Business Valuations and Divorce with Melissa Gragg, CVA, CFE, MAFF, CDFA

  March 30, 2021

On this episode of We Chat Divorce we welcomed Melissa A. Gragg, CVA, CFE, MAFF, CDFA, and owner of Bridge Valuation Partners. Melissa provides litigation support services and expert witness testimony for marital dissolution, owner disputes, commercial litigation, business interruption claims, personal damage calculations, lost profits, and personal injury. She also conducts business valuations for purposes of estate planning as well as mergers and acquisitions. 

Hosts, Karen, and Catherine sit down with Melissa to discuss Business Valuations and Divorce.

Let’s get into it!

  • Approaching the valuation process and understanding the reasons why.  
  • The difference between getting a certified valuation and a non-certified valuation.
  • The space of divorce, the space of mediation, the space of collaborative, and how valuation theory fits within that.

Learn More >> https://www.valuationstlouis.com/about-valuation-experts

Find Bridge Valuation on Facebook >> https://www.facebook.com/ValuationStLouis

Follow Melissa on Instagram >> https://www.instagram.com/msvaluation/

If you have questions for us or a topic you’d like us to cover, contact us at hello@mydivorcesolution.com or visit MyDivorceSolution.com 

The We Chat Divorce podcast (hereinafter referred to as the “WCD”) represents the opinions of Catherine Shanahan, Karen Chellew, and their guests to the show. WCD should not be considered professional or legal advice. The content here is for informational purposes only. Views and opinions expressed on WCD are our own and do not represent that of our places of work.

WCD should not be used in any legal capacity whatsoever.  Listeners should contact their attorney to obtain advice with respect to any particular legal matter. No listener should act or refrain from acting on the basis of information on WCD without first seeking legal advice from counsel in the relevant jurisdiction. No guarantee is given regarding the accuracy of any statements or opinions made on WCD.

Unless specifically stated otherwise, Catherine Shanahan and Karen Chellew do not endorse, approve, recommend, or certify any information, product, process, service, or organization presented or mentioned on WCD, and information from this podcast should not be referenced in any way to imply such approval or endorsement. The third-party materials or content of any third-party site referenced on WCD do not necessarily reflect the opinions, standards or policies of Catherine Shanahan or Karen Chellew.

WCD, CATHERINE SHANAHAN, AND KAREN CHELLEW EXPRESSLY DISCLAIM ANY AND ALL LIABILITY OR RESPONSIBILITY FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, OR OTHER DAMAGES ARISING OUT OF ANY INDIVIDUAL’S USE OF, REFERENCE TO, RELIANCE ON, OR INABILITY TO USE, THIS PODCAST OR THE INFORMATION PRESENTED IN THIS PODCAST.

Karen Chellew:

Welcome to We Chat Divorce Podcast. Today, we welcome Melissa Gragg, CVA, MAFF, CDA, and owner of Bridge Valuation Partners. I’ll let you, Melissa, describe all of those titles there. Melissa provides business valuation services for litigation and mediation. So welcome, Melissa.

Melissa Gragg:

Thank you.

Karen Chellew:

Thanks for being with us.

Melissa Gragg:

Yeah.

Karen Chellew:

So let’s start off and maybe you do want to give a little bit of your background, but also talk to us about how you got into mediation.

Melissa Gragg:

Sure. Basically, I’ve been providing business valuation services for divorces and litigation for the past couple of decades, for almost 20 years. Probably about five or seven years ago, I started doing valuations for both parties in litigation, serving as a joint expert. And obviously there’s things to do to make sure you protect yourself and communication has to be very open, but it started to solve some of the problems of discovery. It started to solve the problems of getting some of the documents. In that process, since I was working for a lot of attorneys on both sides and being a neutral valuation person in the middle, these same attorneys were also doing collaborative divorce and they were doing mediation for divorce. And so they said would you be willing to do that?

Melissa Gragg:

And I didn’t really know, but I also saw even then that eventually people would get tired of going to court and they would want some other options. And so I was like, okay, let’s do the mediation training. Let’s do the collaborative training. And it kind of just built upon the skills that I already had in doing joint expert work. And then we sort of have, as a society, moved towards less confrontational ways of getting divorced. And so mediation and collaborative divorce are now really prevalent in divorce matters or even child custody or anything, as well as a lot of other areas. But that’s traditionally where I focus for mediation.

