Valuation of a business can prove to be complicated in a divorce. A joint business valuation expert can be retained to reduce costs if both parties agree to openly share information. Depending on the time of business, the protocol that is followed varies.
Ryan Kalamaya and Yvonne Zuber discuss the general process that is followed from start to finish when a joint business valuation expert gets involved in the divorce process.
About Yvonne Zuber
Yvonne Englard Zuber, CPA/ABV/CFF, CVA, is a Member of the firm Lutz Zuber & Associates, LLC, and is a Director of Marital Dissolution Litigation Support Services. Her practice includes valuations of businesses, stock options, trust interests and pension plans, tracing of separate property, analyses of net spendable income and proposed asset divisions. She has presented at seminars sponsored by the Colorado Judicial Conference, the American Academy of Matrimonial Lawyers (Colorado Chapter), the Colorado Bar Association Family Law Institute, the Lawyers' Public Information Forum, the National Business Institute and the Colorado Society of Certified Public Accountants. Yvonne has served on the Colorado Child Support Commission since 2009 and was also appointed to the Maintenance Task Force.
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Ryan Kalamaya (3s):
Hey everyone. I'm Ryan Kalamaya
Amy Goscha (6s):
And Amy, Goscha
Ryan Kalamaya (8s):
Welcome to Divorce at Altitude. A podcast on Colorado family law
Amy Goscha (13s):
Divorce is not easy. It really sucks. Trust me. I know besides being an experienced divorce attorney, I'm also a divorce.
Ryan Kalamaya (21s):
Whether you are someone considering divorce or a fellow family law attorney listening for weekly tips and insight into topics related to divorce, parenting, and separation in Colorado. Welcome back to another episode of Divorce at Altitude. I am one of your co-hosts Ryan Kalamaya this week, we are talking about Joint Business Valuation Experts. I will confess that this is a topic that is near and dear to my heart. I love dealing with business valuations. It's one of the favorite aspects of my job, and I'm excited to have a business valuation expert, Yvonne Zuber on today's show.
Ryan Kalamaya (1m 4s):
And we're going to get into what goes into business valuations. What's the difference between a joint and a sole or retained, or even a shadow expert? Why you Yvonne or a Joint Business Valuation expert is going to ask a business owner whether or not they filed for divorce. But before we get into that, you've gone. Welcome to the show.
Yvonne Zuber (1m 24s):
Hi Ryan. Thank you very much for having me on. So
Ryan Kalamaya (1m 27s):
Can you give our listeners for those, you know, attorneys are going to recognize your name because you are one of the go to business valuation experts in Denver and throughout Colorado. But can you give us a little background about how you got into the work that you do and a little bit about yourself?
Yvonne Zuber (1m 43s):
Of course, I am a graduate of the university of Colorado were totally unrelated. I started out in pre-med then switched to mathematics and computer science and got a degree in the app after deciding I didn't really want to stay up all night test programs. I ended up going back to school, getting accounting hours and sitting for the CPA exam. So for the first five to six years of my career, I was a traditional CPA. I did tax returns. I did audits. And what I found was that that type of work was just not suited to me. It was routine. And after the third year of doing somebody's tax return, it was, I can't do this anymore.
Yvonne Zuber (2m 30s):
I happened to have a client that was going through a divorce and he asked if I could assist. And I learned that there was an entire field out there that no one had ever mentioned to me called litigation support and specifically in the divorce arena. And that's how I got into it. I love it because it's always changing. I'm always learning new things. It's an exciting field to be in, and it's certainly, isn't retained
Ryan Kalamaya (2m 54s):
You and I were talking offline before we started recording. And we talking about just the learning aspect of, you know, business valuations, but divorce in general. And you know, I, when I was a baby lawyer, I thought that the last thing I would be was a divorce lawyer. You know, growing up in Longmont, Colorado, my dad was a personal injury lawyer and I thought I'd be going to the Denver Broncos as, you know, some sort of litigation guy, but not doing a divorce. And when I met with my mentor, Bob Kendig, who is, you know, you have worked with Bob was just, you know, a phenomenal divorce lawyer. And in Aspen, I remember sitting in my interview and asking him why he did what he did.
Ryan Kalamaya (3m 36s):
And he told me that the learning and just figuring out a person's, how they're making money and the business aspects really appealed to him. And that's very similar to me and you and I were talking about just how much you learn when you dive into someone's business.
