Property settlement can be a substantial part of separation and divorce. Whilst valuing tangible property such as homes and cars is relatively straightforward, valuing a business is usually more complex. One of the first questions we are asked by self-employed clients is what impact a separation may have on their business. This is a valid worry – you’ve spent years building a business, only to find suddenly your livelihood may be at risk or operations may be impacted by a separation. We’ll take a look at business valuations in a property settlement in this article, outlining some of the key considerations and next steps.
Reaching an agreement
Whether the business in question is your former partner’s, yours or jointly operated by you both, it’s important that you and your former partner seek to agree on a value together and ascertain any issues in dispute that are a roadblock to an agreement. The party who wants to keep the business could undervalue the business or claim that they alone create the value of the business; particularly relevant when an individual’s specific expertise or skill set is the main offering to customers, for example, an interior designer.
We often recommend calling upon a trusted accountant, who is aware of the business position and its history, potential tax consequences of any proposed settlement and issues to be considered for asset protection. A familiar third party can often play a positive role in achieving a settlement sooner and potentially avoid the cost of an independent valuation in some cases.
You can engage an expert, third-party forensic account with experience in business valuation within family law cases including those in court proceedings. Any professional involved in the valuation process must be willing and able to present their professional findings in court. How you engage this expert is important. If not engaged properly, the evidence from the expert may be subject to challenge later on if an agreement can’t be reached.
Generally speaking, one valuer will provide a final ruling on the business’ value. You may request to use a separate valuer to that of your partner, but you must present a strong argument as to why the court should accept this evidence.
Engaging a secondary valuer can be costly and time-consuming, so the best outcome would be an agreed approach between both parties. Ordinarily, the valuation cost is shared equally between parties unless one party requests additional information from the valuer which increases the cost significantly. In this instance, the two parties should negotiate the allocation of cost.
Methods of valuation
The valuer’s report will include the final valuation and how they arrived at that valuation. Businesses can be valued using a range of different methods and each method examines the business from a slightly varying perspective. A particular approach may be the most appropriate to an individual case, depending on the business set up or the industry
A fair market valuation assumes a scenario in which there is a willing buyer, a willing seller and neither party is under compulsion to buy or sell. If we imagine a family business in which you have a 20% stake and your parents hold the remaining 80%, your parents have the majority vote in decisions regarding the business. A fair market valuation assumes a willing buyer but in reality, finding an investor for a business in which your parents have full control in that scenario is unlikely. It may be that your share value is discounted. This is just one example of issues that business valuations traverse.
Any form of valuation will consider the business profits, assets and any other relevant information required to provide an accurate and unbiased final valuation. Providing any and all the relevant documentation quickly and in an organised fashion allows for a smooth and therefore cost-effective process in which an accurate result can be obtained.
Providing relevant information
In providing information, do not disregard loan accounts in which you or your former partner may owe money to the business, or the business may owe money to you or your former partner. A full analysis of realisation and other taxation costs may be crucial to the valuation and should not be overlooked. Mistakes can be made when overlooking such issues, which can have a marked impact on any settlement to a party’s detriment if not fully identified ahead of time.
Business valuations are an important part of the property settlement process, but just one part of a larger picture. When you’re dealing with the stress of a relationship breakdown, you need reassurance that you’ve got an experienced legal professional in your corner. We take a no-nonsense and pragmatic approach to advising our clients, guiding them on the path that will best achieve their goals, protect their interests and allow them to get on with the important job of running their business or home or whatever else should be taking priority.
We work with a range of top-level forensic accountants to assist our clients in identifying issues and helping them reach an early resolution to property settlement wherever possible.
Contact us today for an initial consultation with Shannon Daykin, Daykin Family Law’s Director, an Accredited Family Law Specialist with a wealth of experience and expertise in family law and complex property settlement. We’ll discuss your business, how to protect your interests and how we can assist in resolving your property settlement as efficiently as possible.