If you or your ex-spouse own a private business, it may need to be valued for child support, maintenance (alimony), and asset distribution.
Even though most credentialed valuation analysts are subject to professional and ethical standards, there are those who will choose to “rig” the value higher or lower. That is, some will intentionally manipulate the result in favor of one spouse.
Here are some things that could point to a rigged business valuation.
A rigged business valuation may report an income that is too high or too low
An estimate of a business’ future income or cash flow is one of the most important parts of the report. The key question to ask is: does the income make sense? Here’s how to check:
- How does report income compare to tax returns and financial statements? If it differs greatly, find out why.
- Does the analyst take the reader from a historical number to the number they use? It’s acceptable to use a different income number in the report. Try to understand how they got there.
Risk Rate Too High or Low
Once you’ve tackled the income or cash flow (above), it’s time to review the risk rate. The cash flow will often be divided by the risk rate to estimate the value of the business under the income approach. The key question to ask is: does the risk rate make sense? Here’s how to check:
- Is the risk rate used smaller than 15% or higher than 23%? If it is, there should be a detailed justification in the report. Intentionally lowering the risk rate increases the value of the business; raising the risk rate too high decreases the value of the business. Understand that a risk rate between 15% and 23% could also be inappropriate in some circumstances.
Missing Valuation Approaches
The analyst should determine the need for an income approach, market approach, and asset approach. Sometimes, all three will be used. Sometimes it will be two and sometimes one. The key question to ask is: did they use all the relevant approaches? Here’s how to check:
- Did they use an income approach? An income approach is almost always used. If you don’t see it, ask why.
- Did they use a market approach? If the business is in an industry where brokers are used, there are probably sales transactions available. If the analyst did not use the market approach, it’s possible they left it out to rig the result.
- Did they use an asset approach? An asset approach is one of the least used methods for profitable businesses. The time, cost, and accuracy of using it is often not justified. However, if the business is losing money or if it was created to hold assets, an asset approach may make sense. An asset approach can provide a “floor” value for the business in some cases.
The Bottom Line
If the valuation analyst has access to information, facilities, owners, and managers, they should arrive at a similar business value whether they’re hired by the in-spouse or out-spouse. Credentialed analysts are required to prepare reports with “integrity and objectivity” or they are in violation of their professional standards. Unfortunately, some “hired gun” analysts rig valuation reports to satisfy attorneys and spouses when their allegiance should be to the court.
This short-sighted approach hurts families relying on reports for child support, maintenance (alimony), and asset distribution. You can protect yourself and avoid a rigged business valuation by reviewing the guidelines above and seeking ethical professionals.
The examples above should not be used to make decisions without seeking professional guidance. Nothing above is a calculation of value or a conclusion of value under AICPA or NACVA professional standards.