Yvonne Zuber (3m 53s):
Every business is unique and every case is different. And I especially enjoy divorce because there's a lot of emotions that are in play and you really have to discern, are the emotions kind of pushing the case or are there valid business reasons for what's happening? Just to give you an example, I had years ago, a settlement conference where we had two attorneys, two experts, both parties, and they were arguing over a painting that had a market value of $400. So it was on the walls of the business and they wouldn't agree to value for the business because they couldn't decide who was going to get the painting.
Yvonne Zuber (4m 33s):
The reality is that the painting was a proxy for what they were arguing about. There was a lot of emotion in the room and that particular settlement conference was not a place where there was going to be a resolution. And if they settled the case about a week later. So I find that piece of it very, very intriguing is how to navigate the emotions and invariably the accusations you get from one party or the other, and still try to push forward with what we need to do to value of this.
Ryan Kalamaya (5m 8s):
You know, listeners, they know that we have this hypothetical divorce story involving Eric and Melanie Wolfe. And Eric Wolf is a business owner in, in our story. And so if Eric comes to me and says, Hey, you know, I've got this business. It's not apple, it's not Elon Musk. It's not Tesla. And as we're recording, as Elon Musk is selling a bunch of stock and everyone knows about it and knows how much he's making in closely held businesses. We have to figure out how much it's worth. And so one conversation I'm definitely going to have with Eric is having a Joint Business, Valuation Experts, two to determine the value. So can you walk us through, from your perspective, what are situations and with Eric's business, it might not be a good fit for a joint expert compared to a retained
Yvonne Zuber (5m 55s):
Expert. I would say the number one element that needs to exist is trust between the parties. When you're doing a Joint Business Valuation, you're going to be getting input from both parties as when one party completely disbelieves the, what the other party is providing is accurate. Then I don't believe it's a good fit for each joint expert. It's a better fit for a solely retained expert because you're really looking for a forensic analysis. So number one, you'd have to have trust. You really have to have two parties. I think that in addition to trust, respect each other and believe that the other party will respect the integrity of the process.
Yvonne Zuber (6m 43s):
You have to have individuals who communicate well, it doesn't work. If one individual believes something is happening in the business, but for whatever reason, they're not comfortable telling me. And then you also have to have a situation where they both have a common goal. And the common goal is to determine the value of the business with a commitment on the side of both parties that they're going to work towards that goal. It's a very co-operative process and where it can't be. I don't think it can be successful.
Ryan Kalamaya (7m 17s):
Yeah, I know that it used to be correct me if I'm wrong, but my understanding, you know, back before I was really practicing, the kind of standard model would be, each party gets their own expert or one party would get their expert and then go through and it would be a battle of the experts. And that there's been more of a modern shift of having a joint because there's a freer access to information, obviously costs are reduced. We'll get into some of that, but is that history or my understanding is that generally correct from your perspective?
Yvonne Zuber (7m 51s):
It is, I've been practicing a long time and been around since before the advent of the joint expert, which wasn't around 2007, 2008. Prior to that, I think it was a bit more adversarial, even though I would say that in Colorado, we've been very fortunate in terms of having a group of experts in the divorce arena who are very competent, highly regarded. And frankly, we work very well with each other, which I believe helps the process advance forward. So even if you're in a situation where you don't have a joint expert, you typically have two experts who are very familiar with each other's situation.
Ryan Kalamaya (8m 36s):
Yvonne, I couldn't agree more. And I've always been impressed with the collegiality of the business valuation community. For those that don't know about the process of a Joint Business Valuation expert, what are the things that you do? How does it start from your end? Where are the things that you do as joint expert?
Yvonne Zuber (8m 58s):
I typically have an attorney call me and hopefully they call me prior to the point in which they've agreed that I will be the joint experts, because sometimes I've had that happen where they stipulate to me being a joint expert, and I'm not available on the date of permanent orders. So it's always a good idea to check with your experts to see if they're available. And then secondly, they will discuss the case with me. What's very important in order to preserve the independence of joint expert from my perspective is that I not engage in any substantive ex parte communications with either attorney. So we either get both attorneys on the phone, or we do it by email, but we do it in some form so that both sides are kept informed as the process is commencing.
Yvonne Zuber (9m 49s):
We assuming then that the party society, they do want to proceed with the process. We will send out an engagement letter and in the engagement letter, we explicitly state the, we will not engage in ex parte communications with counsel, but we do engage in communications with clients without the other party being present. And I think that's an important distinction because I have found, and I think initially back in 2007, when you started doing joint experts, we, or at least I was having both parties on all phone conferences.
