Forensic Accounting Perspectives : New York Business Valuation, Divorce, Business Disputes, Shareholder Disputes, Litigation Support & Accounting Forensics in Connecticut, New York & New Jersey

In these economically challenging times, parties are increasingly seeking ways to reduce the cost and conflict of divorce. Many attempt to streamline the process by retaining a joint expert/valuator to appraise the marital business and/or business interests. Indeed, there are numerous benefits. Consider, for instance, that without a joint appraisal, many non-business owning spouses or those without direct access to marital funds would not be able to afford any expert in the case.  

In addition to the added financial benefit of retaining a joint expert,

• ·the evaluator is also likely to get better access to documents and other evidence than an expert who has been retained by one party or another, 
• ·the evaluator can often take on the role of creative problem solver, coming up with financially efficient, resourceful solutions,
• ·the parties and their attorneys frequently view the joint appraiser as more independent and objective, and can use the joint expert to expedite mediation and settlement.

Attorneys avoid any pitfalls by clearly explaining to their clients the differences between retaining a sole expert and a joint expert. This will help clients from feeling “betrayed” later on in the case—when, for example, the appraiser may spend more time with the business-owning spouse to obtain information and financial records; or when the appraiser’s opinions conflict with the owner’s perception of the business’ value. 

It is important for the legal practitioner to become acquainted not only with appraisers who have experience as joint experts, but also those who also have some mediation or alternative dispute resolution training, as they may prove to be the most efficient joint experts.

The emerging field of collaborative law in many jurisdictions also utilizes the joint expert process. Many mediators/arbitrators are taking advantage of the joint appraisers as well, to reduce the conflict and cost of divorce cases.

The joint appraiser is particularly suited to smaller cases that concern sole proprietorships or family-owned businesses, when two experts would most likely reach similar conclusions of value. Parties in the smaller cases will not often have the funds to hire specialists or consultants—and conversely, where the parties do have such funds, a joint expert may not work to their advantage.

Once the parties have decided to take this route, it is important to work toward creating a framework for the engagement by taking steps to:

• Define the scope of the engagement and determine whether the expert will provide ancillary services, such as forensic investigation, income determination, and accounting for separate property.
• Establish a protocol for communications between the expert and counsel and the expert and the parties.
• Establish a protocol for communications between the expert and the court.
• Establish a protocol for communications between the expert and any consultant, specialist, or rebuttal expert that the parties may hire.
• Establish a timeline and procedure for the document production process, especially who will provide the documents and what they will provide.
• Provide a methodology to enforce the cooperation of the parties and a means of recourse for the expert if requested information is not forthcoming.
• Discuss and define the applicable standard of value.
• Institute a procedure for providing draft reports and receiving comments from attorneys and the parties.
• Determine the format of the final work product and whether the expert will provide a summary or detailed report
• Establish a procedure to compensate the expert, including the amount of a retainer, and his/her recourse for delinquent payments.

There are, of course, common problems in divorce cases. Just because the parties have retained a joint expert does not immune the process, or the appraiser, from the same challenges that can frustrate any divorce proceeding.  Investing the effort to establish a framework for the engagement can reduce these frustrations. In addition, if the attorneys and both spouses support the retention of a joint appraiser, they will have more confidence in the process. 

For more information on business valuation in matrimonial matters, please visit our website www.msgcpa.com. In addition, please visit our podcast library at www.msgcpa.com/podcasts/ for a variety of broadcasts specific to financial matters in a matrimonial setting.

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When it comes to business bankruptcies, the numbers seem to loom larger with every year. From 2005 through 2008, annual business bankruptcies increased by over 200%. In the years 2009 and 2010, business bankruptcies were more than double for the years 2006 and 2007.

We have seen bankruptcy filings from businesses with long histories such as the 163-year-old Tribune Company, or, more recently, younger companies as Blockbuster, whose goal is to cut its debts from $900 million to $100 million, and Circuit City, which seems to be finding a second life online of late. No matter what the size of the company or its reputation, however, valuation plays a key role in the bankruptcy process; and, inevitably, valuation issues will arise.

These issues pervade throughout the entire bankruptcy process--and impact each of the stakeholders along the way. While it is the attorney’s job to reach legal conclusions as part of the valuation, fairness or solvency analyses, the valuation analyst may serve debtors, creditors and legal counsel as either a consulting expert or a testifying expert. Whether a valuation expert uses one or all three of the accepted methodologies—the income approach, the sales or company comparison approach, or the cost approach--they are influenced by data and assumptions used under the formulas.

A company typically elects to file for bankruptcy under Chapter 7 of the Code when continued business operations cannot be supported by the income the company is generating. If a company does elect to file a Chapter 7 bankruptcy petition, a trustee is appointed and the debtor then discontinues its operations and all assets are liquidated on an orderly basis. The proceeds are subsequently distributed to the claimholders and creditors in order of priority.

Valuation issues can range from asset/collateral matters, to disputes as to the true value of a business as a whole entity, to fairness issues related to the valuation of securities and cash flow streams being proposed to settle the claims of various stakeholders. What are some of the most common valuation issues in bankruptcy? A few that come to mind are:

• Distressed companies will often defer necessary expenditures that cause a reorganized company to catch up to retain a competitive position.
• If a recent downturn was caused by a low point in a “cyclical” industry, attorneys and valuation experts need to carefully consider the timing and magnitude of an uptick.
• Working capital deficits are common as accounts payable days lengthen;
• Restructuring professional fees can impact significantly on a company’s cash flows;
• When there is operational restructuring, severance and costs of closing a business’ locations need to be carefully considered.

Working in tandem, counsel and the valuation analyst should be aware of the nuances in market transaction method valuation. For instance, to the extent that financial distress in an industry has been caused by “inflated acquisition multiples,” then great caution should be employed in relying upon such market data.

In addition, it is very important for the analyst to adjust debt to market value in calculating numerator of multiples; to consider that the stock values of distressed companies may not be meaningful; and to utilize “debt-free” market multiples to mitigate the impact different capital structures can have on valuation.

It isthe expert’s responsibility to determine the current value of a business’s collateral, as well as determining the extent to which the collateral has recently declined in value or will likely decline in value in the future. In addressing the valuation issues in this regard, a going concern premise of value is typically assumed, unless the subject company is not expected to reorganize. Depending on the facts and circumstances of each situation, all traditional valuation methods should be considered.

In an economic downturn where even venerable, financially sound businesses can approach insolvency, it is important for valuation experts to capably assist attorneys—especially those with a broad range of legal expertise-- in resolving challenging valuation issues, and successfully meeting clients’ objectives in the bankruptcy process.

For more information about MSG’s business valuation, forensic accounting and litigation support services, please visit our web site www.msgcpa.com.

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