Valuation Videos
Valuation videos about the valuation process, hiring an expert, document requests, valuation methods and what to expect from a valuation company. We have assembled various videos here to address some of your frequently asked questions or FAQs. You can also check out our YouTube channel for a full library of company valuation expert videos.
Should I get a business valuation done before I file for divorce?
Most people will want to do some pre-divorce planning or at a minimum know what the business is worth before they even decide whether to get divorced. Typically the business owner will reach out to a valuation expert and say “I want to try to get a valuation number because I'm doing some strategic planning” or “I just want to know what the business is worth for internal purposes”. Typically, the owner will not tell the valuation person the whole story or that they are considering getting divorced. This could lead to a serious issue in the future divorce process if you get a valuation in writing, as of a certain date, for any purpose.
This report and any emails you exchange with this valuation expert could now be discoverable. What that means is that any email or conversation you have with this person could be shared with everyone in the divorce process even if the valuation took place prior to the divorce. Now what this business owner could have done differently is when they originally got the first valuation, they should have just been clear about the reasons for the valuation and that it was primarily for a potential divorce. And if they had worked with an expert who routinely did valuations for divorce then that expert would have told them that they should not put anything in writing but that they should discuss the value. This would also have allowed the business owner to use the same valuation expert for the divorce which means all the work that they put in to try to determine what the value was prior to divorce would still be relevant and useful in determining the value at the date of divorce.
One of the things that you must keep in mind is that when we serve as an expert witness in a litigation – we are not covered by the same privilege as your attorney. An expert is there to help the judge understand the financial situation of the company and the couple. I am there to serve the court, not to be biased towards one side or the other. So, when you have a conversation with an expert witness it is NOT privileged which means the expert can be pulled into court to discuss what you have told them. The expert may also have to produce all the emails you have sent them. So, when you send an email that says, make the business worth nothing and I don’t want to give my husband or wife a dime…that doesn’t usually go over well with the judge. A business valuation expert IS bound by confidentiality which means they won't discuss the nature of your business or your financials with other people outside of the divorce, but it also means that when they are subpoenaed for trial or for even a deposition the other attorney could ask for all of the emails, all of the interactions, all of the notes and anything that was developed and provided by the business owner under any context during the valuation engagement.
The divorce lawyer could ask for any offers to buy your business, or any valuations you have had over the past five years. The attorney could ask for information in the valuation expert’s files, even emails prior to the date that you filed for divorce. So, this means you need to work with somebody that knows how to value your business but also knows how to testify in court. This will allow you to understand the value of your business prior to filing for divorce but also not to have any documentation of that number or any prior valuations that could be discoverable during your divorce. Basically, this also means you need to be very honest with the valuation expert about the reasons why you want to go through this valuation process and to work with somebody who understands the nuances of divorce court.
How should I run my business if I am getting divorced? Do I take on more debt? Can I start a new business venture?
I usually tell people that they should continue to run their business in the same manner as they did prior to the divorce and not to make any decisions that they think will make the value lower (or higher) or do things that they think are more advantageous in the divorce litigation. Here's the thing - most of the time if you decide to do something different in order to increase debt or reduce your profit which you think will help you, it could potentially backfire on you.
The historical financials, revenue, expenses, profit, losses, assets and debts, all tell the valuation expert a story. And most of the time the valuation experts will be looking at historically what has happened over the past 3 to 5 years. And this history will tell a story about how you've managed the company, how you've increased revenues or profit over time, or if there has been variability in the performance of your company. It will tell the whole story, either steadily up or up and down over time. But it could also potentially tell an expert how you have changed things more recently in a way to contrive the value after you have filed for divorce.
You have to understand that the judges and lawyers and even valuation experts typically work on many cases every year and always are concerned if they start to see a very successful company all of a sudden barely breaking even – or losing money - right before a divorce. Even when things really do go downhill, for legitimate reasons, everyone is skeptical. Most couples lose a bit of focus, when going through a divorce, because it is emotionally draining – so you will see the business results falter sometimes as well. But if you do anything to really force the company to look worse, many the things that you're trying to do are going to be very apparent to the other side and maybe not look as good in the judge’s eyes. So, it is best to document most of your decisions in a way that supports that you are doing the best you can to continue to keep the business successful and profitable.
