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Divorce & Family Law

Frequently Asked Questions In Family Law Property Matters

Why do I need a business valuation when I am getting divorced? 

When a marriage or de-facto relationship comes to an end, the value of all property owned by the spouses need to be tallied up and then the total value divided between the spouses as part of the divorce process.  Property includes any business interests. If one or both of the spouses involved in a divorce has an interest in a business, the value of the business will need to be determined.  

Unless both spouses can come to an agreement over the value of the business, a business valuation will be required.

What is a business valuation? 

Business valuation is a process which applies methodologies and procedures to estimate the value of an owner’s interest in a business.

Determining the value of a business for divorce purposes is a necessary but theoretical exercise because the business is typically not sold as part of the process of dividing the asset pool.

Most businesses are usually operated via a legal structure other than in the name of the party which owns the business, in the form of a company, trust or partnership.  It is the value of the interest held by a party in the company, trust or partnership which operates the business that needs to be valued in a divorce matter. 

While the term business valuation is commonly used in divorce matters, the process of valuing the business also involves valuing other assets and liabilities in the legal entity which own the business.  Sometimes, a single business can legitimately involve more than one legal entity and therefore all the legal entities require a value to be assigned for divorce purposes.  Therefore, the use of the word business valuation for divorce purposes, is more technically a company valuation or valuation of some other intangible asset such as an interest in a legal entity. 

In order to arrive at a figure reflecting the value of the legal entity conducting the business, a number of factors are taken into consideration, including:

  • The past earnings history for the business.
  • The likelihood that the past earnings history of the business will be a useful guide to determine the future performance of the business.
  • Risks attached to the business.
  • The value of the company’s assets and sum of its liabilities, including the value of the business.
  • The value of the spouse’s ownership interest in the legal entity assuming it is not 100% owned.

TIP: The quality of the valuation report is very important as the report could be used later in court proceedings if one of the spouses does not accept the findings of the valuation report.  The cheapest provider for a business valuation report may not be the best option. 

What is the standard of value used in a business valuation?

Typically, the business valuation process requires consideration of the ‘market value’ for the business which is:

 “The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.” [definition sourced from International Valuation Standards Council]

When valuing an interest in a legal entity which operates a business, Australian family law courts consider ‘value’ to be based on the concept of ‘value to owner’.  ‘Value to owner’ does not require any consideration of a (hypothetical) willing buyer and therefore in some limited circumstances, there could be a difference in the value between ‘market value’ and ‘value to owner’.  A business valuer who is experienced in preparing valuations for divorce purposes should be aware of this.

Can a business broker assist with a business valuation?

A business broker may claim formal qualifications to value a business and may even offer to prepare a cheap report, however they are rarely experienced in preparing a valuation report which could withstand the rigours of litigation and be viewed as credible in a court. 

For this reason, we would not recommend relying on a business broker’s opinion in a divorce matter.

A useful analogy here is in respect of real property, for example the family home.  A home owner could approach a number of real estate agents to get an estimate of what their property is ‘worth’.  The real estate agent may even provide the home owner with a letter outlining what the property could be sold for, including evidence around recent sales of comparable properties to support that opinion.  However, in giving that opinion to the home owner, the real estate agent is primarily enticing the home owner to consider selling the property through their agency and will always qualify the opinion by saying it is an indicative appraisal and that the property is only ‘worth’ what someone is prepared to pay for it. 

Similar to a real estate agent, a business broker’s primary job is to sell a business on behalf of a client including advertising the business to attract interested buyers.  A business broker will be more informed by supply and demand for a particular type of business (for example, a coffee shop) and recent sale prices achieved for that particular type of business, rather than the underlying profitability of the business and other relevant financial considerations which justify the value of the business.  In this regard, the sale price that could be achieved may not necessarily reflect its real value, particularly the ‘value to owner’ which is ultimately what needs to be considered in the divorce context.

What skills, experience and qualifications should a business valuer possess?

There are many people who claim they can value a business and they may come from a wide variety of backgrounds.  We recommend selecting a business valuer that meets all of the criteria below:

  1. The business valuer belongs to a recognised professional body in Australia and is recognised by that a profession as a business valuation specialist. Typically, the professional body requires the professional to pass formal examination in addition to demonstrating a minimum number of years practical experience in business valuations.  Such a business valuer will comply with professional standards and other guidance relevant to the preparation of valuation reports and use generally accepted valuation methodologies and procedures to value the business.  In Australia, the only professional accounting body that recognises Business Valuation Specialist is Chartered Accountants Australia and New Zealand.
  2. The business valuer is a forensic accountant who has testified in a court in relation to their expert evidence AND the court has considered the evidence given useful. This usually means the person knows how to present credible evidence.  In our experience, creditable valuation reports assist in resolving matters in court.
  3. The business valuer and forensic accountant regularly prepares business valuation reports for family law purposes. Valuation reports prepared for family law purposes require a range of expertise including communicating with instructing parties, being familiar with judgments issued by the Family Court of Australia, dealing with valuation matters, appreciating competing motivations of parties involved in a divorce and other processes that need to be followed to efficiently to help resolve contentious issues around potential property settlements. 