Yvonne Zuber (10m 30s):
And I found that that was really not helpful because many times the conversations degenerated and we really weren't able to push the process forward. So at this point I do speak to each party separately, but not to the attorneys. Now I will say that that protocol is obviously subject to the attorneys agreeing that that is the protocol they want in place. I've had situations where we've spent literally weeks determining what the appropriate protocol is. There's also a distinction as to whether or not I can engage in ex parte communications.
Yvonne Zuber (11m 10s):
Once the report has been issued, some attorneys think I can, some attorneys think I can't. So my policy is that unless both counsel agree, I don't engage in ex parte communications with counsel. So once we have the engagement letter out, we do ask for a retainer and then we sent out a document request, what that is. And people sometimes will call me and say, I don't understand why you're asking me all these questions that have nothing to do with my business. So please understand that in some way that document requests is meant to address the most expansive list of questions we can ask.
Yvonne Zuber (11m 53s):
We want to make sure that we are not missing anything. It may well be the, for a smaller business or for a particular way in which the business has been set up, that some of the questions are just not appropriate. They're not applicable. All we ask is that the business owner indicates that question is not applicable. We do ask that the business owner respond to the questions, indicate what documents they're submitting. And we'll be asking for financial statements for tax returns. We like to get a backup of the QuickBooks file. If that's what they're using, we find it's a lot easier for us to do our work.
Yvonne Zuber (12m 34s):
If we can just generate the reports that we want. And so we do that. We also asked that we be designated or that we be assigned a password because we don't want to go in as a business owner. And we certainly don't ever want anyone to feel that we could have made any changes to the actual transactions in the QuickBooks, but there's a way to provide an accountants copy or to allow someone to get into the QuickBooks without actually changing anything. And so that's what we do. We will then start analyzing the financial numbers and a business valuation is really made up of two components.
Yvonne Zuber (13m 15s):
You have the, the numbers, the revenues, the expenses that you're looking at, but you also have to have an understanding of the more subjective aspects of the business. So what you want is to understand who their customer basis, who the competition is, who they're marketing to, how they're marketing are they based locally, are they national? We just run through a gamut of questions. And then once we've had a chance to digest that, look at the numbers, look at the answers that we've received. Some of these questions, we will then ask to schedule an interview with a business seller.
Yvonne Zuber (13m 55s):
We do that in order to do a site interview, like the kind of walk in and take a look around. And we also do it because it gives us a chance to sit down and actually have a conversation. And I think those conversations are important. Our goal is not to come up with a predetermined value, but to really understand the business and to come up with what we think is the best estimate of value for the particular business. We will also be speaking to the spouse who is not the business owner, because we think it's important to get that perspective. And many times we'll get information that the business owner isn't quite up front with.
Ryan Kalamaya (14m 38s):
I never seen that before. Well, and I have some follow-up questions on what you just described. So the first thing is, do you have, so the doc request, you know, those it's fairly lengthy, it'll be. And we, on my side, if we're talking about an Eric Wolf business owner will say, listen, this is going to be coming your way and kind of do some triage. Cause people are just, you know, they're always surprised generally, if they're very sophisticated business owner, they probably have gone through something. If there is a valuation in connection with, you know, stock options or they've been, there's a, some merger and acquisition activity, that type of thing.
Ryan Kalamaya (15m 18s):
Do you have sets of questions depending on the business? So do you have a question for a construction business and then a different protocol for a software business?
Yvonne Zuber (15m 29s):
Do we have, I probably have about 20 different templates that I start with. For instance, a medical practice is going to be very different from a construction company in way for medical practices need relative value units. We need to know who the insurance companies that they participate with our construction companies, we're going to be looking for billings, the nexus of costs and cost and accessibility. We need to know what projects they have. If you have a law firm, it's a totally different set of questions. So we do tailor them,
Ryan Kalamaya (16m 1s):
Right? And, and it could be, I mean, my firm, we do personal injury, criminal defense and family law and personal injury. They're based on contingent fees. And that is a totally different model compared to flat fee in driving under the influence. So imagine you've get into those and you have to understand how the businesses is making money.
Yvonne Zuber (16m 24s):
Absolutely. What I always feel is that the better that I understand the business, the better my ultimate conclusion of value will be. And so it's very, very important when I conduct my interviews that both parties be very forthcoming. And it's interesting because I run into two types of business owners. One type is the business owner who wants to minimize the value of the business because he or she understands that they're going through a divorce and they really don't want the business value to be very high. The other type of business owner takes tremendous pride in what they've accomplished.
