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How to Recognize a Rigged Business Valuation During Child Support Calculations

Maggio law firm, California family law attorney, California divorce attorney, California divorce and business valuation, divorce and value of a business, division of assets, divorce division of assets

If you or a soon-to-be ex-spouse own a business, it may need to be valued for the purposes of child support/spousal support calculations and asset distribution. Most credentialed valuation analysts are subject to both ethical and professional standards, but there are the rare few who will engage in subterfuge, attempting to rig the business valuation higher or lower to intentionally manipulate the result in favor of one spouse. Do you know how to spot a rigged business valuation?

Watch Out for a Rigged Business Valuation: What To Look For

  1. Income: Rigged business valuations may report income too high or too low. The estimated future income of a business is one of the most important elements of a business valuation. When considering the income listed in a valuation, consider whether or not the numbers make sense. Compare reported income in the valuation to tax returns and current and past financial statements. If there is a significant difference, look into the issue further. It is acceptable to use a different income number in the valuation, but readers of the report should be able to clearly see the path from a “historical” number to the number reported in the valuation.
  2. Risk Rate: Rigged business valuations may report the risk rate too high or too low. Cash flow is often divided by the risk rate in order to estimate the value of the business. The risk rate, similar to the projected income, should make sense to the reader. If the risk rate is lower than 15% or higher than 23%, there should be a detailed explanation provided. Lower risk rates increase the value of the business, while high risk rates decrease the value. (Please note that in some circumstances a risk rate between 15-23% could also be appropriate even though it was used as a safe range for the purposes of this article).
  3. Valuation Approaches: Rigged business valuations may be missing valuation approaches. Analysts conducting business valuations should determine the need for an income approach, market approach, and asset approach. They may not use all three. In fact, a valuation can use one or all of the approaches. The question to ask is whether or not the analyst used the relevant approaches. An income approach is used in almost every valuation. If it is not included, find out why. If the business is in an industry where brokers are used, there are most likely sales transactions available. In this situation, the market approach should be used. If it is not, it may have been left out to rig the result of the valuation. The asset approach is the least used method for profitable businesses. The asset approach may make sense if the company being analyzed was designed to hold assets or if it is losing money.

If you fear that your spouse is presenting a rigged business valuation or if you need an advocate for child support or spousal support calculations, please get in touch with one of the experienced family law attorneys at The Maggio Law Firm today.

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