How much does a business valuation cost?

This will depend on a number of factors and primarily influenced by complexity of the valuation.  Considerations which may impact on the complexity of the valuation engagement include:

  1. Whether the business is considered unique and operates in an industry where it may not be possible to rely on market-based research data to support professional judgements;
  2. The party or parties which has/have an interest in the business does/do not control the business;
  3. The sales and profits of the business are volatile;
  4. The business is structured in a way that uses more than one legal entity; and/or
  5. The business transacts with related parties to the owners of the business.

Given the above, be wary of:

  1. Anyone who advertises a fixed price for preparing a business valuation. The quality of the work will be compromised if a business valuer accepts an engagement with any of the above complex characteristics; and
  2. The cheapest quote, particularly where the quote in significantly cheaper than any other quote obtained. In our experience a significantly cheaper quote usually will result in a poorly drafted report, that raises questions by the other spouse and the conclusions not accepted which will not lead to an efficient resolution of the matter.

AVG Forensic can provide a (no-obligation and no name) fee estimate upon receipt of the following information about the business:

  1. The type and number of legal entities which are used to operate the business.
  2. The ownership interest held by the parties in each of the legal entities.
  3. A brief description on what the business does (e.g. industry, number of employees and years of operation and ownership).
  4. Annual sales for the past three years (years to be specified) as shown in the profit & loss statements.
  5. Annual net profits before tax for the past three years (years to be specified) as shown in the profit & loss statements.
  6. Total assets as at the end of the last financial year (years to be specified) as shown in the balance sheet
  7. Total liabilities as at the end of the last financial year (years to be specified) as shown in the balance sheet.

What information is required to prepare a valuation report?

Upon acceptance of AVG Forensic’s terms of engagement to prepare a business valuation report, we will provide a detailed request for specific documents from which will extract the relevant information to prepare our report.  Standard requests include:

  1. Financial reports, consisting of balance sheet and profit & loss statements for all entities being valued for the past three to five financial years.
  2. Income tax returns for all entities being valued for the past three to five financial years.
  3. Business Activity Statements covering the period commencing from the date of the last available set of income tax returns through to present day.
  4. Depreciation schedule listing all of the physical assets such as machinery, buildings, equipment and stock.
  5. Lease and/or other written agreement for use of the business premises. If the business premises is owned by a related party, three market rent appraisals from a commercial real estate agent should also be provided.
  6. Annual payroll summary for the past three financial years setting out the names of the employees, annual gross salaries and annual superannuation paid with annotations provided setting out the job description for each employee and the full-time equivalent hours worked by the employee.
  7. Annual sales by customer report for the past three financial years.
  8. Verification of ownership interest in the legal entity (e.g. ASIC extract and/or trust deed).
  9. Shareholder and management agreements.

Our requests for documents are tailored and therefore different for each valuation engagement and therefore the above requests should not be viewed as a complete set of requests.

How is a business valuer appointed?

If the matter involves formal litigation, the Family Law Rules 2004 specifically require a ‘single jointly-appointed expert’ to value the business.

Single Jointly-Appointed Expert

This process requires both spouses to agree on who the specific business valuation expert will be.  This process can involve each of the spouses separately nominating one or more expert and if both parties nominate the same expert from the pool of candidate experts, that expert will likely be jointly appointed.  Sometimes this process can take time and if the parties ultimately cannot agree on a suitable expert, the Court will appoint one.  The fee charged by the ‘single jointly-appointed expert’ to prepare the report is usually split 50:50 between the spouses.

If litigation proceedings have not commenced as part of the divorce process, it is recommended that the spouses seek to agree on a single-jointly appointed expert, rather than have each spouses separately engage an expert to prepare a valuation report. 

Occasionally, one of the spouses may obtain their own valuation report and seek to rely on this for the purpose of achieving a property settlement.  This is not recommended as the process involved in preparing the valuation report is rarely made transparent to the other spouse, which can raise legitimate questions over the independence of the business valuer and the weight which should be placed on the conclusions expressed in the valuation report.

