Divorce Valuation Issues Revisited

I am a dueling expert in my first contested divorce appraisal in several years.  As such, it was interesting to reflect on the issues that have arisen. The subject interest is 100% equity in a security systems installation and monitoring company.

This case involves:

1. An unresolved valuation date (date of separation March 2009, financials furnished through September 2009, trial date February 2009). This turns out not to be a big deal; there has been and is expected to be no material change in the business or its financial position during this time frame.
2. Whether future earnings (and value based thereon) are marital property.  In this jurisdiction, they are not.  Interestingly, the opposing expert is hot to trot with a forecast of the business, which is unarguably declining for demographic, economic, competitive and other reasons. This is going to work against them!
3. Forensic issues related to personal expenses charged to the business. Many of the historical personal expenses were to the benefit of the spouse (not the business owner).  I maintained that these should NOT be added back to historical results because of this; were they to be added back, the spouse would get (a) the benefit of those historical expenses and (b) their capitalized value as part of the business, which is a double dip.
4. Making sure that the parties understand that whatever owner compensation level is assumed for valuing the business should also apply to support payments, to avoid double-dipping.
5. Opposing expert arguing that the business could liquidate (sell its customer list to a competitor) and realize a higher value.  Unfortunately for that individual: (1) market data do not bear this out; (2) the sale would result in payments over time or a steep discount to current value; and (3) sale to a competitor is not fair market value, which is the standard for marital matters in Ohio,.
6. The classic hunt for add-backs (non-recurring items) and arguments as to whether it is reasonable to value a business assuming there are no unforeseen expenses whatsoever.  (I believe that every business has such expenses every year.)
7. Being sure to explain things carefully to (in this case) a rather unsophisticated client, including the fact that I am objective and independent; if I were to be biased, my opinion would be worthless to all concerned
8. The value of a major non-operating asset: a loan made to finance the renovation and resale of a vacation property.  The renovation is not done, the real estate market is weak, and there are major uncertainties about the collectibility of the loan.  The value of the real estate will have to be established by a residential real estate appraiser, but even then the documentation of the loan is sloppy and there are huge credit issues.  I have taken the position that it will be impossible for any business appraiser to value this loan given all these uncertainties, and will value the business excluding the loan.

One totally new (for me) issue arose: the opposing expert, in his list of interview questions, wants the business owner to state what the fair market rental rate (for Company real estate owned by a related party) and fair market compensation (for the owner) should be.  My client’s attorney asked me how I would respond to this (were I the business owner).  I said “first of all, I do not understand what fair market value is, second, I have no idea about market rent or salary rates and third, isn’t that your (the appraiser’s) job to research that?” The attorney absolutely loved that!