Karen Chellew:

Yeah, that’s great. And I think when you are able to reduce the adversity, it does allow better pathway for negotiation. And with so many people having businesses and pass through businesses and the whole goodwill factor, having someone like you to provide perspective on that can be very invaluable. I’ve sat in many conversations or conferences with clients and their attorneys where the first thing out of the attorney’s mouth is, okay, well, we need to get three business valuations at each one I need a retainer of $30,000 without even knowing the client. So I think it’s good that we’re going to have this conversation today to break this down and deconstruct the whole perspective of valuing businesses.

Melissa Gragg:

Yeah. And I think that people don’t understand that valuations and even litigation process or mediation process, it can be in stages and a lot of times at the first stage, the attorneys or the parties or the clients, they don’t even know if they need a valuation. And I think that’s where it gets a little bit interesting, is that you can actually work with a valuation person to run preliminary numbers. Like take a look. There’s a lot of things that I can see in a tax return, either a personal tax return or a business tax return that tells me whether this is a valuation that is sizeable, right? Because if we’re talking about a valuation of millions, then it’s going to be very important to go deeper into that to make sure you get to the right number, right?

Melissa Gragg:

The best number that the documents get you to. But the other is, if it’s a $10,000 business, why are you paying $30,000 for an expert to come in and say, it’s worth $10,000. So a lot of times just coming in and we’ll just say, hey, why don’t we just take a few hours? Why don’t we just look at what you have and then say, yeah, I think there’s going to be value here or no, because valuation is also very much tied to compensation for the owner. And then compensation has to do with maintenance or alimony and child support. So they’re all intertwined. And so you have to make sure that you’re not double counting and that you’re not using those things in the same place.

Catherine Shanahan:

Well, that really brings us to the point that is really overlooked. And that is, what is the purpose of getting this valuation? And when you go an attorney as Karen mentioned earlier, and they say, okay, let’s get three different ones so we can compare them and we’ll spend $30,000 on each or what have you, or when you mentioned that, okay, you might have a company worth $10,000, so why would you spend this, the swirling question here that is overlooked is what’s the purpose of this? Are you in this to sell the business? Are you in it to co-own the business together? Are you in this to get your buyout? Do you need income from this business and how do we not double dip like you’ve said? You can’t take an equitable distribution as an income stream. There has to be some kind of balancing between the two. And so a lot of times it’s people coming in just scared. One spouse saying you’re not getting the business because it’s mine. And the other one saying, oh my gosh, what do I need to do? So when we do our recommendations and considerations in our reporting, before we send them over to you for a valuation, it’s really important to understand why you want this valuation.

Melissa Gragg:

Yeah. And I think that business owners don’t always know all of the documents and the pieces that are needed. Right. I’ll get a tax return and it’ll be 10 pages long and I’ll be like, so I know that this isn’t the whole tax return. And I really need the whole thing to look at. I’ll get all the business valuation stuff, but there’s a pension and the pension is worth more than the business valuation. But basically when a couple comes together, they have all of these assets or they have all of these pieces of property things, right, that they own. And then they have debts or things that they need to pay on those properties. And so a lot of people can come in and say, okay, well, you have a car. The blue book is this. You have a house; the value is this. But in the business, that’s always kind of that missing piece in their personal balance sheet that they’re like, we don’t really know what that is.

Melissa Gragg:

Well, a lot of courts are going to ask to do a business valuation based on fair market value or fair value. Now, these two things may sound a lot alike, but they are not. And then it comes down to the state and how the state is defining that word. Right. And so in the State of Missouri, we’re looking at fair market value, but that means a willing buyer and a willing seller. It doesn’t mean that you’re going to go sell the company. It means that what would the price be if somebody of the street, not strategic, not a competitor, but comes in and purchases this company. Right. What cash flow? I mean, a lot of times it comes down to cash flow. What’s the cash flow? Well, if you have a business that all of the cash flow goes to pay the salary of the owner and there’s nothing left, then what else is left in that business?

Melissa Gragg:

So it’s a lot of those different nuances. But working in the middle, first of all, we’ll get access to documents. Either they’ll go through your process and everybody is communicating and they’re like, yes, let’s get all the documents together. Or they will work together and get the documents, but then we’re coming together because the valuation has some subjective pieces. And so what we’re doing in those subjective areas is making some assumptions. But if we look at the history of the company or we look at the prospective future of the company, those are facts, right? And then we take those facts and then we apply some valuation stuff on top of it. When we do that and we’re working for both parties, we’re being reasonable and kind of in the middle on those subjective assumptions. We’re not saying, okay, here’s a low value, here’s a high value, let’s average it and go in the middle.