Yvonne Zuber (17m 4s):
And to me, it's been interesting to see how they will tell me what their plans are for the following year that they anticipate they're going to be much more successful because this business is really a part of their identity. And even though they understand the purpose that I'm valuing the business for, they can't get away from the fact that this is their baby. And they're very proud. And just five weeks ago.
Ryan Kalamaya (17m 27s):
Yeah. My observation is that when people have these different incentives, it is always interesting how human beings can change their opinion. So someone could relay what their income is for bankruptcy purposes, and that is different than trying to get a, a home and a mortgage. And there's very different or, you know, a divorce. And, you know, so for you, I imagine I've definitely dealt with it where a startup company or a company that is raising money, the materials that they produce for their investors is in stark contrast to what they usually are saying. When, if they're the former of the examples that you gave, where they're trying to kind of depress the value, their business and what I call divorce flu, they have a really bad case of divorce flu, where they all of a sudden they can't work,
Yvonne Zuber (18m 17s):
Hopefully correct Ryan. And one of the problems we have in valuing businesses is that most individuals, when they filed their tax returns, we'll try to take every legal action that they can. And sometimes, obviously they kind of stretch the definition of what's legal. So we see a lot of situations with closely held corporations or any partnerships, whatever the form of the businesses, where personal expenses are being run through the business and deducted as business expenses. Sometimes it's very much of a stretch as to whether or not that expense is actually a business expense.
Yvonne Zuber (18m 58s):
But the problem is that since we're relying on records that were prepared for purposes of tax filing, the incentive to depress income is the same there as it is in a divorce.
Ryan Kalamaya (19m 12s):
This episode is brought to you by our law firm. Kalamaya Gosha Amy. And I describe our law firm as an innovative and ambitious trial team that pushes the boundaries to discover new frontiers in family law, personal injuries, and criminal defense in Colorado. We currently have offices in Aspen, Glenwood Springs, Edwards, Denver, and Boulder. If you want to find out more, visit our website, Kalamaya dot law. Now back to the show, Yvonne in the intro I talked about when a, if a business owner files and why that may or may not matter, can you talk to me about what you look for and why that might matter?
Ryan Kalamaya (19m 52s):
Yvonne Zuber (19m 53s):
It does matter because as we've spoken about previously, we have, what's known as the divorce flu. And the reason that I want to know who filed and how long the parties have been separated is because it tells me if the business owner filed that the business owner may have been planning for the divorce for a few years prior to the filing. That is a different situation than if the business owner had no idea that a divorce was pending, which basically says to me that the books and records to the date of the filing are probably a pretty good proxy for what's been happening in the business. But I'm always a little suspect when I know that it's a business that can be manipulated with respect to revenues where projects can be delayed.
Yvonne Zuber (20m 41s):
And the business owner may have been contemplating divorce for a number of years.
Ryan Kalamaya (20m 47s):
And then you can't get into issues of when did they hire their divorce lawyer? How long have they been talking to them?
Yvonne Zuber (20m 54s):
And if there is extensive planning that that might impact your work as the, it generally impacts my work into how far back am I go to look at certain transactions. So I might be interested in, see if monies were perhaps send to another bank account two years back. If it's the business owner who filed, I wouldn't be as concerned with what happened two years ago, if it's the spouse of a business owner who filed.
Ryan Kalamaya (21m 24s):
Right. And, and do you think, is it fair to say that that might make a difference as to whether or not you use a three-year average versus a five-year average or some sort of weighted average where, you know, you're trying to buffer out some of that divorce flu effect?
Yvonne Zuber (21m 41s):
It could, it would also, it's also another reason why I like the native QuickBooks file so that I can go through and look at the pages and see if there's anything strange. Let's say between two years ago, when we think that some divorce planning was starting to take place and three or four years
Ryan Kalamaya (22m 0s):
You've gone, you mentioned shadow experts in retain experts in for those that are aware, there is a long form podcast that we have episode on shadow experts. It was a presentation that we did that I did with Eric six as a joint expert. I'm curious about this, you Yvonne, do you have, does your approach change when there are other experts involved? So if Eric and Melanie Wolfe each have their own expert, or if Eric just has his own expert and you know about it, does that change your approach or is that something you welcome? Like, tell me about your thoughts with other experts. You said that you it's a collegial environment and, but what, how does that impact you as the joint?
