High dollar, contested divorce litigation engagements often involve complex financial issues. In turn, those financial issues usually include business valuations and voluminous amounts of documents and financial information. How does an attorney or business appraiser determine what is crucial to the case and what is trivial or secondary information? One such piece of financial information that varies wildly in its interpretation and importance to the case is a personal financial statement.
A personal financial statement is a document submitted to a bank or lending institution for the purpose of securing financing by representing an individual or couple’s financial position or net worth. In other words, it’s an asset and liability statement with estimates of value for each item. If the individual or couple owns a business, there generally is an estimate of value assigned to that asset.
Family law attorneys and business appraisers should always ask for personal financial statements as part of their discovery or information request for the business valuation. If one exists, how important is this document and how much weight should be given to it? Here’s where there are wildly different views of the same document.
One view of a personal financial statement is that no formal valuation process was used; so at best, it’s a thumb in the air, blind estimate of value of the business.
The opposing view would say the individual or couple submitting the personal financial statement is attesting to the accuracy and reliability of the financial figures contained in that document under penalty of perjury. Further, some would say the business owner is the most informed person regarding his business, its future growth opportunities, competition, and the impact of economic and industry factors on the business.
With such polar views, how do family law attorneys and business appraisers use personal financial statements? Dismiss them and throw them out? Use them as a gold standard and forego a formal business valuation? As usual, the two adages “it depends” and the “truth lies somewhere in the middle” are both probably accurate in this situation.
Attorneys and business appraisers never want to be surprised by not knowing about information or documents that exist. Therefore, you should always ask for personal financial statements. They should then be used as another data point along with the other indications of value that a business appraiser is considering, such as an asset value, income value, market value, recent transactions within the Company’s stock, etc. As with recent transactions within the Company’s stock, consideration should be given to the timing of submission for the personal financial statement and the relevance and motivation involved in the event.
If the value indicated by the personal financial statement falls within a reasonable range of the estimates from the other methodologies, it should probably be given more weight. Be cautious if the value indicated by the personal financial statement is materially higher or lower than a reasonable range indicated by the other methodologies. In which case, it may require the business appraiser to ask more questions regarding the thought process behind the estimate in the personal financial statement.
Bottom line, ask for personal financial statements, analyze them, but consider them along with other factors and methodologies before concluding on a value for the business. These documents can be helpful in the divorce process, but don’t let them become the smoking gun by not asking for them or by not being aware that they exist.
Originally published in Mercer Capital’s Tennessee Family Law Newsletter, First Quarter 2018