Executive Summary
Business valuations become highly contested when the result will be used to divide marital property, set a buyout price, determine damages, or support (or attack) expert testimony. In divorce, buyouts, and shareholder conflicts, the “right” value is rarely just a spreadsheet output—it is the product of defensible assumptions, consistent standards, and reliable source records.
In disputes, valuation work is evaluated under pressure: opposing counsel tests the data inputs, challenges normalization adjustments, attacks discount rates and growth assumptions, and argues about discounts for lack of marketability and lack of control. A valuation that is not well-supported can be weakened quickly in deposition or at trial.
This guide explains when valuation disputes arise, the accepted frameworks and methods used in litigation, a simple numeric example, the documents needed to support a credible conclusion, and common pitfalls—plus rebuttal strategies that help withstand opposing expert critique.
When this issue arises
Valuation disputes commonly appear in three fact patterns:
- Divorce (equitable distribution): valuing a privately held business interest, separating business vs. personal expenses, and addressing personal vs. enterprise goodwill.
- Partner buyouts and shareholder exits: determining a buyout price under an operating agreement, shareholder agreement, or negotiated settlement—often involving discounts/premiums and disputed adjustments.
- Shareholder conflicts: valuing interests where control rights, distributions, compensation, related-party transactions, or record reliability are challenged.
These matters often escalate when the parties disagree on valuation date, standard of value, what earnings are “normal,” or whether discounts should be applied. The most efficient path is to define those issues early and anchor every major assumption to reliable source records.
Accepted methods and frameworks used in disputes
In most litigation contexts, valuation professionals rely on a consistent set of frameworks and methods. The specific mix depends on the purpose of the valuation, the standard and premise of value, and the quality of available records.
Key litigation concepts that should be defined early (and used consistently throughout the analysis):
- Standard of value: fair market value, fair value (often statute-specific), investment value, or another defined standard depending on the engagement purpose.
- Premise of value: going concern vs. orderly liquidation vs. forced liquidation.
- Valuation date(s): a different date can change risk, outlook, comparables, and economic conditions—especially in divorce and damages matters.
- Level of value: controlling vs. minority; marketable vs. nonmarketable—these drive discounts/premiums.
- Normalization adjustments: removing nonrecurring items, discretionary expenses, and owner-specific benefits to estimate sustainable earnings.
Commonly accepted valuation approaches used in contested matters include:
- Income approach: discounted cash flow (DCF) or capitalization of earnings/cash flow when supportable forward-looking assumptions can be documented.
- Market approach: guideline public company method and guideline transaction method when appropriate comparables exist and can be adjusted credibly.
- Asset approach: adjusted net asset method when asset values drive the business (e.g., holding companies, asset-intensive operations) or when earnings quality is too weak for income-based methods.
In divorce, buyouts, and shareholder conflicts, disputes frequently concentrate on owner compensation, related-party transactions, revenue completeness (especially cash receipts), debt-like items and contingencies, and discounts/premiums (DLOC/DLOM).
Numeric example: a simple valuation walk-through
This example is intentionally simplified to show how assumptions drive value and where disputes typically occur. The numbers below are illustrative and not a substitute for a case-specific valuation.
Assume a closely held company has the following normalized results for the most recent year:
- Revenue: $2,500,000
- Reported operating profit: $250,000
- Normalization adjustments (add-backs): $90,000 (owner personal expenses, one-time legal expense)
- Normalized operating profit: $340,000
- Normalized taxes (assume 25% effective): $85,000
- Normalized after-tax operating profit: $255,000
- Estimated annual capital expenditures and working capital needs: $55,000
- Estimated normalized free cash flow (FCF): $200,000
Income approach (simplified capitalization model):
If the analysis supports a 3% long-term growth rate and a 16% discount rate, a simplified model indicates:
Indicated value ≈ FCF ÷ (Discount rate − Growth rate) = $200,000 ÷ (0.16 − 0.03) = $200,000 ÷ 0.13 ≈ $1,538,000.
Where disputes arise (sensitivity to key assumptions):
- If the opposing side argues the add-backs are overstated by $40,000, FCF becomes $160,000 and the indicated value becomes $160,000 ÷ 0.13 ≈ $1,231,000.
- If the discount rate is challenged (e.g., 18% instead of 16%), then $200,000 ÷ (0.18 − 0.03) = $200,000 ÷ 0.15 ≈ $1,333,000.
- If growth is challenged (e.g., 1% instead of 3%), then $200,000 ÷ (0.16 − 0.01) = $200,000 ÷ 0.15 ≈ $1,333,000.
Discounts/premiums example (minority, nonmarketable interest):
If the concluded enterprise value is $1,500,000 and the subject interest is a minority position, parties may debate lack of control (DLOC) and lack of marketability (DLOM). Discounts are typically applied sequentially. For example:
- Start value: $1,500,000
- Apply DLOC 10%: $1,500,000 × (1 − 0.10) = $1,350,000
- Apply DLOM 20%: $1,350,000 × (1 − 0.20) = $1,080,000
- Combined effect: $1,500,000 to $1,080,000 equals a 28% total reduction.
