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Separation and Divorce – how is my business value calculated?

Separation and Divorce – how is my business value calculated?

Posted On: 11 April

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When a de facto or married couple separate and commence the process of identifying their assets, liabilities and superannuation benefits, they need to include their business interests. If one or both of the parties to the relationship have a financial interest in a business, company and/or family trust, that interest forms part of the parties’ assets and a value will need to be attributed to that business interest.

In our years of representing clients who either own and operate the business or are the spouse of the person who owns and operates the business, spouses can often have views that the business has a higher value than it may in fact have. When this occurs, the business will be required to be valued pursuant to the Federal Circuit and Family Law of Australia (Family Law) Rules 2021 (the Family Law Rules)

Appointment of Single-Expert

In some instances, parties can agree on a value to be attributed to the value of a business after the exchange of financial disclosure. This includes Financial Statements and Taxation Returns for the past 3 financial years. Often this process involves the business accountant providing a breakdown of their view on the value of the business and how it has been calculated.

Where there is a dispute about the value of a business, lawyers for both parties will jointly engage a single-expert pursuant to the Rules. Known as the jointly appointed valuer. The valuer appointed will be a forensic accountant who will review the financial performance of the business for the previous 3 to 5 financial years. They will also consider the forecast for the business and speak to the stakeholders in the business. Where necessary, they will speak with the business accountant to understand the financial business management and daily operations of the business.

Methodologies used in business valuations

When a single-expert or valuer is appointed, there are a number of methodologies that they can use to value the fair market value of the business. A fair market valuation is generally defined as “the price that would be negotiated between a knowledgeable and willing but not anxious buyer and a knowledgeable and willing but not anxious seller acting at arm’s length within a reasonable time frame”.[1]

The most common methodologies use by single experts are:

  • A capitalisation of estimated future maintainable earnings;
  • A capitalisation of estimated future maintainable dividends;
  • The net present value of projected cash flows; or
  • Net asset backing.

A capitalisation of estimated future maintainable earnings

Where an entity trades actively, this method is often appropriate to value the business based on capitalised earnings and a comparison of results obtained with assets utilised in generating that income. In using this methodology, it is necessary to determine the future maintainable earnings of the business by reference to the past earning capacity and removing or including an adjustment for non-reoccurring revenue. This is the most commonly used methodology in family law matters.

A capitalisation of estimated future maintainable dividends

This method is often used when you have a minority interest in a business and you’re not able to influence the business operations or the dividends. It is essentially a party who receives dividends and a pattern of receiving dividends has been established.

The net present value of projected cash flows

This method is based on a value of an asset being dependent on the future net cash flow of the business being discounted to a present value. The difficulty using this methodology is often that businesses have not prepared cash flow forecasts which are sufficient for a single-expert to rely upon.

Net asset backing

This methodology is used where a business is not making profit, or the cash flow is less than that which could be earned if the assets of the business were sold and the proceeds of sale were invested. The value of the business is simply the result of all assets minus the liabilities. They are valued as if they were disposed of in an orderly fashion and not a fire sale.

If you are in the early stages of a separation from your spouse and a business forms part of your assets, we recommend that you contact our office on (07) 3532 3826 or info@pcfl.com.au to seek legal advice from one of our experienced Brisbane family lawyers.  We offer fixed fee initial consultations and are available to meet you in our Brisbane City office or our Northside family law office. Alternatively, initial consultations can be undertaken from the comfort of your home by utilising Zoom video conferencing.

[1] High Court of Australia in Spencer v The Commonwealth of Australia (1907).

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