Ryan Kalamaya (22m 43s):
Yvonne Zuber (22m 44s):
I actually welcome it, especially in complex cases. The first thing that I would say is, I think it's always smart. If you have a joint expert to have someone review the report, mistakes happen and I've seen everybody make them, they're not deliberate, but it, I don't think it happens often, but they happen enough that it's not bad to have another set of eyes review what someone has done. And so when I've finished shadow expert often look at a joint experts report and then conclude that I might've approached the valuation process somewhat differently, but the value is reasonable.
Yvonne Zuber (23m 24s):
That being said, I personally really welcome have shadow experts that I can work with during the process. Number one, we can ensure that everybody gets the same information. So we're all working with the same documents we can communicate amongst each other, which I think is very critical. If there's any issues that one has, the shadow experts might be in a better position to raise the concern than the actual party, because they understand the technical implications of what the party is saying. So from my perspective, I think that if you have a shadow expert and especially in a complex case, it makes the process much more successful in terms of the ultimate conclusion
Ryan Kalamaya (24m 13s):
You mind, you know, for people that haven't been through, there's a process for the joint expert, where they issue a draft report, and then there's a finalization of that report. Can you walk us through, or talk to me about what impact shadow experts or attorneys have with those comments on your draft report?
Yvonne Zuber (24m 34s):
Well, our draft report is issued as a draft as provided by the statutes and then the attorneys, the parties, and shadow experts. If there are any, we'll get back to us, I take those comments very seriously. I consider them, and sometimes I will modify my opinion. I will sometimes ask for more information. It's difficult to say how I react in every case, some comments I dismiss and some comments, somebody may have a point that I should consider that I have not considered. So I'm open to suggestion. I feel that I'm always learning and one of the parties were counsel or the shadow expert may have thought of a concern that I didn't know.
Ryan Kalamaya (25m 22s):
Right. And you know, mistakes are made. And I've certainly seen that where, you know, someone will catch a mistake and that is, is really helpful. I always, it's interesting for me to see the process unfold because oftentimes there'll be a deadline for the expert reports that in turn is driven by the trial, which also in turn is driven or is driving, you know, settlement discussions. And when people are doing things and clients oftentimes will say, well, I don't, I don't want to go to trial, but I want to get my divorce done as soon as possible. And it's amazing what happens when you set a trial date, things start really moving. Whereas if we leave it kind of open-ended, and it's, that's always a tricky thing.
Ryan Kalamaya (26m 4s):
But having that comment period, you know, I, I had a case fairly recently where the joint experts, I mean, there's a lot of work out there right now for joint experts. And so people are busy and they were not going to get us the draft rapport. They weren't even going to have a final report by the time it was due. And the other side said, why don't we just extend the deadline? But it was not going to lead to very productive, contemplated, you know, a contemplated process to digest those comments before we were set for trial. So I think that's always tricky in terms of that process. When you get to that stage,
Yvonne Zuber (26m 40s):
I would agree, Ryan, and I'm sure you've heard from experts, not just me, that the court deadlines can sometimes be very unreasonable, especially if the business is not a multi-million dollar case, the course will sometimes have one to just kind of speed through and it can't be done that quickly. And so we have a lot of concerns within the expert community that the courts are pushing the process too quickly, and we cannot get the answers to our questions. We don't get the documents we need. We're just being pushed to come up with some kind of report as quickly as possible.
Yvonne Zuber (27m 20s):
And I don't think that that gives the clients what they need.
Ryan Kalamaya (27m 24s):
Curious you Yvonne, when, you know, cause there is a discussion about that draft and the attorneys will talk oftentimes will some attorneys will just, they want the full draft with a narrative. And for us, we oftentimes will provide a client with a hypothetical business valuation report to give them an idea of what it looks like. And you know, the narrative section, some of it is canned that you guys have about the macro economic climate and all of that, but then really the schedules. And so some attorneys will say, I just care about the schedules. I tend to fall into that camp because I, I want, I just want to see the numbers. And so, you know, they want to see the draft report about how they arrived.
Ryan Kalamaya (28m 7s):
I have a five and a seven year old. I know that you're a grandmother and you're kind of in that realm. So, you know, especially my seven year old, it's like really kind of seeing how you got to the answer when you're doing math. We all remember that. And so for you, talk to me about how you feel about the, just providing the schedules and maybe doing a conference call with the attorneys versus writing of comprehensive narrative, because I've heard different experts say, well, I really, my thought is crystallized as I'm drafting it and that's an upside, but the downside is that it's more expensive and you know, it's going to take longer to draft that report. So talk to me about how you think about that dynamic when you're dealing with draft reports and just producing the schedules.
