarios are ordered from least collaborative to most collaborative, and from the presumptively least convincing opinions of value to the most convincing. However, the credibility of an appraisal is primarily influenced by the appraiser's work product and professional experience. The three scenarios are:

1. One Appraiser, Jointly Retained

• One business appraiser is retained at the outset of the engagement.
• The collaborative law participation agreement and the business appraiser's engagement letter state that the parties can only retain one business appraiser, if this scenario is chosen.
• The participants in the collaborative divorce may or may not be bound by the appraised value resulting from the valuation.

2. Two Appraisers, Jointly Retained

• Two business appraisers are retained at the outset of the engagement.
• One business appraiser performs the due diligence and creation of the valuation report, and the other business appraiser reviews the valuation report.
• The business appraiser that reviews the report creates a list of the key items that he or she disagrees with, and computes the resulting difference in value.
• At the outset of the valuation process, the participants may stipulate that the value of the business will be the average of the two appraised values.

3. Collaborative Valuation

• Two appraisers are jointly retained at the outset of the engagement.
• The appraisers work together to produce a single document and information request.
• The appraisers review the documents produced and discuss the valuation methods to consider.
• The appraisers participate in a work session to create the initial valuation methods, and perform the necessary research.
• Following the working session, the appraisers work independently on their allocated responsibilities, and then participate in another work session to arrive at an indication of value for the subject interest in the subject company.
• The appraisers produce a letter or summary report that describes the valuation methods performed and the mutual opinion of value.
• The participants in the collaborative divorce may or may not be bound by the appraised value resulting from the valuation.

Choosing the Best Option

The scenarios discussed above can be modified to fit specific situations, but the incentives of all stakeholders in the process must be reviewed to ensure that a fair opinion of value will result.

One of the important topics for the parties to discuss in choosing how to conduct their business valuation relates to total cost for each one of these scenarios. In general, each one should produce total fees that are within a comparable range. The fees paid for scenario one ' one appraiser, jointly retained ' may be the least expensive out of the three set-ups; however, this method allows for the most one-sided opinion of value.

Scenarios numbers two and three should generally cost somewhat more than the first, but the credibility of the appraised value should be greater. In addition, in a collaborative valuation, the business appraisers are able to efficiently reconcile differences in opinions during working sessions, rather than through formal reports and expensive testimony.

The chosen scenario should meet the specific needs of the engagement. If the subject business is small and straightforward, one appraiser may be jointly retained. However, if a business is expected to be a major point of disagreement, a collaborative valuation may be the best option for minimizing financial and emotional costs.

Conclusion

A litigious divorce can create unnecessary financial and emotional hardships on a couple or family going through an already difficult period. While not all divorcing parties are able to put their differences into perspective in order to work together toward a satisfactory settlement, the cooperative process creates a welcome opportunity for those who can. Arrangements for the sale of the marital home, child custody and, as we have seen, business appraisal, can be made in many ways through the collaborative process. It's up to the divorcing spouses to decide the method that will work best for them. But no matter what scenario they choose, with the help of the collaborative framework, business appraisers can efficiently arrive at highly credible opinions of value that minimize costs and unnecessary work.

Scott DeMarco and Steve Egna are Certified Business Appraisers accredited by the Institute of Business Appraisers. Mr. Egna is the Director of Business Advisory Services at Teal, Becker, & Chiaramonte, CPAs, P.C. (www.tbccpa.com), and Mr. DeMarco is a Senior Client Consultant. They are affiliate members of the Collaborative Divorce Association of the Capital District Inc. in Albany. In addition, the firm is a member of the American Business Appraisers National Network (www.businessval.com). The authors can be reached at 518-456-6663. This article was written in collaboration with Michael D. Assaf, Esq. of Assaf & Mackenzie, PLLC. Troy, NY. He can be reached at 518-266-9060.

