Family law disputes – valuing the family business

A business interest, whether held individually or jointly, through a partnership, company or trust, forms part of the pool of matrimonial assets to be divided as part of a property settlement. Valuing the family business can be difficult.

Why value a business?

When couples separate, the division of property is not purely a mathematical exercise. This is particularly so when considering a family business which may be the sole or significant vehicle for the family income.

If the business is profitable, or likely to become profitable, one of the parties may wish to retain it and pay out the other. This is where disputes most likely arise, as the party retaining the business obviously wants the value to be as low as possible while the other party wants the opposite.

How do you value goodwill?

In the family law context, businesses are generally valued by specialist accountants. If you ask 5 different accountants to value the goodwill of a business, you will get 5 different answers, possibly very different.

They generally agree that the value of a business depends on its future maintainable earnings. However, the real discrepancy comes when they multiply the earnings by a factor to arrive at a value. Some might say that the business is worth as little as 2 times its maintainable profit, others can apply a factor of 10 times earnings, or even more. There is no correct answer.

The real value of a business, like the value of any asset, is what a purchaser is prepared to pay for it. Evidence of the sale of comparable businesses, including the multiplier of earnings used to calculate the price is relevant, if that information is available.

Personal goodwill of the owner

In a family law context, the party who has been running the business and intends to continue to do so will often claim that the real value of the business is their personal involvement and relationship with customers and suppliers. In many cases, this may be true, especially with a small business. They argue that, for that reason, the business itself has little or no value.

Business downturn after separation

It is extremely common for the profit of a family business to be reduced significantly when the parties separate. The party running the family business, usually the husband, is often accused of causing the business downturn. If it can be proved that he did so deliberately, the court will be very harsh, and will penalise him in working out the split of the matrimonial pool of assets.

Choosing a valuer

It is important that the valuer appointed be an impartial and neutral expert who is familiar with family law matters, the requirements for preparing expert reports and, if necessary, giving evidence in Court.

Both parties should agree on the expert appointed and provide joint instructions.

The benefits of engaging a single valuer are that the parties usually share the expense, the process is streamlined, and the evidence is generally accepted by the Court without further application. In limited cases, individual valuations may be requested, and permitted by a Court.

If the parties are represented, their lawyers should work together to identify a suitably qualified valuer, obtain costings and determine the terms of reference for the valuation. Correspondence should include the relevant Family Law Rules with which the appointed expert must comply in providing the report.

Arranging the report and the importance of disclosure

Once the valuer and costs are agreed, written instructions are provided by the lawyers. The instructions will set out the terms of reference and additional information is provided to assist in making the assessment.

The Family Law Act requires that separating couples make genuine efforts to resolve disputes, and, as far as practicable, comply with the duty of full and frank disclosure. Where business interests are concerned, disclosure documents may include balance sheets, profit and loss accounts, budget and cashflow forecasts, supply and service contracts, business activity statements, tax returns, deeds, joint venture agreements and trusts.

The extent of information required will be determined by the complexity and (likely) value of the business and the valuer may request additional information to consider a proper assessment.

Conclusion

If you have been operating a family business and are separating, it is important to understand the value of the business which will ultimately form part of a financial property settlement.

A formal business valuation can be used in the early negotiations of a financial property settlement, during mediation or, if necessary, in Court proceedings.

How does this apply to you?

It is hoped that this article has been helpful to understand your rights to property settlement. However, there is no substitute for sitting down with an experienced family law expert to discuss your particular case. We offer a service of a meeting of up to one hour with one of our family law specialists to discuss your particular case, and advise you as to your entitlement to property settlement. Cost is $280 excluding GST. To arrange an appointment, please telephone 9923 2321 or email us at enquiries@somervillelegal.com.au

For more information about a Family Law contact Family Law Specialists  Peter Lacivita.