If your divorce involves a family business, there is no shortage of professionals ready to put a value on it for you. They are easy to find and constantly self-promotional. Everyone who values businesses is fond of saying it’s a mixture of science and art. They’re right. I believe, though, that recent advances are making it more science than art.
Three maxims are in order:
A Certified Valuation Analyst (CVA) is a CPA who has completed a rigorous training discipline in the gathering and analysis of information relevant to the valuation of a closely held business. There are perhaps 1,400 CVA’s in the United States today. CVA’s are trained to apply consistent standards of valuation, standards so consistent that multiple valuations by competent CVA’s will be remarkably close. In addition, to the extent that values are disputed, a CVA will have a richer toolset with which to defend the value he or she has provided and to challenge the value provided by another.
When I first heard my good friend and CVA Butch Williams talk about the consistency of evaluations, I regarded his statement with more skepticism than anything else. But when I called the National Association of Certified Valuation Analysts (NACVA), an anecdote from NACVA’s administrator got my attention.
He described a workshop in which about 45 CVA’s divided into three groups to value a business that was to be disposed of in divorce. The first group was told to represent the husband (who would end up with the business). The second group was told to represent the wife. The third group was told to render as accurate a value as possible for the benefit of the judge. The first group (representing the husband) valued the business at 740,000. The second group (representing the wife) valued the business at 790,000. The third group (striving simply for accuracy) valued the business at 745,000.
I come from a world where it’s not unheard of for the husband’s CPA to value the business at $400,000 and the wife’s analyst to value the business at $1.8 million. I was impressed.
The organization that trains and certifies CVA’s is the National Association of Certified Valuation Analysts (NACVA). You can check out their web site now, or you can call on their toll-free number, (800) 677-2009.
The American Institute of Certified Public Accountants (the trade group for CPA’s) has a separate certification program that is as rigorous in its own way as the CVA designation. It’s called “Accredited in Business Valuation,” (ABV for short).
The AICPA is not quite so self-promotional about the ABV designation as NACVA is about the CVA designation, but I regard them as representing the same degree of specialization and targeted knowledge.
It would be wise, and usually prudent expense management, to avoid simply looking for a valuator who is close by geographically. The better practice is to locate a valuator with specific experience in the industry. He or she will be much more aware of the questions to ask, the possible opportunities and vulnerabilities facing the business, and the “rules of thumb” so helpful in business valuation.
Let’s take an example. Let’s say that you and your spouse have a dry cleaning business in Louisville. It would be far more efficient and effective to hire a valuator from Philadelphia who knows dry cleaning businesses soup to nuts than someone close by who has only general knowledge of the industry. I’m making this up, because I don’t know dry cleaning businesses, but a valuator who does know them may know how to estimate volume based on how much of a particular chemical the business uses, or how many hangers it buys. Or how the typical dry cleaning business’s receipts break down among checks, cash, and credit cards. He or she will be much more likely to estimate the true income and expenses of the business accurately.
Will you pay more because the valuator comes from a distance? A little. Typically, though, the valuator will be able to gather all the information he or she needs in one on-site visit. The process will begin with the valuator requesting a great deal of information about the business, which the business will send to the valuator for review in his or her office. The valuator may have a telephone conversation or two (or depending on complexity, more than that) to clarify data. Then the valuator makes one on-site visit to see the business, talk to principals and employees, and maybe interview customers and even competitors. Then he or she returns to the office, culls through all the data, and produces a valuation report. This is one more example of the growing irrelevance of geography.