Winter 2019

Thought Leadership in Family Law Valuation Issues
Editor for This Issue: Justin M. Nielsen
About the editor: Family Law Valuation Thought LeadershipThought Leadership Discussion:
Practical Guidance to the Family Law Counsel Working with a Valuation Specialist
Robert F. Reilly, CPA
When the marital estate includes a closely held business, a business ownership interest, debt
or equity securities, or intangible assets, the family law counsel (“counsel”) may retain a
valuation analyst (“analyst”) who specializes in the valuation of such financial assets. The
counsel may retain such a valuation specialist when the marital estate ownership interest
includes shares in a family-owned or otherwise closely held company, partnership interests
in a professional practice, a professional license, or family-owned intellectual property rights.
This discussion summarizes some of the issues that counsel may consider in the selection
of such a valuation specialist. In addition, this discussion summarizes the development
procedures and the reporting procedures with regard to such a family-law-related business
or intangible asset valuation. Counsel should be generally familiar with the professional
standards and practices for the valuation development and the valuation reporting related
to such marital estate financial assets. This is because, in addition to retaining the analyst,
the counsel will have to work with, rely upon, examine, and defend the selected analyst—
and the analyst’s valuation expert report. And, in a deposition or at trial, the counsel
may have to cross-examine an opposing analyst—and respond to the opposing analyst’s
valuation expert report.
Calculation Engagement versus Valuation Engagement in a Family Law Context— Can a Valuation Engagement be More Efficient and Effective?
Justin M. Nielsen
Within a family law context, legal counsel (“counsel”) to each marital estate party may retain
a valuation analyst (“analyst”) to assist with certain equitable property settlement aspects
associated with the marital dissolution. Namely, the analyst may be retained to estimate the
value of certain marital property, such as a family-owned business ownership interest. In such
instances, counsel may retain the analyst to perform either (1) a calculation engagement
or (2) a valuation engagement. This discussion (1) highlights the differences between a
calculation engagement and a valuation engagement within a family law context and (2)
explains when each engagement may be most appropriate, efficient, and effective. This
discussion also includes a summary of certain business valuation professional standards and
practices associated with each type of engagement.
The Business Valuation “Baker’s Dozen”: Questions Legal Counsel Should Consider Asking (and the Expert Should Expect to Hear) in Deposition/Cross-Examination— And Why Charles A. Wilhoite, CP
Charles A. Wilhoite, CPA
Business valuation in a family law setting requires a broad understanding and reasonable
application of generally accepted business valuation theory and practice. This discussion
identifies 13 questions that a testifying expert should expect to hear, and opposing
legal counsel (“counsel”) should consider asking, in a deposition/cross-examination. The
questions typically are relevant with regard to any business valuation performed in a family
law context. Responses to the questions can provide significant information (1) regarding
the foundation for an opposing expert’s valuation analysis and opinion, and any weaknesses
that can be exploited, and (2) that can be used to support the valuation variables
underlying the valuation analysis and opinion of counsel’s own expert.
Business Valuation Review Engagements in
a Family Law Context
Lisa H. Tran
In a family law context, the valuation analyst (“analyst”) may be retained by legal
counsel to review the valuation of a business, business ownership interest, or security
prepared by another analyst. The review of another analyst’s business valuation report
requires an understanding of generally accepted business valuation practices, including an
understanding of relevant business valuation standards and procedures. This discussion
addresses the applicable professional standards that analysts consider when completing a
review of a business valuation report and provides analyst guidance with regard to some of
the more common inconsistencies or errors identified during a review engagement.
Best Practices Discussion:
Practical Guidance to Identifying and
Valuing Goodwill in a Family Law Context
Justin Nielsen and Connor J. Thurman
In family law matters, the valuation analyst (“analyst”) may be retained to provide an
independent estimate of the value of closely held service-oriented company ownership
interests, or professional practice ownership interests, to assist in the equitable settlement
of the marital estate. During these assignments, one common issue that analysts and legal
counsel confront is the identification and treatment of any goodwill included in the value of
the closely held service-oriented company or professional practice. In general, this goodwill
can be identified as either (1) enterprise (or institutional) goodwill or (2) personal goodwill.