A single jointly appointed expert in litigation will have a primary duty to the Court rather than the spouses and will have an obligation to make all reasonable and desirable enquiries to assist the Court in making a decision.  If an alternative dispute resolution method is used (i.e. litigation has not commenced), the single jointly appointed expert will typically prepare the report in a similar process to that required under litigation primarily because the valuation expert will want to demonstrate to the parties that he or she is independent and his or her opinion has not been influenced by one of the spouses.

Even when a single-jointly appointed expert is used to opine on the value of the business, the individual spouse may chose to engage his or her own business valuer to assist – say, ask their own appointed business valuer to review the single-jointly appointed expert’s valuation report and assist with questioning the single-jointly appointed expert about the valuation report in order to obtain a level of confidence about the valuation opinion expressed.

TIP: It is important to always appoint someone who is independent when obtaining valuation services, i.e. someone who has no attachment to the business or the parties.  This helps ensure you receive an impartial and objective opinion in relation to the valuation. While it may be tempting to ask the family accountant to comment on a valuation report prepared for divorce purposes or provide an opinion on value before getting a valuation report, the family accountant is generally considered to be seen as biased (even if he or she claims is not biased).

What can I do if I’m not happy with the valuation report?

Here are some quick tips to evaluate the appropriateness of in the valuation report:

  1. It is important you fully understand the valuation report which has been presented to you. A report which you do not fully understand is unlikely to persuade you in accepting the conclusion expressed.
  2. The date of the valuation is important. Value changes over time and value can change significantly as circumstances can change over time.  Therefore, the longer the period between the date of the valuation report and the date of the assessment of value the less reliance you will be able to place on the value for the purposes of a property settlement.  A valuation report expressing an opinion on the value of a business which is over 9 months, particularly involving a business which has not historically been stable in terms of revenue and profits, is likely to raise significant questions over its relevance for use in a property settlement.
  3. What caveats and other limitations are included in the report – do these caveats and limitations cause water down the valuation? Did the valuation expert simply rely on statements provided to him or her without making any further reasonable enquiries in relation to the accuracy of the statements?  Where sufficient number of documents reviewed in preparing the valuation report?  If the answer is no to any of these questions, chances are the report will not be credible.

Shadow Expert

A forensic accountant, with valuation expertise, can review a valuation report and act, initially as a shadow expert to advise you about the merits of the valuation report which may include drafting written questions to the single-jointly appointed expert about the valuation report (under the Family Law Rules 2004 this needs to be done within 21 days following receipt of report). 

If the shadow expert determines there is a significant problem with the valuation report, he or she may come out of the ‘shadow’ and present a justification, usually to the Court, on an alternative view on value and why the valuation report of the single-jointly appointed expert should not be the preferred view on value.

For information on Challenging Valuation Reports, please click –  How to Challenge Valuation Reports for Family Law Purposes

How else can a forensic accountant assist in separation and divorce?

If litigation commences as part of the divorce process, your lawyers will likely ask you to complete a form called Financial Statements (click here for example) which requires setting out numbers for various items including the values for Property (at Part I), Superannuation (Part I), Liabilities (Part K) and Financial Resources (at Part L), among other additional items.  The form will be submitted to the Court by both spouses and the Court may ultimately need to determine the values where the spouses cannot agree on the values for any particular item.

Outside of litigation, a similar process is adopted, although it is less formal, as part of reaching a property settlement as part of the divorce process.

A forensic accountant can work with you and your lawyers to assist you completing this form (whether formally required or informally used) and reviewing the other spouses disclosures, particularly around whether:

  1. All property in which an interest is held has been identified. Click here for  information on Finding Hidden Assets;
  2. The value assigned to the identified property is likely to be correct.
  3. The value of superannuation has been correctly applied, particularly in relation to self managed superannuation funds.
  4. Whether there are any liabilities which have been omitted.
  5. Whether the liabilities shown are shown at a correct value.
  6. Whether personal goodwill through the operation of a business is shown as a financial resource.
  7. Assist your lawyers to present an argument that the appropriate split of assets should be something other than a 50:50 split.
  8. Work with other experts to quantify a proposed plan for dividing the asset pool taking into account tax effective outcomes and other financial issues.

 

AVG Forensic provide clear and high quality forensic accounting and business valuation services which can be relied on for the purpose of achieving a family law property settlement.  We adopt a systematic process based on years of experience. Please contact us to discuss how we can help.

 

 


How we help
At AVG Forensic, we deliver high quality expert advice and reports, in a timely manner and at great value to your case. We provide clarity and focus to the quantum in dispute.

Phone: +61 2 8188 4889
Level 57, 19-29 Martin Place
Sydney NSW 2000

Phone: +61 3 8658 4278
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Melbourne VIC 3000