Page 48 - Family Law Services

• The selection of the time periods used for the underlying data.

• The computation of the valuation multiples.

• The timing of the price data used in the valuation multiples in relation to the valuation date.

• Adjustments to the multiples for differences in qualitative and quantitative factors between the
guideline companies and the subject company:

— Size

— Depth of management

— Diversification of markets, products, and services

— Relative growth and risk

• Appropriate weighting of the indications of value arrived at under each multiple.

• Adjustments may be necessary to the indicated value for degree of control and marketability be-
cause the guideline public company data is on a minority, marketable basis.

The merger and acquisition method relies on transactions involving the sale, merger, or acquisition of a
business. A number of databases are available to the CPA to research transactions in the marketplace,
including Bizcomps, Pratt’s Stats, Public Stats, IBA Market Database, FactSet Mergerstat, and Done
Deals. The development of the valuation multiples under this method and the key points to consider are
the same as in the guideline public company method. As previously mentioned, adjustments may be
necessary to the indicated value for degree of control and marketability because the guideline transac-
tions assume a control, marketable basis.

The CPA should be alert to and inquire if there have been actual sales of equity interests in the subject
company. If there have been, then the CPA will need to determine if the transactions are arm’s-length
and can be relied upon to arrive at a reasonable indication of value.

Even though the CPA should consider all three valuation approaches, having an understanding of local
law is imperative. In some jurisdictions, the practitioner cannot consider any income streams that extend
beyond the valuation date. Using a discounted cash-flow methodology (which requires the use of a fore-
cast to estimate value) may be a futile exercise because the court may not allow the projected figures to
be used. A theoretical dilemma results because valuation methods generally involve estimating future
earnings or cash flows, or both, through some means, whether in the discount rate or an actual cash-flow
projection. A clear understanding of local law will help the practitioner design a presentation that effec-
tively supports his or her professional opinion and meets the family law requirements of the particular
jurisdiction.

Compensation

When valuing a controlling interest in the subject company, the valuation expert typically considers con-
trolling adjustments. The most typical control adjustment relates to the owner’s compensation. In a mari-
tal dissolution matter, compensation adjustments can affect the determination of marital income for con-
sideration of alimony or maintenance and child support. The determination of reasonable compensation

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