The divorce process can be stressful and emotional, particularly when dealing with financial decisions involving a family-owned business. A family business can either hold significant value as the largest family asset or simply function as a source of income, providing the owner with a job.
When a business is part of a divorce context, the parties should consider the following:
Choose the Right Types of Valuation:
Calculation of Value
A calculation engagement involves fewer procedures than a valuation engagement, resulting in a calculated value that is usually less costly. According to SSVS No. 1, a calculation engagement occurs when the valuation analyst and the client agree on the valuation approaches, methods, and the extent of procedures. The calculated value, expressed as a single amount or a range, has limited scope and is not suitable for divorce contexts. Typically used in the preliminary stages of divorce valuation, it may help control costs and initiate negotiations. However, it should not be used in the litigation process except for negotiations. Calculations of value may have a specific amount or a range of values, with reporting mechanisms usually being a one-page letter report or an oral report.
Conclusion of Value
Certified Public Accountants must adhere to definitions outlined by the Statement on Standards for Valuation Services (“SSVS”) No. 1 issued by the American Institute of Certified Public Accountants (“AICPA”). SSVS No. 1, issued in June 2007 by AICPA, specifies that a valuation engagement, involving more procedures than a calculation engagement, results in a conclusion of value and is generally more expensive. The engagement occurs when the valuation analyst estimates the value of the subject interest, applying valuation approaches and methods deemed circumstantially appropriate. Conclusions of value have no scope limitation, and reporting options, such as oral reports, letter reports, summary reports, or detailed reports, can help contain the cost of the valuation engagement. In the context of divorce, lower levels of reporting may not meet the objective of communicating the valuation conclusion to the end user and/or reader. It is advisable to start at a lower level but be prepared to move up to the next reporting level if the litigation progresses.
Choose the Right Qualified Appraiser:
During the divorce process, ensure the retention of the right qualified appraiser(s). Many Certified Public Accountants (CPAs) have performed valuations on a part-time basis over the years, but given the consistent changes in the valuation field, finding an appraiser committed to the industry and holding credentials such as Accredited Senior Appraiser (ASA), Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), or Certified Business Appraiser (CBA) is crucial.
Hire Only One Appraiser:
This is not the norm, but certainly not out of the ordinary either. There are two reasons why hiring one independent appraiser makes sense. The first reason is that valuation engagements performed by a qualified, respected appraiser can be costly. Good appraisers do not cut corners. They explore every avenue and every aspect considered in a conclusion of value engagement. This takes time and money, but the end result is a valuation that can stand up to any and all scrutiny. The cost of divorce is also expensive, and wherever money can be saved, it should be done. There are some appraisers who will perform the valuation on the cheap, but these are also the ones that are not as thorough. You get what you pay for. The second reason is independence.
The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct, Rule 102 – Integrity and Objectivity states:
“In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.”
The AICPA Statement on Standards for Valuation Services No. 1 states:
“The principle of objectivity imposes the obligation to be impartial, intellectually honest, disinterested, and free from conflicts of interest. If necessary, where a potential conflict of interest may exist, a valuation analyst should make the disclosures and obtain consent as required under Interpretation No. 102-2.”
The hard part for valuation analysts is they are usually hired by one side or the other. It is challenging for most analysts to remain independent and not be advocates for their clients. Some of the best appraisers do not understand this. They will issue an opinion that is as high or as low as they can defend. This is not the way it is supposed to be. To solve that problem, only hire one. There will be no obligation, whether subliminal or not. The single appraiser now becomes a consultant explaining the appraisals and what part of the appraisal is subjective and where there could be ranges of value. This consultant role could not happen with an adversary on the other side.
Making the wrong choices and decisions in a divorce can be costly — and slow down the process. Couples need honest, efficient, and well thought out advice to keep the process moving and make them feel as comfortable as possible as they move onto the next phase of theirlives.
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