Yvonne Zuber (28m 54s):
I think it depends on the business. Now. I have some situations where both parties are happy with the schedules. And I think personally it'll cost about 2000 to 2,500 less just to produce the schedules, especially if there can be a settlement after that. And then I also produce a cover letter where if there's something that needs to be emphasized in terms of what I did in my schedules, I can do it there without going through a full blown narrative report. I think that it's a good compromise, but obviously not as you pointed out by and not all council agree, I'm not sure if you actually look at the business valuation reports that are issued in the divorce, Rita, they're already summary reports.
Yvonne Zuber (29m 44s):
They're not the full reports that would be required if we were not in a litigation setting. And that's really important to take into consideration because the AI CPA sets and I'm a member of the AI CPA, they have certain business valuation standards, you're doing a valuation in the context of litigation and the supposition is your subject to deposition, or at least people can ask you questions. Then it's appropriate to do a summary report. So given that our reports are summary reports regardless, I've never seen the full blown, I shouldn't say never, but I rarely see the full blown business valuation report in a divorce setting.
Yvonne Zuber (30m 28s):
And given that I'm not sure how much has really lost by just doing schedules and a cover.
Ryan Kalamaya (30m 35s):
That's helpful. And I guess the other thing that I'm curious about asking you is about thorn hill and that, you know, there was this kind of sea change when inner marriage of Thornhill came out within the valuation community. And I think it is interesting how courts they can vary. You talked about consistency. And one of the things that I struggle with is, you know, seeing different judicial officers, some will apply a discount for lack of marketability or minority discount. Some will not, and there's not real, any clear guidance in that may be fine, but I'm wondering if you have any thoughts on how we can move forward so that there's flexibility because every case is different, but also at the same time, having some predictability in that at least is there's always that argument about the marketability discount and those issues.
Yvonne Zuber (31m 38s):
Y you raise a number of interesting points, I think with Thornhill. And if you read the case closely, which I'm, unfortunately not sure that everybody does, I believe that all the court did was indicate that the separation agreement that had been signed by the parties was enforceable, that it wasn't unconscionable. So the court never really directly address the issue of is the size of the discount that was taken in Thornhill appropriate. And the discount in Thornhill was quite large, but the court also didn't go in the direction that New Jersey did with brown versus brown.
Yvonne Zuber (32m 19s):
So what New Jersey did is they set a standard for business valuation in divorce and said you don't apply discounts, which makes it a lot easier there if you're doing what I'm doing, right. Because of that, I think we're kind of in a dilemma in Colorado as a joint expert, I do think it's important for me to provide both an investment value, which is with no discounts at a fair market value, which is with discounts where there is more of an, I think where you see experts diverge more is on the issue of whether or not you should apply a discount for lack of marketability, to a hundred percent ownership interest.
Yvonne Zuber (33m 2s):
And there's a body of work out there that says that if the business is profitable, that even if it takes you two years to sell the business, you're still going to be earning the income. That is the basis for the valuation conclusion while you're trying to market the business. So if anything might be appropriate, it might be some type of a liquidate. It might be a discount for actual selling costs, not so much a marketing ability discount, or lack of marketability discount,
Ryan Kalamaya (33m 35s):
Right? And I've seen one judge liken it to, you're essentially arguing for a discount because it's illiquid, but we have to value interests in divorces that are illiquid all the time. And so that makes sense to me, it's just, it's, it is one of those things where there is a disagreement, or it can vary, as you said, and we already have a fair amount of flexibility within the various issues that valuation experts can disagree on reasonable compensation adjustments for entertainment discounts, you know, just normal discounts. And, you know, when you add that on, there are definitely cases that have gone to trial on whether or not there should be a marketability discount or not.
Ryan Kalamaya (34m 21s):
That's kind of a challenge. I think that the legislature and the law that we have to grapple with that you are related to that issue as well. Right?
Yvonne Zuber (34m 29s):
Absolutely. And it was certainly make our lives much easier if either the legislature or the appellate courts would address that issue and come to some conclusion to give us some guidance, because right now, and that's one of the issues, especially as a joint expert, is you really have to look at what courts might do, how they might look at your conclusion and actually provide two different numbers. And as you pointed out, Ryan people do go to trial because those two numbers can be pretty significant or the difference in value between the two numbers can be very secret.
