Spring 2017
Thought Leadership in Family Law Financial and Valuation Issues
Editor for This Issue: Charles Wilhoite
Family Law Valuation InsightsThought Leadership:
Evaluating Key Person Risk When Valuing a Closely Held Company for Marital
Dissolution Purposes
Michael A. Harter, Ph.D.
The operations, and the underlying value, of many closely held companies may be
affected disproportionately by dependence on one or two key individuals. This dependence,
typically referred to as “key person risk,” is recognized within the valuation profession.
This key person risk is often accounted for in the form of a valuation discount applied to
the company’s overall business value. Valuation analysts providing services in a marital
dissolution setting often face the challenge of performing the necessary diligence to (1)
identify whether a company is exposed to key person risk and (2) assess the impact of key
person risk on the closely held business valuation.
Personal Goodwill and Corporate Goodwill
within the Family Law Context
Frank “Chip” Brown, CPA
The valuation of “personal” goodwill and “corporate” goodwill is often a disputed issue
in a marital dissolution matter. Depending on the prevailing state statute, the distinction
between these two types of goodwill may play an important role in determining which
assets are marital property and which assets are separate property. Valuation analysts can
provide significant guidance and support to family law counsel with regard to identifying
and quantifying professional goodwill and business goodwill within a family law context.
Similarly, family law counsel can provide invaluable legal guidance to the analyst regarding
the relevant statutory authority and judicial precedent within the subject family law
jurisdiction.
A Reminder from the Bench:
Reasonableness Matters
Charles A. Wilhoite, CPA
There are many capable and qualified financial analysts throughout the country who are
able to serve effectively as financial experts in a marital dissolution setting. Regularly, courts
issue decisions that serve as a reminder that qualifications and experience are necessary for
financial experts to produce supportable expert opinions. However, such expert opinions still
may not persuade the court if they fail, in any respect, the test of reasonableness.
Relevance of Discounts for Lack of Control
and Lack of Marketability in Marital
Dissolution Matters
Natasha M. Perssico, CPA
A discussion of the application of valuation discounts for lack of control and for lack of
marketability in marital dissolution cases is predicated upon an understanding of (1) the
standards of value commonly applicable in marital dissolution cases, (2) the valuation
methods used and the resulting value level to which discounts are applied, (3) the specific
control and liquidity facts and circumstances relevant with regard to the subject business
interest, and (4) the relevant statutes and case law applicable in the jurisdiction
Integrity
(The author wishes to remain anonymous)
“If you have integrity, nothing else matters.
If you do not have integrity, nothing else matters.”1
Income Taxes and Value Considerations
Robert P. Schweihs
Typically, income taxes result in a reduction in the net earnings and cash flow resulting from
business operations. Further, income taxes typically reduce the net proceeds realized from
the sale of a business or a business interest. Currently, an entity can be legally structured
in a variety of ways, with the various structures resulting in different income tax treatment.
The recognition and understanding by a valuation analyst of the variety of legal operating
structures available to companies, and related income tax implications, will enable the
analyst to develop more complete valuation analyses and conclusions. Such considerations
are relevant when providing valuation services in a marital dissolution context.
Best Practices
Business Valuation in a Divorce Setting
Charles A. Wilhoite, CPA
Business valuation in a divorce setting requires a broad understanding of generally accepted
business valuation theory and practice. This discussion addresses several considerations
regarding a business valuation completed in a divorce setting, including (1) the development
of the engagement specifics, (2) the relevant standards of value, and (3) the generally
accepted standard valuation approaches and methods. Further, topics that often are the
subject of significant disagreement in a divorce valuation setting are considered, including
(1) the analysis of controlling versus noncontrolling and marketable versus nonmarketable
ownership interests, (2) the impact of ownership agreements and prior transactions on the
valuation process, and (3) intangible assets (i.e., “goodwill”).
Estimating Discount Rates and Direct
Capitalization Rates in a Family Law
Context
Stephen P. Halligan
Valuation Practices and Procedures Insights
Estimating the risk-adjusted discount rate or direct capitalization rate are among the more
challenging aspects of developing a reasonable business value indication when using the income
approach to valuation. Generally accepted business valuation practice recognizes multiple
methods for the development of discount rates and capitalization rates. Analysts that (1)
implement generally accepted practice, (2) rely on credible sources for rate of return information,
and (3) provide circumstance-specific support and rationale when developing discount and
capitalization rates will be better positioned to defend their business value conclusions.
Understanding the Appraisal Review
Process
Lisa H. Tran and Irina V. Vrublevskaya
The review of another valuation analyst’s family-law-related work product requires an
understanding of generally accepted valuation practice, including relevant valuation
standards and relevant judicial precedents. This discussion addresses (1) applicable
standards to consider when completing an appraisal review, (2) the applicable standards
to follow in a valuation engagement or a calculation engagement, and (3) some common
inconsistencies or errors identified during an appraisal review.
Implementing Normalization Adjustments
Benjamin H. Groya
Valuation Practices and Procedures Insights
The valuation of a closely held business or security typically involves analyzing historical
financial statements to estimate a normalized level of expected cash flow. Analysts generally
adjust certain expenses to facilitate comparison to similar publicly traded companies and to
provide a picture of the normal operations of the subject company. The following discussion
addresses the application of these income normalization adjustments.
Calculation Engagement versus Valuation
Engagement in a Marital Dissolution Context
Justin M. Nielsen
Valuation Practices and Procedures Insights
In a marital dissolution context, legal counsel hired by each party often will require the
services of a valuation analyst to assist with certain property settlement aspects of the
divorce. Specifically, an analyst may be retained to provide an independent opinion of
the value of certain marital property, such as a closely held business interest, included
in a marital estate. Typically based on cost considerations, legal counsel frequently find
themselves considering between two scopes of service that an analyst can provide in
a divorce setting: (1) a calculation engagement or (2) a valuation engagement. This
discussion highlights the differences between a calculation engagement and a valuation
engagement within a marital dissolution context, and explains the business valuation
standards and requirements associated with each engagement. Also discussed is the
assessment of projections that may be used in a discounted cash flow analysis in a
calculation engagement.