How a Business Is Valued in a Family Law Property Settlement

When a marriage or de facto relationship ends and one or both parties own a business, the business, or the interest in it, usually forms part of the property pool. Unlike a house or a superannuation account, it does not arrive with a statement that says what it is worth. The figure in the accounts is a historical cost, not a value. The price the owner has in mind is often a hope. The figure the other party expects is often a fear. A valuation replaces all three with a reasoned figure that both parties and their advisers can examine.

This article explains, in general terms, what a valuer does to reach that figure. It does not describe how the value is then used in the settlement. That is a matter for the parties' lawyers.

First, what exactly is being valued

The interest, not just the business

In a family law matter the question is rarely "what is the business worth" on its own. It is "what is this person's interest worth". A person may own all of a company, a minority of its shares, a share in a partnership, units in a unit trust or nothing fixed at all as a beneficiary of a discretionary trust. Each is a different thing to value. The first task is to identify the entity, the class of interest, the percentage held and how the structure affects what the holder can actually do with it.

The valuation date

A valuation is at a date. The instructions, or the engagement letter, fix that date, and the report values the business as it stood then, on what was known or reasonably expected at the time. Some matters need more than one date, for example at separation and at a later point, and the report can then explain what changed between them. Which dates are relevant is a question for the lawyers, not the valuer.

The basis of value

Most family law valuations adopt market value: the price a willing but not anxious buyer would pay a willing but not anxious seller, both properly informed and dealing at arm's length. In some matters the instructions ask a different question, such as what the business is worth to the person who holds it. Where that is relevant, the report says which basis was adopted and why the answer differs.

Understanding the business

Before any numbers are adjusted, the valuer needs to understand how the business earns its money and what it depends on. That comes from the financial statements, tax returns and management accounts, from the ownership documents, and usually from a conversation with the owner or the accountant. The questions are practical: who the customers are, how they are won, who does the work, what the owner does day to day, what contracts and licences the business relies on, and what would happen if the owner stepped away.

Working out maintainable earnings

Normalisation

The profit in the accounts is the starting point, not the answer. A privately owned business is run for its owner, and its accounts reflect that. The valuer adjusts, or normalises, the reported earnings to show what the business would earn under ordinary commercial ownership. Typical adjustments include the owner's remuneration, replaced by what it would cost to employ someone to do the same work; private expenses paid through the business, such as vehicles, travel or family wages for work not actually done; payments to related parties that are above or below market rates; and one-off items such as an insurance recovery, a legal dispute or the sale of an asset.

Choosing the years

The valuer then asks what the business can be expected to earn in a normal year. A single very good or very bad year is rarely the answer. Recent years are weighed against each other, trends are examined, and the reasons for any change are identified. If the last year was affected by the separation itself, the report says so and explains how that was treated.

Goodwill and dependence on the owner

Goodwill is the value of a business above its identifiable net assets. Australian law treats it as a single asset of the business rather than as separate personal and commercial assets. What the valuer does is analyse the sources of that goodwill, such as location, name, systems, staff, contracts and relationships, and consider how far each depends on the owner personally.

This question often decides the value. A business that would keep its customers, staff and contracts under a new owner has goodwill that a purchaser would pay for. A business whose customers deal only with the owner, or whose licences and referrals attach to the owner personally, may produce a good income and yet have little that could be sold. The report sets out that analysis and the evidence for it.

Choosing the method

Once maintainable earnings and the nature of the goodwill are understood, the valuer selects a method and explains the choice. For a trading business with stable earnings, the usual approach capitalises the maintainable earnings at a rate that reflects the risks of that business. For a business whose value lies mainly in its assets, or which has no earnings beyond a fair wage for the owner, a net assets approach may be more appropriate. Projections are used sparingly and only where they can be supported. The report states why the method was chosen and, where a second method was used as a check, what it showed.

From the business to the interest

The value of the business as a whole is not the end of the analysis. Debt is deducted, cash and assets the business does not need to trade are added, and the result is the value of the equity. The valuer then values the particular interest. A whole business held by one person is straightforward. A minority shareholding, a partnership share or an interest held through a trust requires the rights attached to it to be examined, because an interest that cannot control distributions or be sold freely is not simply a fraction of the whole.

What the report should show

A report prepared for a family law matter should let a reader who did not run the business follow every step: what was valued and at what date, what documents were relied on and what was missing, every adjustment and why it was made, the reasoning for the method and the assessment of risk, the treatment of goodwill and owner dependence, and the movement from enterprise value to equity value to the interest. A figure without that working cannot be tested, and a figure that cannot be tested is of limited use to either party.

Why two parties arrive at different figures

Owners tend to see the effort, the risk and the debt. Former partners tend to see the income, the lifestyle and the growth. Both may be right about the facts and still hold very different expectations of the value, because value depends on how those facts are weighed. An independent valuation does the weighing in the open, so the disagreement narrows to specific points that can be discussed rather than the figure as a whole.

Where to from here

For negotiation, mediation and property-settlement discussions, a Settlement Valuation at $2,995 + GST provides a written independent report on the terms described above. It is not prepared for filing or reliance as expert evidence in court. Where the matter is before the Court, or an expert report is expected, a Court Expert Valuation from $8,995 + GST is prepared through an expert on suitable instructions, with a Chartered Accountant as the signing valuer, with the final fee confirmed after scope review. If a business forms part of your property pool, tell us about the matter and we will confirm the appropriate scope before anything begins.

This is general information about how business valuations are approached in family law matters. It is not legal, taxation or financial advice. The appropriate scope depends on the circumstances of the matter and any applicable instructions or court orders.