Melissa Gragg:

No, we’re saying, so each time I go through the valuation, like, hey, we picked this capitalization rate at this level because I see it, the range between here and we went in the middle because we’re working for both parties. Right. And quite frankly, that’s what I was doing in litigation anyway, but I would have one side or the other would be like, well, can you just make the value be a little bit higher? Can you make the value to be a little bit lower? And in valuation those subjective areas, you can do that, but you have to have a good reason and you have to be able to support it. And if it’s just, I decided to do that, everybody else can see it. And if everybody else can see it, you’re not really successfully supporting a position. You’re hanging yourself out and everybody can see that you’ve contrived that number. So when we work together, we don’t have to do that and we can support it. It’s just the same work that I was doing. People come in and they’re like, she’s going to tell it like it is. She’s just going to tell you the truth. And a lot of times I think that’s what’s missing because people can settle it if they have the right information

Catherine Shanahan:

Tell us the difference between getting a certified valuation and a non-certified valuation?

Melissa Gragg:

Well, I think that traditionally this valuation concept was born from accounting firms, servicing clients, and then starting to realize that there’s also like gift and estate tax when you transfer some of your property or a business to the next generation. Right. So they kind of got into that. They started learning about business valuations and you see a ton of CPAs and accountants have a valuation credential, but they would only do maybe one valuation to 10 valuations a year. Okay. So we do 50 to 100 plus valuations in a year. So I think the difference is just the specialization. So you could have a credential, but I think that the next question is, how many valuations do you do a year? How many kinds? You don’t typically need a valuation person that knows your industry.

Melissa Gragg:

They don’t have to have done a million in your industry. They need to understand the space; the space of divorce, the space of a mediation, the space of collaborative and how valuation theory fits within that. There are certain things in Missouri that you can’t do because the law prevents it. So the law trumps the valuation theory. Right. You can go to every state and that’s going to be the same issue. And so realistically, if you’re doing these traditional evaluations in your CPA, it could still be an actual evaluation, right? They have a credential, but they just don’t know what they don’t know. And that can get too caught up. We did a recent one that nobody took discounts. There are discounts in the valuation, but nobody took them. They were operating from another state, coming into the state that they were testifying in. They didn’t know the case law. And so I think that kind of certified valuation report just needs some credential behind it. But I think that the question is also, do you do these valuations in litigation or in mediation because presenting a valuation and fighting for your position in deposition or trial and then presenting it to two parties in mediation is very different, right?

Karen Chellew:

Absolutely. And to your point, again, I tend to be in the middle of these situations and they’ll go to their attorneys. And to your point, the attorneys are vying to get that valuation to support their client. And they know they need it to be really high or really low because they know at the end of the day, the judge is going to chop it in the middle and say this is it for most cases. Now sometimes, obviously there are some advocacy involved there, but to your point, your approach is getting to that end result and neutralizing it right out of the gate. And I think if people understood that sooner than later, they would save. So let’s say they each spent $30,000 on their business valuator, they would save $60,000 collectively by just approaching it knowing that that’s how it’s going to be.

Melissa Gragg:

Right. Absolutely. But I think there’s also a benefit here for mediators because I think mediators and even lawyers in the divorce arena, they stay away from complex cases. Right. Financially complex cases are harder. They don’t always know the nuances of what’s happening. And I think that where we come in, is we partner with mediators and we say, listen, you’re going to do all of the other stuff. You’re going to mediate the parenting plan and the custody. You could even do the income and expenses and the property statement, whatever you feel comfortable doing, but then we come in and value the harder assets, right? The more complex financial things. Like if you have a complex compensation package that involves warrants or stock, RSUs, restricted stock units, phantom stock, all these things that vest over time.

Melissa Gragg:

Or if you have a pension, but you can’t separate the pension, so we need to know what it’s worth today. And then you have the business valuation. So those are complex things. In my mind, as a mediator, you can still do all the other things that you had planned on doing, but you can take on more difficult cases that everybody shies away from because we come in and we understand the mediation process. We also understand the litigation process and we can help the parties. If one party is just like, well, I know that this is how you value it because I’ve been in this business forever, those are hard conversations for somebody that doesn’t know valuation to say you’re wrong, right? But if they’re wrong, we have the capability of saying, well, that’s probably not correct information, but here’s a third party document, not just my opinion.

Melissa Gragg:

And that’s what we’ve always done in litigation, is support opinions with third party data that, yes, I’m presenting this information, but it’s also educating them on why their position is just, well, if the valuation is $400,000, then I get to keep the house. That’s usually the thought process, it’s like, well, if it’s high enough, then I get to keep the assets that I want. Whereas the reality is, if people understand the true picture, right? The true reality of their financial situation, they can make better educated guess… Not guesses, but better educated decisions on what they truly want or need in that environment. And we can facilitate that conversation. Once you get past one business and you now have five different businesses or 10 different businesses, that exponentially becomes more costly in litigation. And sometimes all of them don’t need to be valued. So it’s a different process.

