Business Valuations in Collaborative Divorce

Written by Richard L. Wolf, CPA/ABV, CFE, CVA.

For couples with complicated finances, such as ownership of a business, Collaborative Practice can be an excellent choice. Typically, when there is a business involved, the couple will retain a neutral business valuation specialist. This individual may already be working as the couple’s neutral financial professional, or it might be a separate business valuation professional.

A business valuation as part of a Collaborative Divorce is quite different from a valuation performed for a litigation matter. Some of the key differences include:

1. The purpose of the valuation – In a litigation setting, the purpose of a valuation is to assist the court in determining the value of the business or subject interest. In Collaborative, the purpose is to help the couple agree on a value for the business or subject interest that they both understand and believe is fair. The valuator can look at what makes sense for the couple and their available resources.
2. The discovery process – Since both spouses agree up front in the Collaborative process to provide all relevant information, it should be easier for the valuator to obtain the information necessary to value the business or subject interest. In addition, this information should be readily shared amongst the entire Collaborative team. Finally, each spouse can provide their own understanding of the issues potentially impacting the value.
3. Reporting – In Collaborative, the valuator is not bound by specific court rules. As a result, the valuator is free to deliver a preliminary report for review by both spouses. If either spouse makes a persuasive case to revisit an issue or adjust some of the assumptions, the valuator can make an adjustment. The valuator can also give a range of value, rather than a specific dollar value typically seen in litigation. This allows the couple to agree on a point within the range when examining other financial factors. In litigation, the valuator provides a conclusion of value. A conclusion of value is typically more involved (and therefore more expensive) as the valuator must consider all three valuation approaches and follow other standards. A calculation of value allows the valuator and the client to agree on the approaches best suited for the specific engagement. As a result, the calculation engagement typically limits the amount of work and time, and therefore is usually less expensive. The calculation engagement is well suited for the Collaborative process.
4. Cost – As noted above, a calculation engagement is usually less expensive than a conclusion of value. In addition, in the Collaborative process, the couple is utilizing the services of a single, neutral business valuation specialist instead of each spouse hiring their own valuator. The Collaborative process also allows the couple to agree on items that might impact the value of the business. For example, both spouses might agree not to adjust the cash flow of the business to reflect excess compensation paid to their children.

Assuming the couple has decided to participate in the Collaborative process, what should they be looking for in a neutral business valuation expert? First, they should make sure that the valuator has the appropriate qualifications and experience. Common certifications for business valuators include:  Certified Valuation Analyst (CVA), Accredited in Business Valuation (ABV) and Accredited Senior Appraiser (ASA). The couple should ensure that the valuator has experience handling valuation engagements in a divorce setting. They should also see if the valuator is Collaboratively trained as this will show that they have a good understanding of the Collaborative process and its goals. Finally, the valuator should have a reputation for fairness as it will be necessary for them to be unbiased in their analysis.