This discussion summarizes the differences between enterprise goodwill and personal
goodwill. This discussion addresses state statute guidance with regard to the treatment
of enterprise goodwill and personal goodwill within a family law context. This discussion
also summarizes (and provides an illustrative example) of the generally accepted valuation
approaches, methods, and procedures that can be applied in the analysis of goodwill within
a family law context.
Goodwill Valuation Considerations
Involving Private Companies and
Professional Practices
Robert F. Reilly, CPA
The valuation of either business (also called institutional) goodwill or personal (also called
professional) goodwill is a common issue in the family law context. The goodwill issue arises
when the marital estate owns a private company or a professional practice or when one of
the marital parties holds a professional license. The goodwill valuation may affect the value
of the private company or professional practice ownership interest. The goodwill valuation
may be relevant if the practitioner’s personal goodwill either is—or is not—a marital estate
asset. And, the goodwill valuation may be relevant if the marital estate includes only the
appreciation (or the excess over a normal amount of appreciation) in the goodwill during
the term of the marriage. This discussion summarizes many of the analyst’s considerations
in the valuation of goodwill in a family law context.
The Identification and Valuation of
Intellectual Property for Family Law
Purposes
John C. Ramirez
Valuation analysts (“analysts”) are often called on to value intellectual property for family
law purposes. This is because a marital estate may own, directly or indirectly (through
a family-owned or private company or professional practice), intellectual property. In
such instances, the value of the intellectual property can be the subject of considerable
controversy between the marital parties. For this reason, family law legal counsel—and
other parties involved in the marital dissolution process—should (1) understand the
procedures and factors commonly used to identify intellectual property assets, (2) recognize
the generally accepted approaches to use to value intellectual property assets, and (3)
be familiar with the intellectual property economic attributes that analysts consider when
valuing intellectual property assets for family law purposes.
The Importance of the Subject Industry
When Applying the Income Approach in a
Family Law Valuation Context
Samuel Nicholls and Justin Nielsen
In a family law context, legal counsel (“counsel”) may retain a valuation analyst (“analyst”)
to estimate the value of a closely held business ownership interest held within the marital
estate. When estimating the value of this marital estate business interest, the analyst
may apply the income approach, discounted cash flow (“DCF”) method. When applying
the income approach, the consideration of the subject company industry is an important
issue for the analyst. This is because the analyst should apply due diligence procedures
when utilizing management-prepared financial projections in the analysis, including the
comparison of the management-prepared financial projections to relevant industry data.
Further, company management interviews may assist the analyst in performing appropriate
diligence procedures with regard to the application of the income approach (including the
application of management-prepared financial projections). This discussion summarizes the
relationship between the income approach and the subject industry. And, this discussion
provides practical guidance regarding the analyst’s role in (1) properly addressing the
subject industry when applying the income approach and (2) conducting company
management interviews in a family-law-related business valuation.
Understanding Key Person Considerations
When Valuing a Private Company in a
Family Law Context
Matt Courtnage
Family Law Valuation Practices and Procedures Thought Leadership
When retained by family law counsel (“counsel”) to estimate the value of a private company
within a marital estate, the valuation analyst (“analyst”) may consider the potential
subject company dependence on one or two key individuals. This “dependence” is typically
referred to as key person dependence or “key person risk.” Key person risk is recognized
within the valuation profession as a relevant company-specific risk characteristic, and it can
be accounted for in several ways within a valuation analysis. Therefore, the analyst may
perform appropriate due diligence to (1) identify any key person risk associated with the
private company and (2) quantify and present the impact of any key person risk within the
private company analysis.