Effective business valuation reports for family law purposes.

Valuation analysts are often called on to prepare business valuation/security analysis reports for a variety of transaction, taxation, accounting, financing, litigation, and strategic planning purposes. The transaction purposes include fairness opinions related to the sale of (1) the business enterprise or (2) a block or class of security of the business enterprise. The taxation purposes include (1) income taxation, (2) gift and estate taxation, and (3) property taxation. Such valuations are prepared for both tax planning and tax compliance purposes. The accounting purposes include implementation of FASB SFAS Nos. 141, 142, 144, and 123R and of AICPA SOP 90-7. The financing purposes include solvency analyses, insolvency analyses, and collateral valuations for financings, refinancings, restructurings, and troubled debt workouts. The litigation purposes include dissenting shareholder appraisal rights, shareholder oppression, fraud and misrepresentation, fraud on the market, noncompetition agreement violations, breach of contract, lender liability, tortuous interference with business, bankruptcy, intellectual property infringement, and other claims. And, the strategic planning purposes include the identification of restructuring, reorganization, intercompany transfer, or spin-off opportunities.

This discussion focuses on the valuation of business and business interests for family law negotiation, litigation, and dispute resolution purposes. The topic encompasses the preparation of a business/security valuation related to the equity interests included in the marital estate. These business interests may include separately owned property or the appreciation of property owned both before and during the marriage. And, this discussion encompasses both of these types of business interests in the marital estate: (1) closely held or family owned businesses and (2) restricted publicly traded securities. It assumes that the analyst performs the business/security valuation analysis, prepares a written valuation opinion report, and serves as an expert witness in a family law administrative hearing or judicial proceeding.

For purposes of this article, the term business valuation will include the analysis and appraisal of: (1) a corporation--total invested capital, total equity, a class of equity, or a block of stock, (2) the total operating assets of a going concern business, (3) a fractional ownership interest in a closely held or family owned business, (4) the restricted securities of a publicly traded company, (5) a tax pass-through entity, such as a partnership or S corporation, (6) a limited partnership or limited liability company, (7) a professional services company, (8) a professional practice, (9) a joint venture, (10) a franchise, (11) a sole proprietorship, (12) a division or subsidiary of a parent corporation, (13) a line of business or product line, (14) a portfolio of securities, and (15) etc.

Of course, every valuation analyst attempts to make every business valuation report clear, convincing, and cogent. This valuation report objective holds for analysts who prepare valuation reports for transaction, financing, accounting, taxation, bankruptcy, and management information purposes. And, this valuation report objective is particularly important within a controversy (e.g., family law settlement, dispute, or litigation) environment. Also, this valuation report objective is particularly relevant when the valuation analyst expects to provide expert witness testimony regarding the subject business/security valuation.

First, this discussion summarizes the common attributes of an effective business valuation report. Second, it summarizes common errors to avoid in the preparation of the intangible asset valuation report. And, third, it summarizes the basic quality control procedures that valuation analysts should consider before issuing the written business valuation report within a family law context.

BUSINESS VALUATION REPORTS PREPARED WITHIN A CONTRARIAN ENVIRONMENT

Commercial litigation and tax disputes involving business enterprise and business interest values are often decided by a judicial or administrative finder of fact. In this contrarian environment, an effective business/security valuation report should be both well-written and well-organized. In addition, an effective business/security valuation report should satisfy (1) all of the valuation analyst's professional standards and (2) all of the litigant client's engagement requirements.

Of course, controversy and litigation related to business enterprise franchise fee, royalty rate, economic damages, lost profits, etc. are also often decided by a judicial or administrative finder of fact.

And, the above-mentioned professional quality expectations also apply to the …