Ryan Kalamaya (35m 6s):
What is your general rule of thumb you have on, on, you know, how what's the cutoff do you think for a valuation, a joint valuation when you see in terms of estimate of value? So if I look at a business and I think, ah, it's, this is probably worth at 50 it's, $50,000 and just kind of a back of the napkin or a hundred thousand dollars. When is that, you know, I've heard attorneys talk about civil litigation, where if there's a contract dispute, you know, some attorneys will say it needs to be $200,000 in order for their or some threshold. Is there a general rule of thumb that you think is helpful for people that know
Yvonne Zuber (35m 43s):
You're asking me, can you have a joint valuation expert for a very large business? I believe you can. And in France with very large businesses, you have much better books and records than you do a small business.
Ryan Kalamaya (35m 57s):
Where does the cutoff for small businesses in your mind when it's just not worth having an expert get involved?
Yvonne Zuber (36m 5s):
I think it depends. And I think it typically is at least worth having someone look at the numbers. And the reason that I'm saying that is a number of years ago, I had a pediatric practice that I was valuing and the attorney called and said, you know, he's really not making any money. He's turning less than a hundred. He was earning about 120,000 a year. And the reasonable compensation for a pediatrician was about 150,000. There's no reason to value it. What the attorney wasn't seeing is that the tax return was filed on a cash basis of accounting. The accounts receivable that the pediatric practice was waiting for from the insurance companies was not anywhere in their books or records.
Yvonne Zuber (36m 53s):
It was maintained separately because of that. Had they only gone with the tax return, they would have undervalued the practice by about, I think there was about a hundred thousand in accounts receivable. So sometimes the type of assets that you're looking for may not be obvious. That being said, there are certain types of businesses that I think you can at least look at a tax return or look at a bank statement and then ask, are there any accounts receivable? And those are the types of businesses that I usually call it, where you buy yourself a job. Those are the types of businesses where you're not really earning more than you would be earning if you were working for someone, but you have control of your life.
Yvonne Zuber (37m 39s):
And that's why you're willing to contract out to somebody to do the work or you, or you have a small laundry, or you have a small flower shop, that type of thing. I don't think that you can have a rule of thumb in terms of what the revenue level is, because it depends. What you're really looking at in a business is whether or not the net income of the business is greater than what the reasonable compensation would be for the business owner to replace him or herself. Right? So if you have a physician, for instance, that reasonable compensation level is very different than might be for a plumber or for a somebody who does drywall.
Yvonne Zuber (38m 21s):
So you really have to have a feel for what that individual could earn if they were to go out and get a job.
Ryan Kalamaya (38m 30s):
And I think that's helpful. What would you say to a client of mine, Eric Wolf, if he's a real estate broker and you know, he's real estate is hot right now, as we're recording this and they are, you know, they're making a lot of money, but it is, it is him or Eric Wolf. You know, he doesn't have a ton of assistance or, you know, a brand, you know, really, but it is him or a carpenter that goes in, but they, they make, you know, a good amount of money, you know, 150 or $200,000. What do you say to that owner that comes to you and says, it's just me. And there is no value. I am the business. What is your response in those contexts?
Yvonne Zuber (39m 10s):
Well, my responses it's too bad that you live in Colorado because if you lived in a different state, what you're saying that your, the business would absolutely be taken into account and your business would not be valued. What we're doing here is talking about the difference between personal Goodwill entity, Goodwill and personal Goodwill is basically the Goodwill. That just is the result of your individual contacts, work, personality, whatever the entity Goodwill is a business that has a distinguishable, identifiable brand. And in many, many states, personal Goodwill is not considered a, an asset for purposes of Maryland to solution.
Yvonne Zuber (39m 54s):
So we wouldn't be valuing that. I actually had an interesting case in number of years ago, where there was a physician who had an office in Sterling and then another office in Nebraska. He filed for divorce in Colorado without being aware that in Colorado personal Goodwill was considered a marital asset, but in Nebraska, it's not. And he was a sole practitioner where his business would not have been valued in Nebraska for purposes of a divorce, but it was in Colorado. So what I say is that's what the law is. That's what we have to do. I mean, we understand that, but I would say that the fact that the individual doesn't have anybody else there that is taken into account to some slight extent, perhaps in how we value the income stream, but, and the capitalization rate, which is really a reflection of risk.
Yvonne Zuber (40m 47s):
But we can't say we're not going to value it because it's the businesses.
