Because business entities are often a large part of a marital estate for divorce, family lawyers and clients should understand how to review the report and spot issues even before hiring or relying upon the party’s own expert for review.

1.Professional standards and credentials – Along the lines of starting at the very beginning (channeling my best Julie Andrews), begin with an analysis of the qualifications and credentials of the person performing the analysis. There are three professional associations in the U.S. that issue valuation standards – American Society of Appraisers (ASA), American Society of Certified Public Accountants (AICPA), and National Society of Certified Valuation Analysts (NACVA). Also, the Uniform Standards for Professional Appraisal Practice (USPAP) provides the accepted standards for all appraisals. Ensuring that the expert has one of these credentials will show a minimum quality standard for the credentials of the expert.

2. Clear Assignment – the valuation report should be clear on what the assignment is; in other words, what is the purpose of the report? The valuation methodology and the conclusion are driven by the parameters in the assignment. The assignment should contain information such as the subject property to be valued, the ownership characteristics to be valued, the valuation date, the purpose of the valuation, and the standard of the valuation.

3. Is the report comprehensive? Look for statements in the valuation report that indicate certain procedures were not performed because of a lack of data. Look for the following informationin the valuation as a quick checklist:

Identification of the property

  • Effective valuation date
  • Definition of value
  • Purpose of appraisal
  • Actual or assumed ownership characteristic such as marketability and/or lack of control
  • Basic company information
  • Economic and industry outlook
  • Sources of information
  • Financial statement analysis
  • Valuation methodology – income approach, market approach, or asset approach
  • Valuation synthesis and conclusion
  • Appraiser’s qualifications
  • Contingent and limiting conditions

4. Does the report consider alternate methods of value? Three valuation approaches are generally considered in an valuation – income, market, and asset approaches. A typical valuation report considers at least two of these methods of value. Each method should be close in value. If there are huge swings in the value indicated by each methodology, it could indicate an error in the valuation. These errors could include an assumption error or math error.

5. Are the financial projections reasonable? Most valuations consider the future financial projections of the business. However, these projections must be reasonable. Some considerations to look for in evaluating the reasonableness of the projections include:

  • Whether they present the most likely picture of the business in the future considering all available information
  • Whether they appear credible considering the historical performance, the industry, and economy as a whole
  • Neither too optimistic or pessimistic
  • Do not include upward or downward bias based on the desire for future performance.

6. Sources of Information – Is the report based on information that is known as of the valuation date? Use of outdated or old information would not be reliable as of the current valuation date and would be a red flag.

7. Bias – does the report show objective analysis based on reasonable methodology and credible data sources? Consider whether the report contains unsupported input that causes a swing in the conclusion.

 

Hat tip to Alina Niculita’s article Red Flags in Valuation Reports in Family Lawyer Magazine.

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Photo of Michelle O'Neil Michelle O'Neil

Michelle May O’Neil has 27 years’ experience representing small business owners, professionals, and individuals in litigation related to family law matters such as divorce, child custody, and complex property division. Described by one lawyer as “a lethal combination of sweet-and-salty”, Ms. O’Neil exudes…

Michelle May O’Neil has 27 years’ experience representing small business owners, professionals, and individuals in litigation related to family law matters such as divorce, child custody, and complex property division. Described by one lawyer as “a lethal combination of sweet-and-salty”, Ms. O’Neil exudes genuine compassion for her client’s difficulties, yet she can be relentless when in pursuit of a client’s goals. One judge said of Ms. O’Neil, “She cannot be out-gunned, out-briefed, or out-lawyered!”

Family Law Specialist

Ms. O’Neil became a board-certified family law specialist by the Texas Board of Legal Specialization in 1997 and has maintained her certification since that time. While representing clients in litigation before the trial court is an important part of her practice, Ms. O’Neil also handles appellate matters in the trial court, courts of appeals and Texas Supreme Court. Lawyers frequently consult with Ms. O’Neil on their litigation cases about specialized legal issues requiring particularized attention both at the trial court and appellate levels. This gives her a unique perspective and depth of perception that benefits both her litigation and appellate clients.

Top Lawyers in Texas and America

Ms. O’Neil has been named to the list of Texas SuperLawyers for many years, 2011-2018, a peer-voted honor given to only about 5% of the lawyers in the state of Texas. In 2014-2018, Ms. O’Neil received the special honor of being named by Texas SuperLawyers as one of the Top 50 Women Lawyers in Texas, Top 100 Lawyers in Texas, and Top 100 Lawyers in DFW. She was named one of the Best Lawyers in America for 2016 and received an “A-V” peer review rating by Martindale-Hubbell Legal Directories for the highest quality legal ability and ethical standards.

Author and Speaker

A noted author, Ms. O’Neil released her second book Basics of Texas Divorce Law in November 2010, with a second edition released in 2013, and a third edition expected in 2015.  Her first book, All About Texas Law and Kids, was published in September 2009 by Texas Lawyer Press. In 2012, Ms. O’Neil co-authored the booklets What You Need To Know About Common Law Marriage In Texas and Social Study Evaluations.  The State Bar of Texas and other providers of continuing education for attorneys frequently enlist Ms. O’Neil to provide instruction to attorneys on topics of her expertise in the family law arena.