In a divorce - How do we split the business? Will I have to continue to own the business with my spouse?
I have seen times where a judge will allow a divorcing couple to continue to own the business, but usually that is because both people are highly involved in the company and they request to stay owners. Even then, it is a sticky situation for the judge. Typically, the courts want to see one person maintain the business and the other person no longer in the business.
Most of the time a couple things that they're going to have to buy the other person out of the business and in some respect this is true but the reality is that we are valuing the business in order to provide a number that we put on your statement of property and list it as one of the assets that you own in the marriage. So, this means that you could have a business worth $1,000,000 as well as retirement accounts, houses, cars, and other investments. It could be that one person keeps the business worth $1,000,000 and the other person receives other assets or investments also equal to a million dollars.
There are situations where the business could be the primary asset or has the largest monetary value in the marriage and there isn't enough other cash or investments or houses to provide the spouse with a million dollars of other assets. In this case there could be a payment for the distribution of those assets over time and the business owner would be paying the spouse over a certain number of years in order to make the distribution of the marital assets equitable or fair, in the courts eyes. As a reminder, the rules of divorce are different in each state which means that the way the assets are divided could be different if you were in Missouri as opposed to Illinois, Tennessee or Kansas. This is one of the reasons that a couple would seek to settle the valuation issues and payments outside of court, to have some control over how the property is split. If you have one or both people that are unreasonable in their expectations, then they may have to go to court and have the judge decide how to split the assets.
Almost all business owners think that the business would be worth nothing without them.
Maybe the business owner is the primary salesperson or driver of the business, or maybe they have all the relationships with all of the clients, or maybe they have special training or a proprietary process that makes them unique. I think most business valuation people understand that the business is heavily reliant upon the main owner, especially in small businesses, but that usually does not mean that the business is worth nothing if the owner steps aside. And this is definitely true in divorce court, the judge is not going to assume that the business is worth nothing when that same business has provided a significant lifestyle for the couple. This means if you look back - has your business allowed you to buy a nice house, multiple cars, vacations, private school, basically a comfortable living? If the business has provided for the family and increased your assets, then you have to consider that there is value to the business – at least in the eyes of your spouse and the court. How a valuation analyst treats the significance of the owner becomes a very important issue and this is why one of the things the expert reviews is the owner’s salary in the valuation.
There are various cases in each state that specifically deal with compensation and a concept of the “double dip”, which is a complex issue in valuation. Better saved for another conversation. Many times, we can incorporate the reliance on the owner in two ways – in the cash flow of the business or the risk that that cash flow will continue. Take for example you have a business owner who makes $250,000 net profit in the business – but pays themselves no salary, just distributes cash as necessary for living expenses. Now if we think the business is worth four times profit then the business is worth $1,000,000 or 4 times $250,000. Remember, since this person takes no salary all of the profit flows to the bottom line. Now, in the state of Missouri and many other states, we have to consider the “fair market value” as the standard of value in a divorce. Fair Market Value is the value of the business with a willing buyer and a willing seller. This means - what is the value of the business to someone who has no knowledge of the industry but would come in and start to operate this company – someone off the street. For example, If the judge bought this business – how much money would he make and what would he pay for the cash flows? Maybe the new owner will hire a manager or CEO to run the business, or a salesperson or several people. So that might mean that the new operator would have to replace the business owner with one or 2 people depending upon how much the business owner is involved in the business. So, this is where reasonable compensation could be a valuation adjustment in the income statement. The valuation expert would need to add this additional expense, which would reduce the profit. So, let's say that same business owner who is making the $250,000 of net profit in the business really should have been paying himself $200,000. Now we only have $50,000 left and the value of the business is $200,000 – or 4 times $50,000. It is not the $1,000,000, because we had no cost for the owner. This is kind of the issue of the double dip.
