From Denise French’s Blog
The small business owner in divorce faces unique challenges that other, regular W2 employees don’t. A business owner’s divorce attorney (or their spouses divorce attorney) will often ask that a business valuation be completed. Not only is this another time consuming item on the divorce check-list, but it’s an expense typically ranging between $7,500 – $20,000. The appraisal may take weeks if not months to complete and much information will be requested of the owner. This can be overwhelming to the business owner who is already exhausted due to the time, emotion and costs of the divorce itself.
There is an alternative to the comprehensive business valuation report which can help the small businessperson save both time and money while providing the attorney with a reliable, third party number to use in mediation. This is the Calculation of Value Report. According to the National Association of Certified Valuation Analysts (NACVA), a Calculation Engagement occurs when the client and member agree to specific valuation approaches, methods, and the extent of selected procedures and results in a Calculated Value.
The calculation report will perform a deep dive into the financials of the company as any business valuation should. The report will be short, typically 6 – 8 pages and if conducted according to the standards of the NACVA it will include the purpose of the report, description, ownership size, nature, restrictions and agreements of the interest being valued as well as a calculation date and report date. It will include the scope of work, calculation procedures, hypothetical conditions/assumptions and the reason for their inclusion. It will include subsequent events which are considered and denote if reliance on a specialist was required. It will include a statement of financial interest and whether or not the author is obligated to update the report. Finally, it will be signed by the valuation analyst who is responsible for providing the report.
The calculation report should show normalized financial schedules for the subject company. The owners compensation as well as other balance sheet and income statement non-recurring items should be reviewed, researched and normalized. The company documents including financials, tax returns, corporate documents, buy sell agreements and other articles of incorporation should be reviewed. An interview with the owner will still need to be conducted, although they are usually done remotely via a zoom meeting or facetime on a smart-phone. The calculation report will also include any discounts for lack of control if the owner is not the sole owner and discounts possibly for lack of liquidity.
Typically, two of the three approaches will be used whether it is the Asset Approach usually using the Adjusted Net Assets Method, the Income Approach using either the Capitalization of Earnings or the Discounted Cash Flow Method and/or the Market Approach typically using the Guideline Public Company Method showing both the Seller’s Discretionary Earnings Multiple and the Revenue Multiple. The financial schedules showing the numbers will be included in the report as well as a list of the sources of information utilized to derive the calculated value.
These reports are often used in mediation. They provide a way to save time and expense as they are produced in a shorter time period and cost less than a full conclusion of value report. A word of caution, these reports may not be accepted by the courts, but can be morphed into a full report if court becomes a necessity.
Overall, this is a way to save time and expense while providing a calculated value of the subject company based off its historic, current and expected financials.