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This month's questions and answer:
Q. I am concerned that the divorce attorneys in my case (both mine and opposing counsel) have agreed that my wife's and my businesses should be valued. I am in manufacturing and my wife is a marriage guidance counselor. Her business income has been pretty regular over the last four years but my business has taken a beating lately with the soft economy. Although a couple of years ago it did great. I am concerned as I don't really understand how valuers work and whether they will take into account the fact that my business may have less income in the future in making a valuation for the divorce.
A. The answer this month is provided by Steve Kessler, CPA and frequent business valuer for divorce valuations.
Let's break your question down into discreet components as follows:
Another issue that is often encountered is whether each party should hire their own business appraiser. Since business valuation is a complex area of specialization, it is expensive process. Therefore, one valuation expert rather than two results in a significant cost saving. You could agree on both using the same valuer but make it clear to the valuer he/she represents both of you. There may be instances where for whatever reason you want your own valuer and not a shared one. Unfortunately, if your case is one of approximately 2% that go to trial and your side does not have it's own valuation expert, the Judge will have no choice other than accepting the opposing expert's valuation (assuming the expert is qualified). These are a few of the considerations your attorney will be able to assist you with when considering a business interest valuation.
Lets now consider the last question since it will help us to answer the second question. It is important to understand that valuation is an art and not a science. Valuation experts will employ various methodologies depending on the particular type of business interest being valued. An extremely simplified overview of the valuation process is as follows:
Now for the second question - does the expert consider current and future economic prospects for the business? The answer is yes. The expert will use quantitative tools to determine what the most likely earnings of the business will be over an appropriate time frame. The current year is often the most relevant but not always. The preceding years in descending order are generally less relevant. Arguments can be made as to which years are the most relevant depending on the facts of the case. From these facts a model for the future is built which helps the valuer provide a value for the divorce process.
STEVEN J. KESSLER, C.P.A., A.B.V., C.V.A., M.S. TAXATION
Mr. Kessler is a principal in the firm of Morrow Kessler & Dowsing PLLC. The primary focus of Mr. Kessler's practice is taxation and litigation support services. He practices in the area of taxation, business valuations, pension valuations, and litigation services particularly for family law cases. Mr. Kessler has served as an expert witness in King, Kitsap, Snohomish, and Pierce Counties. Mr. Kessler earned his Bachelor of Arts Degree in Accounting with honors from Seattle Pacific University in December 1983. He received a Master of Science Degree in Taxation from Golden Gate University in June 1986. Mr. Kessler has earned the designations of Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), and Diplomat of American Board of Forensic Examiners (DABFE). Mr. Kessler is a member of the American Institute of CPA's, The Washington Society of CPA's, National Association of Certified Valuation Analysts, American Society of Appraisers (Candidate Member), Seattle Estate Planning Council, Seattle University Planned Giving Community, University of Washington Planned Giving Committee.