In Family Law the valuation of a business is a complex process. It’s not as simple as looking at the balance sheet.
In Family Law and Divorce usually the normal valuation processes that are used to value businesses by accountants and valuers are also used in Family Law cases, but there are occasionally differences in approach. Perhaps there is a market (“a potential buyer”) for the business, perhaps not. Even if there is a market for the business, that may not represent what the court assesses to be the “value to the owner”.
The fundamental issue with any business is whether it is profitable. If not, then usually the business is valued on a net tangible asset basis – in other words, add up the value of the plant and equipment (market, not book value), accounts receivable etc, then deduct the liabilities and accounts payable, and that’s the value.
If the business is profitable, then its’ value is sometimes assessed as a multiple of the profit ( 1,2 or even 3 times profit – called the capitalization rate).
But what is profit? How profit is calculated needs to be considered. Sometimes it is artificially reduced by paying personal expenses as business expenses. Sometimes wages paid to the owner are higher, or lower than market. For example, a business may appear to be profitable, but that is because the owner pays him or herself no, or a low wage. On the other hand, a business may appear not to be profitable, but that is because the owner pays him or herself a wage well above market, leaving no “profit” left. All these factors are considered as part of assessing value., and often the bookkeeping or accounting profit is adjusted upwards or downwards as part of the valuation process.
Sometimes a party’s business interest is only a percentage of the total value of the business, and therefore a discounting of value may occur – a controlling interest is of more value than a minority interest.
Business valuation is a complex process, and many factors come into the analysis of the true value of a business, or business interest, in a Family Law or Divorce settlement matter. Expert, Specialist advice is needed. It’s far more complex than simply looking at Balance Sheet figures.
What’s the lesson from all this?
The important thing to remember is that that no two cases are the same, that the law is complex, and the Courts have a very wide discretion to make decisions.
It’s only when you go into the detail of the matter, and understand that some factors favour one side, and some factors favour the other, that one is able to predict the outcome through the courts.
Don’t rely on friends, family or Google.
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