The valuation person still typically has to consider a salary to the owner, as a pseudo replacement value – and adjust the valuation accordingly. This deals with the cash flow, but what about the risk. There could also be increased risk because of owner dependency, key-man issues, which reduces value. Typically, these adjustments don’t necessarily result in the company having no value, but the value is reduced when taking into consideration the effects of the reliance upon the owner. Again, thinking YOU, as the business owner, can just go into court and testify that the business relies upon you and then claim that the business is worth nothing without you, is a risky proposition.
The judge could look at all of the other “stuff” you have accumulated and think you are just trying to screw over your spouse. Are there times when you take out a salary and there is no profit left and therefore no value to the business, sure, this can happen. But your testimony will probably not get you there. Work with a valuation expert to understand the reality of the situation and how the expert can show the compensation or owner dependency issues in a way that supports your reality, but does it within the constructs of valuation theory and in a way that will stand up to the scrutiny of the judge in court.
I owned this business before I got married and my name is on everything, so it’s just mine, right?
There are many times when a business owner has owned a business for several years prior to the marriage. So, we talk about these issues as the difference between separate property and marital property. Separate property was owned prior to the marriage and an expert might come in and “trace” the assets to determine if they are still separate or have been comingled or turned into marital property. Why do you care? Well separate property is not divisible in a divorce situation, meaning you don’t have to split it with your spouse when you get divorced. This is for certain states that allow these rules. Community property states are different – such as California, Texas and Arizona (as well as several other states).
Typically, there are nuances regarding income from a business, especially separate property, that are different then the appreciation in the business. So, for example in the state of Missouri - income on separate property is marital but appreciation of separate property is still separate. So, what does this mean? One example is that if you own a share of stock, as a separate asset owned before the marriage, then the income or dividends on that stock is still considered marital income that could be divided between the couple. But if the stock went from $2 a share at the time of marriage to $4 a share at the time of divorce, then the appreciation in that stock, because it is still one share of stock, is a separate asset and the value of $4 per share is still considered separate. But if the marital income was reinvested to buy more stock, then you could have a portion is marital and a portion is separate. See how it gets confusing pretty quickly?
So, an expert will come in and analyze the investments to understand which portion marital and which portion is separate, they also testify to the process in court. So how does this translate to the business? Well the valuation expert may have to consider what was the value at the date of marriage and what is the value as of the date of divorce. Even if there is a change in value, if the change in value is due to appreciation of that business then it could still all be separate. But then you must consider the income from the business, and was it reinvested in the business or was it paid out in the form of compensation to the owner or distributions of income. And then finally the valuation expert may have to consider if that compensation or the distributions were reasonable. There could even be a layer of complexity depending upon the structure of the company. So, is this company an LLC, a partnership, or a Corporation? Sometimes the issues regarding a business that was created prior to the marriage are not as clear cut as it would seem, so the valuation expert would have to consider the situation from many different aspects.
They might wonder - How do I protect the other investments I owned before I got married?
There are a couple ways that you can protect your assets or investments that you owned before you got married. Most of the ways involve some planning prior to marriage. Pre-nuptial agreements are one way to clearly establish how things get separated if you get divorced. Many times, people will not necessarily want to do these at the beginning or before the wedding, so a post nuptial agreement is done during the marriage. But will both parties agree to the stipulations.
Many times, I have seen some of the best planning done by very wealthy families who want to protect the wealth for each generation and want to preserve it from getting dissipated or lowered in a divorce. For example, there was one case where the house that the couple lived in was really owned by the wife’s parent’s estate and held in a trust that would not transfer until the parents died. So, the couple was living in a beautiful house, and after the couple filed for divorce, the husband thought that the wife would keep the business and the husband would take the house, since they were worth roughly the same amount. The problem was the couple didn’t really own the house. Now there are other issues when money to buy a house was gifted to another couple, but after the divorce the checks were clearly gifted to the wife only and therefore there was a portion of the house that was separate and a portion that was marital. Not as easy to figure out, right? So, you need to keep clear records of any “gifts” or inheritances, since these are separate property.
