Valuation of Business – Fundamental Principles

10/08/2015

Taylor’s case in the Full Court Family Court reviewed numerous previously reported cases and observed, for example:

1.         The determination of the value issues “is essentially a matter for the Trial Judge”

2.         The determination of the valuation may be assisted by expert evidence by an appropriate Expert which has the purpose to enable the Trial Judge to form his or her “own independent judgment on the matter of the application of the appropriate principles”.  In our experience when there is a contest between the parties as to the value of an asset, for example, a Business or property there must be expert evidence for consideration by the Trial Judge.  The Expert is available at the hearing to be cross examined.  The Trial Judge does not have to accept evidence from an expert as to the valuation.  Often there is debate as to all or some aspects of the expert evidence and some adjustment are made to the Valuation by the Expert.

3.         The determination of the valuation of the Business involves the determination of the most appropriate method of valuation which determination in turn depends on a number of factors, for example, the purpose for which the valuation is made, the nature of the shareholding, the nature of the company’s business, including the company’s capacity to earn profits without or only with a key person and the value of the assets, considering gross assets and liabilities and the capacity to fund the Business operations.

4.         The primary test is that of a hypothetical prudent purchaser, however, that is not always the case.  One of the issues that arises is whether the Business is to be sold and if so on what basis or whether the Business will be maintained by one or other of the parties to the relationship.  If it is a business that was previously operated by each of the parties to the relationship there is additional complications as to the allocation of the Business and also the valuation of the Business. 

5.         There is also the issue as to whether the Business is to be valued on a basis of fair market value or the value to the owner.  This will depend on the factual circumstances of the issues between the parties.  The Full Court in 2006 considered the evidence of two experts in valuing an interest in a medical partnership.  The Full Court accepted that the Trial Judge could have accepted the evidence of either of the two experts as to the valuation of the interest in the medical practice.  If the Trial Judge had accepted either valuation, as it is a factual matter, the finding of fact would usually be unappellable.  This shows that it is critical that the appropriate considerations be given during the preparation of the case including preparation for cross-examination. 

There are many other considerations in the valuation of a business, for example whether the appropriate salary is paid to family members involved in the Business operations as this will have a material effect upon the valuation of the Business.  It is critical to consider this aspect.

Even though it is most common that the Business will be valued on the hypothetical prudent purchaser basis, is it is not to be taken for granted that this is the only appropriate basis of valuation.  There are many numerous alternative basis for valuation of a business and almost unlimited matters for consideration involving a Business valuation.

Richard Watson has the experience to analyse the Business operations and ensure that the appropriate Expert is engaged to give the appropriate expert evidence. 

The principles of valuation of a Business for family law purposes is not the same as it is for other purposes, for example, sale to a third party, internal sale to shareholders, tax purposes and many other purposes that one might consider. 

The Business can be operated through many or a combination of different structures, for example, the Business can be operated through a company, trust, partnerships or as a sole trader.  One needs to consider the interrelationship between these various entities to properly assess the value of a Business. 

The assessment of the value of the Business is only the first stage of assessing the value of the asset held by either party, for example, the shares in a company.

Often owners of a Business do not have an objective view of the real value of the Business.  Also one party to a marriage or proceedings may have a different view to the other party.  All opinions should be considered by legal advisers so as to be able to understand the parties’ position and take into consideration all aspects that are critical in the determination of the valuation of the Business.

If you are faced with difficulties in relation to the operation and the valuation of businesses not fully within your knowledge or you having scant information please contact Richard Watson to discuss the matters of importance for a favourable outcome in your circumstances hopefully by way of settlement rather than by way of litigation.

Please telephone Richard Watson or Dennis Grant who have dealt with matters of this nature on numerous occasions to discuss any concerns or queries.

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