At the beginning of all family law matters, it is necessary for the total property (including assets, liabilities and superannuation and either held individually or jointly) to be identified and valued, to determine what property is available for division between you.
A business, whether operated as a sole trader, a partnership or through a legal entity such as a company or trust is considered as property and will be taken into account by the Court in any property division (otherwise known as a property settlement in family law).
A business may be operated by a spouse solely, or jointly by both parties. In our experience it is common that one spouse (ordinarily the spouse who does not control the business) considers that the business has a significant value. The other spouse (ordinarily the spouse who controls the business) thinks that the business has a nominal value.
In circumstances where spouses are unable to agree or they simply are unsure themselves of the true value, the business will need to be valued by an independent person to determine its value.
Who can value the business?
Different businesses will require different calculation methods, and will require advice from an expert valuer, who is usually a forensic accountant.
It is also important that the valuer is appointed jointly by you and your former spouse to ensure the process and report is impartial. In this case, the valuer would be known as ‘the single expert witness’.
If your matter goes to Court, it is important that the valuer has the specialized knowledge in that area so that they can justify the basis of their report if they are required to give evidence and it is therefore important that they are instructed in accordance with the Family Law Rules.
What documents will be required?
For an expert to correctly value the business, it is important for them to have an understanding of the business and industry in which the business operates, as well as a review of financial documents and holding discussions with the management.
While every single business will be different, as a guide, the documents that will ordinarily be required to value the business include:
– Any establishment documents such as deeds or constitutions;
– Tax returns for the past three years for all entities being valued;
– Financial Statements for the past three years for all entities being valued;
– Business Activity Statements (BAS) for the period since the last financial statements;
– Budgets; and
Methods of Calculation?
A business can be valued a number of different ways and having regard to a number of factors including the profitability of a business and its assets however, the most common methods to value a business, include:
- Asset based method – where the value of the business is determined by the assets of the business, less the value of the liabilities (ordinarily used where a business is not generating sufficient income).
- Earnings based method – based on the future maintainable earnings (‘FME’) of the business, with a suitable multiple (ordinarily 2 – 3 times the FME).
- Market based method – based on what a willing but not anxious buyer would be prepared to purchase the business for in the current market would purchase the business for.
An additional layer of complexity which may impact on the business valuation can be where one spouse (or both spouses) hold a minority interest in a business with other third parties. This means that their control of the business may be limited and they may be unable to sell their interests, unless it is to the other shareholders. This of course may not be an attractive sale to another independent third party and it is therefore common for the value to be discounted to account for this.
Goodwill of a business is a value associated with the established reputation of a business and can be considered as an asset, available for division between the parties, but does not exist in all businesses. For example, there might be transferable goodwill (i.e a monetary value of goodwill) or the goodwill may not be transferrable, as the person conducting the business is the reason for the business and this cannot be sold (i.e. the business relies on personal referrals).
Value to owner
The owner may not be a willing seller and wish to retain the business for a number of reasons. In those circumstances, consideration would be had to the benefits the owner may derive if they continued to operate the business.
If you are unsure how your business may be valued in your family law matter or the impact it might have on your property settlement, we encourage you to reach out to us for further information and to explore what options may be best for you in your circumstances.
Would You Like Further Information?
By Tegan Martens
Director & Principal Family Lawyer
The information contained on this site is for general guidance only. No person should act or refrain from acting on the basis of such information. Appropriate professional advice should be sought based upon your particular circumstances.
Please note that family lawyers cannot provide accounting or valuation advice. However, experienced family lawyers will be able to identify business valuation issues early and will be able to provide strategic advice as to how best to address any business valuation issues.