One of the ways is to keep track of what you had prior to the marriage meaning keep the investment account statements and do not comingle your accounts. So if you have an investment account with $100,000 prior to marriage, set up arrangements with the financial institution that any income or dividends will NOT be reinvested in the separate account, but will be transferred and reinvested into a different account or a joint marital account. Because the income could be marital, but at a minimum the accounts would be easy to trace back to the time of marriage. This is one way to prevent the accounts from being comingled or mixed together and considered transmuted or converted from separate to marital.
If the valuation expert doesn’t understand comingling or transmutation of property surrounding marital and separate accounts in your state and this is an issue in your situation, you might want to contact some other people who have dealt with these issues. So, after we deal with splitting the assets, there could still be payments made from one spouse to the other which is called maintenance or alimony, and if you have children – there could also be a child support payment and calculation.
How much am I going to have to pay my spouse in alimony or child support?
One of the ways a valuation expert may also get involved in a divorce is in the calculations of maintenance or alimony and child support. The expert will review the personal tax returns and business information in order to determine the income available to the couple. They are looking at what each person has made in the form of salary, W2 wages, consulting agreements, or income from various business interests. Typically, the expert will review 3 to 5 years of information and see if there are any trends or patterns.
If one spouse has not worked over the past several years, in order to be at home with the family, there could be an additional expert hired call a vocational rehabilitation expert. This expert will determine what that person could make if they were to enter the workforce given their background, education, prior experience and/or work history. This typically this is a different expert and one that only focuses in this narrow job, determining a reasonable salary for a non-working spouse, or spouse that is not working at their full potential.
After the voc rehab specialist determines the non-working spouses’ salary, then the valuation expert could determine a reasonable salary for the working spouse. Many times, an executive, with a w-2 salary and bonus, is easier to determine the salary, than that of a business owner which may fluctuate more with a business cycle. This is where the two experts pay differ in opinion – because of the variability in the historical pay. Many times, if the business is not doing well the owner may not take as much in salary or distributions and when the business is doing really well then, they take a little bit more. So, we are there to determine what would be reasonable going forward.
There are times when a business owner may try to take less money out of the business for salary when they're getting divorced because they think that that will show a better picture to the court. But many times the court is going to look at the history of payments and a big drop off in the year prior to divorce could again signal that it is just a one-time situation so this is another case of where you should just continue doing things as you normally do them, So that it doesn't show the appearance of you trying to manipulate the numbers for your benefit.
Why do we have to hire two experts? Do I have to pay for both?
Well most of the time both people will hire an attorney and an expert to testify to the value of the business and potentially develop alimony and child support scenarios for the court. Unfortunately, many times this results in one expert value in the business really high and another expert value in the business really low. This is because there are times when the judge, we'll see 2 experts who have extensive backgrounds and who appear to know what they're doing or maybe it's just a really complicated business, and the judge believes that both experts have reasonable values. The problem is those values are millions of dollars apart and so instead of going just with one expert the court could average the two values or split it down the middle. So, this means that if one expert said that the business is worth a million dollars and the other experts said that the business is worth nothing then the court could just say it's worth 500,000.
As much as this doesn't seem reasonable to the business owner this is a possibility of what could happen at trial. In an ideal world each attorney is hiring an expert so that they understand what the value of the company is and what are some of the risks in going to court. So are there some risks that the business could be separate and therefore not a divisible asset in court period are there risks that the business could be worth nothing and there would be nothing to split in court. Or are there any risks that the attorney cannot identify without using a valuation expert to go through the historical financials and help them to become smarter about the current situation.
