Family Law Property Division – Valuation of Businesses and Shares

06/11/2018

The Family Court and Federal Circuit Court of Australia are empowered to divide property between spouses and partners following breakdown of marriage or de facto relationships.  The Court needs to divide property on a just and equitable basis.  To achieve this, the Court will need evidence of the value of property it is being asked to divide.

Valuing a house, a car or superannuation is relatively straightforward.

However often the assets will include a business (or part of a business) operated by both the parties to the marriage or de facto relationship; or operated by one of the parties to marriage or de facto relationship.

The business may be operated in conjunction with others who are not related to the parties to the relationship the subject of the breakdown in the sense that each of the partners to the business have their separate interests in the business.

Often the business operated by a party either alone or in partnership with other individuals is operated in different structures for example partnership, company, trusts.

Valuation of these types of assets is not always a simple process.

It is important to ensure the valuation is appropriate and valued on the appropriate basis. An inappropriate basis may value the basis at a figure higher than the appropriate market value or lower than the appropriate market value.  Either of these will cause an injustice to one or other of the parties or both parties to a marriage or de facto relationship.

The parties’ interest in a business may not be and usually is not solely based on a percentage of the value of the total business in particular if there are other parties or shareholders.  This is critical to the valuation of the business.

How will the Business or the Shares in the Business be Valued?

There are different methods of valuing an interest in a business.  The method adopted (or the combination of methods adopted) will depend on whether the business is a small or a private business perhaps operated as a sole trader, a partnership or by a Trust.  Care needs to be taken to ensure that all Valuations are carried out by the proper method.

There are three main methods of Valuation for businesses:

1.        Earnings based Valuation. 

2.        Assets based Valuation. 

3.        Market based Valuation.

The Family Law Act itself does not indicate which method should be adopted however there are many cases which have been decided as to the appropriate basis to value a business in the appropriate circumstances.

Care needs to be taken in relation to Valuation of a business and a suitably qualified forensic accountant should be retained to value the business.

The first step is to understand the type of the business, the relationship of the business to its owners and customers and the factors that may have an effect on the valuation of the business.   As a whole this should be considered by the Lawyer in consultation with the appropriate Expert to be engaged.

The second step would be to determine what method of valuation or combination of valuation methods of the business should be applied.

There are significant considerations which need to be taken into account in undertaking how the Valuation and outcome of the proceedings may be effected.

Capitalisation of Future Maintainable Earnings Method

The most often used method is the capitalisation of future maintainable earning methods which involves:

  • The estimated future maintainable earnings of a business.
  • Application of an appropriate capitalisation rate. 
  • Assessment of surplus on unrelated assets and liabilities.

Discounted Cash Flow

The discounted cash flow method of valuing a business involves:

  • Assessment of the cash flow of the business for a period of years. 
  • An assessment of the termination value at the end of that period. 
  • Apply discount rate to apply to projected cash flows. 

Assets Based Valuations

Asset based Valuations of businesses either on the basis of a going concern or on the basis of a sale of assets involves:

  • Reduction of asset values for assets such as machinery – discounting for discontinuance of trading. 
  • Make allowance for additional liabilities that may be incurred and factor in the loss of right that cannot be transferred – e.g. a lease. 

Watson & Watson have experience in Valuation cases and will identify the issues and retain the appropriate Valuer or set of Valuers to ensure proper valuation of assets to facilitate fair outcomes.

If you are about to embark on financial/property settlement and one of the major assets is the business in which you have an interest or involvement and are unsure of your entitlements in relation to the business, please contact Richard Watson Senior Family Law Solicitor or his Personal Assistant Shereen Da Gloria to discuss your concerns.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 02 9221 6011.

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