Karen Chellew:

And what you’re saying, Melissa, I get so passionate because that is why we created My Divorce Solution. To capture all of the documentation and neutralize it so that professionals like you and mediators can take that information, that data, the documentation to support it and help these clients, these couples make really good decisions for themselves because that pathway of gathering the information, neutralizing it, helping them understand the components of the data and the documentation, by the time they get to you, they’re ready to talk. They’re ready to hear an unbiased approach. And the adversity has been so neutralized by that point, they can really have good negotiations.

Catherine Shanahan:

[inaudible 00:17:43] about how one party thinks that they don’t have to give this information. And at the end of a year or two, or however long they prolong it, they end up giving the information, but if they only would have known that if they gave the data from the beginning, it would have cost them thousands and thousands of dollars or less. [inaudible 00:18:01] saying, I didn’t give this because I didn’t have to, or I was told that I didn’t have to. And eventually you’re going to do it in the least costly way or you’re going to do it in an overabundance costly way.

Melissa Gragg:

Absolutely. And I think mediators and attorneys, especially mediators, because when they’re mediating a simple divorce, right, they’re just getting some simple documents, the most recent statement for the mortgage or something like that. And it’s all like they can kind of handle it, right? When you start to get into complex financial situations, you can’t just, a client comes in, I want to mediate my divorce, I want to be divorced by the end of the month. It’s a longer process. And part of that process is the collection of the data. And if these parties are first getting divorced, they’ve never been divorced again, they don’t know. They don’t know, oh, I can get into my bank account and get 12 months of transactions downloaded into Excel. That would be easier for everybody to look at. Well, I didn’t know that. Oh, we could work to put all the documents in one location. So a service that kind of assists in that collection of data will make that beginning part faster. So then, yeah, you can get it faster.

Catherine Shanahan:

I’m sorry. Not only faster, but what individuals don’t realize is when you start off not doing this process and not working together, it adds more doubt into the non-business owner spouse. So if you prolong the data or you hold back some data, you’re only putting fear in the other spouse’s mind. And that’s what lends to, okay, I need three business evaluations because now I’m scared. He’s holding back or she’s holding back data, and I’ll need to pay three different people to give me three different answers.

Karen Chellew:

Using marital assets.

Catherine Shanahan:

Yeah, exactly. So again, getting together and doing it in the beginning is the best way to get the best use of your money.

Melissa Gragg:

And manipulating numbers always makes people very nervous because you always… Not always, but typically you have one spouse that knows where everything is. They know where all the assets, the bills paid, everything, and you have one spouse that just has been on the sideline. Maybe doesn’t even have access to any of the accounts. Maybe doesn’t even know where they are or if they exist. And we had a recent one where I was even suspicious of one of the parties. And every single time we got the documents, there was no suspicion. I mean, half the time, even in the business valuation, people will try to tell me what they think I want to hear or what they think, if I tell her this, then she’s going to make the value be higher or lower.

Melissa Gragg:

I can see through all of that. They have to understand that I am asking certain questions just to know the position or if it is a difference than what the data is telling me because in my mind, the tax returns and the financials tell a story. But then the story, it’s kind of like a book and somebody tore out certain pieces, right? And so I’m looking at the book and it tells most of the story, but then there are certain pages that are like, ooh, that was missing. So what happened here, right? So I’m just looking at completing the financial story and then I’m layering on the business valuation theory on top of it. Now, they sometimes think they know how to manipulate that, but it doesn’t matter. It just is trying to get to the truth.

Melissa Gragg:

It’s trying to get to that position. And I agree, if everybody has started disclosing information, sometimes they think things are way more powerful or damning than they really are. And sometimes they’re even leaving hidden gems of value to just look like there’s nothing there. And I think that that’s where it gets a little confusing because yes, no one’s going to know what they don’t know, but what you want to prevent is three years down the line, they come back and sue the attorney or somebody else because, oh, this document wasn’t disclosed or, oh, this account wasn’t disclosed. And so you’re already in a very emotional situation to begin with, the more over communication you can have. And so in that process, I typically over-communicate. And I tell people, ask questions or stop me, but I’m like, I want to make sure everybody in the room understands what the financial story is and has the opportunity to ask questions. And going through that process means you can’t position the valuation to be a certain number.