Now, if the situation is such that you have one primary business owner who makes the money for the marriage and one of the spouses stay home or are not the primary wage earner then you have a situation where both experts are going to be paid out of marital money. So, in some cases yes if you are the main wage earner you could be paying for both experts. There are times when main wage earning spouse and their attorney we'll go in and ask the court for the fees for the other expert comma and they are requesting that payment come from the business owner or the person who is making the most money in the situation or in the divorce.
In some other situations each person is going to be responsible for their attorney’s fees and their expert fees, but if you consider that those fees are going to be paid when all of the assets or property and debts are split between the two parties then those expenses are really going to come out of marital money as well. So are there ways that you can hire one expert to determine the value and save some time effort and money, yes of course there is, but you both have to agree to hire one person. Most of the time this will happen when both attorneys not the same expert and believe that this expert is reasonable and impartial. Typically, this valuation expert will work for both parties and be able to work through the valuation and present the numbers to both the couple and the attorneys at the same time.
There is a process and a strategy around being the one valuation expert hired by both people. not all experts are capable and affective at this role. There could be times where each side offers up its Top 2 or 3 experts and hopefully there is one expert that is on both lists and therefore can be utilized by both parties.
Do I have to file for divorce – or are there other options?
I'm sure you're thinking at this point that the divorce process does not seem as simple as you originally thought, and typically if it involves a business valuation and or more complicated financial issues, then you could be correct. There are other options to getting divorced depending upon your situation, your relationship with your spouse, your communication history with your spouse, or even depending upon your financial situation.
There are times when the couple has drifted apart over time and are making a decision to separate permanently, and mediation or the collaborative divorce process could be beneficial. Most of the time a business owner may want to have a little bit more control over the process and can achieve a reasonable resolution with a mediator or collaborative divorce professional – you just need someone who has all of those skills.
Sometimes it is helpful to work with someone who understands the complexities of your divorce and can translate the issues to your spouse. When one person is not involved in the business, there could be a learning curve in understanding how it is valued. At a minimum – have a meeting or conversation with a valuation expert, do you think they could help your spouse to understand the issues or would they just be more confused? One thing to keep in mind, no matter what process you utilize to come to agreement on all the financial issues, you will still typically need a lawyer to file the divorce papers in the end.
What is a CDFA or Certified Divorce Financial Analyst
As people begin the divorce process, they look for a financial planner or accountant or someone to help them understand the numbers part of the divorce process. When you are thinking about getting divorced, there are many people who can provide financial services to assist you and your attorney, a CDFA is one option.
This person usually understands how divorce works in your area – whether you go through mediation or divorce court. We help everyone understand what the financial picture will look like in the future. Sometimes this person is called a financial neutral if the parties are involved in divorce mediation or collaborative divorce. If there is a business involved, a valuation expert can be hired to help the couple understand what the business is worth.
How do I increase the value of my business? what do I need to do if I want to sell my business in five years?
Most business owners want to know how to increase the value of a business and sell the company in five years. If you create a business that can operate if you were on an island with no access to email, for two weeks, then you probably have created a sustainable business model.
So how do you increase the value of your business? One of three things have to happen:
Increase revenue
Decrease expenses
Decrease the risk of the cash flow continuing
Lower expenses equals higher profit or cash flow to the buyer. The reality is someone may just want to buy your business because of the clients or the contracts or the relationships in the industry. If you really want to market to sell your business you could do a valuation each year – the costs are lower for these “updates” each year. Then when you are really ready – you would hire somebody such as a business broker or a mergers and acquisition firm which is basically an investment bank, and they would run an auction style process to sell your company. The true “market” price of your company is reliant upon the investment banker and how successful they are at managing the auction process
Valuation Process
What happens after you hire a valuation expert? What documents do I need to prepare?
Small business owners always have questions about the valuation process. What happens after I hire a company valuation expert?
First the expert is going to give you a list of company information which you need to compile in hard copy or electronic format - this is sometimes called a "Document Request". Documents such as historical financials, income and expense projections, operating agreements, buy-sell agreements, prior sales transactions within the company, lease agreements are all examples of what the expert will need for the valuation engagment.