The collaborative divorce process uses alternative dispute resolution methods in a field that, at first blush, seems immune to such techniques. Before starting in on the process, the participants must execute an agreement stating that they will not seek a litigated resolution to their matrimonial dispute; rather, they will work toward a peaceful negotiated settlement of all issues. With this framework in place, participants in a collaborative divorce can dissolve their marital union with dignity and respect, and formulate an agreement that will more likely be adhered to over the long run.

Divorcing couples using the collaborative process still generally need help navigating the complex emotional and financial issues surrounding the dissolution of a marital relationship. They may choose to have the assistance of several professionals at the negotiating table, including counsel, accountants, psychologists, divorce coaches and other facilitators of their own choosing.

Valuation

One of the more complex issues faced by many divorcing couples involves the valuation of businesses and business interests that are property of the marital estate. Conducting a business valuation requires a variety of analyses, including examination of the economic environment, industry developments and the unique attributes of the business being valued. These questions must be answered in all divorce situations, but when appraisal of a business is conducted in conjunction with a collaborative divorce, it is fundamentally different from one carried out in a more adversarial divorce setting.

Collaborative vs. Contentious

A business owner going through a divorce may represent to the non-titled spouse that the business is very unhealthy and will soon seek bankruptcy protection when, in reality, the business has produced consistent income over time and should reasonably be expected to do so in the future. Some non-titled spouses may feel that it is not worthwhile to retain a business appraiser, but the business may be the largest of the marital assets. In a typical contentious divorce, however, most non-titled spouses will seek an appraisal.

Business appraisers accredited by respected professional organizations undergo specialized training, and are required to maintain their accreditation through continuing education. (The accrediting organizations in the U.S. are the Institute of Business Appraisers, American Society of Appraisers, National Association Certified Valuation Analysts, and the American Institute of Certified Public Accountants.) Having common standards for appraisers does not mean, however, that any two will come up with similar valuations of a given business concern. Even with commonly accepted professional standards and valuation methods, two business appraisers valuing the same entity can arrive at entirely different results based on, among other things, differing methodologies and interpretations of supporting data. Each appraisal may be equally valid, and supportable by the same data.

Problems with 'Dueling 'Experts'

Hiring two or more “dueling experts” to conduct business valuation analysis in a litigated divorce can be extremely unproductive. Some common problems with this method are:

• When each spouse retains a separate business appraiser, there is a duplication of certain work.
• Extensive requests for documents and information sent multiple times to the titled spouse add to the cost of the valuation.
• One party may use document production, the valuation process, and the overwhelming cost of continuing litigation as leverage to force an inequitable settlement.
• Comprehensive valuation reports must be structured to withstand cross-examination in court. This may cause valuation reports to be more detailed than they need to be.
• Business appraisers must prepare themselves and counsel for defense of their reports in court, which can be expensive.
• In some cases, the adversarial nature of each spouse retaining a business appraiser may create bias in the business appraiser's opinion of value.
• The litigation process may span years, causing business appraisers to sporadically work on valuation projects as information becomes available to them. This creates an inefficient work process that increases project costs.

Each business appraiser independently arrives at a formal opinion of value, which forces the appraisers to defend their opinions and criticize each other. This structural process problem does not easily allow business appraisers to find common ground in what is a subjective opinion of value.

Problems with a Single Appraiser

In a litigated divorce, the business owner and non-titled spouse may seek to avoid duplicative work by jointly retaining a single business appraiser. Even when this is done with the best of intentions, one spouse may disagree with the appraised value. In this case, the spouse that disagrees with the appraised value may retain another business appraiser to value the business. At that point, the appraisal process begins anew. This structural problem perpetuates the adversarial nature of valuing a business in a divorce.

Business Appraisals in Collaborative Divorce

Valuation in a collaborative divorce setting can be structured to arrive at a reasonable value of a business that also minimizes emotional and financial costs.

If a business appraiser is retained in a collaborative divorce, he or she must state in the engagement letter that, if the collaborative process breaks down, the appraiser will not participate in any subsequent litigation related to the divorce. According to the Uniform Collaborative Law Act, the valuation report and work product resulting from the collaborative divorce also are not admissible as evidence in court. Uniform Collaborative Law Act. Uniform Law Commission. July 2009. With these safeguards in place, the parties are more likely to be open and honest with the evaluator concerning the business and its value.

