Valuations of Real Property or Businesses in Divorce

What is a real estate property appraisal?  This is an unbiased estimate of fair market value performed by a real estate appraiser.

Fair market value can be defined as an estimate of the price at which real property would change hands in an arm’s length transaction. That is, a voluntary transaction between a willing buyer and a willing seller, both having equal bargaining power and a reasonable knowledge of the pertinent facts. In short, an appraisal is a supportable and defensible opinion of value provided by a real estate appraiser.

Although there are different methodologies an appraiser can use in determining a value estimate for your property, most often we rely upon the sales comparison approach to value. This is the process in which the property being appraised is compared to similar homes that have recently sold. Data from property inspection, county records, interior/exterior photos, realtors, sellers, and other sources is compiled and contrasted against the appraised property.

There are many steps taken by an appraiser to determine a property’s value, most typically including visiting the property in-person, confirming qualitative and quantitative elements, reviewing sales activity in the neighborhood and comparing the property to relevant sales of competing homes. The data gathered by the appraiser during this process is organized and presented to you in this final report.

The in-person part of an appraisal often takes over an hour, depending on your home size. The appraiser will take photographs, confirm size/room counts, make note of condition, updates and upgrades.

As the property owner, you will also want to be ready for the appraisal process. Itemize any recent improvements that you have made. Be prepared to discuss both positive and negative features of your home to the appraiser. If you are unable to attend the appraisal appointment, we encourage you to contact us via email to disclose any information you feel is relevant to the appraisal.

What is a business evaluation?  This is an unbiased estimate of the value of the business and/or the real income it generates.

Business valuation is at the core of virtually all strategic business decisions. By having a good understanding of the value of their business, a party in divorce can reduce tax liabilities, prevent litigation, avoid selling for too little or paying too much, plan for a smooth owner succession, and reduce business risk. Business valuations provide owners and their professional advisors with the information they need to make good decisions.  However, not every type of business valuation is useful in a divorce, most of these evaluations used in litigation are specifically done for purposes of the divorce and the number of business evaluation experts who are qualified to testify in court are few and far between.  A seasoned divorce attorney will guide you in selecting these specialize experts.  Further, you want the evaluation done in accordance with the American Institute of Certified Public Accountants Statement on Standards for Valuation Services No. 1 (SSVS No. 1).

The standards of value used in most experts valuation of a Company is Fair Market Value with a premise of going concern.  The term “fair market value as used herein is defined as the value arrived at between two individual at arms-length with fair representations by each. The term “business enterprise” as used herein is defined as the combination of all tangible and intangible elements associated with a business entity, and reflected by the value determined for the owner’s equity, net of all stated liabilities. The term “going concern”, as used herein, means that the business is anticipated to continue in a manner consistent with prior operations. The valuation of a business requires consideration of all pertinent financial data, as well as investigation of all factors, which have a bearing or may influence the market price. Included with these factors are:

1. The history and nature of the business
2. The economic outlook in general and the condition and outlook of the specific industry in particular
3. The book value of the subject company’s stock and the financial condition of the business
4. The earnings capacity of the company
5. The dividend-paying capacity of the company
6. Whether or not the company has goodwill or other intangible value
7. Sales of the stock and size of the block of stock to be valued
8. The market price of stocks or corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, or in a private transaction.

In developing an opinion of value, most experts consider three standards to valuation, namely the Income Approach, the Market Approach, and the Assets Based Approach. Each of the three standards of value have multiple valuation methods or approaches. I have analyzed the various methods and approaches and determined the most appropriate valuation methods for the Company are as follows:
1. Income Approach – Capitalization of Historical Earnings.
2. Excess Earnings – Capitalized Excess Earnings of the Company in excess of a return on net assets.
3. Market Approach – Multiple of Sales (revenues).
4. Multiple of EBITDA.

Often times, these experts provide the following services under the guidance of counsel and the client and contain the following analysis and documentation:

• Business valuations supported by comprehensive written appraisal reports, which are appropriate for high-scrutiny situations (i.e. I.R.S. matters, litigation, etc.).
• Business valuations supported by restricted-use appraisal reports, which are appropriate for a limited audience (i.e. the client).
• Limited calculations, which are intended to provide an approximation of the value of a business. Oftentimes, limited calculations are used in consultation on the purchase or sale of a business.
• The review and/or critique of business appraisals prepared by third parties.
• Business transaction advisory and support services, such as providing strategic advice and consultation to sellers and buyers.
• Other valuation-related services, such as advising owners about how to increase the value of their business or prepare it for sale.