A business valuation report just landed in your divorce case. It’s long, it’s technical, and one number in it may decide the biggest financial issue of your case. Here’s how to read it, what to look for, and which assumptions to question. No accounting degree required.
This is the last post in our series on business valuation in a Washington divorce. It builds on the three valuation approaches and the judgment calls that move the number.
Read the first pages first
Most people flip to the conclusion of value and react. Read the setup first, because those framing decisions shape everything that follows.
- The standard of value. Fair market value or value to the holder? The report defines it early. The definition drives whether discounts apply and how the appraiser treats goodwill.
- The valuation date. Reports are usually built on a year-end date. If trial is a year later and the business changed, the number may be stale, and the report almost certainly says the appraiser won’t update it.
- Scope and limiting conditions. Somewhere near the back is a section saying the appraiser accepted the financials without verification, isn’t offering legal opinions, and relied on management’s representations. That section tells you what the report is not: it’s not an audit and not a fraud investigation.
Check the expert’s credentials
Don’t assume the person who signed the report is licensed for everything in it. Business valuators come with different credentials, and they aren’t interchangeable. A CPA license is an accounting license. Valuation credentials like ABV, ASA, or CVA cover valuation methodology. Forensic credentials like CFF (Certified in Financial Forensics) or CFE (Certified Fraud Examiner) cover tracing funds and detecting manipulated records. Some valuators hold several of these. Some hold only one, and some hold a valuation credential without being a CPA at all.
Then compare the credentials to what the report actually does. A standard valuation accepts the books as given. But if the report goes further, reclassifying transactions, tracing money between accounts, opining that records were manipulated or that income was hidden, that’s forensic accounting work. If the expert isn’t credentialed for the work they performed, that mismatch goes to the weight of their opinion, and it’s a fair question to raise in a deposition or at trial. The same goes for legal conclusions. A business valuation report sometimes asserts what the law “dictates” about discounts or goodwill. Appraisers aren’t lawyers, and most reports admit that in the fine print.
Checking is easy. CPA licenses are searchable on the Washington State Board of Accountancy website, and the credentialing bodies (AICPA, ASA, NACVA) have member directories. Five minutes of looking can reframe an entire report.
Find the normalization table
Every income based business valuation report has a table that starts with the company’s reported profit and adjusts it up or down to “normalized” earnings. This one table usually contains the most contested judgment calls in the whole report: replacement salaries for the owner, market rent for a building the owner also owns, personal expense add backs.
For each adjustment, ask two questions. What document supports it? A salary survey, rent comps, actual receipts? Or “professional judgment”? And which direction does it push the value? In a divorce, remember who hired the appraiser and which direction helps that side. That doesn’t make the number wrong, but it tells you which assumptions deserve the hardest look.
Did they subtract equipment and working capital?
Sustainable cash flow should reflect what it costs to keep the business running: equipment replacement and working capital. Find the cash flow table and look for a line subtracting capital expenditures or “capex,” and one for changes in working capital. If they’re missing or set to zero, the report is capitalizing income the business can’t actually sustain, and the value is likely overstated. This matters most for companies with trucks, machinery, or aging equipment.
Look at the rate math
Find the capitalization rate or discount rate schedule. You’re looking for three things:
- The company specific risk premium. It’s pure judgment. Does the number match the story? A report that describes heavy dependence on one owner but assigns a small risk premium is internally inconsistent.
- The growth assumption. Compare it to the industry outlook cited in the same report. Assuming the company beats its industry forever is an aggressive choice.
- The capital structure. How much debt versus owner’s equity the model assumes.
Why an assumed debt level raises the value
That last one deserves a plain English explanation, because it’s not obvious. Debt is cheaper than equity. A bank lending to a business might charge 8% interest. An investor buying a small business outright demands a much higher return, maybe 20% or more, because they carry all the risk of ownership. When the appraiser builds the overall rate, they blend those two costs based on how much of the company they assume is debt financed and how much is equity. It’s called a weighted average cost of capital, or WACC.
Here’s why it matters. The more debt the model assumes, the more of the blend uses the cheap 8% money and the less uses the expensive 20% money. That pulls the overall rate down. A lower rate becomes a lower capitalization rate, and dividing the same cash flow by a smaller number produces a bigger value. So an assumed debt level, all by itself, can inflate the value, even if the company has never borrowed a dime. If the report assumes the company is 15% or 25% debt financed, ask what actual loans support that. If the answer is “it’s a typical industry structure” and the company has no bank debt, no equipment loans, and no line of credit, the model is describing a hypothetical company, not this one.
The pattern to remember: lower rate, higher value. Every choice that shaves the rate raises the number.
Check what got added on top
After the capitalized value, look for anything added on top: excess cash, real estate, other non-operating assets. For each add on, ask whether it’s really separate from the business or whether it’s part of what generates the earnings that were just capitalized. Cash is the big one. “Excess” is a judgment about how much cushion the business needs, and reasonable people disagree by hundreds of thousands of dollars.
Questions worth asking the appraiser
Whether in a deposition, at mediation, or through your attorney, these questions cut to the middle of most reports:
- What licenses and credentials do you hold, and which parts of this report fall outside them?
- What documents did you rely on for the replacement salary, and for market rent?
- Where does your report subtract equipment replacement costs and working capital needs?
- What facts about this company support the company specific risk premium you chose?
- How did you decide how much cash the business needs to operate?
- If the court disagrees with one of your assumptions, how much does the value change?
That last question matters most. A credible appraiser will acknowledge the value is sensitive to their inputs. That concession is what turns a single number into a negotiable range.
When to get your own expert
Not every case needs an expert on each side. A rebuttal expert or a full second valuation makes sense when the business is the dominant asset, when the report’s assumptions look one sided, or when the books themselves are questionable. Sometimes a consulting expert working behind the scenes, helping your attorney frame questions, gets most of the benefit at a fraction of the cost. And in many cases the parties agree on one joint expert up front, which saves money but makes it even more important to understand the report you get, because it’s the only one anybody will have.
The bottom line on a business valuation report
A business valuation report isn’t a verdict. It’s an expert’s opinion built from assumptions, and the assumptions can be examined. Disagreeing with the value doesn’t mean the expert did bad work. It means asking what data supports each judgment call, why the expert made the choices they did, and whether those choices fit this company. The spouse who understands that walks into negotiation prepared. The one who takes the number at face value doesn’t.
If a business valuation is about to shape your divorce, we can help you read it, test it, and respond to it. Call us at (425) 954-5578 or schedule a consultation.
This post is part of our series on business valuation in divorce. Read the others: How a Business Valuation Works in a Washington Divorce, The Three Ways Appraisers Value a Business, and The Judgment Calls Hiding Inside a Business Valuation.
This article is general information, not legal advice. Every case is different. If you’re facing a divorce involving a business, talk to an attorney.