One of the first steps for the expert is to review three to five years of historical financial data. This will be income statement and balance sheets, either audited, reviewed or compliled by an accounting firm or CPA, or if you don't have an accountant then you can supply the expert with tax returns for the company.
The business valuation expert will also want to review your projections for income and expenses. The valuation company expert will meet with you for a couple hours and discuss all facets of your business including operations, staffing, management, locations, industry and economic issues pertaining to your company.
The expert will develop a report or calculations depending on your specific situation. It will take time to gather all the pertinent documents for the valuation, so the faster you can get the documents to the expert, the faster they can get going on the work.
If you own a business in St. Louis and would like to learn more about business valuations, give us a call.
Valuation Methods
How does the expert value a business? What methods do you use to value businesses?
Clients always have questions about how to value a business and methods of valuing a company.
There are a few different methods used by experts when completing a valuation of a company.
Income Approach
Cost Approach
Market Approach
There are guidelines for each method and comprehensive business valuation analyses for each particular approach. In general, a professional valuation expert has to consider these three approaches. And by professional, I mean an expert with credentials or certifications who are members of organizations which have standards -- and the professional has to comply with these standards.
Many times other finance and accounting professionals such as CPAs, business brokers or financial advisors may be able to give you an idea of the value of a company, but they are not necessarily obligated to use any specific business valuation methods.
Typically a company would need a formal valuation if there was some type of litigation involved or if the valuation is going to be attached to a tax return and submitted to the IRS. In these cases the valuation expert needs to understand and conform to the standards.
Valuation in a Divorce
What happens when you own a company and you file divorce papers? What are the three levels of valuation in divorce?
Many attorneys and business owners want to know about valuation issues regarding divorce in Missouri?
What happens when you own a company and you file divorce papers? Well the first step is to contact a family law attorney who you trust to handle your case. Then you need to start gathering data, including prior tax returns for at least the past five years, financial statements, bank records, buy-sell agreements and operating agreements just to name a few.
You will then start discussing the value of the company with your spouse, preferably through your attorney. If you find out that your view of the value is different than your spouse's view of the value -- then you may need a business valuation expert.
I typically see valuations for divorce have three different levels -- the first is calculation phase. This is where the expert reviews all info and determines the value of the business -- which is not a full valuation per se. Just calculations and some financial spreadsheets.
Then the second level is the report phase. if a settlement cannot be reached and the parties get closer to trial, the experts will then produce reports regarding the calculations. This is to outline the valuation methods used by the expert. These reports are ususally submitted to the court and to both attorneys at the same time -- and prior to the court date.
The final phase is expert testimony. After the reports are issued, the attorneys may want to questions the experts in deposition. This is treated like testimony in divorce court. This happens relatively close to the trial date. And then the experts will testify in trial.
One thing to keep in mind -- the experts are truly servants of the court and judge and therefore you should work to find an expert that tells you the truth rather than what you want to hear. If your divorce goes to trial you will want an expert who can support their numbers with data and not just opinions.
Experience and Credentials
Does the expert need experience in a specific industry in order to provide valuation services?
Small business owners always have questions about company valuation issues: one of the main questions is "Do I need a valuation expert with experience valuing companies in my industry?"
Well the answer is yes and no. For the most part a person who specializes in valuing businesses and who has a valuation credential such as a CVA, ABV, ASA or even a CFA, knows how to value most types of companies. Many of the same valuation methods apply to a manufacturing companies, professional services firms or product distributors.
The valuation expert looks at three approaches. Asset approach, income approach and market approach. In short the analyst will look at the assets, liabilities and equity of the firm for the asset approach. The income and expenses in an income approach or other market transactions in your industry for the market approach. Market transactions are essentially other companies who have been bought or sold in recent years. So no matter what you do, or service you provide the valuation methods are similar. So someone who is accredited in valuation theory will understand how to value most companies.
So it is good to question an expert about their experiences -- but also question them about their valuation credentials. This factor may be of more importance.