Determining Business Value for Family Court – What to Know

When it comes to divorce settlements or inheritance, business valuations are rarely as straightforward as the valuation of property owned by family members. Since businesses have legal obligations to both the government and parties outside the family, a more complex process of determining value is necessary. It is not uncommon that business fixed assets and industrial plant and machinery assets are subject to property settlement.

To understand what asset valuation means in the context of a family-owned business means, it is important to know the distinctions between ‘value to owner’ and ‘fair market value’.

Fair market value versus value to the owner

The market value of a property or business plant & machinery asset is the price at which an asset will change hands. This transaction, done in an open and unrestricted market, would hypothetically be between a willing seller and buyer. A stipulation of market value is that no parties involved are being coerced into the process, and are willingly exchanging ownership for its monetary equivalent.

This cannot be the sole basis, though, especially in the context of a family law valuation. When valuing a business for property settlement cases, arbiters cannot just rely on the procedures for valuing a business for sale. The reason for this is the parties involved must consider the benefits the owner would receive if they retained their shares or interest.

Common factors in determining business value

Every business has some variation in structure and financial objectives and there is no ‘template’ for making a valuation, especially for family law purposes. This is where professional valuers come in as they’re able to utilise a set of principles and processes that best suit the individual circumstances.

As an example, current operating activities, or a lack thereof, would be considered in the assessment. Valuers must also examine the business’ stability of income and revenue, and note extreme or persistent fluctuations on record.

Also, goodwill – namely, the reputation of a company, or its business location – are non-quantifiable factors that can also affect the value. At the end of the day, what is valuable for one party may not be as valuable to another. This is where procedures specific to the valuation of businesses for the purpose of family law come in.

Some valuation methods

One way of determining the value for family law purposes is by generating a figure of estimated future dividends. This is the best course of action for when a party requesting valuation has a minority interest in the business and has no executory functions or influence on the number of dividends that come in.

Another method is by assigning the net present values of future earnings. Net present value is computed using a formula and considers all cash flows in a business, discounted to the present. Since this method works best with slow-growing, stable figures, it is not often used for valuing small to medium size businesses, such as those that a family would own.

What is common in family law, though, is computing based on future maintainable earnings. This is a more straightforward application of discounted cash flow and involves the evaluation of income and expenses from the past 36 months. This information will be used to make forecasts on how the business will do in the future.

Conclusion

When it comes to family law and courts, business valuation has nuances that are not covered in fair market assessments. Hiring an independent valuer will ensure an equitable solution for all involved parties.

If you’re looking for expert family law valuation services in Sydney, get in touch with us today to see how we can help.