In divorce and statutory “fair value” contexts, whether discounts apply—and which ones—can depend on jurisdiction, governing documents, and case-specific facts. A defensible valuation states what standard is being applied and why.
Documents and data checklist
A defensible valuation is only as strong as the records behind it. Below is a practical checklist litigation teams and parties can use to reduce delays and strengthen reliability.
- Organizational / legal: operating agreement, shareholder agreement, buy-sell provisions, amendments, capitalization table, minutes, key contracts, known claims, and settlement agreements (if any).
- Financial statements: income statement, balance sheet, and cash flow statement for 3–5 years; interim statements through the valuation date; general ledger detail and chart of accounts.
- Tax records: business returns (3–5 years) with supporting schedules; K-1s; payroll filings; any notices or unresolved tax issues.
- Banking and payment processing: bank statements for all accounts; cancelled checks; deposit detail; merchant statements (card processors); PayPal/Stripe/Square reports; cash logs where applicable.
- Owner compensation and benefits: payroll registers, W-2/1099s, benefits, retirement contributions, owner distributions, and shareholder/partner loan activity.
- Revenue support: invoices, sales journals, customer concentration reports, contracts, pricing lists, returns/allowances, and pipeline/forecast data (if used).
- Expense support: major vendor listings, leases, insurance, professional fees, and documentation supporting any proposed add-backs or nonrecurring items.
- Asset details: fixed asset register, appraisals (if any), real estate info, inventory counts, and intangible asset schedules.
- Debt and contingencies: loan agreements, amortization schedules, covenant compliance, contingent liabilities, threatened claims, warranties, and indemnities.
- Industry/market inputs: market reports, public company comparables used, transaction data sources, and internal budgets/forecasts (if relied upon).
Common pitfalls and rebuttal strategies
In contested matters, valuation disputes usually turn on a small number of leverage points. Below are common errors and practical rebuttal strategies used in litigation.
- Pitfall: treating the valuation date as an afterthought. Rebuttal: anchor every dataset and assumption to the valuation date; explain subsequent events and why they are or are not considered.
- Pitfall: unsupported add-backs (or missing documentation). Rebuttal: tie each adjustment to source records and explain why it is nonrecurring, discretionary, or non-operating.
- Pitfall: unclear treatment of personal vs. enterprise goodwill. Rebuttal: state the framework and tie it to facts (customer relationships, systems, workforce, brand, and any noncompete considerations).
- Pitfall: ignoring related-party transactions and owner perks. Rebuttal: identify related parties, test reasonableness, normalize to market terms, and show the impact on cash flow.
- Pitfall: weak or cherry-picked market comparables. Rebuttal: document selection criteria, show adjustments, exclude outliers with explanation, and demonstrate economic similarity.
- Pitfall: mechanical discounts/premiums. Rebuttal: explain level-of-value, control rights, marketability factors, and apply discounts sequentially with clear math and support.
- Pitfall: overly optimistic projections. Rebuttal: test forecasts against historical performance; run sensitivity analyses; disclose how value changes when contested assumptions move.
- Pitfall: leaving easy deposition “gotchas.” Rebuttal: define terms up front, keep assumptions consistent, and ensure every key number is traceable to a source record or a clearly stated professional judgment.
Practical litigation tip: The most persuasive rebuttal often includes a transparent bridge from raw records to normalized earnings/cash flow, followed by sensitivity analysis showing how value changes when disputed assumptions move.
Frequently Asked Questions
1) How is a business valued in a divorce?
Typically by applying the income, market, and/or asset approaches to the specific facts and required standard of value, with careful attention to owner compensation, add-backs, goodwill characterization, and reliable source records.
2) What is the difference between fair market value and fair value?
Fair market value is commonly framed as a price between willing parties under no compulsion. “Fair value” is often statute-specific in shareholder matters and may limit certain discounts. The applicable definition should be stated clearly at the outset.
3) Do discounts for lack of control or lack of marketability always apply?
No. Whether discounts apply can depend on the engagement purpose, governing documents, and sometimes jurisdiction-specific rules. If applied, the valuation should show the math and support.
4) What documents matter most early in the process?
3–5 years of financials and tax returns, complete bank statements and deposit detail, general ledger detail, ownership documents (operating/shareholder agreements), and support for any proposed add-backs or related-party transactions.
5) How long does a litigation-oriented valuation usually take?
Timing depends on record quality and scope, but contested matters commonly involve iterative data requests, normalization work, and rebuttal analysis. A complete document set early can materially reduce delays.
6) What makes a valuation defensible for expert testimony?
Clear definitions (standard and premise of value), traceable data, supported adjustments, consistent assumptions, transparent calculations, and sensitivity analysis that anticipates opposing expert critiques.
Sources
- AICPA — Statement on Standards for Valuation Services (SSVS No. 1).
- IRS — Revenue Ruling 59-60 (valuation of closely held business interests).
- American Society of Appraisers (ASA) — Business Valuation Standards.
- Business Valuation Resources (BVR) — valuation resources and publications.
Contact the team at Joey Friedman CPA PA for a confidential consultation to discuss business valuation support for litigation, transactions, divorce, or shareholder matters.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Outcomes depend on specific facts and circumstances.
