Valuation methods and how they affect your property distribution.
In our experience assisting parties embroiled in family law property disputes, one of the most highly contested issues is the value to be attributed to a party’s business interests. These can include shares in a proprietary company, interests if a partnership, or a sole trader operated business.
It is obvious why parties engage in such heated dispute over business valuations, engaging in expensive forensic investigations to obtain a valuation that is favourable to them, and it is usually the preference of the party running the business to retain them rather than dispose of them.
In a recent case in the Federal Circuit and Family Court, Gare & Farlow  FecCFamC2F 109, the discrepancy between two valuation methods adopted by two experts along resulted in a difference of about $370,000 in a case involving an asset pool of about $3.5 million.
How is this possible one may ask.
For those who are unfamiliar, there are a number of methods to value a business such as the net asset valuation method, sustainable earning method, and value to owner method, just to name a few. In addition, most businesses also have intangible assets such as business goodwill and intellectual properties such as trademarks, making the exercise even more difficult and confusing. In Gare, the issue was further complicated by the fact that the subject business was conducted out of a property owned by the wife’s father.
In cases before any court, the determination of valuation issues is essentially a matter for the trial judge (See, Hull & Hull (1993) FLC 91-360 at 78,410.), and whilst a judge may be assisted by the opinion of an expert, they must form their own independent judgement by application of the appropriate principles, including departing from the values ascribed by the various experts called in evidence.
Whilst the primary test for the value of the parties’ shareholding in a company is that of the hypothetical prudent purchase, there are many cases in which the present commercial or capital value of shares in a proprietary company may not reflect their value to the spouse who will retain or control them after the proceedings are finalised, and the Court must ascribe a value that is realistic based on the worth of the shares to the party himself or herself, and in that matter, it was decided that the “value to owner” method will be more realistic, resulting in the Court adopting the higher valuation of $429,500 rather than the lower one of about $57,129.
When trying to resolve a financial dispute between couples who own businesses and shares in proprietary companies, it is important that the lawyers instructed are familiar with businesses and the different ways a company ought to be valued, and at Longton Legal, not only do we have a team of commercially sensible lawyers in our family law team, we also have lawyers with expertise in various fields of law that can assist in cases when needed.
*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*
Special Counsel | Accredited Family Law Specialist NSW
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