Value Added
Appraisers can help divorcing parties in many ways

It’s not easy to keep all the parties happy in a marital dissolution case. But from the beginning to the end of the divorce process, valuation professionals can help handle financial issues in a fair, expedient manner.

Valuation nuances in divorce - The most obvious ways valuators help divorcing spouses are in valuing private business interests (and other marital assets) and in providing expert witness testimony related to business valuations. But valuations in divorce differ from other types of valuations in several ways.

For instance, family courts may prefer the market approach for its perceived objectivity. Many courts also embrace the excess earnings method — a hybrid of the cost and income approaches — especially for small professional practices.

Divorce cases frequently require valuators to reconcile the income approach with these preferred methods as well as with other, nontechnical value indicators, such as rules of thumb, purchase offers, loan applications, insured values and buy-sell agreements.

Another nuance of divorce valuations is dealing with goodwill. Valuators must separate goodwill from both the company’s tangible value and from other identifiable intangible assets, such as patents, brand names, client lists or proprietary software.

Many jurisdictions require valuation experts to split goodwill into two components: 1) personal goodwill, which cannot be separated from the practitioner; and 2) business goodwill, which is salable to a third party. In roughly half of the states, personal goodwill is not part of the marital estate.

Rather, it’s considered part of the monied spouse’s future earnings capacity. When assessing goodwill in marital dissolution cases, valuators need to review applicable state statutes and case law.

Beyond valuation - A marital estate needn’t include a private business interest to benefit from a valuation professional’s expertise. Valuators have the requisite training, experience and professional resources to handle a wide range of financial issues, including forensic accounting matters.

For instance, some unscrupulous monied spouses hide assets and income, employ unorthodox accounting techniques or intentionally deplete business values. Many valuators are qualified to conduct fraud investigations if foul play is suspected. Others can refer clients to a forensic accountant who specializes in divorce.

During settlement talks, bickering about personal matters or trivial details can waste time and energy. Valuators often act as the voice of reason, keeping parties focused on financial matters and pinpointing key differences. With customized spreadsheets at hand, valuators also evaluate proposed settlement options — including anticipated tax consequences — while the parties sit around the negotiating table.

In court and after - When the parties can’t settle their differences out of court, valuators are there to help address complex financial matters. In addition to testifying on marital asset values or, in some cases, fraud investigation findings, valuators can help attorneys draft technical questions for deposition and trial. They can assist with jury instructions or critique the opposing expert’s report as well.

Valuators can ease post-divorce transitions. A valuator’s financial expertise can serve both imminent needs, such as personal budgeting and tax preparation, and long-term goals, such as investments, insurance and retirement planning.

Flexibility and openness - The key to getting the most from a financial professional is communicating your expectations soon after filing for divorce. A detailed engagement letter can help define the assignment’s parameters.

A valuator’s role often changes during the course of a case. So, it’s important to keep the lines of communication open. For example, valuators should immediately report financial statement irregularities. Similarly, attorneys need to call valuators to confirm trial dates and discuss technically relevant case law. Miscommunications can lead to wasted efforts, excessive professional fees and costly courtroom mistakes.

A valuator’s early involvement improves the chances of discovering all relevant financial information and completing key valuation procedures. Valuators can help at all stages of the process, leading to the best results.

Sidebar: Expert or consultant? You decide.

When hiring a valuation professional to help with divorce proceedings, you face a tough question: Do you need an expert or a consultant? The differences between these two types of services are more than semantic. Failure to understand them can compromise a valuator’s perceived objectivity — both in and out of court.

The expert - Experts provide unbiased opinions on technical matters. In a divorce case, an expert might appraise, say, a private business interest or an intangible asset, such as a patent, copyright or professional license. Or an expert might estimate how much a premarital asset appreciated during the marriage, bifurcate a business’s goodwill into its personal and professional components, or prepare a rebuttal report refuting the opposing expert’s conclusions.

Valuation experts help divorcing parties, attorneys and judges make sense of complicated financial issues. Accordingly, all their work products — including correspondence, draft reports, work papers and electronic files — are typically discoverable. Unfortunately, courts often perceive experts as “hired guns.” To counter any preconceived notions, most experts charge by the hour, rather than on a contingent basis.

The consultant - Consultants act as advocates for their clients. Most jurisdictions don’t require disclosure of consultants’ identities. Accordingly, a consultant’s work product is generally not discoverable.

Examples of consulting services that valuators routinely offer in divorce include assisting in developing case strategy and drafting cross-examination scripts for the opposing expert.

It’s common for a valuator’s role to evolve during divorce proceedings. For instance, after the court issues its final ruling, an expert witness may be called on to advise the client on personal financial matters. But once an expert crosses the advocacy line, he or she usually can’t turn back without risking his or her independence, professionalism and integrity.