In a collaborative divorce setting, the following appraisal scenarios are possible. These scenarios are ordered from least collaborative to most collaborative, and from the presumptively least convincing opinions of value to the most convincing. However, the credibility of an appraisal is primarily influenced by the appraiser's work product and professional experience. The three scenarios are:

1. One Appraiser, Jointly Retained

• One business appraiser is retained at the outset of the engagement.
• The collaborative law participation agreement and the business appraiser's engagement letter state that the parties can only retain one business appraiser, if this scenario is chosen.
• The participants in the collaborative divorce may or may not be bound by the appraised value resulting from the valuation.

2. Two Appraisers, Jointly Retained

• Two business appraisers are retained at the outset of the engagement.
• One business appraiser performs the due diligence and creation of the valuation report, and the other business appraiser reviews the valuation report.
• The business appraiser that reviews the report creates a list of the key items that he or she disagrees with, and computes the resulting difference in value.
• At the outset of the valuation process, the participants may stipulate that the value of the business will be the average of the two appraised values.

3. Collaborative Valuation

• Two appraisers are jointly retained at the outset of the engagement.
• The appraisers work together to produce a single document and information request.
• The appraisers review the documents produced and discuss the valuation methods to consider.
• The appraisers participate in a work session to create the initial valuation methods, and perform the necessary research.
• Following the working session, the appraisers work independently on their allocated responsibilities, and then participate in another work session to arrive at an indication of value for the subject interest in the subject company.
• The appraisers produce a letter or summary report that describes the valuation methods performed and the mutual opinion of value.
• The participants in the collaborative divorce may or may not be bound by the appraised value resulting from the valuation.

Choosing the Best Option

The scenarios discussed above can be modified to fit specific situations, but the incentives of all stakeholders in the process must be reviewed to ensure that a fair opinion of value will result.

One of the important topics for the parties to discuss in choosing how to conduct their business valuation relates to total cost for each one of these scenarios. In general, each one should produce total fees that are within a comparable range. The fees paid for scenario one ' one appraiser, jointly retained ' may be the least expensive out of the three set-ups; however, this method allows for the most one-sided opinion of value.

Scenarios numbers two and three should generally cost somewhat more than the first, but the credibility of the appraised value should be greater. In addition, in a collaborative valuation, the business appraisers are able to efficiently reconcile differences in opinions during working sessions, rather than through formal reports and expensive testimony.

The chosen scenario should meet the specific needs of the engagement. If the subject business is small and straightforward, one appraiser may be jointly retained. However, if a business is expected to be a major point of disagreement, a collaborative valuation may be the best option for minimizing financial and emotional costs.

Conclusion

A litigious divorce can create unnecessary financial and emotional hardships on a couple or family going through an already difficult period. While not all divorcing parties are able to put their differences into perspective in order to work together toward a satisfactory settlement, the cooperative process creates a welcome opportunity for those who can. Arrangements for the sale of the marital home, child custody and, as we have seen, business appraisal, can be made in many ways through the collaborative process. It's up to the divorcing spouses to decide the method that will work best for them. But no matter what scenario they choose, with the help of the collaborative framework, business appraisers can efficiently arrive at highly credible opinions of value that minimize costs and unnecessary work.

Scott DeMarco and Steve Egna are Certified Business Appraisers accredited by the Institute of Business Appraisers. Mr. Egna is the Director of Business Advisory Services at Teal, Becker, & Chiaramonte, CPAs, P.C. (www.tbccpa.com), and Mr. DeMarco is a Senior Client Consultant. They are affiliate members of the Collaborative Divorce Association of the Capital District Inc. in Albany. In addition, the firm is a member of the American Business Appraisers National Network (www.businessval.com). The authors can be reached at 518-456-6663. This article was written in collaboration with Michael D. Assaf, Esq. of Assaf & Mackenzie, PLLC. Troy, NY. He can be reached at 518-266-9060.