Effective Business Valuations & Forensic Accounting In Marital Dissolutions Matters
Many family law matters become contentious and emotional. However, California is a community property state and each marital dissolution case has an end in sight, i.e., the division of assets.1 In contrast, other types of civil litigation are fraught with unknowns including rulings on liability and whether the court will find economic damage analyses, such as plaintiff’s lost profits and defendant’s disgorged profits, acceptable measures. The narrower focus in marital dissolution litigation can provide an opportunity for efficient and effective solutions. A major key to efficient resolutions in divorce proceedings involving business assets is: (1) a business valuation supported by incisive research and analysis, and (2) forensic accounting of all relevant records and systems to assist in calculating the proper revenues and profits for the valuation.
To perform a business valuation, the appraiser will conduct due diligence that typically covers the following:
1. Company operations: Review of products/services, customers, suppliers, workforce, intellectual property, and litigation/regulatory matters. The goal here is to determine how the business’s processes, infrastructure, and management relate to and result in its financial performance.
2. Financial analyses: Review of past several years company financial statements and review of any avail-able projections, budgets, or forecasts. The determination of fair market officers’ compensation. Identifying non-business perquisite expenses and/or non-recur-ring one-time expenses. Fair market compensation adjustments as well as non-business and non-recur-ring expense adjustments are usually the two major calculations to arrive at the company’s profit to use in a business valuation. Additional discussion on the non-business/non-recurring expenses appears in the Forensic Accounting section below.
3. Economic analyses: The analysis will focus on prevalent conditions in GDP, unemployment, financial market conditions, and inflation. The goal is to deter-mine how economic conditions, both historical and forecast, impact the company’s value.
4. Industry analyses: The analysis will center on competition trends, consumer preferences, historical and projected total industry revenues, and potential disruptive technologies. The objective is to determine how industry conditions, both historical and forecast, impact the company’s value.
5. Valuation research and analyses: The appraiser will select relevant methods, determine representative revenues and profits, calculate discount and capitalization rates, and select guideline comparable business sales for valuation multiples. The valuation opinion(s) should logically follow the appraiser’s analyses and conclusions associated with 1. through 4. above.
A business valuation encompassing 1. through 5. above meets all the diligence requirements in any matter includ-ing marital dissolutions, broader civil litigation, mergers and acquisitions, and estate/probate matters.2 In many California counties, it is the case that family law judicial officers frown upon the use of projected income state-ments and guideline comparable business sales valuation methods. However, there are circumstances warranting their consideration, including but not limited to the following:
a) The company’s industry is in an active merger and acquisitions (M&A) market and the business being valued has the infrastructure, organization, and financial performance typical of potential buy-out targets. Buyers of businesses in this industry utilize comparable business sales valuation methods and projections.
Thomas Pastore, ASA, CFA
Mr. Pastore is Chief Executive Officer and Co-Founder of Sanli Pastore & Hill, Inc. He has been involved in financial consulting for over 35 years, specializing in mergers and acquisitions (fairness opinions, projections, scenarios and stress testing), intellectual property and intangible asset valuations, family law, litigation consulting, and public accounting. Mr. Pastore has served as an expert witness in federal and state courts for business litigation cases in California, Texas, Arizona, Wisconsin, Nebraska, North Dakota, and New York. He has testified in 70 trials and over 200 depositions.