THE BUSINESS VALUATION PROCESS

In a dissolution of marriage one of the parties will sometimes have an ownership interest in a business such as a sole proprietorship, partnership or closely held corporation. Unlike the ownership of stock in a publicly traded corporation where the value of the stock can be ascertained from regularly published stock quotations, an interest in a closely held business must be determined through the use of experts. The cost of business valuations can range from $1,500.00 to as high as $10,000.00 depending upon the complexity of the business. This cost is for expert witness fees and would generally not include expenses and time for your lawyer to gather documents necessary for the expert to perform the valuation.

"What's involved in having a valuation of our company prepared?" is one of the most frequently asked questions by potential clients. This handout outlines that process in detail for your review. Each step in the process must be understood to eliminate potential confusion and to ensure the highest quality of service.

The Introductory Phase

• The valuation consultant is introduced to the client and subject company (or professional practice) to be valued, usually by referral from an existing client, from one of the company's professional advisors or your attorney.

• The valuation firm provides qualification information and requests sufficient financial and descriptive information (usually recent audits and marketing brochures) for initial review. The scope and purpose of the appraisal assignment are clarified.

The Engagement Phase

• The valuation firm develops an engagement letter which specifies the major elements of the appraisal assignment, including the purpose, the "as of" date, the scope of the expected appraisal report, the expected time requirements for completion, and the proposed arrangement for fees and expenses.

• The client executes the engagement letter and collects or has the attorney request information outlined in the valuation firm's data request form.

The Valuation Phase

• The valuation firm receives information from the company as required in the firm's data request form.

• The valuation consultant's preliminary assessment of the company begins with a detailed financial and ratio analysis.

• Appropriate industry and economic background research is initiated, including obtaining publicly available market data.

• An on-site visit (usually conducted in one day) is scheduled with company management. Normally, one (or two) valuation consultant(s) will visit company headquarters to:

- Review in detail the company's background, financial position, operations and outlook;

- Review appropriate corporate documents not normally exchanged by mail unless necessary (board minutes, etc.);

- Tour the facilities and obtain a complete understanding of the operations; and,

- Respond to questions from management.

• The follow-up analysis is completed. Additional telephone conversations with management clarify remaining questions.

• The company's performance is placed within the industry, and publicly available market data is compared with this performance.

• The company is valued.

The Report Phase

• A draft report is developed by an experienced business valuation consultant.

• The valuation consultant discusses the valuation in draft form with the attorney and client or the company management and advisors to assure factual correctness and to clarify any possible misunderstandings.

• The draft report and work files are reviewed by the valuation firm's senior management to ensure quality and conclusions.

• A "stand-alone" document is issued which complies with the Uniform Standards of Professional Appraisal Practice.

• The valuation firm's data files are prepared for permanent storage.

Financial Responsibilities

It will be the client's obligation to pay for the cost of an evaluation. After an initial consultation with the attorney, the attorney should speak with the business valuator to determine an appropriate retainer fee. The client will be responsible for placing funds sufficient to cover that retainer fee in the escrow account of the attorney directly to the appraiser. Upon completion of the evaluation a final bill would be rendered. The client would then receive that final bill and would be responsible for satisfaction of that bill.