Business Valuation – How does the Family Court value a Business?

12/08/2015

As part of the process the Court determines what are the assets available for distribution between the parties and what are the valuations of those particular assets.

The process is initially commenced by disclosure as to the extent of the assets and liabilities and negotiations as to the valuation of particular assets.  Often the parties agree as to the extent of the assets, and the appropriate value of many of the assets.

However often there is real issue and contention as to the valuation of a particular asset such as a “Business”.  The Business can be conducted through many different structures for example directly owned by a person, a partnership including husband and/or wife and possibly others, a company structure, joint venture and/or trusts.

The Court’s role is to determine the valuation of each of the assets available.  Often the Court states the valuation shall be based on a “hypothetcal purchaser” at current market value; but how this is determined? If one looks at a Business being conducted through a private company, it is the shares in the private company that are to be valued.  However, these shares cannot be valued unless the underlying assets of the company including the Business operated is valued. 

Traditionally there are diffirent bases upon which businesses are valued; for example, market based, income generated capitalisation of earning, discounted cash flow or net asset position.  There may be adjustments having regard to the wishes of the business operators, and other market conditions including competition, restrictions to entry (for example qualifications or licences required) market share, customers, patents and other intellectual property and protection thereof. 

There are also other considerations and adjustments that must be made to the valuation of the shares of the parties having regard to such matters as control of the company shareholdings, assets of the company, liabilities of the company, earnings of the company, key persons required for the operation and the business contracts.

There are complications as to how a value is affected by a covenant by a Vendor not to complete with the purchaser of the business. Usually in a third party transaction of a small business the vendor of the business to an independent third party ourchaser gives a covenant by the vendor of the business not to compete with the purchaser of that business. This covenant affects the amount that the vendor can obtain for the business.

Where a business is an asset of the parties to the relationship, there is an issue as to whether the Court would enforce such a covenant by one party not to compete with the business if transferred to the other party.

Some of these are taken into consideration in valuing the Business of the company and some are matters for consideration in relation to the value of the shareholding of a particular person in a company such as the husband and/or wife in the Family Court proceedings. 

Valuation of a business is more complicated than the valuation of most other assets.  For example the valuation of the home is normally much more straightforward in particular where the home is a conventional home where there are comparable sales of similar homes. 

There are many different variables to be considered in valuing a Business.  There is no structured outline which one can universally follow to come to the same conclusion that the Court may come to in a disputed matter. 

This is where experience in commercial matters are critical in valuing the assets and considering the propositions, arguments and proposals that are suggested or argued by one or other party, the solicitors, accounts, valuers and others who are involved in the process of assisting in the valuation and negotiations and/or preparing a party’s case for Court.  There needs to be proper reality check as to propositions being put,  This is where Watson & Watson have the experience to understand, check, consider and determine the appropriate evidence required for the valuation of the Business so that the optimum outcome can be obtained. 

Please contact Richard Watson to discuss your concerns or any queries you may have.

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