Valuing a Business – Who gets the business, at what valuation?

11/08/2015

When a marriage breaks down, there are extensive rules governing how the assets of the marriage are to be divided between the parties to the marriage.  The assets to be taken into consideration in the division of the assets of the parties includes a business in which one or other or both have an interest.

Normally, the Court will apply the “hypothetical prudent purchaser” test when it has to value a business.  That is, the business’ value will be what a prudent purchaser with knowledge of the business, its current holdings and dealings and its future prospects, would value it at. 

Also there is in some circumstances a dispute about who will receive the business in the distribution of the assets.  This dispute occurs in cases where for example the parties to the marriage or relationship are also business partners and conduct the family business.  It also arises where the business is owned by the parties to the relationship however it is primarily conducted through a management process which does not integrally include one or other or both of the parties being intimately involved in the conduct of the business. 

Will the Court allocate a value to a business which is not reflective of a valuation based on the normal accounting principles and/or which would apply to the “hypothetical prudent purchaser” test.

The Court is obliged to value the business and not just choose a value of the business on a subjective basis rather than an objective basis. 

However, the Court can consider the value of the business attributed to the business by one or other of the parties in particular, where the value attributed to the business by a party who is prepared to have it allocated to that person is more than the valuation of the business applying the “hypothetical prudent purchaser” test.

The value to owner is a concept that was discussed in the case of Aitkin in 2013 is intended to bring to account additional economic benefits that might be available to the Business owner by his or her control of the shareholding and it is intended to include within the valuation any commercial financial advantage to that owner which might not necessarily be available to any other third party if the business is sold to a third party.  This is a difficult and contentious issue.

One case in which the above issues have been considered is the case of Ledarn v Ledarn where the Family Court was asked to rule in circumstances where one party (the wife) valued the business higher than the value ascribed to it under the “hypothetical prudent purchaser” test.  In this case the business was to a degree conducted without the expertise of the husband or the wife to the exclusion of the other.  The wife had primary control of the business in the sense that the wife managed the business following the husband’s bankruptcy some years earlier.  The valuation as assessed by independent valuers was in the order of $8 million.  The wife valued the business as being worth $10 million to her.  The business was conducted through a company.

The Court held that family law cases often require analysis beyond the simple commercial or capital value of the shares in a company. This was a case in which the number arrived at by the traditional methods did not represent the value of the asset to the spouse who controlled it, given her stated intention to continue to run the business in the future. The court was prepared to value the business at $10 million and give the wife control of the asset at that value.

The husband had argued that the valuation of $10 million represented an attempt to “bargain” with the Court, thus making her position more attractive. There was some precedent to support this view. Although in this case the higher valuation was accepted, it may not be in every case.

There is some indication by the Court that the result may have been different if the wife’s intention was to sell the business. 

Similarly, if it was the wife’s intention that the business be allocated to the husband at the higher valuation the Court would not have accepted that basis. 

There was also an issue raised as to whether the Court could and if so would place a restriction of trade against the husband if the business was to be transferred to the wife.  The Court held that it could make such an order and considered relevant matters relating to that aspect.

Although in this case the Court accepted the higher valuation argued for by the wife on the basis that the business would be allocated to her as part of the distribution of assets it may not in every case.  The Court will not simply allow the parties to bid against the other and allow the highest bidder to obtain the business at that higher bid.  In Ledarns case the Court considered that the higher value was the most just and equitable decision in relation to the allocation of the business and the assets.  Having regard to the net distribution of the total pool of assets, the total pool was increased by $2 million based on the wife’s assertion rather than the valuation of the business based on the “hypothetical prudent purchaser” test. 

The primary consideration that Family Courts will seek to uphold is whether or not the end result is just and equitable.

Just and equitable is not the same as what one party may think is “fair”. Often the Family Court proceedings and in particularly highly contested proceedings each party can think that the result is unfair.

At Watson & Watson we have considerable experience in considering valuations of all types of businesses and in considering same in light of the numerous various alternatives as to valuations and the particular issues that arise in each case.

Unfortunately, in some cases the true valuation of a business is not what either party would consider to be the appropriate value to be ascribed to that business in the proceedings. 

Please telephone Richard Watson or Dennis Grant should you have any enquiries in relation to difficult issues as to Valuation and the allocation of the business and the terms or restraints to be applied.

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