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.