Melissa Gragg:

If something comes to light that’s like, oh, we forgot about this piece, it just layers into the valuation, but you still have the same methodology. Right. Now, most of the time in litigation, nobody wants to disclose the methodology because then they’re going to come after me, things like that. The reality is there’s probably 95% of the valuation, 90% of it, something like that, is theory. And the other 10% is art. And that’s where you really have to get defendable third-party data to help you support your position. Right now, we’re in a very unique economy. We are looking at a past that we cannot rely upon as an indicator of the future and the future is unknown. And so we sit here at a moment in time trying to explain what the value of something is. And do we ignore last year or do we use it. Do we ignore the past or do we use it? Do we look at the future? So, I mean, realistically, any time that an attorney or a business person or anybody understood valuation; right now, it’s completely changed. And so you really need somebody that can come in and take all of those external factors and bring them into the picture and tell people the impact. What does that mean? Yes, I have considered it. What does it mean? And then they can say, okay, I think that makes sense.

Karen Chellew:

Yeah. And to all of our point, approaching the valuation process this way, I’m sure it’s extraordinarily less expensive. You get a more [crosstalk 00:24:59] approach. So if people knew that if they came to My Divorce Solution, they get their documents, they get them interpreted, they’re all collected, they go to their professionals, not only are they managing their divorce in a less stressful way, but financially it’s so much more cost-effective. So for people who come to us midway having spent $200,000 already, they all say, I wish we came to you first. I’m sure you hear it all the time as well. So for those out there who are listening and you haven’t started, or you’re just starting, it’s super important to know what you’re arguing over or what the disputes are before you start the dispute.

Melissa Gragg:

Well, and a lot of times that more passive spouse that hasn’t been aware of the financial situation has to be given a voice. Okay. And they have to be given the permission to ask questions. I’m not trying to be silly about it, but it really is. So I don’t really come in and give permission or do any of those things, but I hyper explain everything and I explain it in a very simple way that everybody can understand, but I’m always there to make sure that the spouse that doesn’t know what financial is, is content with the answers and understands because what that does is kind of deescalate the emotion when you have the understanding of the facts. Right. Because if all you’re thinking is like, this person has said that we have millions and now they’re saying that we have nothing, like sometimes that is the truth.

Melissa Gragg:

That is the hard truth, right? And so when I come in, I deal with numbers. I am very empathetic to the emotion and I allow the emotion to happen because it happens and you have to allow it because it needs to get out, but also that understanding of the true picture. Once that sets in, and then they’re like, okay, I don’t want to hear it from my spouse. Right. I want to hear it from this person. But once I explain it and be like, there isn’t hidden money or there is. Once it’s explained, then they can start to get out of that hyper emotion that was just confusion, partly and get into, okay, how do we move forward? Now, those people also sometimes need like, you can’t stay in the $1 million house. Financially, it’s not going to be feasible.

Melissa Gragg:

A lot of these things, the attorneys don’t want to say. The mediator doesn’t want to say. A lot of people, even in this space, are non-confrontational by nature. I don’t mind confrontation. I don’t think it has to be confrontation. I think it has to be information. It just has to be what is it telling us and how can I take that information and then make the best decision I’ve given valuations that are $1.2 million, right? And I say, listen, it is reasonable to be somewhere between $1 million and $1.3 million. So if you guys can figure out a space in there that this works, then you’re fine. If you want to give up something and you know that it’s worth $20,000, it’s going to be your choice. That’s the beauty of mediation, is you can choose that that’s not that important and it’s more important to the other person. And so I’m going to give on that position. Right. But you can’t do it, if you don’t have all of the pieces of the puzzle.

Catherine Shanahan:

[inaudible 00:28:35] we always believe that if you have financial clarity, then you can make smart decisions. And that’s what our mission is. So if you’re out there, you have the clarity and you want to give up or negotiate away an asset, that’s your right to do, but do it with financial clarity so that you feel confident moving forward in your life because in divorce, knowledge is not only powerful, but it’s everything.

Karen Chellew:

It really is. Thank you, Melissa. We have more conversations to have. We only just barely touched on this subject as we know, but I’m really happy that we’ve crossed paths and you’re doing really good work and we’re proud to introduce you to our listeners.

Melissa Gragg:

Yeah, I love it. Thank you so much. And your service is just an amazing part of helping kind of maybe the new way of doing things, right? The new way of divorcing. So I think we’re all on the cutting edge, right?

Karen Chellew:

Absolutely. Divorce inside out, I call it. All right. Thank you, Melissa.

Melissa Gragg:

Thank you.