Ryan Kalamaya (40m 52s):
Yeah. Those are, I can tell you from experience. Those are very tough conversations to have where if someone moves from California, Andy BOM, and I, you know, he's a expert that, you know, and we recorded an episode on tracing and I will never forget having a conversation with a client that Andy was involved with where, you know, someone moved from a different state to Colorado and it converted a tremendous amount of separate property into marital property, but you see it in business valuations with Goodwill. And then of course the claim of double dipping. So what are, you know, like to kind of tie this all up, when I say double dipping, you know, w what am I referring to? Because I always hear that Yvonne is, you know, we're, double-dipping, how can I pay, you know, how can Eric Wolf pay Melanie Wolfe for his business?
Ryan Kalamaya (41m 40s):
And then also potentially be looking at maintenance or alimony and child support based on that same income stream.
Yvonne Zuber (41m 47s):
Again, the response to that is, unfortunately you live in Colorado and we are bound by what case law says, double-dipping is, it's not an accounting definition of double-dipping it's case law definition of double-dipping the Bookout case. There's a number of cases that basically say, and I think the way we account this talk about it is that double-dipping in Colorado is not, double-dipping what we're really referring to is that when we value a business on an income stream methodology, where we capitalize an income stream, that's the same income stream that is then going to be used to pay maintenance and child support, as you pointed out Ryan, but that's not an argument that you can make in Colorado.
Yvonne Zuber (42m 35s):
You can certainly make that argument in other jurisdictions, but not here,
Ryan Kalamaya (42m 39s):
Right? And the long, and the short of it is that when you're, especially when you're dealing with an income based approach, you are projecting future revenue and trying to figure out what the present value of that future income stream is. And then the same time we're looking at child support or maintenance, and we're determining what people's income is. And it's, those are challenging conversations to have. Well, you've Yvonne. We could talk for hours and hours about business valuations, you know, the difference between a software company and a construction business and how you would approach that. But while we save some of those questions for maybe another episode, but, you know, I really enjoyed the time.
Ryan Kalamaya (43m 22s):
And thank you for those that need to find you, you know, your, most of your work comes from attorneys, but for those that are curious about, you know, finding out more about you, where, where can they find out more
Yvonne Zuber (43m 34s):
Site, which is CD dash CPA,
Ryan Kalamaya (43m 39s):
Any parting thoughts for those going through a divorce and a business valuation, whether it be a joint expert or a shadow expert, any parting kind of advice, or, or thoughts that we haven't covered,
Yvonne Zuber (43m 53s):
That if both parties can understand that the business valuation is really, I always say that I have the easy part of it. It's fighting about the money. It's not fighting about the kids. I would not want to be doing that work. And if the parties can understand as painful as it is to look at these financial issues, to try to look at them logically so that we're not really dealing with emotional issues, when we're looking at the valuation of the business, that's the time to try to focus on what the business attributes are. And now what the personal interactions are, because the more emotion you bring into the process, I think the more difficult it is to have a good outcome for both parties.
Ryan Kalamaya (44m 43s):
I agree more, or I couldn't agree more Yvonne. And, you know, I mean, we've had various episodes on the emotional aspects. It's something I see probably more than, than you do. But undoubtedly, when you're talking to a business owner or, you know, someone like Melanie Wolfe who doesn't own a business, you're still getting that emotions. And for people to understand that it is helpful when you can kind of set that aside, as difficult as that is that it makes the process it's a lot less expensive and there's a better result at the end of the day.
Yvonne Zuber (45m 16s):
Absolutely. I couldn't agree with you
Ryan Kalamaya (45m 18s):
More, Ryan. Well, thank you. I know that we've worked together as you've been a joint expert on various cases. You've been on the other side of various cases and you've also been, you know, along with me, so I'm sure we will be in touch. And until next time, thank you for listening here at the Divorce at Altitude podcast.
Yvonne Zuber (45m 35s):
Thank you Ryan, for having me on
Ryan Kalamaya (45m 38s):
Everyone. This is Ryan again. Thank you for joining us on Divorce at Altitude. If you found our tips, insight or discussion, helpful, please tell a friend about this podcast for show notes, additional resources or links mentioned on today's episode. Visit to [email protected] Follow us on apple podcasts, Spotify, or wherever you listen in. Many of our episodes are also posted on YouTube. You can also find Amy and me at Kalamaya dot law or 9 7 3 1 5 2 3 6 5 that's K a L a M a Y a.law.