It is common for a business valuation to include the business interests of both parties where they each have an interest in a business or the same business. Exactly what those business interests include is open to negotiation. It is often determined by the forensic accountant who undertakes the valuation to determine which assets and liabilities should be included. But if there is no agreement it is to be determined by a judge or arbitrator.
So what gets valued?
So the first step is to identify all of the companies, family trusts, partnerships and other entities in which either party might hold an interest including as a director, shareholder, partner, trustee, appointor or beneficiary. Once that is identified the valuer can be engaged to conduct the valuation.
The family law business valuation includes only the interests of the parties in the business. It sometimes doesn’t include the interests of the other business owners, trustees or beneficiaries. But other times the best approach to the valuation is to value the whole business and then value each person’s share. In these cases, it is usually not a case of multiplying the value of the business by the owner’s percentage share. Few people are interested in buying a part interest in a business so there is usually a discount applied for a part interest because of lack of control and lack of marketability. The discount applied depends on various factors including the percentage interest and whether it is a majority or minority interest.
Is it just the assets and liabilities?
The value of an operating business earning a fair rate of return is usually determined with regard to both asset values and the consistency and quality of earnings. There are a number of valuation approaches which may be adopted when valuing an entity. The primary valuation approaches fall into two categories, being the income and asset based approaches.
Included in the valuation is not only the assets and liabilities of the business but also any goodwill if there is any. Goodwill is defined as “that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.” It is hard to value and there are a number of correct approaches to doing it. There is enormous scope for disagreement as to the value. Valuing goodwill is a science in itself and is somewhat discretionary. It is best valued by an experienced forensic accountant who can apply their judgment based on their knowledge of the industry, resources and experience.
Other intangibles may be also included in the valuation such as Unpaid present entitlements and Retained earnings. If requested the valuation may include, for example, the shares of the parties in a private company such as an employer. It may also value a self-managed superannuation fund.
But there are certain interests which might not be included in a valuation. For example, a beneficial interest in a family trust might be regarded as a financial resource or a mere expectancy and is therefore usually not property. But sometimes it might have to be valued anyway because it might have an impact on the entitlement of each party.
Other personal assets of the parties are generally not included in the valuation. However, loans from any of the entities to or from the parties are usually included.
What about liabilities?
Liabilities and anticipated liabilities should be included in the valuation. So should taxation and realisation costs. Those liabilities might not be incurred if the business isn’t sold but they are generally included in the valuation. There can then be negotiations taking those potential costs in to account. If there’s no agreement the judge will determine which liabilities are to be included.
There are some occasions when a liability can’t be determined or quantified and other occasions when the liability is contingent. In those unusual cases the valuer will probably not include the liability but will qualify their opinion. It is then up to the parties to try to negotiate an agreement taking in to account that liability or if they can’t do so, it will be determined by a judge or Arbitrator.
Adjusted book value method
A common method of valuation is the adjusted book value method. The valuer will go through each item in the Balance sheet of a business and make the adjustments they consider appropriate. The valuer may decide not to include certain assets or liabilities. Often that is because there are items which shouldn’t be in the Balance sheet, for example, if there is a private asset or liability which really belongs to one of the parties but has been included as a business asset or liability.
Other times there will be an adjustment because the value shown in the Balance sheet is not a true reflection of the actual value. Sometimes there will be a separate valuation of an asset.
How can the business valuation be used?
It is best to try to agree with your former partner about exactly what is and what isn’t to be included in the valuation. If there is no agreement it is often a good idea to get it all valued anyway and then try to negotiate based upon the information provided in the valuation.
The valuation should be included when determining the pool of property available for distribution between the parties. That is the first step in trying to negotiate a property settlement. But if an agreement can’t be negotiated the valuation will be used in any court proceedings or Arbitration.
In general, the sooner the business is valued and negotiations commence the sooner the case can be resolved and the parties can move on with their lives.